1951 (9) TMI 36 - HC - Income Tax

Court classifies interest on securities as income from securities under Income-tax Act, rejecting earned income argument.

Kothari (HC.) Versus Commissioner of Income-tax

The Court affirmed that interest on securities should be classified as income from securities under Section 8 of the Income-tax Act. The applicants' ... - Issues Involved:1. Whether interest on securities should be treated as earned income under Section 10 (income from business) or Section 12 (income from other sources) or as income from securities under Section 8 of the Income-tax Act.Detailed Analysis:Issue 1: Treatment of Interest on SecuritiesThe applicants in these cases had multiple sources of income, including interest on securities, business profits, dividends, and other interests. They claimed earned income relief for the interest on securities, arguing that the securities were part of their business operations and thus should be considered business income under Section 10 of the Income-tax Act. The Income-tax Officer, however, treated the interest on securities as unrelated to the business of purchase and sale of Government Securities and declined to allow earned income relief, assessing it under Section 8 instead.The Tribunal upheld the Income-tax Officer's decision, stating that interest on securities is a distinct source of income and should not be treated as business income. The Tribunal also rejected the alternative contention that the net income from securities should be classified under 'other sources' as per Section 12, noting that Section 12 deals with income not falling under any other specific head mentioned in Section 6 of the Act.The High Court was asked to decide whether the interest on securities should be treated as earned income under Section 10 or Section 12, or as income from securities under Section 8.Judgment Analysis:The core question was whether the interest on securities should be treated as earned income under Section 10 (income from business) or Section 12 (income from other sources), or as income from securities under Section 8. The applicants argued that the securities were part of their business operations and should be considered business income. However, the revenue authorities and the Tribunal disagreed, treating the interest on securities as a separate source of income under Section 8.The Court affirmed the Tribunal's decision, emphasizing the following points:1. Classification of Income: The Income-tax Act classifies income under various heads, and once income is classified under a specific head, it cannot be reclassified under another head. Interest on securities is specifically chargeable under Section 8, and this classification is distinct and separate from business income under Section 10.2. Scheme of the Act: The Court explained the scheme of the Income-tax Act, noting that it imposes a single tax on the aggregate total income of an assessee, classified under various heads. Sections 8 to 12 enumerate the principles for computing income under these heads. The classification under Section 6 does not imply multiple taxes but a single tax on the aggregate income.3. Precedents: The Court referred to several precedents, including the House of Lords' decision in Salisbury House Estate Ltd. and the Court of Appeal's decision in Thompson v. Trust and Loan Company of Canada, which established that income falling under a specific head cannot be taxed under a different head.4. Earned Income Relief: The definition of 'earned income' in Section 2(6AA) does not include interest on securities under Section 8, as it does not involve personal exertion by the assessee. Therefore, the assessees' attempt to classify interest on securities as business income under Section 10 was not valid.5. Exhaustion of Heads: Section 12 can only be invoked if the previous heads of income are exhausted. Since interest on securities is chargeable under Section 8, it cannot be classified under Section 12.In conclusion, the Court held that interest on securities must be treated as income from securities under Section 8 of the Income-tax Act. The assessees were not entitled to claim earned income relief for such interest, and the question was answered against the assessees. The assessees were ordered to pay the respondent's costs, fixed at Rs. 250.