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Interpretation of Section 8 of the Income-tax Act regarding deduction of interest on borrowings for investment in securities, Determining the principle for deciding the funds utilized by a bank in the investment of securities. Analysis: 1. The judgment delves into the interpretation of Section 8 of the Income-tax Act concerning the deduction of interest on borrowings for investing in securities. The court analyzed the provisos under Section 8, particularly focusing on proviso 1, which allows for a deduction of interest paid on borrowings for investing in securities. The court clarified that this deduction is applicable only when the securities are taxable and not tax-free. The court emphasized the need to interpret the section and its provisos as a whole to derive a comprehensive and logical meaning, ultimately concluding that the deduction under proviso 1 does not apply to investments in tax-free securities. 2. The judgment discussed conflicting views from different High Courts on the interpretation of Section 8. While the Madras High Court supported the view that the deduction of interest on borrowings is not permissible for investments in tax-free securities, the Nagpur High Court took a contrary stance, allowing for the deduction despite the double benefit received by the assessee. The Bombay High Court favored the interpretation of the Madras High Court, emphasizing the need for a strict construction of taxing statutes and concluding that the deduction under proviso 1 is limited to investments in taxable securities. 3. The second issue addressed in the judgment pertains to determining the principle for identifying the funds utilized by a bank in the investment of securities. The court examined whether the bank used its working capital or deposits for investing in securities to ascertain eligibility for the deduction under proviso 1. Despite the lack of clarity in the bank's accounting practices, the court rejected the presumption that deposits were primarily used for investments, highlighting the absence of banking practices mandating such allocation. The court upheld the Tribunal's decision to deem that investments were made proportionately from both capital and deposits, aligning with the rule of justice, equity, and good conscience. 4. The court re-formulated the first question to address the computation of interest on borrowings based on proportional investments from capital and deposits. Both questions were answered affirmatively, confirming that the interest deduction under Section 8 is contingent on investments in taxable securities and that the bank's investments were deemed to be proportionate from capital and deposits. The judgment concluded with the assessee being directed to pay the costs, with the concurring opinion of Justice Tendolkar.
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