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Issues Involved:
1. Deduction of interest paid on borrowed money for investment in tax-free securities. 2. Applicability of Section 10(2)(iii) versus Section 10(2)(xv) of the Income-tax Act. 3. Interpretation of the proviso to Section 8 of the Income-tax Act. 4. Apportionment of interest charges between taxable and tax-free securities. Issue-wise Detailed Analysis: 1. Deduction of Interest Paid on Borrowed Money for Investment in Tax-Free Securities: The primary issue was whether the bank could claim the deduction of the entire interest paid on fixed deposits, specifically the amount apportioned by the Department as interest payable on monies borrowed for investment in tax-free Mysore securities. The Department disallowed Rs. 2,80,194 of the total Rs. 25,91,565 interest charges, which was confirmed by the Appellate Assistant Commissioner and the Tribunal. 2. Applicability of Section 10(2)(iii) versus Section 10(2)(xv) of the Income-tax Act: The assessee bank argued that the interest paid on deposits should fall under Section 10(2)(xv) (general provision for business expenses) rather than Section 10(2)(iii) (specific provision for interest on borrowed capital). The court rejected this contention, stating that deposits received by a bank in the normal course of its business constitute borrowed monies and thus fall under Section 10(2)(iii). Therefore, the application of Section 10(2)(xv) was excluded. 3. Interpretation of the Proviso to Section 8 of the Income-tax Act: The court examined whether the sum of Rs. 2,80,194 represented interest on monies borrowed for investment in Mysore securities within the scope of the proviso to Section 8. The court concluded that the deposits received and the securities purchased were part of the bank's normal business operations and not borrowed specifically for investment in securities. Therefore, the proviso to Section 8 did not apply. 4. Apportionment of Interest Charges Between Taxable and Tax-Free Securities: The court noted that prior to the 1956 amendment to Section 8, there was no statutory provision for apportioning interest payments between taxable and tax-free securities. The court emphasized that the deposits and securities were part of the bank's stock-in-trade, and the interest charges were trading expenses deductible under Section 10(2)(iii). The court found no basis for apportioning the interest charges as the Department claimed. Conclusion: The court held that the entire interest paid by the bank, including the Rs. 2,80,194, was a permissible deduction under Section 10(2)(iii) of the Income-tax Act. The assessee was entitled to deduct the full amount of interest charges from its taxable income. The court's interpretation was based on the statutory language and supported by relevant case law, including United Commercial Bank Ltd. v. Commissioner of Income-tax and Hughes (Inspector of Taxes) v. Bank of New Zealand. Costs: The assessee was entitled to the costs of the reference.
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