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TMI Blog1967 (9) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment years, which are involved in this reference, the nature of the business of the company and its earning was the same. It is, therefore, necessary to give the figures of income only for the first year as the said figures are typical with regard to the subsequent years also. In the assessment year 1951-52 the company derived income from dividends to the extent of Rs. 7,61,407. Out of this amount, a sum of Rs. 5,86,873 represented the dividends paid by other companies which had paid or would pay super-tax in respect of the profits out of which such dividends were paid. The balance of Rs. 1,74,534 represented income from other than such dividends. Now, the assessee-company satisfied all the conditions set out in the Explanation to the Notification No. 47 of the Governor-General-in-Council dated 9th December, 1933, and was, therefore, entitled to the exemption from payment of super-tax in respect of the income specified in the said notification. In the assessment year the sum of Rs. 5,86,873 represented such income and the assessee accordingly claimed exemption in terms of the notification in respect of the entire amount. The loss of the business being the expenses for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, which defines the companies which come within its scope. Since there is no dispute that the assessee-company fulfils all the requirements of the Explanation to the notification, it is not necessary to set it out. On the construction of the notification the main question is what is the meaning of the expression "income" used in the said notification. Mr. Joshi, the learned counsel for the department, argues that the word "income" as used in the notification means the computed income or the total income and not the gross income. His argument is that the notification provides for exemption from tax and, therefore, postulates the taxability of the income. Now, taxable income under the Income-tax Act is the total income, because under the charging section it is the total income that is subjected to tax. Total income under the Income-tax Act is the income of the categories referred to in sub-section (1) of section 4 and computed in the manner laid down in the Act. The different heads of the income referred to in section 4 or given in section 6 of the Act and the manner and the method of computing the income arising under the said heads is given in the following sections from 7 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards interest in respect of tax-free securities to which the notification applied. In his assessment he had claimed exemption from tax in respect of the entire amount of Rs. 44,720. The Income-tax Officer, however, had deducted from the said sum of Rs. 44,720 a reasonable sum expended by the assessee in realising the interest and interest payable on the money borrowed for the purpose of investing in those securities, with the result that he had allowed him exemption only in respect of Rs. 7,276. The argument advanced by the department was similar to the argument advanced by the learned counsel before us, viz., that the exemption could be allowed not in respect of the gross income but in respect of the computed income under the Act. It was contended that, since the interest on securities was required to be computed under the provisions of section 8 of the Act, the income in respect of which exemption could be granted would be the income which would emerge as computed income after the process of computation of income under section 8 was applied to it. The Supreme Court negatived the said contention and held that the notification was a self-contained one giving a total exemption f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's business was carried on for the purpose of obtaining income, which was exempt from super-tax, and income which was not so exempt. Expenditure incurred in the business was incurred for the purpose of earning both kinds of income. The part of the expenses which could be attributable to the earning of the tax-free income could not enter the computation of the income, which was liable to tax, because that income being free from tax, there was no question of considering the expenses incurred for earning that income and there was also no question of allowing the assessee the said expenses. In the present case, a larger portion of the income earned by the assessee was of the kind, which was exempted from payment of super-tax. A large part of the expenses incurred by the assessee, therefore, must also have been spent for the earning of that income. What the assessee wants by allowing an exemption in respect of the entire amount is not only to get an advantage in respect of the tax in respect of the dividend amount but also in respect of a further sum representing the expenses attributable to the earning of the said income, because he wants to set off that sum of expenses also against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the whole or part of the income of Rs. 5,86,873 was entitled to exemption. It cannot, however, be said that the contention, which is now made out by Mr. Joshi, was not involved as an aspect of the question raised and debated before the Tribunal. It would appear from the order of the Tribunal that the departmental representative had submitted before it that, by allocating the whole of the loss or expenses to the income which was outside the scope of the notification, the assessee would be getting, what may be called a double advantage, i.e., getting exemption under the notification once and getting deduction for the entire loss or expenses out of the income which does not come within the notification. It may be, as Mr. Mehta says, that this submission was urged in the context of the construction of the notification and for urging that, on a proper construction of the notification, the expression "income" used in the notification must be construed to mean computed income and not the gross income and it may be that the Tribunal might have considered it in that context only. In cannot, however, be said that this aspect of the controversy between the parties was not even referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifies for exemption under the notification, the benefit to which it is entitled, on a proper construction of the notification, would cover the whole of the income without deduction of any loss or other expenses that the company has incurred. In other words, what is required to be considered is not only a construction of the notification but the effect thereof on the assessment of the assessee in the present case. We will, therefore, hold in favour of Mr. Joshi that the second contention urged by him is permissible to be raised on the question framed in the present reference. We find, however, that the said contention cannot succeed in view of the Supreme Court decision in Commissioner of Income-tax v. Indian Bank Ltd. In that case the assessee, which was a banking company, had, in the course of its business, invested a large sum in securities including securities, the interest on which was exempt from tax. Profits and losses on the purchase and sale of such securities were duly taken into account in computing the business income of the assessee. The Income-tax Officer, however, did not allow the entire amount of interest paid by the respondent on moneys borrowed from its various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wholly and exclusively for the purpose of the business. The legislature stops short at directing that it be ascertained what was the purpose of the expenditure. If the answer is that it is for the purpose of the business, Parliament is not concerned to find out whether the expenditure has produced or will produce taxable income. Secondly, the reason may well be that Parliament assumes that most types of expenditure which are laid out wholly and exclusively for the purpose of business would directly or indirectly produce taxable income, and it is not worth the administrative effort involved to go further and trace the expenditure to some taxable income." In view of this decision, it would be clear that, if the expenses are allowable as business expenses, they will be allowed to be deducted from the income of the business, which is liable to tax. The circumstance that the business activity has produced income, a part of which is liable to tax and a part of which is free from tax, will not permit the allocation of the expenses between these two parts of the income and allow only that part which is attributable to the earning of the taxable income. In the present case before us, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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