Alfred Henry Lionel Leach, C.J.
1. The first question referred involves the construction of Section 8 of the Indian Income-tax Act, 1922, as amended in 1939. The first clause of the section states 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 Provincial Government, or on debentures or other securities for money issued by or on behalf of a local authority of a company. Then follow three provisos. The first proviso allows the assessee to deduct the interest payable by him on money borrowed for the purpose of investment in securities. In other words, the tax is only payable on the amount of interest received, less the interest which the assessee has to pay as the result of having borrowed to make the investment. The second proviso says that no income-4 tax shall be payable on the interest receivable on a security of the Central Government issued or declared to be income-tax free. The third proviso makes a similar provision in respect of a security of a Provincial Government issued income-tax free, but in that case the tax is payable by the Provincial Government.
2. The assessee here is the Madras Provincial Co-operative Bank, Limited, a society registered under the Co-operative Societies Act, 1912, and the Madras Co-operative Societies Act, 1932. In the year of account, 1938-39, the assessee received in interest on tax-free securities the sum of Rs. 69,975. By reason of the second proviso to Section 8 the assessee is entitled to deduct this sum when can-dilating the amount of income on which income-tax is payable. The exemption does not apply in respect of super-tax. Section 16 (1) (a) states that in computing the total income of an assessee any sums exempted under the second and third provisos to Section 8 shall be included.
3. The assessee is not content with the deduction of the Rs. 69,975. It is said that the Income-tax Officer should, by virtue of the first proviso to Section 8, allow a further deduction of Rs. 26,729 being the interest which was paid in the year of account on monies borrowed for the purpose of buying tax-free securities. The second proviso was always in the section. The first proviso was inserted in 1939 and there can be no doubt that the object which the Legislature had in mind was to exempt to this extent interest received on securities which were taxable. In our opinion, the assessee here is entitled to the benefit of the first proviso in respect of interest received from securities which are not tax-free and to the benefit of the second proviso in respect of tax-free securities. The assessee is not entitled to a double exemption in respect of the tax-free securities. The question will be answered in this sense.
4. The second question must also be answered in favour of the Income-tax authorities. The assessee has invested money in debentures issued by the Madras Cooperative Central Land Mortgage Bank. These debentures were bought by the assessee in the open market. The contention is that the monies paid for these debentures represent loans to the Madras Co-operative Central Land Mortgage Bank and therefore represent transactions which are part of the ordinary business of the assessee. Clause 12 (2) of the by-laws of the assessee says that loans may be granted by the executive committee to registered societies as defined by the Madras Co-operative Societies Act, 1932, other than Central Banks in the Province, on such terms and conditions as the executive committee may prescribe from time to time and with the general or special sanction of the Registrar, under Section 32 of the Madras Co-operative Societies Act, 1932. There was no sanction asked for or given here and therefore there was no loan to the Madras Cooperative Central Land Mortgage Bank within the meaning of the by-laws. But apart from this, the fact that the assessee went into the market to purchase these securities shows that the object was investment. The interest paid on these debentures represents taxable income. Consequently the answer to the second question is that the interest on the debentures represents interest on an investment.
5. The Commissioner of Income-tax is entitled to his costs, which we fix at Rs. 250.