INDIAN BANK LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) 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 purpose 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 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 deducting 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 " 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) ? "

(2.) THE relevant portion of section 8, as it stood in the assessment year 1951 -52 with which we are now concerned, was

(3.) 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