COMMISSIONER OF INCOME TAX Vs. NARANDAS AND SONS

JUDGEMENT

(1.) THESE are three references on a case stated under section 256(1) of the Income -tax Act, 1961. The assessment years with which we are concerned are the assessment years 1963 -64, 1964 -65 andj1965 -66. As the references arise on a consolidated statement of case and as the disputes are common judgment.

(2.) THE respondent -assessee is a firm carrying of business in Bombay. The said firm consists of two partners and was duly registered under the Indian Income -tax Act, 1922. The said firm was a dealer in Government securities which formed its stock -in -trade. It appears that as pointed out by the assessee to the Income -tax Appellate Tribunal, 90% of the securities held by it stood in the names of banks which collected the interest on these securities from the Government as the holders of these securities and passed on the amounts collected to it after deducting collection charges. The statement of the case shows that these securities were pledged by the assessee to banks under letters of pledge containing a power of sale. The contention of the assessee before the Income -tax Officer was that in respect of its securities held by the banks as aforesaid the interest or income which the banks passed on to them should be considered as 'Income me from business' and not under the head of income 'Interest on securities' for the purpose of assessment. The Income -tax Office concerned treated this income as interest on securities falling under section 18 of the Income -tax Act, 1961, and taxed it as such in the hands of the assessee. On appeal from this order, the Appellate Assistant Commissioner took the view that it was only interest on securities held in the name of the assessee which was liable to be treated as interest on securities and that in respect of the securities of the assessee held by banks as a aforesaid, the income from the same received by the assessee should be treated as income from business. The Revenue preferred appeals against this decision of the Appellate Assistant Commissioner to the Income -tax Appellate Tribunal. The Tribunal took the view that the Government paid interest to the banks in respect of the aforesaid securities held in the names of the banks and what the assessee received from the banks was not interest in its hands but was something which was equivalent to interest which was assessable under the head 'Income from business'. The Tribunal took the view that the legal owners in respect of these securities were the respective banks in whose names the securities were held and not the assessee. On the basis of this conclusion, the Tribunal agreed with the view of the Appellate Assistant Commissioner.

(3.) BEFORE going into the arguments of respective counsel, it would be useful to note that Chapter IV of the Income -tax Act, 1961, deals with the computation of total income and provides that the total income has to be computed under what are known as 'Heads of income'. Section 18 of the said Act deals with the 'Head of income 'known as 'Interest on securities'. This income is referred to as 'Head of income -B'.'Head of income -D' is profits and gains of business or profession. Section 28 provides that certain income will be chargeable to income -tax under the head 'Profits and gains of business or profession'. The submission of Mr. Jetly, learned counsel for the Revenue, is that the income of an assessee has to be computed, assessed and taxed under one head of income or the other. These heads of income are mutually exclusive and where a particular income or the other. These heads of income are mutually exclusive and where a particular income falls within one head of income, it cannot then be regarded as falling under any other head of income. In support of this submission, Mr. Jetly cited the decision of this court in CIT v. Narandas and Sons, a case of the very assessee before us, reported in : [1978]115ITR587(Bom) . In that case, the Act with which the court was concerned was the Indian Income -tax Act, 1922, but there is no dispute that the scheme of assessment under that Act and the Income -tax Act, 1961, is the same. In that judgment, this court relied upon the decision of the Supreme Court in United Commercial Bank Ltd. v. CIT : [1957]32ITR688(SC) , which took the view that income from interest on securities falls under section 8 of the Indian -tax Act, 1922, and is not business income falling under section 10, even though the securities are held by a dealer as his stock -in -trade, and this court followed the said decision. The Division Bench of this court which decided the aforesaid case has pointed out (at p. 589) that the view taken by the Supreme Court was that the sections dealing with the heads of income are mutually exclusive and where an item of income falls specifically under one head, it has to be charged under that head and no other and that income from 'interest on securities ' falls under section 8 of the Income -tax Act, 1922, and not under section 10. It cannot be brought under a different head of income, namely, 'profits and gains of business' under section 10, even though the securities are held by a banker as part of his trading assets in the course of his business. Although the said decision of this court as well as the decision of the Supreme Court referred to above have been rendered in connection with the Indian Income -tax Act, 1922, it is an undisputed position that the scheme of computation and assessment of total income under the said Act is similar to the scheme of computation of total income and its assessment under the Income -tax Act, 1961, and hence the principles laid down in the aforesaid decision must apply to cases falling under the Income -tax Act, 1961. In view of this decision, it appears to us that there is considerable substance in the submission of Mr. Jetly.