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TMI Blog1971 (8) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 the Income-tax Officer accepted the claim of the assessee that the interest income of Rs. 2,750 was exempt under section 10(15)(ii) of the Income-tax Act, 1961. But, he negatived the further claim of the assessee that the expenditure incurred in earning the said income, including the interest paid on funds borrowed for purchasing those securities, was a permissible deduction. Adopting a pro rata basis he apportioned Rs. 2,533 as the expenditure capable of being related to the earning of the interest income of Rs. 2,750 and disallowed the same. An appeal by the assessee to the Appellate Assistant Commissioner was dismissed. The assessee proceeded in second appeal to the Income-tax Appellate Tribunal. The Appellate Tribunal allowed the appeal, holding that section 19 applied to income from securities which was exempt from tax under the Act and that, therefore, the expenditure claimed was deductible. Alternatively, the Appellate Tribunal said, in case section 19 was not applicable, the claim to deduction would be permissible under sections 30 to 37. At the instance of the Commissioner of Income-tax, the Appellate Tribunal has referred the following question under section 256(1): " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial Bank Ltd. v. Commissioner of Income-tax that under the Indian Income-tax Act, 1922, the income of an assessee was one and sections 7 to 12 of the Act directed the mode in which the income tax was to be levied and that those sections were mutually exclusive. Where an item of income fell under one specific head it was to be charged under that head and no other, and, therefore, interest on securities would fall under section 8 and not under section 10 even though the securities were held as a trading asset in the course of business by a banker. Notwithstanding that it falls to be considered under section 8, it continued in fact to be part of the income from the banking business. The purchase and sale of securities was as much part of that business as receiving deposits from clients and withdrawals by them. In such a case, the court said, the entire business fell to be treated as the same business. The principle laid down in that case was followed by the Supreme Court in Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd. Then, with effect from April 1, 1956, the Finance Act, 1956, inserted an Explanation in section 8 which indicated how the proviso to section 8 was to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transaction of borrowing, purchased securities, again in the course of his normal banking business. If the borrowing and the investment in securities were independent transactions, each undertaken in the course of the normal business of the bank, it should be obvious that it would not be a case of borrowing for the purpose of investment in securities. It would really be a case of borrowing for the purpose of the business, the banking business." The learned judges held that the entire amount of expenditure incurred by the assessee-bank was admissible as a deduction under section 10(2)(iii). They rejected the contention that a part of the interest calculated on a proportionate basis as being payable in respect of the part of the fund utilised for the purchase of tax-free securities was not deductible. They observed : " ....... even if the bank had acquired the Mysore securities from out of the funds on which interest charges were paid in the year of account, the fact that the income from the Mysore securities was not taxable did not make the interest charges any the less trading expenses of the bank, expenses for the deduction of which, in computing its business income, section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and trace the expenditure to some taxable income. " The Supreme Court also adverted to the decision in Hughes v. Bank of New Zealand and pointed out that all the judges in that case took the view that interest paid by the bank on capital borrowed in the course of its business and utilised in buying tax-free securities had to be deducted in arriving at the taxable profits of the business notwithstanding that interest earned by the bank on the tax-free securities could not be taxed. The decision in Chellappa Chettiar v. Commissioner of Income-tax was expressly approved. In that case a Full Bench of the Madras High Court had held that where a person borrowed money for his money-lending business and lent it out to constituents and was obliged in the course of the business to receive agricultural lands in repayment of debts from such constituents he was entitled to a deduction of the interest paid by him on so much of the capital borrowed by him for business purposes as was represented by the agricultural lands. He was so entitled notwithstanding that agricultural income was also not taxable under the Income-tax Act. We shall now refer to two cases concerned with section 8 itself. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an assessee in the previous year shall be chargeable to income-tax under the head 'Interest on securities',- (i) interest on any security of the Central or State Government ; (ii) interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act. (2) Nothing contained in sub-section (1) shall be construed as precluding an assessee from being charged to income-tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income-tax for any earlier previous year." " 19. Deductions from interest on securities.--Subject to the provisions of section 21, the income chargeable under the head 'Interest on securities' shall be computed after making the following deductions- (i) any reasonable sum expended by the assessee for the purpose of realising such interest ; (ii) any interest payable on moneys borrowed for the purpose of investment in the securities by the assessee." " 20. Deductions from interest on securities its the case of a banking company.- (1) In the case of a banking company- (i) the sum to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urges that section 18(1) is a charging provision and only those securities fall to be considered under it as yield income which is taxable. Tax-free securities, he says, are not contemplated within sections 18 to 21. That is so, he points out, because of the words in section 18(1) : " The following amounts due to an assessee in the previous year shall be chargeable to income-tax under the head 'Interest on securities'." Now, section 18 is not a charging section. The charge of income-tax is levied by one section alone, and that is section 4 of the Act. Section 14 sets out the different heads of income under which all income falls to be classified for the purposes of the charge of income-tax and the computation of total income. The sections which follow, for example, sections 15, 18 and so on, do not create a charge. They merely specify the income which is chargeable to income-tax under different heads and how that income should be computed. That being so, when considering the income from different sources which falls to be considered under the head "Interest on securities", sections 18 to 21 must be construed in their fullest natural comprehension. Upon computing the interest on ..... 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