THE UNITED COMMERCIAL BANK LTD., CALCUTTA vs. THE COMMISSIONER OF INCOME-TAX, WEST BENGAL

Case Analysis

THE UNITED COMMERCIAL BANK LTD., CALCUTTA vs. THE COMMISSIONER OF INCOME-TAX, WEST BENGAL

May 5, 2025

A) ABSTRACT / HEADNOTE

This landmark judgment in The United Commercial Bank Ltd., Calcutta v. The Commissioner of Income-Tax, West Bengal (1958 SCR 79) delved into the interpretation of Sections 6, 8, 10, and 24(2) of the Indian Income-Tax Act, 1922. The primary issue revolved around whether interest received on securities, when held as part of a bank’s trading assets, should be classified under “business income” or treated separately under the head “interest on securities” for taxation purposes. The appellant, a commercial bank, contended that since these securities formed a part of their banking business—i.e., trading assets—the interest earned should qualify as “business income” under Section 10, thereby permitting the set-off of business losses under Section 24(2). However, the Income-Tax Department contended, and the Supreme Court affirmed, that the various heads of income under Section 6 are mutually exclusive. Hence, income arising from “interest on securities” must fall under Section 8, irrespective of whether the securities were held as trading or capital assets. The Supreme Court, while rejecting the unified treatment of income sources for banks, did acknowledge that if such securities were indeed held as part of the trading assets, the question of whether losses can be set-off under Section 24(2) should be re-examined based on a factual finding. Accordingly, the Court remanded the matter back to the High Court for further factual determination.

Keywords: Income-tax, interest on securities, business income, set-off, trading assets, Section 24(2), mutual exclusivity of income heads, banking business, Section 8, Income Tax Act 1922.

B) CASE DETAILS

i) Judgement Cause Title
The United Commercial Bank Ltd., Calcutta v. The Commissioner of Income-Tax, West Bengal

ii) Case Number
Civil Appeal No. 161 of 1954

iii) Judgement Date
May 23, 1957

iv) Court
Supreme Court of India

v) Quorum
Justices Bhagwati, Venkatarama Ayyar, and J.L. Kapur

vi) Author
Justice J.L. Kapur

vii) Citation
1958 SCR 79

viii) Legal Provisions Involved

Section 6, Section 8, Section 10, Section 24(2) of the Indian Income-tax Act, 1922
Section 277F of the Indian Companies Act, 1913 (Banking definition)

ix) Judgments overruled by the Case (if any)
None explicitly overruled

x) Case is Related to which Law Subjects
Taxation Law, Corporate Law, Banking Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The case revolved around the interpretation of income tax provisions in the context of banking operations. The appellant, United Commercial Bank Ltd., argued that interest earned on government securities should not be treated distinctly from general business income if such securities were part of trading assets. This argument had far-reaching implications as it sought to blur the statutory boundaries between different heads of income delineated under Section 6 of the Indian Income-Tax Act, 1922. The Income Tax Officer, Tribunal, and High Court all took the position that “interest on securities” must be independently assessed under Section 8, and not under Section 10 for business income. The bank’s claim for a loss set-off under Section 24(2) was thereby denied. However, the Supreme Court clarified that a remand was required to factually determine whether the securities were held as trading assets integral to the banking business.

D) FACTS OF THE CASE

The appellant bank, a registered commercial bank, was assessed for the Assessment Year 1945-46. Its income was computed under two heads:

“Interest on Securities”: ₹23,62,815
“Business Loss”: ₹8,86,972

After adjusting the business loss against interest income, the net income stood at ₹14,95,826. However, the bank further sought to carry forward and set off a previous year’s loss (₹3,21,929) under Section 24(2). The Income Tax Officer disallowed the claim, arguing that losses under the “business” head could not be set off against “interest on securities,” since the two are distinct under Section 6. The Tribunal and High Court upheld this view. The bank then appealed to the Supreme Court, which took up the case due to its importance regarding the classification of income from securities held as trading assets by banks.

E) LEGAL ISSUES RAISED

i) Whether income from interest on securities held as trading assets by a bank could be assessed under “business income” (Section 10) or must necessarily fall under “interest on securities” (Section 8) of the Act.
ii) Whether business loss from the previous year could be set off under Section 24(2) against the income from interest on securities in the current year.
iii) Whether the income tax provisions under the Indian Income-Tax Act, 1922, mandate mutual exclusivity of heads of income under Section 6.

F) PETITIONER/ APPELLANT’S ARGUMENTS

i) The counsels for Petitioner / Appellant submitted that the securities were trading assets of the bank. They argued that banking business encompasses activities like investing in securities and earning interest. Thus, the interest earned should be included under the business head, as per Section 10. They referred to Section 277F of the Indian Companies Act, 1913, defining banking as accepting deposits and investing in securities, thereby implying that investment in securities was integral to banking operations[1].

They asserted that the income tax framework should allow flexibility, especially where income arises from the same business stream, even if legally tagged differently. They further relied on the principle that if two heads of income could apply, then the assessee had the discretion to be assessed under the one which imposed the lesser burden, citing Commissioner of Income-Tax v. Bosotto Bros. Ltd. (1940) 8 ITR 41[2].

The appellant also placed reliance on the decisions in Commissioner of Income Tax v. Ahmuty & Co. Ltd. [1955] 21 ITR 63 (Bom), which allowed dividend income from share trading to be considered business income, and Sadhucharan Roy Chowdhury, In re [1935] 3 ITR 114, in support of treating certain income from operational assets under the business head.

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that the structure of the Indian Income-Tax Act, 1922, envisaged mutually exclusive heads of income under Section 6. They argued that interest on securities fell squarely under Section 8, regardless of whether they were held as capital or trading assets. Allowing it under business income would undermine the statutory scheme.

The Respondent relied on multiple precedents including the seminal British case Salisbury House Estate Ltd. v. Fry [1930] 15 TC 266 and Butler v. The Mortgage Company of Egypt Ltd. [1928] 13 TC 803, asserting that once a source is covered under a specific head, it must be taxed under that head only[3].

They further pointed to the taxation mechanics under Section 18 (relating to tax deduction at source on securities) and the form prescribed under Section 22, which separated “interest on securities” from business income. The rationale was that securities income always remained distinctly chargeable under Section 8, regardless of business character.

H) JUDGEMENT

a. RATIO DECIDENDI

i) The Supreme Court held that each head of income under Section 6 is mutually exclusive. Hence, interest on securities, even if derived from trading assets, must be taxed under Section 8 and not under Section 10[4]. The classification depends on the nature of the source, not the capacity in which it is held. Business profits arise under Section 10, while interest, a separate stream, must be computed as per Section 8.

The Court clarified that allowing flexibility in classification would nullify the purpose of distinct charging heads. It referred to judicial dicta from Chuni Lal B. Mehta v. CIT [1938] 6 ITR 521 (PC) and Commercial Properties Ltd. v. CIT, Bengal (1928) 3 ITC 23 to affirm that income must be taxed under the head it naturally falls into[5].

b. OBITER DICTA

i) The Court observed that the question whether interest income from securities could be treated as arising from the same business under Section 24(2) depended on whether those securities were part of the trading assets of the bank. Since this was a factual issue, it required examination by the Tribunal. Thus, the matter was remitted for a fresh factual finding[6].

c. GUIDELINES

Each head under Section 6 of the Act is mutually exclusive.
Interest on securities, even when forming part of trading assets, must be taxed only under Section 8.
Business losses under Section 10 cannot be set off against income from securities under Section 8 unless same business continuity is proven under Section 24(2).
Courts cannot reclassify income merely based on the taxpayer’s treatment or intention unless the statutory head is ambiguous (which in this case it was not).

I) CONCLUSION & COMMENTS

This decision is a landmark exposition on the compartmentalization of income heads under the Indian Income-Tax Act, 1922. It underlines the importance of statutory interpretation over functional classification. The judgment preserved the integrity of the tax code by rejecting attempts to merge conceptually distinct heads of income. However, it also displayed judicial prudence by remanding the case for determining if the securities indeed formed part of trading assets, showing the Court’s inclination toward factual precision over abstract legalism.

The ruling continues to influence current income tax jurisprudence under the Income-tax Act, 1961, where similar principles still govern classification and set-off rules. This decision is especially crucial for banking and financial institutions dealing with multi-source income streams.

J) REFERENCES

a. Important Cases Referred