JUDGMENT
Shukla, J.
1. This is a reference by the Income-tax Appellate Tribunal, Indore, under Section 256(1) of the I.T. Act.
2. Assessee is a co-operative society. It appears (that it carries) on banking business and also runs a consumer stores. Separate sets of account books are maintained for the aforesaid business activities. During the previous years relevant to the assessment years 1972-73 and 1973-74, the consumer stores unit of the assessee credited Rs. 11,179 and Rs. 17,956 as interest in the current account of the banking unit and account books of the banking unit showed credit of these sums in the current account of the consumer stores unit. These entries reflected that the banking unit of the assessee advanced loans to its consumer stores unit and interest thereon was credited in the respective account books.
3. The ITO in his original assessments allowed the above amounts as expenditure on capital borrowed. Since under Section 80P(2)(a)(i) of the I.T. Act the income of a society carrying on banking business is exempt from tax, the ITO did not bring to tax the interest income in the banking unit of the society. The ITO later issued a notice under Section 148 of the Act and after hearing the assessee disallowed the expenditure claimed as deduction on account of payment of interest and added the same in the computation of the assessee’s total income.
4. The assessee-society appealed against the order of the ITO. The AAC allowed the appeal and deleted the additions. The Department then filed a second appeal against the order of the AAC before the Appellate Tribunal.
5. The Appellate Tribunal reversed the order of the AAC and restored that of the ITO. The Tribunal held that the banking and consumer stores businesses were carried on by the same assessee and in fact interest was paid by the assessee to itself. It also held that by claiming deduction of interest as expenditure on the one hand and seeking exemption of income under Section 80P of the Act on the other, the assessee got a double benefit.
At the instance of the assessee the following questions have been referred to this court for our opinion :
“(1) Whether, on the facts and circumstances of the case, the interest paid by the consumers stores to banking department to arrive at the correct profit of each department is an allowable expense ?
(2) Whether, on the facts and circumstances of the case, Sub-clause (i) in Clause (a) of Sub-section (2) of Section 80P covers the case of a co-operative society regarding the income derived from the business of banking with another department ? ”
6. The assessee admittedly carries on banking activities and also runs a consumer stores. Though separate sets of account books are maintained for the above business activities, the tax is chargeable on the total income of the assessee and not on separate business activities. Under Section 36(1)(iii) of the I.T. Act, deduction is allowed for the amount of interest paid in respect of capital borrowed for the purposes of the business or profession. Words ” borrowed and paid ” in these provisions clearly postulate two different entities, one which lends capital and the other which borrows and pays interest. The same entity cannot be its own lender and borrower, nor interest can be paid to self.
7. In a different context, their Lordships of the Supreme Court dealt with a situation somewhat analogous to one in this reference in Kikabhai Premchand v. CIT, [1953] 24 ITR 506. In the cited case, the assessee, a sole proprietor, had withdrawn his stock-in-trade and settled it on a trust in which he himself was a principal beneficiary. The valuation was made on cost price though the market price was higher. The question was whether income arose from this transaction. Bose J., speaking for the court, observed (p. 509) :
” In the present case disregarding technicalities it is impossible to get away from the fact that the business is owned and run by the assessee himself. In such circumstances we are of opinion that it is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent. Cut away the fictions and you reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and income-tax law.”
8. The above observations will apply mutatis mutandis to the facts of the case under reference. Kikabhai’s case [1953] 24 ITR 506 (SC) was referred to in CIT v. B.M. Kharwar, [1969] 72 ITR 603 (SC) by the Supreme Court and some of the observations in Kikabhai’s case were explained. Those observations which were referred to by the Supreme Court
in Kharwar’s case are not relevant for deciding the question before us. In Kharwar’s case it was held that regard must be had to the legal relations arising from a transaction and not to the substance of the transaction. In Kharwar’s case, [1969] 72 ITR 603 (SC), a firm had transferred its assets, machinery, etc., to a private limited company of which the shares were held by the same persons who constituted the firm. Their Lordships held that the balancing charge was payable by the firm under Section 10(2)(vii) of the Indian I.T. Act, 1922, because two different entities had entered into a contract and it did not matter that persons constituting the two different entities were the same. In fact in Kharwar’s case the observations made by Bose J. in Kikabhai’s case, [1953] 24 ITR 506 (SC) were tacitly approved and it was observed that (p. 608 of 72 ITR) “the legal effect of the transaction in Kikabhai’s case was not to effect a sale or transfer of the business assets from one person to another”. By converse proposition, in Kharwar’s case it was approved that there could not be a transfer of a business asset by the same person to himself.
9. Section 28 of the I.T. Act specified income chargeable to tax under the head ” Profits or gains of business or profession “. Under Section 28(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year shall be chargeable to tax under the same. In CIT v. C. Parakh & Co., [1956] 29 ITR 661 (SC), where the assessee carried on business at a number of places in India and Pakistan, it was held by the Supreme Court that profits earned in India and Karachi were to be thrown together and the expenses including the managing agency commission were to be deducted therefrom. In other words, income from different units could not be considered separately while computing the total income of the assessee from different businesses.
10. In CIT v. A. Suppan Chettiar & Co., [1930] ILR 53. Mad 702; AIR 1930 Mad 124 [SB], it was held that the words “any business” occurring in Section 10(1) of the Indian I.T. Act, 1922, will include all businesses put together and profits and gains should be held to mean the aggregate profits or gains of all the businesses together.
11. Thus, while computing the total income of the assessee in the instant case, the amount of interest claimed as expenditure by the assessee was not allowable because the interest was paid and received by the same person, i. e., the assessee, and in fact there was no payment by one person to another.
12. Learned counsel for the assessee relied on two decisions in support of his case. One is CIT v. Hantapara Tea Co. Ltd., [1973] 89 ITR 258 (SC) and the other is Anil Starch Products Ltd. v. CIT, [1966] 59 ITR 514 (Guj). Perusal of these two cases will show that the facts were entirely different and the statement of law will not be applicable to the facts of the case
under reference. In Hantapara Tea Co.’s case the assessee carried on the business of manufacture and sale of tea and for this business used thatch, bamboo and fuel, etc., grown in its tea estate. The Agrl. ITO assessed to agricultural income-tax the market value of the thatch, bamboo and fuel, etc., grown in the tea estate. The assessee claimed deduction of these items on the market value while computing the profits from its tea business under the Indian I.T. Act, 1922. In that context the Supreme Court held that if the assessee had to pay agricultural income-tax on the market value of the agricultural produce raised in its estate and used in its tea business, it stands to reason that while determining the deductible expenditure incurred for the purpose of its business, the market value of the produce should be taken into consideration. Actually the question in the above case for consideration was whether the deduction should be computed on the basis of the market value of the agricultural produce or on the basis of cost of production. Their Lordships of the Supreme Court decided this question in favour of the assessee. Obviously the question was entirely of a different character and the statement of law could not apply to the present case.
13. The other cited case of Anil Starch Products Ltd., [1966] 59 ITR 514 (Guj), also deals with a different problem. The company manufactured industrial starch. Subsequently it set up another plant for producing dextrose and the raw material, i.e., industrial starch produced by the company was supplied for production of dextrose. The question was whether for giving the benefit under Section 15C of the Indian I.T. Act, 1922, to the new undertaking the raw material, i. e., industrial starch, produced by the company, should be charged at the market price or the cost price for the purposes of computing the profits and gains of the new undertaking. Again it is obvious that the question raised and answered was entirely different. In both the cited cases the assessee used raw material produced by itself for manufacturing a new product and, therefore, it was held that the market price of the raw material should be taken into consideration for computing the profits of the assessee’s business.
14. We, therefore, hold that the interest paid by the consumer store unit of the assessee to its banking department was not an allowable expense for computing the profit of each department. In our opinion, the Tribunal was justified in rejecting this claim. Question No. (1) is, therefore, answered in the negative and against the assessee.
15. Question No. (2) actually is a corollary to question No. (1). If one unit of the assessee could not claim payment of interest to the other unit as allowable expenditure, because, in fact, there was no expenditure, no income could arise to the other unit in whose account the interest was credited. Question of exemption under Section 80P(2)(a)(i) of the Act, therefore, does not arise. 16. Section 80P(1) is as follows :
“80P. Deduction in respect of income of co-operative societies.–(1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in Sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in Sub-section (2) in computing the total income of the assessee. ”
17. The language makes it clear that what Section 80P contemplates is that first the gross total income of a co-operative society has to be computed and then the income referred to in Sub-section (2) has to be deducted. While computing the gross total income of the assessee-society if there is no interest income, the question of deducting such income will not arise. We, therefore, hold that on the facts and circumstances of this case, Sub-clause (i) of Clause (a) of Sub-section (2) of Section 80P of the Act does not cover the case of a co-operative society regarding income derived from the business of banking with another department of the same society. Question No. (2) is, therefore, answered in the negative and against the assessee.
18. There will be no order as to costs.
