True head of income controls tax treatment of securities receipts and limits disallowance of apportioned salary costs.

Section 40A(5) was held to apply only to salary and perquisite expenditure attributable to the business head under "Profits and gains of business", and not to the portion allocated to "Interest on securities"; the assessee's position was accepted on that issue. Interest received by a bank on sale of securities was also classified under "Interest on securities" rather than as business income, reflecting the rule that receipts must be taxed under their true head of income; this issue too was decided for the assessee. The ratio is that a disallowance linked to business expenditure cannot extend to amounts referable to another income head.

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Issues: (i) Whether Section 40A(5) of the Income-tax Act, 1961 applies only to the portion of salary and perquisite expenditure apportioned under the head "Profits and gains of business" and not to expenditure apportioned under the head "Interest on securities"; (ii) Whether interest received by the assessee bank on sale of securities is taxable as "Interest on securities" and not as "Profits and gains from business".

Issue (i): Whether Section 40A(5) of the Income-tax Act, 1961 applies only to the portion of salary and perquisite expenditure apportioned under the head "Profits and gains of business" and not to expenditure apportioned under the head "Interest on securities".

Analysis: The Court accepted the view that the disallowance under Section 40A(5) is attracted only to the expenditure relatable to the business head and not to the portion attributable to interest on securities.

Conclusion: The issue was answered in favour of the assessee and against the Revenue.

Issue (ii): Whether interest received by the assessee bank on sale of securities is taxable as "Interest on securities" and not as "Profits and gains from business".

Analysis: The Court held that the receipt on sale of securities had to be assessed under the head "Interest on securities" and not as business income.

Conclusion: The issue was answered in favour of the assessee and against the Revenue.

Final Conclusion: The appeal failed and was dismissed, with the answers to both questions affirming the assessee's position on the tax treatment of the disputed expenditure and receipts.

Ratio Decidendi: A disallowance provision tied to business expenditure cannot be extended to amounts apportioned to a different head of income, and income from securities must be classified under the appropriate head on the basis of its true character.

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