1972 (9) TMI 34 - HC - Income Tax

1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the relief under section 86 was only with reference to the net amount of interest and not on the gross amount ? 2. Whether the method of computation of net interest from tax-free securities adopted by the Income-tax Officer was correct ?

Summary

Issues:
1. Interpretation of section 86 of the Income-tax Act, 1961 regarding rebate on interest from tax-free securities.
2. Correct method of computation of net interest from tax-free securities by the Income-tax Officer.

Analysis:
The petitioner-bank derived income from interest on securities issued by the Mysore Government for the assessment year 1962-63. The bank claimed rebate under section 86(i) of the Income-tax Act, 1961 on the entire interest amount received. However, the Income-tax Officer deducted a portion for expenses related to the investment, resulting in a lower net income. The Appellate Assistant Commissioner and the Tribunal upheld this decision, stating that the relief under section 86 was based on the net income after deductions under sections 19 and 20. The Tribunal also rejected the bank's argument against the splitting of expenses for realizing interest on tax-free securities. The Tribunal raised two questions for decision by the court regarding the interpretation of section 86 and the correctness of the computation method used by the Income-tax Officer.

In a related case, the Supreme Court's decision in Commissioner of Income-tax v. South Indian Bank Ltd. clarified the application of notifications issued by the Central Government under the Income-tax Act. The Supreme Court emphasized that notifications exempting income from tax should be construed independently of the provisions of the Act. The notification in the current case exempted interest on securities issued by the Mysore Government from income tax. The court determined that the bank was entitled to rebate on the entire interest amount received as per the terms of the security, in line with the notification. The court relied on the Supreme Court's decision to support the bank's claim for full rebate on the interest from tax-free securities.

The court directed the Tribunal to investigate whether any of the securities from which interest was received became chargeable to income tax during the relevant accounting period. This aspect was overlooked in previous proceedings due to the notification not being considered. The court instructed the Tribunal to provide relief accordingly based on the law explained in the judgment. The court ruled in favor of the assessee based on the interpretation of the notification and the Supreme Court's decision. The second question regarding the computation method of net interest did not require consideration following the resolution of the first issue.