9911796707
TMI Blog1979 (10) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... branches at Bombay, Delhi and Madurai. It owns a building called " Bosotto Building " in Madras and another building called " Newspaper House " in Bombay. There was an equitable mortgage of these two properties in favour of the United Commercial Bank Ltd. and the Regional Provident Fund Commissioner, Madras, as security for loans taken from these institutions. The assessee paid interest of Rs. 2,32,499 for the year 1963-64 and Rs. 2,20,293 for the year 1964-65 to the two mortgagees. In the computation of the property income assessed in the hands of the assessee, the interest paid to these two mortgagees was allowed as deduction under s. 24(1)(iii) of the Act. The assessee claimed, in addition, these two identical amounts as deduction under s. 36(1)(iii) of the Act in the computation of its business income. The ITO negatived the claim under s. 36(1)(iii) on the ground that when s. 24 spoke of payment of interest on mortgage as one of the specific items of deduction in computing the income from property, the allowance exhausted itself and that it did not survive for consideration as interest paid on borrowed monies under any other section. The AAC confirmed the disallowance under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under s. 24(1)(iii). Section 4 provides for the levy of income-tax in respect of the total income of the previous year of every person. The expression " total income " is defined as meaning the total income referred to in s. 5 computed in the manner laid down in the Act. Chapter IV deals with the computation of total income, and s. 14, which is the very first provision in that Chapter, is as follows : " Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:-- A. Salaries. B. Interest on securities. C. Income from house property. D. Profits and gains of business or profession. E. Capital gains. F. Income from other sources. " This provision is substantially similar to s. 6 of the Indian I.T. Act, 1922. In the United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC), the assessee, a bank, derived income from interest on securities. It claimed that in the computation of its profits it was entitled to set off the carried over loss from the previous year against the profits of the year of assessment under s. 24(2) of the 1922 Act. The inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T [1961] 42 ITR 49, the Supreme Court again referred to the classification of income under distinct heads under s. 6 of the 1922 Act and pointed out as follows : " Income-tax is undoubtedly levied on the total taxable income of the taxpayer and the tax levied is a single tax on aggregate taxable receipts from all the sources ; it is not a collection of taxes separately levied on distinct heads of income. But the distinct heads specified in section 6 of the Income-tax Act, indicating the sources are mutually exclusive and income derived from different sources falling under specific heads has to be computed for the purpose of taxation in the manner provided by the appropriate section. If the income from a source falls within a specific head set out in section 6, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head. " In both these cases, the Supreme Court referred with approval to the decision of the House of Lords in Fry v. Salisbury House Estate Ltd. [1930] 15 TC 266. It is unnecessary to refer to the other decisions on the point which have all been considered in CIT v. Central Studios (P.) Ltd. [1973] 88 ITR 298, a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essional fees received as a private practitioner. Schedule E allowed expenses which were wholly and exclusively and necessarily incurred in the performance of his office, while Schedule D was more liberal in the matter of allowances of expenditure. The assessee claimed that over and above what was allowed as expenditure under Schedule E, he should get the deduction for the amounts expended by him under Schedule D. The Commissioners found that the assessee exercised the profession of consultant radiologist, his part-time hospital appointment being a necessary part of the exercise of that profession by him or being merely incidental thereto notwithstanding that a great deal of time was taken up by the part-time appointment. The Chancery Division rejected the assessee's claim for the allowance under Schedule D in excess of what had been allowed under Schedule E. The Court of Appeal reversed this decision. The matter thereafter reached the House of Lords. A point urged before the Chancery Division and before the Court of Appeal was whether the assessee was holding an office or employment of profit so as to fall within Schedule E. Both the courts negatived this contention. It was held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... theoretical binary fission into two halves having unequal rights to expenses laid out in the exercise of that profession. " Harman L.J. also pointed out at page 51 as follows : " It is the object of the Crown, therefore, to split the doctor in two and to treat him as if he was in the enjoyment of two sorts of profit, one arising under Schedule D and one under Schedule E, to oblige him to make two returns, and to attribute to each activity the expenses exclusively incurred in the course of it. " This unanimous pronouncement of the Court of Appeal was reversed unanimously by the House of Lords. Before the House of Lords the assessee conceded that an appointment under the National Health Service, to such a post as that held by him, fell within Schedule E and that an assessment must accordingly be made under that Schedule. In the light of this concession, the only question that arose for the consideration of the House of Lords was whether expenses incurred in earning the profits or gains which were assessable under Schedule E were, so far as they were not allowed in that assessment, deductible for the purposes of the assessment under Schedule D. After referring to Fry v. Salisbur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chetwode v. IRC [1977] 1 All ER 638 (HL). At all material times, the taxpayer was ordinarily resident in the United Kingdom. He created a settlement and appointed an entity called " Trust Corporation of Bahamas Ltd. " as trustee of the settlement. The trustee held the trust fund on trust to pay the income thereof to the taxpayer for life, with remainder to his issue. The Trust Corporation acquired the entire share capital of the company called " Attleborough Investment Co. Ltd. ", incorporated in Bahamas. That company used its assets to acquire securities in the United States. Attleborough Investment Co. Ltd. received dividends from the United States' securities and incurred, in relation to those securities, certain management expenses of a revenue nature. Section 412 of the U.K. Act provided that the taxpayer was liable to be charged on the income as if the said income had been received in the United Kingdom. If the income had been received in the United Kingdom, there would be no deduction for the management expenses. The assessee, however, claimed that even in construing what the dividends were, it was necessary to give the deduction for the management expenses. In dealing with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an ordinary word in the English language and unless the context otherwise requires, it should be given its ordinary natural meaning in a statute. " Thus, there are two principles to be borne in mind. Though there is a definition of the word " income " in s. 2(24), it is only inclusive and not exhaustive. It includes whatever is income construed in its natural or ordinary sense. There are also artificial categories added to that income. But barring those artificial categories, the natural concept would determine the quality of income. It is in this sense that the word " profits " is understood in its natural and proper sense, that is in a sense which no commercial man would misunderstand. See Gresham Life Assurance Society v. Styles [1892] 3 TC 185 (HL). It is also in this sense that under the Indian law it is stated that profits to be assessed are the real profits and that they must be ascertained on ordinary principles of commercial trading and commercial accounting: See CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144, 148 (SC) and Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1, 8 (SC) and the other cases cited at pages 340 and 341 of Kanga and Palkhivala's The Law and Parctice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction of the same amount under s. 36(1)(iii), which had already been allowed under s. 24(1)(iii). However, the logical effect of keeping two distinct groups of provisions as mutually exclusive and requiring computation of the respective heads under the particular group of provisions as if the group is a code by itself, is to show that we have only to look to the particular group of provisions in arriving at the income liable to be taxed under that head. In doing so, it would be irrelevant, at any rate as far as the statute goes, to consider whether the assessee had obtained any deduction for the same expenditure under a different head. Even in this Act, wherever it was considered that the assessee should not have the benefit of any such double deduction, appropriate provision has been made therefor. For instance, the group of provisions dealing with interest on securities is ss. 18 to 21. Section 19(i) provides for deduction of any reasonable amount expended by the assessee for the purpose of realising such interest, and s. 19(ii) provides for deduction of any interest payable on moneys borrowed for the purpose of investment in the securities by the assessee. In the case of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Law and Practice of Income-tax, 7th Edn., in which the learned authors have stated that on general principles an expense once allowed as a deduction under one head could not possibly be allowed over again and that the express provision in section 20(2) was due to the over-anxiety of the draftsman to make the provision beyond doubt. But as pointed out earlier, the logical effect of the principle of mutual exclusion of the respective heads of income and dealing with the different groups of provisions pertaining to the respective heads of income as complete codes in themselves would be to cut at the propriety of importing into the provisions any common law aspect of prohibition of double deduction. The case of Mitchell and Edon v. Ross [1961] 40 TC 11 (HL) did not deal with any question like the one before us. In that case, to the extent the expenditure had been incurred in appointing the assessee to the public office as a consultative radiologist, there could be no question of its being deducted as any expenditure wholly and exclusively laid out for the purpose of carrying on the profession. The assessee was deriving income under two heads, one under Schedule D as a private prac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atutory code of deduction. There, however, seems to be a silver lining in prospect for the department owing to later day changes in the Act. Section 24(1)(iii) has disappeared from the statute book with effect from 1st April, 1969. This might mean that the assessee cannot thereafter possibly put forward the same dual claims for the years thereafter. We consider that the question referred to us is not happily worded and does not really bring out the controversy between the parties. We would, therefore, reframe the question as follows : " Whether, on the facts and in the circumstances of the case, the assessee is entitled to the deduction of the interest paid on the equitable mortgages under section 36(1)(iii) of the Act, having obtained a rightful deduction of the same amount under section 24(1)(iii) of the Act as it stood at the relevant time ? " This question is answered in the affirmative and in favour of the assessee. We now turn to the reference made at the instance of the assessee. The following are the questions referred : " (1) Whether, on the facts and in the circumstances, the Tribunal was right in law in holding that the interest of Rs. 16,600 and Rs. 17,596 we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of mortgage. It, therefore, confirmed the assessment of these two amounts. It is this part of the assessment that is now challenged by the reference of the first question set out above. It is not in dispute that the assessee is maintaining the accounts on mercantile basis. It is only on the basis of this system of accounting that the assessee debited the interest due from Jhajharia in his account. By merely keeping it in the interest suspense account, the assessee cannot get over the liability to tax. As the Tribunal rightly pointed out, the interest in mortgage suits is determined by Order 34, and not by s. 34: See Jagannath Prosad Singh Chowdhury v. Surajmal Jalal [1927] ILR 54 Cal 161 ; AIR 1927 PC 1. However, in passing the personal decree, the court would be governed by s. 34 : See Firm Daulat Ram Vidya Parkash v. Sodhi Gurbaksh Singh, AIR 1949 East Punj 213. We have no idea as to what is the rate of interest charged in the contract with Jhajharia so as to consider the question whether the interest claimed was exorbitant or unreasonable so as to justify intervention by court. In these circumstances, the assessee's claim as if no interest accrued could not have been accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the total income at the rate of 55%. Rebates are admissible out of this 55%. But the amount of rebate is liable to be withdrawn in the case of companies declaring dividends. The withdrawal of the rebate was at the rate of 7.5% of the amount of dividends declared. Expln. 3 to Part II stated that for the removal of doubts it was declared that where any dividends were declared by the company before the commencement of the previous year and were distributed by it during that year, no reduction in the rebate should be made under sub-cl. (c) of cl. (i) of the second proviso in respect of such dividends. So, the result of this Explanation was that the withdrawal of rebate would have to be made in the year in which the dividend was declared and not in the subsequent year in which it was paid. The assessee claimed that this dividend declaration being made by the directors, it was a declaration of dividend by the company in the earlier year and that the rebate could not be withdrawn at the rate of 7.5% on Rs. 3,39,000. The Tribunal rejected this contention and held that there was a difference between the interim dividend declared by the directors and dividend declared by the company in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forceable obligation. It was held that the liability to pay the interim dividend was one of the liabilities taken over by the new entity. The claim of the shareholders, however, failed, as there were no distributable profits for the year 1969 and the effect of the provision of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, was a rescission of the resolution dated 16th July, 1969, and nothing could be paid to the shareholders in violation of the statutory provision. In this decision, a decision of the Supreme Court in J. Dalmia v. CIT [1964] 53 ITR 83 (SC) was referred to. In that case, the Supreme Court pointed but that when a company declared a dividend on its shares a debt immediately became payable to each shareholder and that the said rule was applicable only in the case of the dividends declared by the company in general meeting. The resolution of the board of directors declaring an interim dividend did not, it was held, create a debt enforceable against the company, for it was always open to the directors themselves to rescind the resolution before payment of the dividend. The fact that the articles of the company authorised the directors to dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the second proviso as well as in the Explanation, what is required to be looked into is whether the company has declared any dividends. The second proviso uses also the expression " distributed ". The result is that under the second proviso, the rebate was liable to be withdrawn both in the year of declaration and in the year of distribution. The two contingencies of declaration of distribution give rise to the power to withdraw the rebate. This would be double taxation. However, the Explanation did away with any attempt to withdraw the rebate both in the year of declaration and in the year of distribution if they fell in two different years. Under the Explanation the withdrawal of the rebate could not be done in the year in which the dividends were distributed. The result is that the second proviso read with the Explanation would stand in the way of the ITO withdrawing the rebate in the next year when the amount was paid. But in the year of declaration, the rebate was liable to be withdrawn and that is not what has happened in the present case. Explanation 3 was attracted for this year, but there is no liability to tax this year (1964-65). If the Tribunal was right in its constr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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