Karnataka High Court
Commissioner Of Income-Tax vs Vysya Bank Ltd. on 22 November, 1990
Equivalent citations: [1991]190ITR77(KAR), [1991]190ITR77(KARN)
JUDGMENT M.P. Chandrakantaraj Urs, J.
1. In this reference case, the Tribunal somewhat strangely had referred the following question for answer by us under section 256(1) of the Income-tax Act, 1961 (for short "the Act") :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the limit of permissible deduction of entertainment expenditure under section 37(2A) should be applied not only with reference to the income computed under section 28, but also taking into account the income computed under the head 'Interest on securities', if he securities are held as stock-in-trade ?"
For the assessment year 1978-79, the assessee, Vysya Bank Limited, Bangalore, claimed that in determining the limit of permissible deduction under section 37(2A), the limit stated therein should be applied not only with reference to the income to be computed under section 28 under the head "Profits and gains of business" before the allowance of such expenditure, but also taking into account the income computed under the head "Interest on securities", the Income-tax Officer repelled that contention and allowed the relief of Rs. 5,000 as entertainment expenditure under section 37(2A) of the Act as against the claim made the sum of Rs. 81,109. On appeal to the Commissioner, the Commissioner of Income-tax (Appeals) held that section 37(2A) provided that a deduction under that section shall be determined on the basis of the income assessable under the head "Profits and gains from business" and notwithstanding in what manner the expenditure is apportioned between business income and interest on securities, the deduction under section 37(2A) should be wholly determined by the income under the head "Profits and gains from business", and the entertainment expenditure admissible, he held, was Rs. 11,157. He, therefore, directed the Income-tax officer to consider the sum of Rs. 11,157 for allocation between business income and interest on securities. Not being satisfied with that order, the assessee appealed to the Appellate Tribunal. It was urged that interest on securities is required to be charged under a specific head because of the provisions of the Act, but that would not alter the character of such income as income arising from profits and gains of business carried on by the assessee which is a banking concern. Therefore, reliance was placed on the decision of the Supreme Court in the case of CIT v. Cocanada Radhaswami Bank Ltd. . As against that contention, the Revenue contended before the Tribunal that the decision of the High Court of Madras in the case of Addl, CIT v. Indian Overseas Bank was nearer to the pint and directly on the question and, therefore, the view taken by the Commissioner of Income-tax (Appeals) was correct and did not call for interference. On such rival contentions, the Tribunal appears to have come to the conclusion that the Commissioner of Income-tax (Appeals) should have ascertained the manner in which the securities were held as investment made by it, i.e., stock-in-trade or in some other capacity, nevertheless, after setting aside the order of the Commissioner, the Tribunal has referred the question to us as extracted earlier in the course of this order.
We find that the Tribunal was not correct in directing the Commissioner to ascertain the character and nature of the holding by the bank of the securities because, admittedly, the income derived was shown as the income of the bank in the course of its business. If that was not disputed, then the security belonged to the bank and investments made by it in the courts of its business. There was no reason to investigate the fact as to in what manner the securities came to be secured or acquired.
In the relevant assessment year, it is not in dispute before us, the income under securities fell under section 14(3) while the other income from banking business other than the investments, interest on securities fell under section 14(D), i.e., income from profits and gains of its business and profession, section 14 itself clearly indicates that income is classified into, in the relevant year, under heads A, B, C, D, E and F. In addition to that. If one looks at the scheme of the Act, other types of income, i.e., special sources of income like from shipping business, etc., are also taxable income. (See sections 44B and 172 of the Act). Therefore, it is not difficult to reasonably conclude that the legislative intent is to classify the income under various heads and permit such income to be assessed in the manner provided in the machinery provisions of the Act for the purpose of computation and recovery of tax. One such provision made to compute the income is section 37 of the Act. Section 37 had relation, by the language employed, to the "income of profits and gains from business or profession". Whereas, at the relevant time, computation of income and assessment of income from interest on securities was under section 18, 19 and 20 of the Act, section 20 permitted certain allowances which alone was admissible in respect of income by way of interest on securities and not available to other incomes under other heads. Therefore, if an assessee had income from more than one source, each of his income from different sources has to be assessed having regard to the provisions which govern the computation of that income and allowances permissible to the source of that income. It is not unusual that an assessee may derive income by way of salary. By way of house property, by way of private lands, by way of business, by way of profession and capital gains, etc., viewed thus, it would not be open to the bank to claim the benefit of classification of its income under two different heads for the sole purpose of claiming benefit of section 37(2A) of the Act to be one type of income falling under the single head, viz., "gains from business or profession".
2. In this context, we should not fail to notice that reliance placed by learned counsel for the assessee before us on the decision of the Supreme Court in Cocanada Radhaswami Bank Ltd.,'s case is inapposite. In that case. What was explained by the Supreme Court was the totality of the taxable income under various heads. The Supreme Court did not examine the scope for claiming allowance under relevant provisions of the Act for the purpose of relief. Therefore, that decision cannot assist the assessee in furthering the contention that all sources of income must have the benefit of section 37(2A).
3. The very question was considered by the Madras High Court in Addl, CIT v. Indian Overseas Bank (1981) 123 ITR 790. In that case, for the assessment year 1865-66, as against the assessee's claim for allowance of Rs. 28,252 under section 37(2) of the income-tax Act. 1961, out of a total sum of Rs. 80,427 incurred by it as entertainment expenditure, the Income-tax Officer allowed only a sum of Rs. 24,763 and disallowed the balance of Rs. 3,489. During the pendency of the appeal before the Tribunal, the assessee claimed that as against its claim of Rs. 3,489, it would be entitled to an allowance of Rs. 8,565 under the head "Interest on securities". That claim for allowance of a higher amount was upheld by the Tribunal. On a reference of the question which is as follows (at p.792) :
"Whether, on the facts and in the circumstances of the case, it has been rightly held that in computing the admissible deduction under section 37(2) of the Income-tax Act, 1961, the interest on securities should also be considered as business income ?"
4. The Madras High Court answered the question in the negative. In other words, in the operative portion of the order, their Lordships of the Madras High Court held that the assessee was eligible only for the allowance of Rs. 24,763 by way of entertainment expenses and a proportion of that amount had to be allowed under section 20 as deduction from interest on securities and the balance would be considered as allowance from profits and gains of business, in other words, while the amount allowed under section 37 to determine the same, the apportionment was directed considering that the income in respect of which the claim arose was under different heads of income and only permissible allowance under the relevant heads should be allowed. We are in agreement with that reasoning and on the admitted facts of this case, we also answer the question in the negative, against the assessee and in favour of the Revenue.