JAGADISAN J. - This is a reference under section 66 of the Indian Income-tax Act raising a question which, judged in terms of the statute, as indeed it ought to be, present no difficulty. In answering the question in favour of the revenue, justice according to law will undoubtedly be done. But whether there should be an amendment of the statute to temper legal justice with equity is a matter worthy of consideration by the legislature.
The Madras Co-operative Central Land Mortgage Bank Ltd., Madras, the assessee in this case, is a Co-operative society registered under the Co-operative Societies Act, 1912. One of the sources of income of the assessee is interest from securities. For the year ended June 30, 1955, the previous year for the assessment year 1956-57, the assessee earned the sum of Rs. 4,30,453 as interest from Government securities. The assessees contention before the department was that there should be a deduction from the said amount in accordance with certain departmental instructions published in the Income-tax Manual, to which reference will be made later. These instructions were, however, deleted from the Manual in its 10th edition, which was the edition in force during the relevant assessment year. The Additional Income-tax Officer, City Circle II, Madras, refused to give relief to the assessee on the basis of the departmental instructions contained in the previous Manual, but was of the opinion that the Explanation to section 8 of the Act, which came into force on and from April 1, 1956, would afford a guide in granting the necessary relief to the assessee. He, therefore, applied the said Explanation and computed the taxable amount of the assessee under this head, interest on securities, in the sum of Rs. 59,498. There was an appeal to the Appellate Assistant Commissioner by the assessee in which the contention urged was that the instructions in the Manual should be followed despite the fact that they were deleted in the latest Manual. The Appellate Assistant Commissioner took the view that the Explanation to section 8 of the Act applied only to a banking company, that the assessee registered under the Co-operative Societies Act cannot be called a company and was, therefore, not a banking, and that there was no satisfactory reason why the method of computing the taxable income under the head of interest on securities hitherto followed applying departmental instructions should be departed from. He, therefore, applied those instructions and computed the net income under this at Rs. 13,578. A departmental appeal before the Income-tax Appellate Tribunal against this decision followed and the result was that the decision of the Appellate Assistant Commissioner was set aside and that of the Income-tax Officer restored. The view of the Tribunal was that though in terms the Explanation to section 8 of the Act cannot be invoked, as the assessee is not a banking company, in the strict sense of the term as used in the Act, the principal underlying that Explanation can well be called in aid, and that is the only relief to which the assessee would be entitled. We must also mention that in the view of the Appellate Tribunal the Explanation to section 8 was more rational than the departmental instructions contained in the previous Manual.
On the application of the assessee under section 66 (I) of the Act the Tribunal has referred the following question to this court : 'Whether the Tribunal is justified in law in holding that the taxable income of the assessee from interest on securities is Rs. 59,498 ?'
The following is the statement of figures showing the income and expenses of the assessee, broadly, for the accounting year ended June 30, 1955.
1. Interest from Government Securities
2. Total gross earnings
3. Investment in Government Securities
4. Total working capital
5. Interest paid on debentures, deposits and other accounts
6. Total overhead expenses and establishment overhead charges
The assessee being a co-operative society is exempt under section 14 (3) of the Act in respect of its business income. Section 14 (3) reads :
'14. (3) The tax shall not be payable by a co-operative society -
(i) in respect of its profits and gains of business carried on by it... (v) in respect of any interest on securities chargeable under section 8 or any income from property chargeable under section 9, where the total income of the co-operative society does not exceed twenty thousand rupees and the society is not a housing society or an urban consumers society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power :...'
Sub-clause (v) of section 14 (3) cannot apply as the amount of income from securities exceeds Rs. 20,000 in this case. It will now be convenient to refer to the departmental instructions, the aid of which is sought by the assessee. These instructions are found at pages 248-249, Part III, Income-tax Manual, issued in 1946 :
'In the case of a co-operative society (including a co-operative bank) whose business income has been exempted from tax nuder section 60 of the Income-tax Act a proportionate amount of interest will be allowed against the income from interest on taxed and tax-free securities. This interest will bear the same proportion to total interest paid as the capital invested in securities bears to the total working capital.'
The amount of investment in Government securities forming the source of income under section 8 of the Act can reasonably be presumed to have come not merely from the working capital but also from the amount obtained by way of debentures, deposits and other accounts. So far as debentures and deposits are concerned the assessee is certainly liable to pay interest to the debenture holders and the persons who have made the deposits. The question for consideration is whether some portion of the interest so paid by the assessee should not go in reduction of the interest earned from the Government securities as it is not unreasonable to suppose that the assessee would not have found the whole of the money invested in securities without the aid of debentures and deposits in respect of which liability to pay interest is attached. The formula devised under the departmental instruction, which is specially Applicable to a co-operative society, is to find out the proportion of the capital invested in securities to the total working capital, and to calculate the same proportion to the total interest paid and deduct the amount so arrived at from the interest earned from Government securities. The application of these instructions to the assessees interest income in the year in question will therefore be as follows :
1. Gross income from securities Rs. 4,30,053.
2. Proportion to interest paid in accordance with the departmental instructions in the Manual
Rs. 15,09,490 (interest paid on debentures, deposits and other accounts).
Rs. 1,30,60,653 (investment in Government securities).
Rs. 4,73,42,603 (total working capital).
The working out of this fraction results in the figure Rs. 4,16,475. Deducting this from the gross income from securities the balance is Rs. 13,578. This, according to the assessee, would be the only amount taxable under section 8. Now the Tribunal has applied what is stated to be the principal underlying section 8 of the Act. Section 8, in so far as it is material, reads :
'8. The tax shall be payable by an assessee under the head interest on securities in respect of the interest received by him on any securities of the Central Government or of a State Government..... :
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 releasing such interest or in respect of any interest payable on money borrowed for the purpose of investment in the securities by the assessee....
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...... 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 profits and loss account of the company, shall be deemed to be the sum reasonably by it for purposes of realising such interest;......
(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 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 the securities by the assessee....'
The proportion of the gross receipts from interest on securities chargeable to tax to the gross receipts from all sources is deemed to be the proper basis of reasonable expenses for realisation or collection of such interest. There is no need to discuss the question whether the Explanation to section 8 of the Act applies or not, as it is indeed common ground between the revenue and the assessee that in terms the Explanation will not apply. The assessees contention is that the Explanation cannot apply to a co-operative society, and that therefore the only alternative method by which the true assessable income of interest from securities has to be taxed is to follow the departmental instructions which had been followed and been in operation for a long number of years prior to their being deleted from the tenth edition of the Manual.
In our opinion the question as framed for our decision is misleading. The true question which emerges from the facts and circumstances of the case is 'Whether the taxable income of the assessee from interest on securities is Rs. 13,578 as contended by the assessee and as worked out on the basis of the departmental instructions contained at pages 248 and 249 in part III of the Income-tax Manual of the year 1946.' We have therefore recast the question in this manner and it is this question which we now propose to answer.
It is true that revenue has given the assessee the benefit of the Explanation to section 8 of the Act, but we are at a loss to understand on what basis such relief has been afforded. A taxing enactment can impose a tax on the subject only by words which are express and plain. There can be no taxation by implication or intendment. A subject who is within the letter of the tax law can be saved only by the exemptions and savings prescribed under that very Act. The saving and exemption clauses of a taxing statute would entitle the subject to their benefit only if the words are plain and unambiguous. A subject cannot get out of the taxing statute on grounds of alleged inequity, harshness or the implications and intendment of the saving provisions. The Supreme Court of America in Bank of Commerce v. Tennessey enunciated the rule thus :
'Taxes being made the sole means by which sovereignties can maintain their existence, any claim on the part of any one to be exempt from the full payment of his share of taxes on any portion of his property must, on that account, be clearly defined and founded upon plain language.... no implication will be indulged in for the purpose of construing the language used as giving the claim for exemption, where such claim is not founded upon the plain and clearly expressed intention of the taxing power'
In Inland Revenue Commissioners v. Ross & Coulter Lord Thankerton, delivering the judgment of the House of Lords, stated the principle thus :
'Counsel are apt to use the adjective penal in describing the harsh consequences of a taxing provision but if the meaning of the provision is reasonably clear the courts have no jurisdiction to mitigate such harshness. On the other hand if the provision is capable of two alternative meanings the courts will prefer that meaning more favourable to the subject.'
There is certainly no equity about a tax. It will not be open to the taxpayer burdened with tax under an enactment to claim exemption from the Act or immunity from the operation of the Act on grounds of analogy or on the ground that exemption under the Act though specific in terms governing a particular category of cases must be liberally construed so as to cover his case as well.
Mr. Swaminathan, learned counsel for the assessee, relied upon the decision of the Bombay High Court in Broach Co-operative Bank v. Commissioner of Income-tax and submitted that the rule of justice, equity and good conscience is not alien to the scope of even a taxing enactment. The following passage from the judgment of Chagla C.J., at pate 493, was quoted :
'The Tribunal has therefore applied a rule which it calls a rule of justice, equity and good conscience by suggesting that it should be deemed that the moneys were invested by the bank proportionately from its deposits and its capital. For want of any better rule or a more equitable rule we see no reason why we should differ from the view taken by the Tribunal.'
We are not called upon to say in this case whether the actual decision of the Bombay High Court in that case is correct or not. We must however observe that if the learned Chief Justice meant to say that the rigours of a taxing enactment can be mitigated by observing rules of justice, equity and good conscience we regret, with great respect to the learned Chief Justice, that we are not able to agree with his view. The Constitution provides that no subject can be taxed except in accordance with law and a tax can therefore be imposed only by the legislature competent to enact the taxing measure. Once that is done the province of the court is only to interpret the statute if doubts arise in a matter of construction. But it is certainly beyond the scope of courts administering tax law to import in its decisions what in its view may appear to be a rule of justice, equity or good conscience. We have no hesitation in holding that the department acted erroneously in applying the principle supposed to underlie the Explanation to section 8 when in terms that provision does not apply.
Mr. Swaminathan, learned counsel, next contended that the department was not justified in departing from the instructions contained in the . v. Ostime. In that case a company carried on the trade of building motor bodies and it had since 1924 used the direct cost method of ascertaining the cost of work-in-progress under which the cost of direct materials and labour alone was taken into account. For the years 1951-52, 1952-53, 1953-54, assessments were made on the company to income-tax on the footing that the cost of works-in-progress should be arrived at by the 'on cost' method under which a proportion of indirect expenses, that is, factory and office expenses, etc., was added to the direct cost. The Special Commissioners found that the accountancy profession was satisfied that either method would produce a true figure of profit for income-tax purposes and that which method should be used was a matter of policy for the decision of the directors of the company. The Commissioners decided, however, that in order to arrive at a true figure of the cost of work-in-progress a proportion of factory over-heads but not of other indirect expenses should be taken into account. It was held that on the facts and findings there was no justification for requiring the company to change from its practice of using the direct cost method. That was a case in which the only question was how the cost of work had to be computed, whether it should be what was called the direct cost method or the 'on cost' method. That the assessee had a right to value the cost in any manner it liked provided the true profits and gains were worked out, reasonably and rationally, was not in dispute. The House of Lords decided that there was no justification to compel the assessee to follow one method in preference to the other. At page 566, Viscount Simonds observed thus :
'.... it is common ground that some value must be attributed to work-in-progress, and that in ascertaining that value two considerations must be borne in mind : first, that the ordinary principles of commercial accounting must as far as practicable be observed and, secondly, that the law relating to income-tax must not be violated..... that is to say, by one means or another the full amount of the profits or gains of the trade must be determined.'
Again at page 567 :
'... regard must be paid to accountancy principles also in ascertaining what that cost is, subject always to the condition that taxing statutes must not be violated.'
The ratio of the decision of the House of Lords is that if the true profits and gains of a company can be ascertained without violating any provisions of the statute by adopting any method of valuing the cost, it is not for the revenue to impose a particular method upon the assessee merely because in its view the more appropriate method would be the method not adopted by the assessee. We do not think that that decision can really help the assessee in the present case to advance the contentions urged.
There is substance in the argument of the learned counsel, Mr. Swaminathan, that some deduction has to be allowed from the interest earned from securities as otherwise there would be no determination of the true income of the assessee. The assessee is carrying on banking business, and it may be that in computing the business income of the assessee an allowance may have to be given as it can never be said that all the gross income earned by the assessee would be the true income without taking into account the expenses incurred. But the assessee is exempt from taxation in regard to its business income. Confining our attention only to the interest on securities, we do not think that any deduction should be allowed either by reason of the departmental instructions, which have no statutory force and which have now been cancelled, or by applying the Explanation to section 8 of the Act which in terms is not applicable. We must point out that there is no reference by the department taking exception to the computation of the taxable income under the head of 'interest on securities' as Rs. 59,498. This has become final. The only question is whether the assessee would be entitled to stiff further relief and can have the amount determined as Rs. 13,578. We do not think that the assessee is entitled to have the amount of interest on securities reduced from the sum of Rs. 59,498 to Rs. 13,578.
We therefore answer the question against the assessee who will pay the costs of the department. Counsels fee Rs. 250.