COMMISSIONER OF INCOME TAX Vs. RADHA SWAMI BANK

JUDGEMENT

(1.) THE assessee, the Radha Swami Bank Ltd., is a banking company. In the course of its banking business, it invested Rs. 75,000 out of its borrowed funds partly in treasury deposit certificates and partly in post office national savings certificates. During the previous year ended December 31, 1962, relevant for the assessment year 1963-64, the assessee received Rs. 2,750 as interest on those securities. Admittedly, interest on treasury deposit certificates is exempt from income-tax.

(2.) IN the assessment proceedings for the assessment year 1963-64 the INcome-tax Officer accepted the claim of the assessee that the interest income of Rs. 2,750 was exempt under Section 10(15)(ii) of the INcome-tax Act, 1961. But, he negatived the further claim of the assessee that the expenditure incurred in earning the said income, including the interest paid on funds borrowed for purchasing those securities, was a permissible deduction. Adopting a pro rata basis he apportioned Rs. 2,533 as the expenditure capable of being related to the earning of the interest income of Rs. 2,750 and disallowed the same. An appeal by the assessee to the Appellate Assistant Commissioner was dismissed. The assessee proceeded in second appeal to the INcome-tax Appellate Tribunal. The Appellate Tribunal allowed the appeal, holding that Section 19 applied to income from securities which was exempt from tax under the Act and that, therefore, the expenditure claimed was deductible. Alternatively, the Appellate Tribunal said, in case Section 19 was not applicable, the claim to deduction would be permissible under Sections 30 to 37. At the instance of the Commissioner of INcome-tax, the Appellate Tribunal has referred the following question under Section 256(1) :

(3.) A banking company borrows funds for the purpose of its banking business, and in the course of its business acquires securities as trading assets. There was a controversy on the question whether the interest from such securities was liable to be considered under Section 8 or under Section 10 of the Indian Income-tax Act, 1922. Section 8 describes how income falling under the head "interest on securities" should be computed, while Section 10 sets out how income under the head "profits and gains of business, profession or vocation" has to be computed. The Supreme Court pointed out in United Commercial Bank Ltd. v. Commissioner of Income-tax, that under the Indian Income-tax Act, 1922, the income of an assessee was one and Sections 7 to 12 of the Act directed the mode in which the income-tax was to be levied and that those sections were mutually exclusive. Where an item of income fell under one specific head it was to be charged under that head and no other, and, therefore, interest on securities would fall under Section 8 and not under Section 10 even though the securities were held as a trading asset in the course of business by a banker. Notwithstanding that it falls to be considered under Section 8, it continued in fact to be part of the income from the banking business. The purchase and sale of securities was as much part of that business as receiving deposits from clients and withdrawals by them. In such a case, the court said, the entire business fell to be treated as the same business. The principle laid down in that case was followed by the Supreme Court in Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd.