(1) In these references, the main question for consideration is as to the applicability, to the facts and circumstances, of the first proviso to S. 8 and the two explanations thereto in the Income-tax Act 1922. The assessee is a well known banking company with its registered office at Madras. It holds securities issued by the then Mysore Durbar of the value of about 21/2crores of rupees as in 1950 and it is common ground there has been no addition thereafter to the securities. The income from these securities was income-tax free, but liable to super tax. For the assessment years 1956-57 to 1959-60, the profits or losses on the purchase and sale of such securities, among others, were taken into account in computing the total income of the assessee under 'business'.
In respect of the first two years, the assessments were reopened under section 34, on the view that the 'proviso and the Explanations thereto to S. 8 had been over-looked by the Revenue and these provisions were applied for all the 4 years, with the result the Income-tax Officer disallowed expenses and interest proportionate to the income from the Mysore Durbar Securities as calculated under the two Explanations to the first proviso to section 8. The assessee's appeals failed but it was successful before the Tribunal inasmuch as it upheld the contention that the proviso as well as the Explanations were inapplicable.
(2) The Tribunal, as a fact, found that the assessee had, in the years in question, incurred no expenses for collecting interest on the Mysore Durbar Securities and that the securities themselves had been originally purchased from the assessee's funds, which included deposits of various kinds from the public to whom it paid interest, depending on the nature on the deposits. The Tribunal was specifically of opinion that the securities had been purchased out of the capital reserves and accumulated profits and that this was supported by figures of investments placed before it for all the four years. In view of the argument before it for the Revenue, the Tribunal had gone into the matter and found that there was nothing on record, by an examination of the figures, either by the Income-tax Officer, or the Appellate Assistant Commissioner, to support the view that any expenses as such were incurred or that any expenses as such were incurred or that borrowed moneys were used for the investment in tax free securities. These are findings of facts which cannot be reviewed and must be taken as final for purposes of the references.
(3) On the factual basis found by the Tribunal, which we have just now mentioned, the contention for the assessee was accepted by the Tribunal that if no expenses were incurred in realising the income from the securities and no interest has been paid on money borrowed for the purpose of purchasing the securities, as was the case, no question of applicability of the first proviso with its Explanations to S. 8 could arise. It repelled the view urged for the Revenue that in spite of the factual position, expenditure as well as payment of interest on the basis of the formula in the two Explanations should be deemed to have been incurred and the same apportioned on the basis of those Explanations. There were certain subsidiary points urged, both for the assessee as well as the Revenue, before the Tribunal, which dealt with them and recorded its opinion. Under these circumstances, at the instance of the Revenue, the following question has been referred to us under section 66(1).
'Whether on the facts and in the circumstances of the case, the assessee is entitled to the allowances of the entire expenses incurred under section 10, on foot that no part of the overhead expenses and interest on borrowed capital is attributable to Government securities under the Explanation to section 8 of the Income-tax Act?'
In the other reference, at the request of the assessee, the questions referred to us by the Tribunal under the same provision, are--
'1. Whether the interest on Mysore securities received by the Bank in the previous years ending 31-12-1955, 31-12-1956, 31-12-1957 and 31-12-1958, were chargeable to income-tax under section 8 of the Income-tax Act read with the notification issued under section 60 as amended in 1954?
2. Whether, if the answer to the first question is in the affirmative and if any part of the expenses and interest was liable to be apportioned to and allowed against the interest on Mysore securities, the Bank was not entitled to exemption from income-tax on the gross turnover amount representing the interest on Mysore securities?
3. Whether the Explanations to the proviso to section 8 are not ultra vires the constitution as being discriminatory, and therefore liable to be struck down under Article 14 of the Constitution?'
So far as the last question is concerned, Mr. Venkatram, who appears for the assessee, has not pressed it, evidently because of K.S. Venkataraman Co. (Pte) Ltd. v. State of Madras : 60ITR112(SC) . He has however, made the following contentions before us:
1. The Bank has not incurred any expenditure for realising the interest on securities and the Bank has not borrowed any money for the purpose of investment in securities and, therefore, the first proviso to section 8 has no application and the Explanation providing for the quantification of the allowance for the purpose of the first proviso has also no application.
2. The interest on Mysore Durbar securities is not chargeable to income-tax under section 8, in view of the notification issued under section 60, but is liable to be included in the total income under S. 12.
3. Even if the first proviso to S. 8 and the explanation apply, there is no justification for classifying the gross receipts of the Bank into three groups, namely (i) interest or securities chargeable to tax under section 8, (ii) interest on Mysore Durbar securities not chargeable to tax under section 8 and (iii) other receipts, as the Explanations contemplates allocating the gross receipts into only two groups, namely, (a) interest on securities chargeable to tax under section 8 and (b) other receipts.
4. Even if any part of the expenses incurred by the Bank and the interest paid by the Bank is allocated to and deducted from the interest on Mysore Durbar securities, the Bank is entitled to exemption from income-tax on the gross amount of interest on Mysore Durbar securities.
It may be seen that none of these points urged for the assessee will arise for consideration, if our answer to the question referred to us, at the instance of the Commissioner of Income-tax, is answered against the Revenue.
(4) In effect, that question raises the applicability of the first proviso and the Explanation thereto to section 8. The substantive part of section 8 relates to the head of interest on securities. Though tax is eventually levied on the total income which is a single concept, its computation has to accord with the several provisions relating to different heads of income. Under S. 8 income-tax is payable under the head 'interest on securities' in respect of interest receivable by an assessee 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. As the provision stood prior to 1933. it had two provisions, the first of which was to the effect that no income tax shall be payable on the interest receivable on any security of the Government of India or declared to be income-tax free. We do not have to notice the second proviso for our present purposes.
By section 3 of the Indian Income-tax (Second Amendment) Act 1933, new proviso was introduced which was renumbered as the first proviso. It provided that no income tax shall be payable under the section by the assessee in respect of any such (sic) deducted from such interest by way of commission by a banker realising such interest on behalf of the assessee. This new proviso was expanded by section 9 of the Indian Income-tax (Amendment) Act 1939, the effect of which was, so far as the present references go, that a similar benefit, as in the case of deduction of expenses, was given in respect of any interest payable on money borrowed for the purpose of investment in the securities, subject to certain exceptions. Therefore, the first proviso covered, for purposes of deduction, the entire amount expended for realising interest or interest payable for money borrowed for the purpose of investment. Section 6 of the Finance Act of 1955, however, further amended the first proviso by substitution of certain words, the effect of which was, what was deductible as expenses for realisation of interest on securities was not the actual amount, but a reasonable sum allowed by the Revenue for the purpose. The first proviso underwent further amendment by section 6 of the Finance Act, 1956 and the two explanations thereto were introduced. The first proviso, as amended, reads--
'Provided 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 or in respect of any interest payable on money borrowed for the purpose of investment in the securities by the assessee except interest chargeable under this Act which is payable without the taxable territories, not being interest on a loan issued for public subscription before the 1st day of April 1958, unless in respect of interest which is so chargeable tax has been paid or deducted under S. 18, or unless there is a person in the taxable territories who may be appointed an agent under section 43 in respect of such interest'.
The two Explanations read:
'Explanations: 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), (iv), (vi-a), (vi-b), (vii), (viii), (xi), (xii), (xiii) and (xv) thereof, the same proportion as the gross receipts from interests on securities (inclusive of tax deducted at source) chargeable to tax under this section bears to the gross receipts 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: and (b) money borrowed shall include moneys received by way of deposits: and that amount which bears to the amount of interest payable on moneys borrowed 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 receipts from all sources bears to the gross receipts from all sources which are included in the profit and loss account of the company, shall be deemed to be interest payable on money borrowed for the purpose of investment in securities by the assessee, and the amount of such interest for which allowance is due under sub-section (2) of section 10 shall be reduced correspondingly.'
The proviso so amended expressly used the words, any reasonable sum 'expended' for the purpose of realising any interest. The first explanation provided a formula for allocation of expenses between interest on securities and other receipts on the same proportion as the receipt of interest chargeable to tax bears to the gross receipts from all sources. The proportion of expenses derived by application of the formula is 'deemed' to be the sum reasonably expended by the assessee for the purpose of realising interest on securities. A similar formula is provided by the other Explanation for apportioning interest referable to borrowing for the purpose of purchasing securities and the proportion arrived at through the formula is in the same way 'deemed' to be interest payable on money borrowed for purposes of investment in the securities. In effect, therefore, whatever be the actual expenses incurred or interest payable or paid, by reason of the explanations which provide a rule of thumb, a certain proportion thereof is fixed as allowable under the first proviso. Instead of leaving it to the officers of the Revenue to fiind what is a reasonable proportion, the two Explanations control, and by the formula, fix the reasonable sum expended on the two items.
(5) Mr. Venkataram presses before us that the whole basis for the first proviso to S. 8 is that there must have been an actual expenditure in realising interest on securities and payment of interest on money borrowed for the purpose of purchasing securities and that the two Explanations are to the first proviso and have no independent existence. He also submits that the 'deeming' in the two explanations is confined to the proportion and not extended to expenditure. In other words, what he says is that where there is no actual expenditure, the Explanations do not suggest that such expenditure should be 'deemed' to have been incurred. On the other hand, for the Revenue, the argument is just the opposite. Mr. Balasubramaniam says that the 'deeming' is to the expenditure as well whether incurred in fact or not and that even on the assumption that the first proviso was not applicable the Explanations were independent of the proviso and were attracted to the facts here.
On a plain reading of the first proviso and the two Explanations, we are clearly of opinion that the contention for the assessee is correct. The first proviso, as we mentioned, used the word 'expended' and not the words 'deemed to have been expended'. We have no reason to think that the position is different in respect of interest payable on money borrowed for investment in securities, though the actual word used by the proviso is 'payable'. That to our minds, only means, liability to pay interest, though not actually disbursed in the assessment year. While the proviso, by itself, left to the Income-tax Officer to determine what is reasonably paid out for realising interest or in payment of interest on money borrowed, the Explanations appear to place a ceiling and arbitrarily fixed the proportion, on the basis of the formula, which shall be 'deemed' to be a reasonable sum expenditure either for realising income from securities or for payment of interest on money borrowed for investment on such securities.
If the actual expense is in excess of the proportion arrived at under the Explanations, the latter is 'deemed' to be the reasonable expenditure, notwithstanding that actually a large amount had been laid out as expenditure. That to our minds is the only purpose of the fiction and its effect goes no further. We fail to see any justification in the language employed by the Explanations, to accept the contention for the Revenue that the fiction is also as to the factum of expenditure, where it has not been factually incurred. We are also unable to accept the further contention for the Revenue that the Explanations will have existence independent of the first proviso. They are necessarily linked up to the first proviso and without it the Explanations will serve no purpose, for it is under the proviso the allowance is given and the function of the Explanations is only to provide a formula to quantify the sums to be allowed under that proviso. That is substantially the view of the Tribunal and we think that it is correct.
(6) Mr. Venkataram went further to contend that even the substantial part of S. 8 will have no application to the Mysore Durbar securities. It is noteworthy that the very securities here under consideration were taken in Commissioner of Income-tax v. Indian Bank Ltd. : 56ITR77(SC) , as not within the purview of section 8. In fact, referring to the securities, the Supreme Court observed that it was common ground among the parties that section 8 did not apply. Apart from that, what is stated for the assessee is that section 8 is confined to income from certain specified securities which did not cover tax free securities issued by the then Mysore Durbar. The section only refers to any security of the Central Government or of a State Government. Prior to the Adaptation Laws Order, 1950, the expressions were 'Government of India' and 'Provincial Governments'. The third proviso to the section says 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 Governments formerly by the Provincial Governments.
The securities which were originally issued by the then Mysore Durbar can hardly be regarded as issued income-tax free by the succeeding provincial or State Government of Mysore. In our opinion, the scope of the substantial part of section 8 is made clear by the third proviso. the reference to the State or Provincial Government in the substantive part must be taken to relate to the Government in the third proviso, and if under the third proviso the securities must have been issued by the Provincial or State Government income-tax free, the securities referred to by the main provision of section 8 can be no different. We are inclined to think, therefore, that the securities issued by the then Mysore Durbar, are not within the purview of section 8. That apparently was the reason why the inapplicability of section 8 to the said securities was taken to be common ground in : 56ITR77(SC) . In our opinion, therefore, section 8 itself will not apply to the securities in question, and, in any case, the first proviso and the two Explanations thereto will be inapplicable. That being so, the question referred to us, at the instance of the Commissioner of Income-tax should be answered against the Revenue.
(7) On that view, as we mentioned at the outset, questions 1 and 2 in the other reference do no call for consideration. But we may in passing, not Commissioner of Income-tax v. South Indian Bank Ltd. : 59ITR763(SC) where the Supreme Court recently held that, on a construction of a notification under S. 60, rebate of income-tax should be on the entire interest earned from securities issued by a former Native State and not on the total receipt by way of interest from such securities minus the amounts spent in collecting or receiving the same. This view, undoubtedly, goes a long way in favour of the assessee on the fourth contention of Mr. Venkataram.
(8) As we said, the question in T. C. 212 of 1963 is answered against the Revenue with costs. Counsel's fee Rs. 250. In view of this, questions 1 and 2 in the other reference do not call for an answer. There will be no costs in this reference.
(9) Answered accordingly.