1971 (8) TMI 52 - HC - Income Tax

Assessee, a banking company, borrowed funds partly in treasury deposit certificates and partly in post office national savings certificates assessee received interest on those securities - admittedly, interest on treasury deposit certificates is exempt from income-tax - whether the amount spent on acquiring tax-free securities can be apportioned and interest disallowed

Summary

Issues Involved:
1. Permissibility of deduction under Section 19 of the Income-tax Act, 1961.
2. Permissibility of deduction under Sections 30 to 37 of the Income-tax Act, 1961.

Detailed Analysis:

1. Permissibility of deduction under Section 19 of the Income-tax Act, 1961:

The court examined whether the expenditure of Rs. 2,533, which was estimated to have been incurred for earning the interest income of Rs. 2,750 (exempt from tax), could be deducted under Section 19 of the Income-tax Act, 1961. The assessee, a banking company, had invested borrowed funds in treasury deposit certificates and post office national savings certificates. The Income-tax Officer had apportioned Rs. 2,533 as the expenditure related to earning the tax-exempt interest income and disallowed it. However, the Appellate Tribunal allowed the deduction, stating that Section 19 applied to income from securities exempt from tax and that the expenditure was deductible.

The court noted that the assessee borrowed funds for its banking business and invested part of those funds in securities as part of that business. Since no funds were specifically borrowed for purchasing those securities, no part of the interest paid on borrowed funds could be specifically attributed to acquiring those securities. The court referenced the Supreme Court's decision in United Commercial Bank Ltd. v. Commissioner of Income-tax, which clarified that income from securities held as trading assets by a banker falls under Section 8 and not Section 10, even though it is part of the banking business income.

The court also cited the Finance Act, 1956, which inserted an Explanation in Section 8, indicating how the proviso to Section 8 should be construed regarding the deduction of sums expended for realizing interest on securities or for deducting interest payable on money borrowed for investment in such securities.

Further, the court referenced the Madras High Court's decision in Indian Bank Ltd. v. Commissioner of Income-tax, which held that the entire amount of expenditure incurred by a banking company was deductible under Section 10(2)(iii) and that no apportionment was permissible. This decision was affirmed by the Supreme Court, which emphasized that Parliament did not require an inquiry into whether the expenditure produced taxable income, provided it was for the business purpose.

The court also referred to cases under Section 8, such as Central Provinces and Berar Provincial Co-operative Bank Ltd. v. Commissioner of Income-tax and Tiruchi Varthaga Sangam Ltd. v. Commissioner of Income-tax, which held that no part of the expenditure incurred by an assessee for its banking business could be disallowed on the ground that it related to tax-free securities.

Under the Income-tax Act, 1961, Sections 18 to 21 set out the mode of levying income under the head "Interest on securities." The court examined these sections and concluded that they did not mark a departure from the principles established under the Act of 1922. Section 18, which specifies the income chargeable under the head "Interest on securities," contemplates interest from all securities, including tax-free securities. Sections 19 and 20 allow deductions for sums expended for realizing interest from securities and interest payable on money borrowed for investment in securities, considering both taxable and tax-free securities.

The court concluded that the assessee was entitled to a deduction of the expenditure of Rs. 2,533 under Section 19.

2. Permissibility of deduction under Sections 30 to 37 of the Income-tax Act, 1961:

Given the court's conclusion that the deduction was permissible under Section 19, it did not consider the alternative question of whether the deduction could be allowed under Sections 30 to 37.

Conclusion:

The court answered the question referred in favor of the assessee, allowing the deduction of Rs. 2,533 under Section 19. The assessee was entitled to costs assessed at Rs. 200, with counsel's fee assessed in the same figure.