RAMASWAMI J. - The petitioner-bank is a public limited company deriving income from interest on securities, business in banking and from other sources. For the assessment year 1962-63, the bank received a sum of Rs. 5,476 towards interest on the following securities issued by the Mysore Government.
1. The Mysore Government 4% conversion loan 1953-63.
2. The Mysore 3% loan 1956-61.
The assessee-bank claimed rebate on this entire amount under section 86(i) of the Income-tax Act, 1961. But the Income-tax Officer deducted a sum of Rs. 4,089 as the proportionate interest on the money borrowed for the purpose of the investment and proportionate expenses in realising the said interest on the securities and arrived at the net income under this source at Rs. 1,387. The assessee preferred an appeal to the Appellate Assistant Commissioner and reiterated his contention that section 86(i) permitted rebate on the entire sum of interest received on tax-free securities and it did not restrict the relief to the amount assessed under section 18 after the deduction provided under sections 19 and 20. The assessee relied on a number of decisions in support of this stand. The Appellate Assistant Commissioner was of the view that the decisions cited were under the Indian Income-tax Act, 1922, and they were inapplicable to the assessees case, as, according to the Assistant Commissioner, the law has considerably changed under the new Act. In that view, he dismissed the appeal. On a further appeal, the Tribunal held that the income that assessable under section 18 was the net income after deduction contemplated as per sections 19 and 20 and the relief given under section 86 was in respect of the Income-tax which would be otherwise payable by the assessee but for the fact that the interest on the securities was tax-free. It sought to derive support for this view from the provisions of section 86(ii). Before the Appellate Tribunal, the assessee also raised a contention that the computation of the net interest under sections 19 and 20 by the Income-tax Officer was erroneous. It was the case of the assessee that having regard to the banking business which the assessee carried on, the entire expenses should be treated as one lump sum deductible as business expenses and the splitting up of the expenses for realising the interest on tax-free securities and the other expenses is artificial, illogical and not permitted under the provision of the Income-tax Act. Though this point was not raised before the Income-tax Officer or the Appellate Assistant Commissioner, the Appellate Tribunal allowed that point to be raised, but answered it against the assessee on the ground that the language of sections 19 and 20 supported the method of computation adopted by the Income-tax Officer. At the instance of the assessee, the following two questions have been referred for our decision :
'1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the relief under section 86 was only with reference to the net amount of interest and not on the gross amoun ?
2. Whether the method of computation of net interest from tax-free securities adopted by the Income-tax Officer was correc ?'
Mr. Ramamani, the learned counsel for the assessee, contended that the interest on the securities in question was income-tax free and governed by the provisions of section 86 and the provisions of sections 18, 19 and 20 have no application to the securities issued income-tax free. In support of this contention he relied upon a number of decisions. Alternatively, he contended that the taxability of the interest in question was solely governed by the notification issued by the Central Government under which the entire interest receivable from the said securities was exempted from income-tax and that the scope of the exemption will have to be considered only with reference to the notification and not with reference to sections 18, 19 and 20. Since the alternative contention is acceptable and is directly governed by the decision of the Supreme Court in Commissioner of Income-tax v. South Indian Bank Ltd., we do not propose to consider the main argument on the interpretation of sections 18, 19 and 20.
In Commissioner of Income-tax v. South Indian Bank Ltd. the facts were these : During the accounting year corresponding to the assessment year 1956-57, the South Indian Bank Ltd., Tiruchur, received a sum of Rs. 44,720 towards interest in respect of tax-free Cochin and Travancore securities. The bank claimed that rebate should be allowed on the entire sum of Rs. 44,720 received as interest from the said security, but the Income-tax Officer deducted proportionate interest and expenses and he granted only a sum of Rs. 7,236 as rebate for Income-tax. Though the Appellate Assistant Commissioner confirmed the Income-tax Officers order, the Income-tax Appellate Tribunal held that the bank was entitled to a rebate on the gross amount of interest amounting to Rs. 44,720. The High Court of Kerala agreed with the Tribunal. On appeal filed before the Supreme Court, the Supreme Court held that the notification should be construed on its own terms in its application to the question of rebate and that there was no scope for controlling the provisions of the notification with reference to section 8 of the Income-tax Act. It is useful to refer to the following passage occurring at page 765 of the report :
'Section 8 of the Income-tax Act provides for the computation of income and deductions therefrom under the head interest on securities. Section 60 if the Act confers a power on the Central Government to make an exemption, reduction in rate, or other modifications in respect of income-tax in favour of any class of income or in regard to the whole or any part of any income of any class of persons. This power is conferred on the Government to meet special situations de hors section 8. If section 8 of the Income-tax Act makes an exemption in respect of a particular income, there is no scope or occasion for invoking the special power conferred on the Central Government under section 60A of the Income-tax Act. Unless we accept the contention that the notification under section 60A was issued by the Central Government in superabundant caution to cover the same ground occupied by section 8 - we need not attribute any such redundancy to the Central Government - we do not see any reason why the notification should not be construed on its own terms in its application to the question of rebate raised in this case.'
The notification in the instant case was issued under section 60(1) of the Indian Income-tax Act, 1922. The relevant portion of the notification reads as follows :
'Incomes included in total income but exempt from the income-tax and not from super-tax.
The following classes of income shall be exempt from the tax payable under the said Act, but shall be taken into account in determining the total income of an assessee for the purposes of the said Act : - .....
(3) Interest receivable on the following securities issued by the Mysore Government : - ......
(2) Mysore Government 4 per cent. Conversion Loan 1953-63......
(4) Mysore 3 per cent. Loan 1956-61 .......'
Under section 297(2)(1) of the Income-tax Act, 1961, notwithstanding the repeal of the Income-tax Act, 1922, any notification issued under sub-section (1) of section 60 of the repealed Act and in force immediately before the commencement of the new Act, shall, to the extent to which provision has not been made under the new Act, continue in force until rescinded by the Central Government. The notification issued under section 60(1) of the Income-tax Act, 1922, is therefore, available for the assessee for claiming rebate on the interest received on tax-free securities. The notification which was construed by the Supreme Court in Commissioner of Income-tax v. South Indian Bank Ltd. was also a notification issued by the Central Government in exercise of its powers under section 60A of the Indian Income-tax Act, 1922, which relates to the power to make an exemption in relation to merged territories, corresponding to section 60 which relates to other territories and the wording of the notification is also similar. The decision of the Supreme Court is therefore on all fours and governs this case. As held by the Supreme Court, the phrase 'interest receivable' in the notification can only mean the amount of interest calculated as per the terms of the securities and not the interest receivable minus the amount spent in receiving the same. On the wording of the notification, therefore, the bank is entitled to rebate on the entire amount received as per the terms of the security. We accordingly answer the first question in favour of the assessee. In view of our answer to the first question, the second question does not arise for consideration.
The learned counsel for the revenue pointed out that one of the securities now in question is Mysore 3 per cent. Loan 1956-61. It is, therefore, necessary to find out as a fact whether any security, from which interest has been received and included in the total sum of Rs. 5,476 claimed as rebate in this case, became chargeable to income-tax during the accounting year relevant to the assessment year 1962-63 in this case. The Tribunal and the authorities below did not consider this question as the notification itself did not figure for consideration before them. We, therefore, direct the Tribunal to go into the question whether any of the securities became chargeable to income-tax during the accounting period relevant to the assessment year 1962-63 and give relief in accordance with the law stated above. The assessee would be entitled to his costs. Counsels fee Rs. 250.