Brooke Bond & Company Ltd. Vs.
C.I.T., West Bengal, Calcutta [1986] INSC 208 (30 September 1986)
PATHAK, R.S.
PATHAK, R.S.
MUKHARJI, SABYASACHI (J)
CITATION: 1986 SCR (3) 980 1986 SCC (4) 689
JT 1986 613 1986 SCALE (2)573
ACT:
Indian Income Tax Act, 1922-Sections 6, 24(2)
& 33A- Assessee-Dividend income shown in return under head 'income from
other sources' - Whether could be computed under head 'income from business'.
HEADNOTE:
The appellant, a sterling company carrying on
business in tea with its Head office in the United Kingdom, invested in the
shares of other tea companies in different parts of the world, and had a
hundred per cent share holding in an Indian subsidiary.
The appellant was assessed under the Indian
Income Tax Act 1922. For the assessment year 1955-56 the appellant was assessed
on its total world income on the basis of provisional figures of its business
loss including depreciation, and its income from individuals. As its Indian
income exceeded its income outside India it was assessed as a resident.
Meanwhile the appellant had already been assessed for the subsequent assessment
year 1956-57 in the status of a 'non-resident' and its income from dividends
was assessed under the head 'Income from other Sources'. The loss determined for
the assessment year 1955-56 could not be carried forward and set off against
the income for the assessment year 1956-57, as the latter assessment was made
subsequent to the farmer.
The appellant preferred two revision
applications, one each for the assessment years 1955-56 and 1956-57 under sub-
s. (2) of s. 33A. In the revision application for the assessment year 1955-56,
the appellant claimed that the quantum of loss determined for that year having
been based on provisional figures should be revised on the basis of final
figures certified by an Inspector of Taxes in the United Kingdom, that the loss
should be ascertained for the purpose of carrying it forward, and that the loss
should be bifurcated between an unabsorbed depreciation and other loss. In the
revision application for the assessment year 1956-57, the appellant claimed a
set off of the loss determined for the assessment year 1955-56 against the
income of the assessment year 1956-57 on the ground that the shares held by it
in different companies constituted its trading assets and the dividend income
accruing there from should be regarded as income from accruing there from
should be regarded as income from business.
During the pendency of these revision
petitions the assessment for the assessment year 1957-58 was completed as a
non-resident, and the income was determined as receipt by way of dividends on
its share holdings.
In the appeal to the Appellate Assistant
Commissioner, it was claimed that the loss for the assessment year 1955-56
should be carried forward and set off against the income of the assessment year
1957-58 under sub-s. (2) of s. 24 because both the losses and the income arose
from business carried on by the appellant, but the appeal was dismissed holding
that there would be no loss if the loss for the assessment year 1955-56 was set
off against the income for the assessment year 1956-57 and that the loss could
not be legally set off directly in the assessment year 1957-58.
In further appeal, the Income-Tax Appellate
Tribunal set aside the order of the Appellate Assistant Commissioner and
directed it to dispose of the appeal afresh after determining whether the
appellant was entitled to set off a business loss arising outside the taxable
territories for the assessment year 1955-56 against the dividend income arising
in the taxable territories for the assessment year 1957-58. The reference to
the High Court was declined by the Appellate Tribunal.
The revision application pertaining to the
assessment year 1955-56 was allowed subject to the claim being verified in
regard to the figures and calculation of depreciation by the Income Tax
Officer. The revision application pertaining to the assessment year 1956-57,
however, was rejected holding that the dividends earned by the appellant from
the investments in shares of companies carrying on the tea business could not
be said to be a part of the appellant's business because the investments were
not incidental to the appellant's business activities and were not held as
trading assets, that the companies from which the dividend was earned were not
companies of which the appellant was managing agent, that a set off cannot be
allowed to the extent of the 982 unabsorbed depreciation brought forward from
the assessment year 1955-56 against the business income derived during the
assessment year 1956-57, and that there was no business income in the
assessment year 1956-57.
A Petition under Art. 226 filed by the
appellant against the disposal of his revision application for the assessment
year 1956-57 was dismissed by a Single Judge, and the appeal against that order
as well as dismissed.
In the appeal to this Court on behalf of the
appellant it was contended: (1) that if this Court clarified that the Appellate
Assistant Commissioner can proceed in the appeal relating to the assessment
year 1957-58 pending before him without being influenced by the observations of
the Commissioner of Income Tax and the High Court in the case relating to the
assessment year 1956-57 on the aspect of carry forward of loss under sub-s. (2)
of s. 24, the appeal would not be pursued, and that if such clarification is
not possible then this Court should confine itself to the case relating to the
assessment year 1956-57; (2) that the Commissioner of Income Tax had conceded in
an earlier proceeding that the dividend income was income from business; (3)
that the loss should be carried forward under sub-s. (2) of s. 24 from the
assessment year 1955-56, to the assessment year 1956-57 and it is not necessary
that the business carried on in the assessment year 1956-57 should be the same
as that carried on in the assessment year 1955-56, and (4) that the claim of
the appellant to carry forward of unabsorbed depreciation under sub-s. (2) of
s. 10 should be allowed.
Partly allowing the Appeal, ^
HELD: 1. The order of the Division Bench and
of the Single Judge as well as the order of the Commissioner of Income Tax on
the revision application for the assessment year 1956-57 are set aside in
regard to the claim of the appellant to the carry forward of unabsorbed
depreciation and the Commissioner is directed to dispose of the revision
application afresh. As to the rest of the reliefs the appeal is dismissed.
[992C-D]
2. Income-tax is a single charge on the total
income of an assessee. For the purpose of computation the statute recognises
different classes of income which it classifies under different heads of
income. For each head of income the statute has provided the mode of computing
the quantum of such income. The mode of computation varies with 983 the nature
of class of such income, for the deductions permissible under the law in
computing the income under each head bear a particular relevance to the nature
of the income. [988B-C]
3. The statute operates on the principle that
it is the net income under each head which should be considered as a component
of the total income. The statute permits specified deductions from the gross
receipt in order to compute the net income. The net income under the different
heads is then pooled together to constitute the total income. The process of
computation at this stage takes in the provisions relating to the carry forward
and setting off of losses and of unabsorbed depreciation. On the conclusion of
the entire process of assessment what emerges is the figure of taxable income,
the quantum of income which is assessed to tax.
[988C-E]
4. Ordinarily when income pertains to a
certain head, the source of such income is peculiar to that head, but it is not
unusual that commercial considerations may properly describe the source
differently. For instance, a banking concern may hold securities in the course
of its business.
The securities constitute its trading assets
and income from them would in the commercial sense be regarded as business
income. However, for the purposes of computation under the income-tax, the
income from such securities would be computed not under the head 'Income from
Business' but under the head 'Interest on Securities'. [988E-G] 5(i) Business
income is broken up under different heads only for the purpose of computation
of the total income, and that by such breakup the income does not cease to be
the income of the business. [988G] 5(ii) Section 6 of the Indian Income Tax Act
1922, which classified the taxable income under different heads made such
classification only for the purpose of computation of the net income of the
assessee. [989C] United Commercial Bank Ltd. v. Commissioner of Income Tax,
[1957] 32 I.T.R. 688; Commissioner of Income-Tax, Bombay City v. Chugandas and
Co., [1965] 55 I.T.R. 17;
Commissioner of Income-tax, Andhra Pradesh v.
Cocandada Radhaswami Band Ltd., [1965] 57 I.T.R. 306 and O.RM.M.SP.SV.
Firm v. Commissioner of Income-tax, Madras,
[1967] 631 I.T.R. 404, 410 followed.
6. The mere circumstance that the appellant
showed the dividend income under the head 'Income from other Sources' in its
returns can- 984 not in law decide the nature of the dividend income. It must
be determined from the evidence whether having regard to the true nature and
character of the income it could be described as income from business, even
though it is liable to fall for computation under another head. [989F-G]
7. In the instant case, the appellant placed
material before the Commissioner of Income-tax showing that it held shares in companies
carrying on the tea business, and that in India it enjoyed a hundred per cent
share holding in the Indian subsidiary. But in order that the share holdings in
tea companies should be regarded as the business assets of the appellant there
must be material evidence indicating that the ownership of the share-holdings
is necessarily incidental to the business of tea carried on by the appellant or
that the share holdings are held as business assets. [989H; 990A-B]
8. From the material placed before the Court,
the Revenue cannot be said to have admitted that the dividend income received
by the appellant from its share holdings in other companies can be regarded as
part of the appellant's income from business. [990F-G]
9. The loss cannot be carried forward under
sub-s. (2) of s. 24 from the assessment year 1955-56 to the assessment year
1956-57 because the shares held by the appellant cannot be regarded as its
trading assets. [991A-B]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 2020 (NT) of 1974 From the Judgment and Order dated 14.8.1973 of the
Calcutta High Court in Appeal No. 317 of 1970 T.A. Ramachandran, J. Ramamurthi
and D.N. Gupta for the Appellant.
C.M. Lodha and Ms. A. Subhashini for the
Respondent.
The Judgment of the Court was delivered by PATHAK,
J. This appeal by certificate granted by the High Court of Calcutta is directed
against a judgment of the Division Bench of the High Court confirming on appeal
the dismissal of the appellant's writ petition.
985 The appellant, Brooke Bond & Company
Ltd., now known as Brooke Bond Leibig Limited, is a sterling company carrying
on business in tea with its Head Office in the United Kingdom. The appellant
has invested in the shares of other tea companies in different parts of the
world, and has a hundred per cent share holding in an Indian subsidiary, Brooke
Bond (India) Limited.
The appellant is assessed under the Indian
Income Tax Act, and the relevant financial year is the previous year in
relation to the corresponding assessment year. For the assessment year 1955-56
the appellant was assessed on its total world income by an assessment order
dated July 16, 1957 on the basis of provisional figures of its business loss
including depreciation, and its income from dividends.
On the basis of those provisional figures it
was assessed to a net loss of Rs.31,33,647. As its Indian income exceeded its
income outside India it was assessed as a resident.
Meanwhile, on March 28, 1957 the appellant
had already been assessed for the subsequent assessment year 1956-57 in the
status of a non-resident, and its income of Rs.53,11,958 from dividends was
assessed under the head 'Income from Other Sources'. It is obvious that the
loss determined for the assessment year 1955-56 could not be carried forward
and set off against the income for the assessment year 1956-57, as the latter
assessment was made subsequent to the former.
On February 12, 1958 the appellant preferred
two revisions applications, one each for the assessment years 1955-56 and
1956-57, before the Commissioner of Income-tax under sub-s. (2) of s. 33A of
the Indian Income Tax Act, 1922. In the revision application for the assessment
year 1955-56 the appellant claimed that the quantum of loss determined for that
year having been based on provisional figures should now be revised on the
basis of the final figures certified by an Inspector of Taxes in the United
Kingdom. The appellant claimed also that the loss should be ascertained for the
purpose of carrying it forward, and further that the loss should be bifurcated
between an unabsorbed depreciation of Rs.40,27,853 and other loss. In the
revision application for the assessment year 1956-57 the appellant claimed a
set off of the loss determined for the assessment year 1955-56 against the
income of the assessment year 1956-57 on the ground that the shares held by it
in tea companies constituted its trading assets and the dividend income
accruing therefrom should be regarded as income from business. It mentioned
that it carried on business in tea in the United Kingdom and the investments
were made in the usual course of 986 its tea business in companies also engaged
in the tea business exclusively. The revision petitions remained pending for
eight years.
Meanwhile the appellant's assessment for the
assessment year 1957-58 was completed in November 1957 as a non- resident,
determining an income of Rs.51,85,836 received by way of dividends on its share
holdings. An appeal was taken to the Appellate Assistant Commissioner of Income
Tax claiming that the loss for the assessment year 1955-56 should be carried
forward and set off against the income for the assessment year 1957-58 under
sub-s. (2) of s. 24 because both the loss and the income arose from business
carried on by the appellant. By his order dated August 14, 1958 the Appellant
Assistant Commissioner dismissed the appeal holding that there would be no loss
if the loss for the assessment year 1955-56 was set off against the income for
the assessment year 1956-57, and that the loss could not be legally set off directly
in the assessment year 1957-58.
The appellant appealed to the Income-tax
Appellate Tribunal and on July 1, 1966 the Appellate Tribunal set aside the
order of the Appellate Assistant Commissioner and directed the Appellate
Assistant Commissioner to dispose of the appeal afresh after determining
whether the appellant was entitled to set off a business loss arising outside
the taxable territories for the assessment year 1955-56 against the dividend
income arising in the taxable territories for the assessment year 1957-58. The
Commissioner of Income Tax applied for a reference to the High Court but the
Appellate Tribunal rejected the application on December 1, 1966.
On December 5, 1966 the Commissioner of
Income Tax disposed of the revision applications filed by the appellant. The
revision application pertaining to the assessment year 1955-56 was allowed
subject to the claim being verified in regard to the figures and calculation of
depreciation by the Income Tax Officer. The revision application pertaining to
the assessment year 1956-57, however, was rejected with the observation that
the dividend earned by the appellant from investments in shares of companies
carrying on the tea business could not be said to be a part of the appellant's
business because the investments were not incidental to the appellant's
business activities and were not held as trading assets. It was also stated
that the companies from which the dividend was earned were not companies of
which the appellant was managing agent so as to require the making of such
investments for the purposes of its business as managing agents. The
Commissioner also rejected the contention of the appellant that a set off
should be allowed to the extent of the unabsorbed depreciation brought forward
987 from the assessment year 1955-56 against the business income derived during
the assessment year 1956-57. The Commissioner observed that there was no
business income in the assessment year 1956-57.
Thereafter the appellant filed a writ
petition in the High Court of Calcutta against the disposal of his revision
application for the assessment year 1956-57, but on September 22, 1969 the
learned Single Judge dismissed the writ petition. An appeal filed by the
appellant was dismissed by the Division Bench of the High Court on August 14,
1973.
The Division Bench adverted to the finding of
the Commissioner of Income Tax in the appellant's revision application relating
to the assessment year 1956-57 that the material placed before him did not show
that the dividend earned by the appellant from its investment in the shares of
different companies could be regarded as part of the appellant's business
income. He had found that the investments in shares were not incidental to the
appellant's business activities and they were not held as trading assets. The
Division Bench held that no error of law in the Commissioner's order had been
established and consequently there was no case for interference with the
rejection of the appellant's claim for carrying forward the losses arising from
its business in the assessment year 1955-56 against the dividend income for the
assessment year 1956-57. On the other contention raised by the appellant, the
claim to carry forward the depreciation allowance pertaining to the business
activities of the assessment year 1955-56 for deduction in the assessment
proceedings of the assessment year 1956-57 the Division Bench appeared to be in
favour of the appellant, but it declined to express any final opinion on the
point. The judgment of the Division Bench is under appeal before us.
At the outset learned counsel for the
appellant stated before us that he would not press this appeal if we clarify
that the Appellate Assistant Commissioner can proceed in the appeal relating to
the assessment year 1957-58 pending before him without being influenced by the
observations of the Commissioner of Income Tax and the High Court in the case
relating to the assessment year 1956-57 on the aspect of carry forward of loss
under sub-s. (2) of s. 24, and that if such clarification is not possible then
we should, in this appeal, confine ourselves to the case relating to the
assessment year 1956-57.
There was considerable debate on the question
whether the 988 dividend income received by the appellant from its share
holdings in different companies engaged in the tea business could be regarded
as business income.
It is a cardinal principle of the law
relating to income-tax that income-tax is a single charge on the total income
of an assessee. For the purpose of computation the statute recognises different
classes of income which it classifies under different heads of income. For each
head of income the statute has provided the mode of computing the quantum of
such income. The mode of computation varies with the nature of the class of
such income, for the deductions permissible under the law in computing the
income under each head bear a particular relevance to the nature of the income.
The statute operates on the principle that it is the net income under each head
which should be considered as a component of the total income. The statute
permits specified deductions from the gross receipt in order to compute the net
income. The net income under the different heads is then pooled together to
constitute the total income. The process of computation at this stage takes in
the provisions relating to the carry forward and setting off of losses and of
unabsorbed depreciation. On the conclusion of the entire process of assessment
what emerges is the figure of taxable income, the quantum of income which is
assessed to tax.
Ordinarily when income pertains to a certain
head, the source of such income is peculiar to that head, but it is not unusual
that commercial considerations may properly describe the source differently.
For instance, a banking concern may hold securities in the course of its
business.
The securities constitute its trading assets
and income from them would in the commercial sense be regarded as business
income. However, for the purposes of computation under the income-tax law the
income from such securities would be computed not under the head 'Income from
Business' but under the head 'Interest on Securities'. In United Commercial
Bank Ltd., v. Commissioner of Income tax, [1957] 32 I.T.R. 688, this Court
pointed out that business income was broken up under different heads only for
the purpose of computation of the total income, and that by such break-up the
income did not cease to be the income of the business. The principle was
followed by this Court in Commissioner of Income-tax, Bombay City v. Chugandas
and Co., [1965] 55 I.T.R. 17 and it was reiterated that business income was
broken up under different heads under the Income Tax Act only for the purpose
of computation of the total income, and that by breaking up the income did not
cease to be the income of the business. It was said:
989 "The heads described in section 6
and further elaborated for the purpose of computation of income in sections 7
to 10 and 12, 12A, 12AA and 12B are intended merely to indicate the classes of
income: the heads do not exhaustively delimit sources from which income
arises," The point was elaborated by the Court in Commissioner of
Income-tax, Andhra Pradesh v. Cocanada Radhaswami Bank Ltd., [1965] 57 I.T.R.
306, where the Court was called upon to consider whether the securities owned
by the assessee formed part of the trading assets of his business, and income
therefrom could be described as income from business, and the Court reaffirmed
that s. 6 of the Indian Income Tax Act 1922, which classified the taxable
income under different heads made such classification only for the purpose of
computation of the net income of the assessee and "though for the purpose
of computation of the income, interest on securities is separately classified,
income by way of interest from securities does not cease to be part of the
income from business if the securities are part of the trading assets. Whether
a particular income is part of the income from a business falls to be decided
not on the basis of the provisions of section 6 but on commercial principles
................ If it was the income of the business, section 24(2) of the Act
was immediately attracted. If the income from the securities was the income
from its business, the loss could, in terms of that section, be set off against
that income." Accordingly, the mere circumstance that the appellant showed
the dividend income under the head 'Income from Other Sources' in its returns
cannot in law decide the nature of the dividend income. It must be determined
from the evidence whether having regard to the true nature and character of the
income it could be described as income from business, even though it is liable
to fall for computation under another head. The principle was again applied in
O.RM.M. SP.
SV. Firm v. Commissioner of Income-tax,
Madras [1967] 63 I.T.R. 404, 410. The position on the law is clear. But is the
appellant in the present case entitled to the relief claimed by it? The
appellant placed material before the Commissioner of Income-tax showing that it
held shares in companies carrying on the tea business 990 and that in India it
enjoyed a hundred per cent share holding in the Indian subsidiary. But in order
that the share holdings in tea commpanies should be regarded as the business
assets of the appellant there must be material evidence indicating that the
ownership of the shareholdings is necessarily incidental to the business of tea
carried on by the appellant or that the share holdings are held as business
assets. The Commissioner of Income Tax was unable to draw any conclusion in
favour of the appellant in this regard, and the appellant failed to convince
the High Court also. We have given our careful consideration to the matter and
except for the Indian subsidiary there is nothing to show that the investments
of the appellant in the other tea companies were intended to bring, or in fact
brought about, some advantage or benefit to the business carried on by the
appellant. The mere fact that the share holdings related to the tea companies
is not sufficient by itself to support the submission that they were acquired
to safeguard the appellant's interest in the tea business carried on by it.
The matter is pending in appeal relating to
the assessment year 1957-58 before the Appellate Assistant Commissioner and it
will be open to the appellant to place further material before the Appellate
Assistant Commissioner to enable him to come to an adequate and satisfactory
decision. The appellant may have a sufficient case specially in regard to the
share holding possessed by it in its Indian subsidiary, but we refrain from
expressing any opinion on the point and we leave it to the appellant to satisfy
the Appellate Assistant Commissioner that the appellants share holdings in the
Indian subsidiary and the other tea-companies enures to the benefit of the
business carried on by it.
An attempt was made by learned counsel for
the appellant to show that the Commissioner of Income Tax had conceded in an
earlier proceeding that the dividend income was income from business. Our
attention has been invited to a recital in the order of the Appellate Tribunal
relating to the assessment year 1957-58 and to what has been stated by the
Commissioner in his reference application against that order. We are not
satisfied from the material placed before us that the Revenue can be said to
have admitted that the dividend income received by the appellant from its share
holdings in other companies can be regarded as part of the appellant's income
from business.
Consequently we are unable to sustain the
appellant's challenge to the view expressed by the Division Bench of the High
Court in regard to the appellant's claim that the dividend income must be
regarded as income from business.
991 The next point raised by the appellant is
that the loss should be carried forward under sub-s. (2) of s. 24 from the
assessment year 1955-56 to the assessment year 1956-57 and it is not necessary
that the business carried on in the assessment year 1956-57 should be the same
as that carried on in the assessment year 1955-56. This point must also fail
because it proceeds on the assumption that the shares held by the appellant can
be regarded as its trading assets.
The final contention of the appellant relates
to the carry forward of unabsorbed depreciation under sub-s. (2) of s. 10. The
Division Bench appeared to be of the tentative view that the appellant was
entitled to the carry forward claimed by it, but it did not express any final
opinion as it had decided to decline relief to the appellant on the ground that
the assessment for the assessment year 1956-57 had already been closed by the
Revenue when the assessment for the assessment year 1955-56 was being made and
the grant of relief would have its consequence on the assessment for the
assessment year 1957-58, in respect of which an appeal was pending. The writ
petition was directed against the order of the Commissioner of Income Tax made
upon the revision application filed by the appellant in respect of the
assessment year 1956-57, and the High Court could have directed the
Commissioner to grant appropriate relief for the assessment year 1956-57. The
Commissioner was not concerned with the proceeding relating to the assessment
year 1957-58. That was a matter pending in appeal before the Appellate Assistant
Commissioner. The point could have been considered by the Commissioner in the
revision application for the assessment year 1956-57. Merely because relief
given by the Commissioner in that regard in the proceeding for the assessment
year 1956-57 could have its consequence upon the proceeding for the assessment
year 1957-58 then pending in appeal before the Assistant Appellate
Commissioner, could not bring the case within proviso (b) to sub-s. (1) of s.
33A of the Indian Income Tax Act. It may be
that the same point was the subject of the appeal, but the point agitated
before the Commissioner was with reference to the assessment year 1957-58. It
could not debar the Commissioner from considering the same point in relation to
the assessment year 1956-57. We need express no opinion at this stage on the
view tentatively expressed by the Division Bench of the High Court that the
appellant's claim to the carry forward of unabsorbed depreciation from the
assessment year 1955-56 to the assessment year 1956-57 is vaild or not. As we
have noted, the view taken by the High Court was tentative only and not its
final opinion. Indeed, no submission was made on behalf of the Revenue before
us on the point.
992 We shall concern ourselves merely with
the correctness of the Division Bench refusing to grant relief after it reached
the tentative finding that there was merit in the appellant's claim to the
carry forward of unabsorbed depreciation. In our opinion, the order of the
Commissioner disposing of the revision application for the assessment year
1956-57 should have been set aside by the Division Bench and the Commissioner
should have been directed to consider the claim on its merits. We make that
direction now. At the same time, we make it clear that it will be open to the
Revenue to contend on the merits that the appellant is not entitled to the
carry forward of unabsorbed depreciation.
The appeal is allowed in so far only that the
order of the Division Bench and of the learned Single Judge as well as the
order of the Commissioner of Income Tax on the revision application for the
assessment year 1956-57 are set aside in regard to the claim of the appellant
to the carry forward of unabsorbed depreciation, and the Commissioner is
directed to dispose of the revision application in respect of that claim
afresh. As to the rest of the reliefs the appeal is dismissed. In the
circumstances there is no order as to costs.
A.P.J. Appeal allowed in part.
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