High Court: Expenses Not Apportioned Between Income Heads

The High Court of Calcutta ruled that expenditure should not be apportioned between different heads of income for taxation purposes in a case involving an investment company dealing in shares. The Court held that as the dividend income was part of the business profit and the expenses were incurred in the course of an indivisible trade, they should not be bifurcated. The decision was based on the principle that expenditure should be deducted from gross income to determine net income, aligning with relevant sections of the Income-tax Act. The judgment favored the revenue, rejecting the apportionment of expenses between income heads.

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Issues:
- Apportionment of expenditure between different heads of income for taxation purposes

Analysis:
The High Court of Calcutta addressed the issue of apportioning expenditure between different heads of income for taxation purposes in a reference under section 256(2) of the Income-tax Act, 1961. The question at hand was whether the Income-tax Officer was justified in apportioning the total expenditure incurred by the assessee between several heads of income and treating the appropriate portion as expenditure against dividend income. The assessee, an investment company dealing in shares, claimed expenditure for assessment years 1963-64, 1964-65, and 1965-66. The Income-tax Officer and the Appellate Assistant Commissioner both apportioned the expenses between different heads of income.

Upon further appeals, the Tribunal found that since the assessee's business consisted of dealing in shares, and its entire stock of shares and securities were shown as stock-in-trade, the entire expenses incurred related to the business of dealing in shares. The Tribunal relied on the decision of the Supreme Court in the case of Commissioner of Income-tax v. Indian Bank Ltd. [1965] 56 ITR 77, stating that as the dividend income constituted a part of the business profit of the assessee, the expenditure incurred in the course of an indivisible trade could not be bifurcated or apportioned. The Tribunal emphasized that the expenditure should be deducted from the gross income to determine the net income.

The High Court analyzed relevant sections of the Income-tax Act, including Sections 14, 56, and 57, which classify income under different heads and provide for the computation of income from other sources, such as dividends. It was highlighted that expenditure laid out wholly and exclusively for the purpose of making or earning such income should be ascertained and apportioned. The Court distinguished the case before them from the Indian Bank Ltd. case, emphasizing that in the former, the income was computed under different heads, and there was a need to compute dividend income separately from business income.

In conclusion, the High Court answered the question in the negative and in favor of the revenue, stating that the expenditure should not be apportioned between different heads of income for taxation purposes. The judgment was delivered by DIPAK KUMAR SEN J., with agreement from C. K. BANERJI J.

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