RAJAGOPALAN, J. - The relevant facts were never in dispute. The year of account with which we are concerned in this reference ended on December 31, 1950. The corresponding assessment year was 1951-52. The assessee bank paid to its constituents in the year of account Rs. 25,91,565 as interest charges on the various deposits received by the bank in the normal course of its banking business. No amount was borrowed in that year or in the past for the express purchase of buying securities or investment in securities. In the course of its normal banking business the assessee bank bought, held and sold securities including Mysore securities the income from which was tax free. The interest it received on all the securities it held, was brought to account as receipts. The money deposited by the constituents as well as the securities bought and held by the bank thus constituted the stock-in-trade of its banking business. Up to the assessment year 1951-52 the entire interest charges paid by the bank were deducted apparently under section 10 (2) (iii) of the Income-tax Act, in computing its taxable income and no attempt was made to apportion those charges on the basis that a portion of the monies borrowed by the bank had been basis that a portion of the monies borrowed by the bank had been utilised for the purchase of or investment in securities, the income from which was tax free. In the year of account 1950, the bank received in the usual course interest on the Mysore Government securities it held which interest was tax free. In the same year it sustained a loss of Rs. 6,616 in the sale of some of these Mysore securities. That was allowed as an item of expenditure under section 10 (2). Out of the total sum of Rs. 25,91,565 paid in the year of account as interest charges, a sum of Rs. 2,80,194 was apportioned by the Department as the interest payable on the portion of the borrowed monies that is deposits of various kinds computed and deemed to have been utilised for the purchase of these tax free Mysore securities. The average value of the holdings in the Mysore securities in the year of account was worked out at a little less than two and a half crores of rupees. The Department took the view that nothing should be deducted under the proviso to section 8 of the Act if it was interest paid on monies borrowed for investment in tax free securities that is securities interest on which was exempt from liability to income-tax under the provisions of the Act. Rupees 2,80,194 was therefore disallowed in deduction the interest charges of the year. That disallowance was confirmed by the Appellate Assistant Commissioner and by the Tribunal to whom the assessee bank successively appealed.
The Tribunal referred the following question to this court under section 66 (1) of the Act :
'Whether on the facts and circumstances of the case the bank was entitled to claim the deduction of the entire interest paid by it on fixed deposits either under section 10 (2) (iii) or 10 (2) (xv) ?'
The relevant portion of section 8 as it stood in the assessment year 1951-52 with which we are now concerned, was :
'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.... Provided that no income-tax shall be payable under this section by the assessee in respect of any sum deducted from such interest by way of commission by a banker realising such interest on behalf of the assessee or in respect of any interest payable on money borrowed for the purpose of investment in the securities by the assessee.....'
The Finance Act of 1956 amended section 8 with effect from April 1, 1956. For the words in the first proviso to section 8 'in respect of any sum deducted from such interest by way of commission by a banker realising such interest on behalf of the assessee' the Finance Act substituted 'in respect of any reasonable sum expended by him for purposes of realising such interest.' We have referred to this amendment merely for the sake of completeness though it has no bearing on the determination of any of the questions at issue. The Finance Act of 1956 added an Explanation to section 8 consisting of sub-clause (a) and (b). sub-clause (b) of the Explanation which is relevant for our purpose, ran :
'In the case of a banking company, - .... (b) money borrowed shall include monies received by way of deposits, and that amount which bears to the amount of interest payable on monies 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 which are included in the profit loss account of the company, shall be deemed to be interest payable on money borrowed for the purpose of investment in the 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 position thus was that even in the case of a banking company there was no express statutory provision for any apportionment of interest payments before Explanation (b) was added to section 8 in 1956. Nor was there any express provision for apportionment on the distinction between securities the interest on which was liable to be taxed and securities which were tax free. The courts however held that monies borrowed for purposes of investment in tax free securities lay outside the scope of the proviso to section 8.
The departmental instructions in force in the relevant assessment year ran :
'When a bank or other concern engaged in business similar to that of a bank receives deposits on account of loans in the course of its business and invests the money so borrowed as occasion arise the entire interest on such borrowings will be allowed as a deduction against its entire income liable to tax without attempting at allocation of the borrowed money to investment in tax free and other securities. When however there is a definite proof (not a mere inference) that a certain sun was specifically borrowed by a bank or similar concern for the purpose of investment in tax free securities and has been so invested the interest on money so borrowed will be set off against the interest on the tax free securities only...'
The proviso to section 8 is a specific provision for the deduction of interest paid on monies borrowed for investment in securities. While section 10 (2) (iii) is a specific provision for deduction of interest paid on monies borrowed for purposes of the business of the assessee section 10 (2) (xv) is a general provision for deduction of expenses incurred by an assessee wholly and exclusively for his business. The learned counsel for the assessee claimed that interest paid by a bank on the deposits it receives in the usual course of its banking business fell not within the scope of section 10 (2) (iii) but within that of section 10 (2) (xv). The further contention was that if a deposit did not constitute capital borrowed within the meaning of section 10 (2) (iii) it could not be money borrowed within the scope of the proviso to section 8 as it stood before it was amended in 1956 by the addition of the Explanation. We are unable to accept the contention that the deposits received from its constituents did not constitute borrowed monies in the hands of a bank. In relation to its constituent whose deposit it received the bank is in the position of a debtor subject to the liability to repay the amount in accordance with the terms of the contract and also subject to the liability to pay the contract rate of interest. In the case of a bank the deposit it receives in the normal course of its business would be monies borrowed for the purpose of the banking business it carries on. It would be capital borrowed within the scope of section 10 (2) (iii). If section 10 (2) (iii) applies to the interest paid on such deposits, the application of the general provision in section 10 (2) (xv) would stand excluded.
The real question we have to decide in this case is whether the sum in question, Rs. 2,80,194, represented or must be deemed to represent interest paid on monies borrows by the bank for purposes of investment in the Mysore securities within the scope of the proviso to section 8 as it stood in the assessment year 1951-52 or whether it was but a part of the interest paid on a capital borrowed by the bank for purposes of its business within the scope of section 10 (2) (iii). We shall confine ourselves to a determination of that question. And we should be construed as an attempt to evolve a formula for universal application in delimiting the respective fields in which proviso to section 8 and section 10 (2) (iii) operate.
We have already pointed out that the bank received its deposits in the usual course of its banking business and that it did not borrow any amount for the express purpose of investment in securities in general or in the Mysore securities with which we are concerned now. The monies deposited with the bank by its constituents merged with its general funds and practically all the monies in the hands of the bank constituted its stock-in-trade or circulating capital. So did the securities which it purchased and held from time to time including the Mysore securities. The securities were purchased for the purpose of the banking business the bank carried on an in the normal course of its banking business. Whether money borrowed by a bank for the express purpose of buying securities as part of its stock-in-trade would make it money borrowed for investment in securities within the scope of the proviso to section 8 as distinguished from capital borrowed for purposes of business and therefore, within the scope of section 10 (2) (iii) does not arise for consideration in this case and we should not be taken as recording in this judgment any opinion of outs on that issue. All that is necessary for us to decide is where the bank received deposits in the course of its normal banking business, and where it purchased securities from its funds which included such deposits, neither the original deposit by the constituent nor that deposit taken in conjunction with the transaction of purchase of securities can be viewed ask transaction of borrowing money for the purpose of investment in securities within the meaning of the proviso to section 8 as it stood in the year of assessment 1951-52, even if the purchase of the securities was subsequent to the receipt of the deposits on which interest was paid. We see no basis for construing the statutory expression in the proviso to section 8, as it stood in the relevant year without the statutory Explanation, 'money borrowed for the purpose of investment in securities by the assessee' to mean 'money borrowed by the assessee who invested in securities his money inclusive of the money that he had borrowed.' We emphasise that we are concerned only with an assessee who carried on a banking business, and who borrowed money in the course of and as incidental to the carrying on of his normal banking business, and who, independent of the transaction of borrowing, purchased securities, again in the course of his normal banking business. If the borrowing and the investment in securities were independent transactions, each undertaken in the course of the normal business of the bank, it should be obvious that it would not be a case of borrowing for the purpose of investment in securities. It would really be a case of borrowing for the purpose of the business, the banking business. Therefore, neither the receipt of the deposits nor the payment of interest on deposits brought the assessee before us within the scope of the proviso to section 8, as it stood before the Explanation was added in 1956, though factually the assessee had purchased securities, interest from which, had to been taxable, would have to be computed for the purpose of taxation only under section 8 of the Act.
This conclusion of ours, based on the language of the proviso to section 8 before the addition of Explanation (b) to section 8 in 1956, is strengthened by the legal fiction enacted by the Explanation. What was deemed by implication to be money borrowed for the purpose of investment in securities was not in fact money borrowed for the purpose before the enactment of the legal fiction. But for that legal fiction, how can holding of securities purchased, let us assume, in 1949, be correlated to deposit received in 1950, and how can the deposits received in 1950 be viewed as monies borrowed for the purpose of investment in those securities It was the average holding of the Mysore securities in the year of account 1950 that was taken into consideration for apportioning the interest charges, independent of the date of the acquisition of these securities. There was nothing to show that any portion of the interest charges paid in 1950 related to deposits that preceded the purchase of the Mysore securities which the bank held in 1950. It should be obvious that in the case of a bank deposits are of a comparatively short duration. So the interest charges incurred in 1950 should normally have related mostly to deposits made in that year or in the year before. We have said that there was nothing to show that these deposits were utilised to purchase these securities. The deposits on which interest charges were paid by the bank in 1950 could not be viewed as money borrowed for the purpose of investment in the Mysore securities held by the bank in 1950.
In the absence of direct authority of any decided case interpreting the statutory expression of the proviso to section 8, 'money borrowed for purposes of investment', we have examined its scope on the language of the statute. We shall now examine the cases to which we were referred to show that we could find nothing in them to militate against the interpretation we have placed on that statutory expression.
In United Commercial Bank Ltd. v. Commissioner of Income-tax the Supreme Court reaffirmed that the heads of income in section 6 are mutually exclusive. Therefore, in the case of an assessee who carries on a banking business his income from securities can be computed and securities can be computed and taxed only under that head and under section 8, even though the securities form part of the stock-in-trade of the banking business of that assessee. But there was no occasion for the Supreme Court to examine in that case the scope of the proviso to section 8 and determine what constituted money borrowed for the purpose of investment in securities as distinct from money borrowed for the purpose of the assessees banking business. Whether any apportionment of the interest charges incurred by a bank was permissible in computing its income from securities under section 8 and its business income under section 10 did not arise for consideration either in that case.
The decision of the Court of Appeal in England was reported at page 541 as Hughes (Inspector of Taxes) v. Bank of New Zealand. The decision of the House of Lords confirming that of the Court of Appeal was reported in the same volume at page 636 as Hughes (Inspector of Taxes) v. Bank of New Zealand.
The relevant facts in the Bank of New Zealand case were as follows : A bank registered and resident in New Zealand was assessed to income-tax for the year 1927-28 under Case 1 of Schedule D in the sum of pounds 94,448 on the profits arising from the business of its London branch, the assets of which included holdings of tax free securities. The tax free securities had all been purchased partly out of the floating capital of the branch and partly out of the monies obtained in New Zealand, to borrow which it had expended pounds 41,262. In the period in question, these holdings produced pounds 78,556 interest. The Court of Appeal held that this interest receipt was tax free. The Court of Appeal further held that though this interest was exempt from taxation, the bank was entitled for purposes of assessment to include in its trading expenses to be deducted from profits, the sum of pounds 41,262 as expenses particularly attributable to earning it. Lord Wright said at page 566 :
'The expenses which are dealt with here by the Commissioners are interest on the money borrowed and used to purchase these particular securities, and it would be a suitable conclusion if that could be deducted...... The case for the Crown can, I thinks be put most forcibly in this way, that this way, that this particular sum of pounds 78,000 odd is to be taken out of the trade altogether, and treated as if it had never been there at all. It can be put out of the computation and along with it the cost of earning it should also be excluded, and in that way the trade from both points of view would be considered as if there never had been any such profits at all. But I cannot find in the Act anywhere any provision which would justify any such elimination of a part of the expenses, where, as here, there is only one indivisible trade....... There is only one trade and we know exactly what are the expenses of that trade, and rule 3 (a) of the Rules applicable to Cases 1 and 11 of Schedule D provide that the expenses of the trade, if the money is wholly and exclusively laid out for the purposes of the trade, are to be deducted. The result seems to be that the Legislature in the Income Tax Acts has expressly provided for certain exemptions and exclusions which will operate when the profits of the trade are being dealt with under Case 1 of Schedule D, and has, either inadvertently or by design, omitted to make any corresponding provision in respect of any allocation or apportionment of the expenses of the trade. In other words, when, for the purpose of taxation under Schedule D, Case 1, you become to compute the profits, you have to exclude altogether this pounds 78,000 because there is, according to the view which this court here takes, express exclusion of these profits, and that reduces on side of the computation, but when you come to the other task of ascertaining the expenses wholly and exclusively laid out for the purposes of the trade you are faced with the total sum, and there is on provision for any apportionment....... the short result is that I find no means, consistent with the language of the Act, of giving effect to this contention of Crown......'
Greene, L. J., said at page 576 :
'The argument for the Crown on that point is of this nature, that in the account of a trading company made out for the purpose of its return under Case I of Schedule D the interest with which we are concerned must, in the first instance, be brought into the account as an item of receipt; and that the statutory provisions which exempt the interest from tax are to be given effect to by then removing altogether that item from the statement of profits and gains, and removing with it something which clings to it in the process of removal, namely, some apportioned part of the expenses of the company. Now I can find no warrant whatever in the language of the state to produce that result. When the statute says that interest is to be exempt I am quite unable to read it as meaning that in giving effect to that exemption by implication some repercussion is to take place on a different provision of the Act altogether. It seems to me quite improper to read any such implication into it. Counsel for the appellant says, and says with truth, that there are many cases in the working of the Act where it is necessary to make apportionments, and he instances as one the case where a non-resident company carries on business both in England and abroad and its accounts have to be dissected in order to bring in only that part of the business which is appropriate for the purpose of taxation. That is perfectly true, and the reason why the dissection has to be made there is that the statute quite clearly requires it and cannot be effective unless it is made. But in this case I can find nothing in the statute which requires this interest to be treated, so to speak, as a trade within a trade. This is really what the Crown contends, that in some way this interest which is to be brought into the account as an item of receipt is to be taken out of it with some apportioned expenses appropriated to it as thought it were a trade by itself. If the Legislature had intended that, in my opinion, it should have said so, and I am quite unable to construe the language of the relevant exemption clauses - because the suggested result can only arise from an implication from those clauses or a qualification upon them - in the way contended for.'
Romer, L. J., put it thus :
'Two alternative views may be taken on that question, views which I think I can best explain by an illustration. Suppose that a company - a non-resident company trading here - has in a particular year trading receipts amounting to pounds 3,000, consisting of pounds 1,000 from War Loan and pounds 2,000 from other sources, and supposing that its trading expenses, properly chargeable under Schedule B, Case 1, amount in the year to pounds 600, the balance of profits and gains is pounds 2,400. On that sum the Crown would be entitled to levy tax, but it will be observed that of that pounds 2,400, pounds 1,600 may be said to come from sources of revenue other than the interest of War Loan and pounds 800 from interest of War Loan, and when the Crown seeks to lay its hand on the pounds 800 for the purpose of taxing it, the taxpayer may say : No. Section 46 forbids that; therefore you can only tax me on pounds 1,600. In other words, the result of section 46 would be to remove from the companys profit and loss account not the whole pounds 1,000 interest on War Loan, but the pounds 1,000 less its proper proportion of the trading expenses of the company. That is one way of looking at it. The other way of looking at it involves the application of section 46 at an earlier stage. The application takes place in this way and at this time. When the company is drawing up its profit and loss account, or somebody is drawing it up on its behalf, the moment that amongst the trading receipts is put down this pounds 1,000 the company says : No, that must be removed from the account altogether having regard to section 46 because by reason of section 46 we are, for income-tax purposes, to be treated as being in exactly the same position as though the War Loan, which we have, produced no income at all. The result of that would be, of course, in the illustration I have given, that a company would be taxed under Case 1 merely on pounds 1,400.
Now, I confess that the first of those two alternative views possesses for me a certain attraction. On the other hand, the Master of the Rolls - and Greene, L. J., I understand, agrees with him - has taken the view that the second of those alternatives is to be preferred. I am not so enamoured of the first alternative as to differ from them.'
When the House of Lords confirmed this decision on appeal in Hughes (Inspector of Taxes) v. Bank of New Zealand. Lords Thankerton stated at pages 643-4 :
'....... it seems to me to be incontrovertible, that in the present case, the investments in question were part of the business of the respondents trade, and that the expense connected with them was wholly or exclusively laid out from the purposes of the trade. Expenditure in course of the trade which is unremunerative is non the less a proper decoction, if wholly and exclusively made from the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense. I agree on this question with the decision of the courts below.'
The principle laid down in the Bank of New Zealand case was extended and applied by this court in Chellappa Chettiar v. Commissioner of Income-tax. The head-note runs :
'Where a person who is carrying on business as a money-lender borrows money for his money-lending business and lends it out to constituents, and is obliged in the course of business to receive agricultural lands in repayment of his debts from such constituents, he is entitled to the deduction of the interest paid by him also on so much of the capital borrowed by him for business purposes as is represented by the agricultural lands got in under section 10 (2) (iii) in computing the profits and gains of his money-lending business.
He is also entitled to a deduction in respect of the establishment and other charges incurred by him for managing and cultivating such lands and the amount spent for obtaining conveyances of such lands.'
At pages 109-110 the learned Chief Justice referred to the decision of the Court of Appeal in the Bank of New Zealand case and at pate 110, after pointing out that the agricultural activities of the assessee were inextricably mixed with and incidental to the money-lending business, the learned Chief Justice observed :
'The above decision seems to support the view which we have expressed that in the absence of any express provision in the Act, the assessee is not to be deprived of the advantages conferred by exemptions such as section 10 (2) (iii) because the capital benefiting therefrom by means of permissible deductions happens to produce a non-taxable income.'
Thus the fact that the securities in the case of the Bank of New Zealand and agricultural lands of Chellappa Chettiar were acquired out of investments of borrowed monies, and that the subsequent income from these sources was not taxable made no difference to the question, whether the trading expenses including interest charges were deductible as expenses of the business the assessee carried on. The statutory provision in this country which authorises deduction of such interest charges is section 10 (2) (iii). Applying the principle laid down in these cases to the facts of this case we reach the position that, even if the bank had acquired the Mysore securities from out of the funds on which interest charges were paid in the year of account, the fact that the income from the Mysore securities was not taxable did not made the interest charges any the less trading expenses of the bank, expenses for the deduction of which, in computing its business income, section 10 (2) (iii) provides. No apportionment is permissible where the deduction is under section 10 (2) (iii).
In United Commercial Bank Ltd. v. Commissioner of Income-tax the banks income from the securities it held was computed under section 8 of the Act, and the net assessable income under the head amounted to Rs. 23,62,815. The bank also derived income from tax free securities. A loss of Rs. 8,86,972 was ascertained when its business income was computed under section 10. One of the contentions of the bank based on this proviso to section 8 was :
'It was lastly contended by the assessee that it should be allowed a deduction from its interest income of not only the interest payable on borrowings which it had invested in taxable securities, but also of the interest payable on the borrowings invested in securities which were tax free.'
That contention was negatived. The claim there was by the assessee for an apportionment of its expenses between its general business activities and its dealings with reference to securities inclusive of the tax free securities. That claim was rejected, and all the expenses were obviously taken into account only for the computation of the business income under section 10. In the case before us the claim for apportionment is made by the Department, and we can see no basis in the Act for sustaining that claim.
In Indian Steamship Co. Ltd. v. Commissioner of Income-tax the head-note itself is sufficiently explanatory of the facts. The assessee, a steamship company, existed in a moribund condition till the year 1943-44 and its subscribed capital amounted to only about Rs. 3,000. In 1944-45 the assessee decided to launch upon real business and obtained the permission of the Controller of Capital Issues for the issue of shares and debentures. The Controller, however, imposed, imposed a condition that any sum in excess of a certain amount received by the assessee should be invested in Government securities, pending actual expenditure on the purchase of ships. The assessee accordingly invested a certain sum in Government securities and received interest assessable under section 8. The assessee claimed that since the money raised had to be invested in Government securities by reason of the condition imposed by the Controller the debenture interest paid should be deducted under section 8. The income-tax authorities disallowed the claim on the ground that the object of issuing the debentures was not to invest the money in securities, but to employ it in the assessees business and that the condition imposed by the Controller made no difference. The court accepted the view of the Department and held that the assessee was not entitled to the deduction claimed. The position of the bank, if anything, is better. It cannot be said that it borrowed monies, that is, it received its deposits to purchase securities in general or tax free Mysore securities, independent of the fact to which we have already adverted that there was no connection between the deposits on which interest was paid in 1950 and the purchase of these securities.
The learned counsel for the Department referred to Somasundaram Chettiar v. Commissioner of Income-tax which was followed by the Bombay High Court in Provident Investment Co. Ltd. v. Commissioner of Income-tax and by the Lahore High Court in Macnabb v. Commissioner of Income-tax, Punjab. In that case the assessee carried on a money-lending business in British India and in Ipoh in the Federated Malay States. He borrowed money in Madras and sent it out to Ipoh and used it there as capital of the business. The interest paid on amounts borrowed in India and remitted to Ipoh was claimed as a deduction under section 10 (2) (iii) of the Act. That claim was disallowed. At page 509 the learned Chief Justice, however, observed :
'...... in my view, the business means the business whose profits are being assessed, and whose profits are being assessed, moreover, in the year under consideration.'
Earlier he had observed :
'.... the only reasonable construction of the section is to construe capital borrowed for the purposes of the business as meaning capital borrowed and used for the purposes of the business.'
Even that test is satisfied in this case. That a particular item of its business income is not taxable does not make it any the less income of the business. We have already pointed out that the principle laid down by this court in Chellappa Chettiar v. Commissioner of Income-tax should apply.
The learned counsel for the Department referred to Commissioner of Income-tax v. Madras Provincial Co-operative Bank Ltd., which was followed by the Bombay High Court in Broach Co-operative Bank Ltd. v. Commissioner of Income-tax, where apportionment was permitted. Apart from the fact that these cases dealt with co-operative banks, which stood on a footing of their own, they do to help us to determine the question at issue, whether any portion of the interest charges paid by the assessee bank in 1950 came within the scope of the proviso to section 8 of the Act.
We have held that no portion of the interest paid in 1950 was on money borrowed for the purpose of investment in securities within the meaning of the proviso to section 8. If the proviso to section 8 did not apply at all, there can be no question of apportioning under that proviso the interest charges between monies utilised for investment in tax free securities and monies invested in investment of securities the interest or income from which is chargeable to tax. We have also held that all the deposits on which interest was paid in 1950 constituted borrowed capital within the meaning of section 10 (2) (iii). Where interest charges are to be deducted under section 10 (2) (iii) of the Act, there can be no apportionment on the basis that a portion of the income resulting from the trading activities of the assessee was tax free. There was thus no statutory basis for any apportionment. Once again we have to emphasise that, where the deduction has to be under section 10 (2) (iii) and not under the proviso to section 8, the fact that the income from the Mysore securities was tax free was not a relevant factor. Rs. 2,80,194 was also an item of admissible deduction under section 10 (2) (iii) of the Act.
Our answer to the question is that the entire interest paid by the bank in the year of account inclusive of the sum of Rs. 2,80,194 was a permissible deduction under section 10 (2) (iii) of the Act.
The assessee will be entitled to the costs of this reference. Counsels fee Rs. 250.
Question answered accordingly.