(a) Income-tax Act (XI of 1922)---

----S.10(2)(xi)---Bad debt ---Assessee, a Bank---Litigation for recovery of debt---Debt, pending decision, cannot be written off and claimed as deduction by assessee.

(b) Income-tax Act (XI of 1922)---

----S.10(2)(xi)---Bad debt---Debt, being barred by time and legal action being not fruitful, would be admissible deduction.

(c) Income-tax Act (XI of 1922)---

----S.10(2)(xi)---Bad debt---Where not a single ray of hope of recovery of debt is left same would be admissible deduction.

(d) Income-tax Act (XI of 1922)---

----S.10(4)(d)---Perquisites---Assessee, a Bank, whose property was occupied by its employee for residential purpose---Bank not incurring any expenditure on providing residential facility to employee---Notional annual rental value of such property could not be treated for computation as perquisites.

(e) Income-tax Act (XI of 1922)---

----S.6---Head of income---Composite business ---Assessee, a Bank deriving income from various sources---Bifurcation of the trade into sub-trades for computing income under various sub-heads as mentioned in S.6 would not be permissible.

(f) Income-tax Act (XI of 1922)---

----S.10(2)(iii)---Interest on borrowed capital ---Assessee, a Bank doing composite business---Interest paid by assessee on borrowed capital invested in tax-free securities would be permissible deduction against profits of business.

1965 PTD 515; (1966) 14 Taxation 304; (1970) 22 Taxation 17 (Trib.) and Commissioner of Income-tax, Madras v. Indian Bank Limited 1965 PTD 515 ref.

MA. Noorani, I.T.P. for Appellant.

Miss Razia Bano, D.R. for Respondent.

ORDER

M.T. SIDDIQUI (PRESIDENT).---This appeal by a public limited company, carrying on banking business, questions a few add backs only in the following circumstances.

2. The first grievance is against five bad debts. The first disallowance of Rs.30,000 concerns a debt against A ....& Co. The Income Tax Officer noted that a sum of Rs.30,000 was prematurely written off and, therefore, disallowed the same. The appellant's contention, as it was before the Income Tax Officer and is also before us, is that property to the above extent, belonging to the wife of the debtor, was mortgaged with the bank, but when the bank attempted to recover this amount from this property, the validity of the mortgage itself was challenged and this matter is still in dispute. Therefore, the appellant has no hope of recovery. The Departmental Representative on the other hand, maintains that until the dispute regarding the validity or otherwise of the mortgage is decided the appellant cannot say that all hopes to recover the debt are lost. In our opinion, the Departmental Representative's contention is correct, as in the event of the mortgage being declared valid the appellant's action in writing off this amount as irrecoverable would not be correct. For this reason we shall confirm this disallowance.

3. The second and third disallowances of Rs.4,742 and Rs.2,987 again relate to premature claims against S. Cloth House and H. Textile Factory. It is not disputed that in both these cases the litigation is still pending. In our opinion, therefore, these disallowances for the current year are in order, as all hopes of recovery have not yet been finished.

4. The next bad debt disputed before us relates to Century Printers where the Income Tax officer disallowed the bad debt claimed to the tune of Rs.32,609. The admitted position is that the appellant's claim in this case became time-barred, as no action was taken in time, because the bank noted that this party was already indebted to various other banks also and there was no possibility of any recoveries from him. The Income Tax Officer simply held that in absence of any legal action, the bad debt could not be allowed. We do not agree with this finding as apparently the debt has been lost and no legal action, in the opinion of the bank was possible, as it would have amounted to a further waste of good money. This disallowance would therefore be deleted.

5. The last debt concerns Karim Bakhsh Abdul Latif. This party had a drawing facility of Rs.21,60,000 which was ultimately reduced to Rs.16,88,000 and the overdraft account to certain extent was recouped so as to leave a balance of Rs.5,54,994 against this party. This amount was in fact written off, earlier after the partial recovery in 1957 but it was disallowed by the Income Tax Officer as premature, because he noted that there was some ginning factory in respect of which the appellant was laying a claim before the Settlement Commissioner. The Income Tax Officer observed that this factory could be allotted to the defaulter on payment of Rs.3,80,000 but this payment was not made by 1957. The Income Tax Officer thought that in the event of this payment the debtor would become entitled to the ownership of the ginning factory and the appellant would be able to recover the shortfall from that property. According to the Income Tax Officer, the same situation subsists even now. Therefore, the bad debt is again treated as premature. The appellant's case, on the other hand, is that the party had died in 1966 and, therefore, there is no possibility now of the payment of such substantial amount by any one to get the factory allotted. In these circumstances all hopes of recovery are now totally lost. We agree with the appellant's contentions that in these circumstances not a single ray of hope is now left and, therefore, the bad debt disallowed earlier should now be treated as bad for all times to come. This allowance should, therefore, be made during the year under consideration.

6. The next objection centers round the computation of perquisites which the Income Tax Officer determined in excess under section 10(4)(d). In this behalf the appellant objects to an amount of Rs.24,000 treated on perquisite of the General Manager who has been provided accommodation in the property owned by the appellant. The-Income Tax Officer fixed the annual letting value of this residence at Rs.24,000. The appellant's simple case before us is that this is not an expenditure which the bank has incurred on providing any benefit to an employee and, therefore, the hypothetical working of the annual letting value of the bank's property, occupied by an employee, cannot be taken into consideration for working out the disallowance under section 10(4)(d) as this provision clearly takes into consideration only expenditure that is incurred on providing benefit to the employee. The bank has not incurred any expenditure in this case and, therefore, this annual letting value cannot be treated as an expenditure incurred by the bank. We agree with the appellant's contentions that the property belongs to the bank and is being assessed separately. The bank is not incurring any expenditure on providing residential facility to its employees by permitting residence on this property and, therefore, for the purposes of section 10(4)(d) the notional value of this property cannot be treated as an expenditure incurred by the bank to provide facility or benefit to its employee. This should, therefore, be excluded from the computation of the perquisite.

7. The last objection concerns the allocation of Rs. 2,55,160 out of interest and expenses attributed by the Income Tax Officer to dividends and capital gains. The facts relating to these allocations are that the appellant-bank derives income from various courses including (i) interest on securities taxable under section 8 of the Income Tax Act, (ii) income from property taxable under section 9 of the Income Tax Act, (iii) income from business taxable under section 10 of the Income Tax Act, (iv) dividend income taxable under section 12 of the Income Tax Act, and (v) capital gains taxable under section 12B. The Income Tax Officer worked out incomes from various of these sources separately. Then he observed that the appellant had paid interest and had also incurred certain expenses in order to earn all the above incomes. The interest alone amounted to Rs.3,75,03,506. He ruled that the proportionate interest payable on investments resulting in dividend income should be charged to that income alone. This proportionate interest was worked out to Rs.2,51,273. Similarly he held that expenses aggregating to Rs.3,889 should be charged against dividend incomes and capital gains to the extent of Rs.2,613 and Rs.1,257 respectively. Thus a sum of Rs.2,55,160 was allocated for consideration, out of interest and other expenditure, against the incomes from dividends and capital gains. The reason was not far to find for this statement, because these two sources of income were chargeable at lower cases of tax whereas the other three sources of incomes noted above are chargeable at the higher rates of tax. This was the reason why a part of the interest or expenditure was allocated either to the incomes received from interest on securities or income from property. The appellant in this behalf made a lengthy submission in writing, before the Income-tax Officer on 25th June, 1973, but it appears that these submissions were also completely ignored.

The appellant's case before us, in these circumstances, is that no material was available to the Income Tax Officer to justify such an action which was in contravention of the past treatment. Similarly, it is argued that in case of no other bank such a treatment has been meted out, although similarly allocable expenditure incurred by other banks would have been much higher in comparison to the appellant. Then it is stated that, as a matter of fact, the records of the bank would clearly show that no part of the borrowed money was utilised in investments in securities, properties and shares, from which these non-business incomes, according to the Income-tax Officer, were being earned. The appellant's submission is that its paid-up capital and reserves alone stand at over Rs.3,80,000 while the non-interest bearing current deposits exceed Rs. 44,00,000 whereas its investments in shares and securities etc., do not exceed Rs.1,00,00,000. Therefore, the Income Tax Officer was little justified in holding that any part of the interest bearing borrowings was utilised in these other investments. Finally, reliance was placed on a number of decisions, reported as 1965 PTD 515, (1966) 14 Taxation 304 and (1970) 22 Taxation 17 (Trib.) to contend that in a composite business, allocation of interest against taxable and tax free incomes is not permissible. The Departmental Representative, on the other hand, once again reiterates the position that was taken up by the Assessing Officer and ultimately contends that the scheme of the Income Tax Act itself provides demarcation of the incomes earned into various heads under section 6 of the Income Tax Act and that under each source of income different allowances or expenses are permissible. Therefore, in all fairness, the taxable incomes from each distinct head must be computed separately and this cannot be done unless proportionate expenses, including the interest payable is equitably allocated to each distinct source from which income is derived or is to be taxed. In this view of the matter, it is argued that the Income Tax Officer's action is fully justified.

After consideration of the factual position we are of the opinion that the action of the Income Tax Officer is no doubt a highly subtle and intelligent one, with the sole objective of keeping the Revenue's interest uppermost. He has, however, lost sight of the fact that the factual position itself, apart from the legal aspect, is against the Revenue. This was precisely the reason why the letter of the appellant dated 25-6-1973 which furnishes all the factual situations about borrowing, investments has been totally ignored. After all the appellant carries on a composite banking business, a part of which comprises of investments in Government securities and other equities. In carrying on this business, the appellant also earns capital gains when some of the investments are realised either for better alternative investments or for the sake of liquidity of cash. Therefore, the appellant has to make investments in different sources. Now in the present case, the admitted position before the Income Tax Officer was that the investment in securities and equities did not exceed Rs.1,00,00,000 the precise figures being Rs.93,29,774, whereas the appellant's paid-up capital and Revenues alone stood at Rs.3,81,00,000 while the current non-interest ?bearing deposits stood at over Rs.44,00,00,000. Thus funds of about Rs.50,00,00,000 were available for making investments in securities and equities. The Income Tax Officer has nowhere pointed out that any part of the borrowed capital, on which the appellant had to pay interests, was utilised in making investments under any of the above two heads. His finding, therefore, that these investments were acquired with borrowed capital is factually incorrect and as such no part of the interest or the expenditure has been proved to have been incurred tin earning incomes from interest on Securities, Dividends or Capital Gains. Therefore, his action, howsoever subtle it may be, cannot be maintained of factual plan. The legal position at the same time, as it emerges from the cases relied upon by the appellant is also against the department as it is clearly laid down that in composite business, the allocation of interest only to the taxable incomes is not permissible unless facts establish otherwise. In the case Commissioner of Income Tax, Madras v. Indian Bank Limited reported as 1965 PTD 515, the Supreme Court of India ruled that there was no warrant for disallowing a proportionate part of the interest referable to moneys borrowed for the purchase of securities whose interest was tax-free. Their Lordships, after discussing the scheme of the Act had, reached the conclusion on the basis of various English decisions, that it is the quality of the expenditure that has to be seen and not the source of income, since, in a composite business, the various activities are interdependent. In 21 T.C. 472, the same plea was taken up and it was held that the interest paid by a bank on the borrowed capital which was utilised in buying tax-free securities had to be deducted in arriving at the taxable profits of the business during the course of which the capital was borrowed notwithstanding the fact that the interest earned by the bank from the tax-free securities could not be taxed. In that case, admittedly, the borrowing was meant for investments in tax-free securities and was directly co-related to tax-free income, still the interest payable in respect of those borrowings also, was held to be deductible against the income from business, for the simple reason that business cannot be bifurcated and continues to remain one indivisible business. After all there can be no trade within a trade. Therefore, on the legal side also we find that the Income Tax Officer in the present case cannot be permitted to bifurcate the appellant's trade into various sub-trades for the purpose of computing the same under various heads mentioned in section 6 although for the purposes of facility of computation this media may be available to him. The crucial issue is that the legislature has never directed the ascertainment of the purpose of an expenditure and, therefore, the law is not concerned to find out whether the expenditure has produced or will produce taxable income. Therefore, it will not be worthwhile to make any effort and involve the Revenue Authorities in tracing the expenditure to some definite individual and distinct taxable source of income. In the present case, however, all the incomes are taxable. The allocation, as we have already stated, was designed only to pass on some of the expenditure to incomes on which the incidence of tax is comparatively lower. Therefore, the ratio of these decisions would all the more go against the department. In this view of the matter, both on fact and on law, the action of the Income Tax Officer cannot be sustained and we would direct the deletion of this allocation.

8. The appeal succeeds to the extent indicated above.

M.BA./2123/T ?????????????????????????????????????????????????????????????????????? Order accordingly.