1967 (1) TMI 27 - HC - Income Tax

Whether the assessee is entitled to the allowance of the entire expenses incurred u/s 10, on foot that no part of the overhead expenses and interest on borrowed capital is attributable to Govt. securities under the Explanation to section 8 - Held, yes

Issues Involved:
1. Applicability of the first proviso to section 8 and the two Explanations thereto in the Income-tax Act, 1922.
2. Chargeability of interest on Mysore Durbar Securities under section 8 of the Income-tax Act.
3. Allocation of expenses and interest related to Mysore Durbar Securities.
4. Constitutionality of the Explanations to the proviso to section 8 under Article 14 of the Constitution.

Detailed Analysis:

1. Applicability of the First Proviso to Section 8 and the Two Explanations:
The primary issue was whether the first proviso to section 8 and the Explanations thereto applied to the facts of the case. The Tribunal found that the assessee incurred no expenses for collecting interest on the Mysore Durbar Securities and did not use borrowed funds for purchasing these securities. Consequently, the Tribunal held that the proviso and Explanations were inapplicable. The court supported this view, stating that the proviso used the term "expended" and not "deemed to have been expended," indicating that actual expenditure was necessary for the proviso to apply. The Explanations provided a formula for allocating expenses and interest but did not extend to deeming expenditure where none existed. Therefore, the Tribunal's decision that the proviso and Explanations did not apply was upheld.

2. Chargeability of Interest on Mysore Durbar Securities under Section 8:
The court examined whether interest on Mysore Durbar Securities was chargeable under section 8, considering a notification under section 60. It was argued that section 8 did not apply to these securities, as they were issued by the Mysore Durbar and not the Central or State Government. The court noted that in a previous case, it was common ground that section 8 did not apply to these securities. The court concluded that section 8 did not cover tax-free securities issued by the Mysore Durbar, thus supporting the assessee's contention.

3. Allocation of Expenses and Interest Related to Mysore Durbar Securities:
The court addressed the allocation of expenses and interest related to Mysore Durbar Securities. The revenue argued that expenses and interest should be deemed incurred based on the formula in the Explanations. However, the court held that the Explanations only provided a method for determining reasonable sums expended and did not create a fiction of expenditure where none existed. The Tribunal's view that the Explanations were linked to the first proviso and did not have independent existence was upheld.

4. Constitutionality of the Explanations to the Proviso to Section 8:
The constitutional challenge under Article 14 was not pressed by the assessee, following precedent from K. S. Venkataraman & Co. (P.) Ltd. v. State of Madras. Therefore, the court did not address this issue in detail.

Conclusion:
The court answered the primary question against the revenue, stating that the first proviso and the Explanations to section 8 did not apply to the facts of the case. Consequently, the other questions raised by the assessee did not require consideration. The court also referenced a Supreme Court decision supporting the assessee's position on rebate of income-tax on interest from securities issued by a former Native State. The revenue's appeal was dismissed with costs, while the assessee's reference did not result in additional costs.

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