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TMI Blog1967 (1) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... , among others, were taken into account in computing the total income of the assessee under " business ". In respect of the first two years, the assessments were reopened under section 34, on the view that the proviso and the Explanations thereto to section 8 had been overlooked by the revenue and these provisions were applied for all the four years, with the result the Income-tax Officer disallowed expenses and interest proportionate to the income from the Mysore Durbar Securities, as calculated under the two Explanations to the first proviso to section 8. The assessee's appeals failed but it was successful before the Tribunal, inasmuch as it upheld the contention that the proviso as well as the Explanations were inapplicable. The Tribunal, as a fact, found that the assessee had, in the years in question, incurred no expenses for collecting interest on the Mysore Durbar Securities and that the securities themselves had been originally purchased from the assessee's funds, which included deposits of various kinds from the public to whom it paid interest, depending on the nature of the deposits. The Tribunal was specifically of opinion that the securities had been purchased out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60 as amended in 1954 ? 2. Whether, if the answer to the first question is in the affirmative, and, if any part of the expenses and interest was liable to be apportioned to and allowed against the interest on Mysore Securities, the bank was not entitled to exemption from income-tax on the gross amount representing the interest on Mysore Securities ? 3. Whether the Explanations to the proviso to section 8 are not ultra vires the Constitution as being discriminatory, and, therefore, liable to be struck down, under article 14 of the Constitution ? " So far as the last question is concerned, Mr. Venkatram, who appears for the assessee, has not pressed it, evidently because of K. S. Venkataraman Co. (P.) Ltd. v. State of Madras. He has, however, made the following contentions before us : (1) The bank has not incurred any expenditure for realising the interest on securities and the bank has not borrowed any money for the purpose of investment in securities and, therefore, the first proviso to section 8 has no application and the Explanation providing for the quantification of the allowance for the purpose of the first proviso has also no application. (2) The interest on Mys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction by the assessee in respect of any sum deducted from such interest by way of commission by a banker realising such interest on behalf of the assessee. This new proviso was expanded by section 9 of the Indian Income-tax (Amendment) Act, 1939, the effect of which was, so far as the present references go, that a similar benefit, as in the case of deduction of expenses, was given in respect of any interest payable on money borrowed for the purpose of investment in the securities, subject to certain exceptions. Therefore, the first proviso covered, for purposes of deduction, the entire amount expended for realising interest or interest payable for money borrowed for the purpose of investment. Section 6 of the Finance Act, 1955, however, further amended the first proviso by substitution of certain words, the effect of which was, what was deductible as expenses for realisation of interest on securities was not the actual amount, but a reasonable sum allowed by the revenue for the purpose. The first proviso underwent further amendment by section 6 of the Finance Act, 1956, and the two Explanations thereto were introduced. The first proviso, as amended, reads : " Provided that no inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proportion as the receipt of interest chargeable to tax bears to the gross-receipts from all sources. The proportion of expenses derived by application of the formula is " deemed " to be the sum reasonably expended by the assessee for the purpose of realising interest on securities. A similar formula is provided by the other Explanation for apportioning interest referable to borrowing for the purpose of purchasing securities and the proportion arrived at through the formula is in the same way " deemed " to be interest payable on money borrowed for purposes of investment in the securities. In effect, therefore, whatever be the actual expenses incurred or interest payable or paid, by reason of the Explanations which provide a rule of thumb, a certain proportion thereof is fixed as allowable under the first proviso. Instead of leaving it to the officers of the revenue to find what is a reasonable proportion, the two Explanations control, and, by the formula, fix the reasonable sum expended on the two items. Mr. Venkatram presses before us that the whole basis for the first proviso to section 8 is that there must have been an actual expenditure in realising interest on securities an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accept the further contention for the revenue that the Explanations will have existence independent of the first proviso. They are necessarily linked up to the first proviso and without it the Explanations will serve no purpose, for it is under the proviso the allowance is given and the function of the Explanations is only to provide a formula to qualify the sums to be allowed under that proviso. That is substantially the view of the Tribunal and we think that it is correct. Mr. Venkatram went further to contend that even the substantial part of section 8 will have no application to the Mysore Durbar Securities. It is noteworthy that the very securities here under consideration were taken, in Commissioner of Income-tax v. Indian Bank Limited, as not within the purview of section 8. In fact, referring to the securities, the Supreme Court observed that it was common ground among the parties that section 8 did not apply. Apart from that, what is stated for the assessee is that section 8 is confined to income from certain specified securities, which did not cover tax-free securities issued by the then Mysore Durbar. The section only refers to any security of the Central Government or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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