The Chotanagpur Banking … vs Commr. Of Income Tax on 5 August, 1955

JUDGMENT

Das, C.J.

1. These are two references which have been. heard together. In Miscellaneous Judicial case No. 89 of 1953, the appellate Tribunal has referred the following question of law, under the provisions of Sub-section (1) of Section 66 of the Indian Income-tax Act to this Court:

“Whether the commissioner of income tax was competent to revise the order of assessment passed by the Income-tax officer on 30-3-1949 for the assessment year 1945-46 under Section 33B of the Indian Income-tax Act, 1922?”.

I shall hereinafter refer to this question as the first question before us. In ‘Miscellaneous Judicial Case No. 185 of 1953’, a Bench of this Court required the Appellate Tribunal to state a case on the following question of law, under the provisions of Section 66(2) of the Indian Income-tax Act, 1822:

“Whether in the circumstances of the case the Income-tax Department, while calculating the income under the head ‘Interest on Securities,” under Section 8 of the Income-tax Act, should have made allowance in respect of interest payable by the assesses on the borrowed capital ” This I shall hereinafter refer to as the second question before us.

2. The appellate Tribunal has stated the facts of the two cases separately. I am summarising those facts for the purposes of answering the two questions stated above. The assessee, the Chotanagpur Banking Association Limited, Hazaribagh, is a public limited company and carries on the business of Banking. The incomes returned by the assessee and assessed by the Income-tax Officer under the various heads of Income for the assessment year 1945-46 are shown in a tabular form below.

Head of Income
Income returned
 
Income assessed

 
Rs.

Rs.

Interest on securities
 
 
 
 

 
taxed
…

43,882
 
43,882

Interest on securities
 
 
 
 

 
Tax free
…

249
 
249

Property
…

5,777
 
5,777

Business Loss
…

88,920
Income
9,395

Other sources :

(1)

Dividend
…

284

”

436

(2)

Royalty
…

Nil
”

4,479

Net result from all heads Loss
…

38,728
Income
64,218

The income of Rs. 64,218/- was held to be subject to an allowance of the loss from business, carried forward from the earlier assessment, under Section 24(2) of the Indian Income-tax Act. The loss from business carried forward from the earlier assessment was a sum of Rs. 58, 173/-. How this sum was calculated would appear from page 2 of the paper book in Miscellaneous Judicial case No. 89 of 1953, namely, in para 4 of the statement of the case submitted by the appellate Tribunal. The Income Tax Officer set off this amount of Rs. 58,173/-against the total income under all the heads, amounting to Rs. 64,218- and determined the assessee’s total income for the assessment year 1945-46 as Rs. 6045/- only.

This assessment order was made on 30-3-1949. The assessee did not appeal against this order of the Income-tax Officer. The Commissioner of income-tax considered that the income-tax Officer was wrong in setting off the loss of Rs. 58,173/-from business, carried forward from the earlier assessment, against the incomes determined under the heads “Interest on securities” “Property and other sources”, for the assessment for 1945-46. The Commissioner of Income-tax then issued a notice to the assessee, and after hearing the assessee, he held that the Income-tax officer was wrong in setting off the unabsorbed or resultant loss from business ‘of the assessment next preceding, against income from “securities” (Section 8), “property” (Section 9) and ‘dividends and royalties” (Section 12) in the assessment for 1945-46.

The Commissioner of Income-tax rejected the contention of the assessee that in a Banking concern all the income of the assessee company derived from all its sources, including interest on securities, house property and dividends, should be treated as profits from business and that the entire loss carried forward from the earlier assessments should be set off against the entire income under all the heads. The Commissioner of Income-tax held that the aforesaid contention of the assessee was in conflict with Section 24(2) of the Indian Income-tax Act. The Commissioner expressed himself as follows in his order:

“The fact that an assessee chooses to amalgamate all his income from various sources into one, is therefore, no reason to assess such incomes collectively under the declared heads or to allow set off of the preceding years’ loss under one head against another in direct contravention of provisions of Section 24(2). In this case the assessee was entitled to set off only a loss of Rs. 9,395/- out of Rs. 58,173/- against the income determined from the same business. Tile argument that income derived from different sources, in his case, constituted income from the same head viz. business, and should not be distinguished for purposes of Section 24(2) is clearly untenable as income under various specified heads is being determined from year to year without any objection on the part of the assessee and is in accordance with the provisions of the Act.

In whatever form the declaration of an assessee may be the I. T. O. is under an obligation to determine separately income under each specified head mentioned in section 6. I hold, therefore, that the order of the Income-tax Officer, setting off the entire loss of the year preceding, against other heads of income for the assessment year 1945-46 is clearly erroneous and prejudicial to the interest of revenue.”

Against, the order of the Commissioner the assessee preferred an appeal.

The Appellate Tribunal upheld the interpretation put by the Commissioner on Section 24(2) of the Indian Income-tax Act. Two additional grounds were sought to be urged by the assessee before the Appellate Tribunal against the order of the Commissioner. One ground, which was allowed to be urged was that the commissioner had no power to interfere with and revise the order of the Income-tax Officer inasmuch as Section 33B was inserted in the Income-tax Act, 1922 by an amending Act of 1948, and did not therefore, apply to an assessment made for the year 1945-46.

I may state here that the amending Act by which Section 33B was inserted came into force on 30-3-1948, and the assessment order was made by the income-tax Officer on 30-3-1949 and the Commissioner of Income-tax made his order under Section 33B on 6-1-1851. The appellate Tribunal held that the Commissioner of Income-tax had authority to revise an order of assessment which was made after the coming into force of the amending Act by, which Section 33B was inserted.

A second point which was sought to be taken but which was not allowed to be taken by the Appellate Tribunal, was that in calculating the income under the head “interest on securities” in accordance with the provisions of Section 8, an allowance should have been made in respect of interest payable by the assessee on money borrowed for the purpose of investment in securities. The appellate Tribunal did not allow this ground to be urged at all, and the learned Judicial Member of the Appellate Tribunal observed as follows:

“This ground cannot be allowed to be taken for the first time now for the simple reason that a decision on it would necessitate an enquiry into the question of fact as to the extent to which the assessee did borrow money for the purpose of investing in the securities, and the rate of interest payable by him on money borrowed for such purpose. The assessee has other assets besides securities. It would have been necessary to make an enquiry into his total borrowings and the way in which the money borrowed was applied, how much of it was locked up in immovable properties or in shares of companies and so forth.

There is no trace anywhere in the record of the assessee having claimed before the Income-tax Officer or the Commissioner that he would be entitled to a refund or adjustment of the tax paid, under Section 8 on any such ground as that the interest on securities was wiped out in whole or in part by the interest payable by him on money borrowed to invest on those securities.”

In the result, the appeal of the assesses was dismissed by the Appellate Tribunal.

3. Thereafter the two references- were made, One is the reference made by the Appellate Tribunal under Section 66(1) and the other is the reference directed by this Court under Section 66(2) of the Act. Certain more additional facts have been stated by the Appellate Tribunal in connection with the reference under Section 66(2). I shall refer to those additional facts when dealing with the second Question before use. I proceed now to a consideration of the first question. This question does not present any serious difficulty.

Section 33B of the Indian Income-tax Act, under which the commissioner revised the order of the Income-tax officer, was inserted by Act 18 of 1948, which came into effect from 30-3-1948. The assessment order, though it was for the year 1945-46, was made by the income-tax officer on 30-3-1949, long after the coming into force of Act 48 of 1948. It is, therefore, clear that the commissioner had power to call for and examine the record and to consider whether the order passed by the Income-tax officer was erroneous to so far as it was prejudicial to the interest of revenue.

The assessment order was made after the coming into force of Section 33B, and the Commissioner exercised his power after the coming into force of Section 33B. Even though the assessment was for the year 1945-46, no final order of assessment has been passed by the Income-tax Officer before the coming into force of Section 33B. Therefore no question of giving retrospective effect to Section 33B arises In the present case. Both the income-tax officer and the Commissioner acted after Section 33B had, come into operation and in respect of an assessment order which was made after the coming into force of Section 33B. That being the position, the first question must be answered in favour of the Income-tax Department and against the assesses The Commissioner of income-tax was competent to revise the order of assessment passed by the Income tax officer on the 30th of March, 1940, for the assessment year 1945-46. Learned counsel for the assessee has not very seriously contested the view which the Appellate Tribunal expressed in the matter. I would accordingly answer the first question in favour of the Income-tax Department and against the assesses.

4. I proceed now to a consideration of the second question. A preliminary point have been argued before us as to whether the second question arises at all out of the assessment or appellate order, inasmuch as no allowance under the first proviso to Section 8 was at all claimed by the assessee at any stage earlier than the hearing of the appeal by the Appellate Tribunal and no Investigation of the facts necessary for determining the amount of allowance was made by any off the income-tax authorities. I shall dispose of this preliminary point first.

5. It is now well settled that where the order under Section 66(2) is passed by a Bench of the High Court after hearing Counsel for both the parties it is not open to the Bench hearing the reference to say that the order passed by the previous Bench was erroneous on the ground that the question did not arise out of the Tribunal’s order and right to be overruled. There are several decisions of this Court in support of this view. As early as 1925, in — ‘Trikamji Diwan Das v. Commr. of Income-tax’, AIR 1925 Pat 352 (A), his Lordship Dawson-Miller C. J., said:

“The Court, however, by Its order considered that it had jurisdiction and ordered the Commissioner to state a case which he has done and it is not competent to this Court now to question the validity of that order.”

The same view was again expressed in — ‘Bisheshwar Singh v. Commr. of Income-tax, B. & O.’, AIR 1955 Pat 96 (B). In the Calcutta High Court, Chakravartti, C. J. said in — ‘Khusiram Murarilal v. Commr. of Income-tax, Central, Calcutta’, 1954-25 I. T. R. 572 (C), at page 577:

“As I have said elsewhere, once this Court directs a case to be stated with reference to a particular question, it must be deemed to have held that the Question did arise out of the appellate order and thereafter it cannot be open to the Bench finally hearing the reference to throw it out on the preliminary ground that the question did not arise at all.”

The earlier case referred to by his Lordship is ‘,he case of ‘ Commr. of Income-tax, West Bengal v. Diana Enginnering Co.’, AIR 1954 Cal 575 (D). In — ‘Mehta Parikh & Co. v. Commr. of Income-tax’, AIR 1954 Bom 82 (E), Chagla, C. J. expressed the view that the jurisdiction of the High Court under Section 66(2) arose when on an application being made under Sub-section (1), the Appellate Tribunal refused to state a case on the ground that no question of law arose; and the High Court had no jurisdiction to ask the Tribunal to state a case on a question when the assessee himself had never asked the Tribunal to refer it be the High Court. His Lordship said that even if the High Court under Section 69 (2), had directed the Tribunal to state a case on such a question, the order of the High Court did not become final, and if the High Court had no jurisdiction to require the Tribunal to state a case in matters where no application was made by the assessee under Section 66(1), the Judges could not confer jurisdiction upon themselves by requiring the Tribunal to state the case.

In — ‘Jesraj Jiwanram v. Commr. of Income-tax, Assam’, AIR 1954 Assam 49 (P). the Assam High Court took a similar view and observed:

“When a Bench of the High Court directs the Tribunal to state a case, it is not open to the parties or to that Bench or another Bench of the High Court to question the validity of the order. The competency or the power of a High Court to issue a ‘mandamus’ can be questioned at the ‘mandamus’ stage before its issue and not when the reference is actually heard. But the Court at the hearing, even though it has ordered the Tribunal to state a case on any question, retains the jurisdiction to decline to answer the question which is purely academic or where the question is unnecessary or irrelevant.

Also where the Tribunal improperly or incorrectly makes a reference in violation of the provisions of the statute, the Court is not incapable of entertaining an objection to the statement of the case if it comes to the conclusion that it should not have been stated. In such circumstances, the Court is under no obligation to express an opinion on the question referred.”

In — ‘Kamal Singh v. Commr. of Income-tax’, AIR 1954 Pat 540 (G), it has been observed:

“The provisions of Sub-sections (1) and (2) of Section 66 of the Indian Income-tax Act, 1922, do not confer upon the High Court a general jurisdiction to decide a question of law that may possibly arise out of the income-tax assessment. The section, on the contrary, confers a special and limited jurisdiction upon the High Court to decide any specific question of law which has been raised between the assessee’ and the department before the Income-tax Tribunal and upon which question the parties are at issue.

The correct interpretation of Section 63(1) is that the question, of law which the assessee seeks to refer must be a question of law which has been actually raised before the Tribunal or actually dealt with by it in its order. Where, therefore, a question of law was not taken either before the Appellate Tribunal or in the application made to the Tribunal under Section 66 (1) or in the application made to the High Court under Section 66(2) for directing the Tribunal to state a case, the High Court is not competent, on a reference under Section 66(2), to decide it.”

6. in view of the authorities mentioned above, it is manifest that the preliminary objection urged on behalf of the Department cannot succeed in the present case. The question on which the appellate Tribunal was required to state a case by a Bench of this Court is not merely an academic or irrelevant question; nor is it a question which does not arise out of the order of the Appellate Tribunal. It is a question which arises out of the additional ground taken before the Appellate Tribunal, which additional ground the Appellate Tribunal did not allow the assessee to urge.

The assessee applied to the Appellate Tribunal for referring the question to the High Court under Section 66(1); the Appellate Tribunal refused to state a case on the question. These being the facts, it must be held that the Bench when it passed its order dated 8-5-1953, requiring the Appellate Tribunal to state a case on the second question before us, the Bench decided that the question did arise on the order of the Appellate Tribunal, and it is not now open to us to go behind that decision. The preliminary objection must, therefore, be overruled.

7. As to the answer which should be given to the second, question some more facts must, be stated. The balance-sheet of the assessee Company shows that the total assets of the Company amounted to Rs. 1,23,76,272/- and odd annas, on 31-12-1944. Out of this amount the total paid-up Capital came to Rs. 58,270/- The Reserve account amounted to Rs. 4,17,399/- and odd annas. Thus the total paid-up Capital and the Reserves as on the 31st December, 1944, amounted to Rs. 5,33,940/- The deposits received by the Company from outsiders amounted to Rs. 1,17,52,706/- and odd.

The interest paid on such deposits during the year 1944 was Rs. 2,39,344/- The book debts of the company & the bills discounted amounted to Rs. 53, 2497- & Rs. 4,03,7577- and odd annas. It is clear from the aforesaid figures that at least a part of the income under the head “interest on securities” of the assessee Bank was made’ out of borrowed capital, borrowed for the purpose of investment in the securities. To what extent the borrowed capital was utilised for investment in securities and what was the interest payable on borrowed capital are matters of calculation. It has not been argued on behalf of the Department that such calculation cannot be made. In my opinion, the Appellate Tribunal was in error in summarily rejecting the claim of the assessee for an allowance under the first proviso to Section 8. If the matter was one of calculation, such a calculation should have been made by the proper authority on the production of relevant materials. The question which we have to answer is whether the Income-tax Department should have made allowance in respect of interest payable by the assessee on borrowed capital. We have not to ascertain or determine the exact amount of the allowance.

8. I shall now read Section 8 so far as it is relevant for our purpose, in order to show that the assesses is clearly entitled to an allowance in respect of interest payable on the borrowed capital. Section 8 states:

“The tax shall be payable by an assessee under the head ‘interest on securities’ in respect of the interest receivable by him on any security of the Central Government or of a State Government etc.”

then there is the proviso which states:

“Provided that no income-tax shall be payable under this section by the assessee……….in respect of any interest payable on money borrowed for the purpose of investment in the securities by the assessee etc.”

The proviso is somewhat cumbrously expressed, but in effect it states that interest payable on money borrowed by the assessee for the purpose of investment in the securities in question is allowable to the assessee subject to certain restrictions which are mentioned in the proviso. There can be no doubt, therefore, that the object of the first proviso to Section 8 is to exempt to the extent mentioned therein interest received on, securities, which are not tax-free. The assessee was, therefore, entitled to an allowance in respect of the interest payable by it on the borrowed capital to the extent to which the borrowed capital was utilised for the purpose of investment in the said securities. Tn refusing to give this allowance to the assessee’ the Tribunal appears to us to have acted against the provisions of Section 8.

9. I would, therefore, answer the second question in favour of the assessee and against the Income-tax Department and hold that, in the circumstances of the case, the Income-tax Department, while calculating the income under the head “interest on securities” under Section 8 of the Income-tax Act, should’ have made allowance in respect of the interest payable by the assessee on the borrowed capital, in accordance with the provisions of that section.

10. In view of the divided success of the parties, there will be no order for costs in either of the two cases.

Kanhaiya Singh, J.

11. I agree.