GOVINDAN NAIR J. - The Income-tax Appellate Tribunal acting under section 66(1) of the Indian Income-tax Act, 1922, has referred the following question of law for our decision :
'Whether on the facts and circumstances of the case, the Tribunal was right in holding that Explanation to section 8 is not applicable in this case and that the entire interest of Rs. 44,720 earned by the assessee from securities issued by the former native States, etc., is entitled to rebate of income-tax ?'
The answer to this question depends on the interpretation of section 8 of the Indian Income-tax Act as well as the notification issued by the Central Government acting under section 60A of the Indian Income-tax Act.
Section 8 provides that :
'The tax shall be payable by an assessee under the head Interest on securities in respect of the interest receivable by him on any security of the Central Government or of a State Government, or on debentures or other securities for money issued by or on behalf of a local authority or a company.'
There are three provisos to the section and an Explanation. The first proviso reads :
'..... that no income-tax shall be payable under this section by the assessee in respect of any reasonable sum expended by him for the purpose of realising such interest.....'
And the third proviso is in these terms :
'Provided further that the income-tax payable on the interest receivable on any security of a State Government issued income-tax free shall be payable by the State Government.'
The relevant portion of one of the notifications (the notifications are similarly worded) issued under section 60A of the Indian Income-tax Act is worded thus :
'No income-tax shall be payable by an assessee on the interest receivable on the following income-tax free loans issued by the former Government of Travancore or by the former Government of Cochin, provided that such interest is received within the territories of the State of Travancore-Cochin and is not brought into any other part of the taxable territories to which the said Act applies. Such interest shall, however, be included in the total income of the assessee for the purposes of section 16 of the Indian Income-tax Act, 1922 :
3 per cent. tax free loan 1952-54 issued by the former Government of Travancore.
3 1/2 per cent. tax free loan 1956 issued by the former Government of Travancore.
3 per cent. tax free loan 1953-55 issued by the former Government of Cochin.
3 per cent. tax free loan 1955-58 issued by the former Government of Cochin.
3 1/2 per cent. tax free loan 1956-61 issued by the former Government of Cochin.'
On the basis of the above section and the notifications, it is contended by counsel for the department that only the net income after deducting from the gross income the reasonable sum expended for realising the gross income, should be added for ascertaining the total income. It is, therefore, urged that the net income must be calculated as provided in the Explanation to section, the relevant portion of which is in these terms :
'Explanation : In the case of a banking company, -
(a) the amount which bears to the aggregate of its expenses as are admissible under sub-section (2) of section 10, other than under clauses (iii), (vi), (via), (vib), (vii), (viii), (xi), (xii), (xiii), and (xiv) thereof, the same proportion as the gross receipts from interest on securities (inclusive of tax deducted at source) chargeable to tax under this section bears to the gross receipt from all sources which are included in the profit and loss account of the company, shall be deemed to be the sum reasonably expended by it for the purposes of realising such interest; and the amount for which allowance is admissible under sub-section (2) of section 10 shall be reduced correspondingly.'
This contention was sought to be supported on two grounds the first of which is that the term 'State Government' occurring in the third proviso to the section must be limited to such State Governments that were Provincial Governments before. We are unable to accept this contention. There is no justification for so limiting the scope of the words 'State Government' occurring in the third proviso. The words 'State Government' are also used in the body of section 8. If the term 'State Government' is understood in that limited sense, the same sense will have to be given to the term as it occurs in the body of section 8. This would lead to the result that there will be no tax on interest receivable on securities issued by States other than those that were Provincial Governments before. We think such an interpretation will be against the clear intention expressed by the legislature in the body of section 8. We, therefore, repel this contention.
Secondly, it is urged by counsel that the third proviso to the section only exempts the income-tax payable on the interest receivable. According to him, the income-tax payable on the interests receivable will have to be calculated in accordance with the terms of the section, and, therefore, necessarily by applying the first proviso to the section. On the other hand, the assessees counsel submits that the third proviso to the section contemplates the calculation of the tax on the entire interests receivable by the assessee. It is unnecessary to decide this question in the view that we are taking of the effect of the notification issued under section 60A of the Indian Income-tax Act.
The wording of the notification is clear. The entire interest receivable by an assessee, in respect of securities specified in the notification, is totally exempted. It is admitted that the interest received by the assessee fall within the notifications. Section 8 is, therefore, not attracted at all in relation to this interest. That being the case, in determining the quantum that should be added for ascertaining the total income of the assessee, the provisions of the notification will have to be looked into and not section 8. The material portion of section 16 is worded thus :
'16. Exemptions and exclusions in determining the total income. - (1) In computing the total income of an assessee - (a) any sums exempted under the....... the third provisos to section 8, ........ shall be included..........'
And it is clear from the above that the section will apply only in cases where sums are exempted under the third proviso to section 8. By virtue of the notification, the section itself is not attracted and a fortiori the proviso to the section cannot come into operation. The quantum of the addition, it appears to us, has, therefore, been provided by the notification itself which we extracted above in these terms :
'Such interest shall, however, be included in the total income of the assessee for the purposes of section 16 of the Indian Income-tax Act, 1922.'
Such interest refers to what is mentioned earlier in the notification, viz., the interest receivable on the tax free bonds specified in the notification.
The entire interest receivable has, therefore, to be added according to the above provision. Section 8, the provisos to the above section and the Explanation, cannot have any application. We, therefore, hold that the entire interest of Rs. 44,720 is entitled to rebate of income-tax.
We answer the question referred to us in the affirmative and against the department. There will be no order as to costs.