TMI Blog1945 (12) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... r the sum of ₹ 1,58,515 which is the money the bank spent to enable it to make the income set out above, can be taken into account in determining the taxable income of the bank. The question at issue between the department and the assessee will be more easily appreciated if they are set out as algebraic formulae. Let A be the income from the tax-free securities and B the income from the taxable, and let X be the interest paid by the bank on the loans borrowed for the purchase of these securities. The assessee claims that its income is A plus B. It claims that it is entitled to deduct X from this under proviso 1 to Section 8 and in addition to deduct A under proviso 2. Therefore according to the assessee its taxable income is A plus B-X-A, that is to say, B-X. The contention on behalf of the department is two-fold. In the first place, it says that as the assessee is not able to say which loan was borrowed for which security, it is not entitled to deduct any part of X because Section 8, read as a whole only permits deductions in respect of taxed securities when the borrowings can be ascribed specifically and with certainty to the purchase of the security. In the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter is concerned we can proceed at once to Section 6. According to it, Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income-tax in the manner herein after appearing, namely:- ****** (ii) Interest on securities . Now it will be observed that this draws no distinction between different kinds of securities. Both the taxable and the tax-free are covered but they are not necessarily both taxable because the section says save as otherwise provided by this Act and in the manner hereinafter appearing We have, therefore, to see whether there is any saving provision in other parts of the Act and whether the manner hereinafter appearing effects any modification. Section 8 is the next relevant provision. It commences thus:- The tax shall be payable by an assessee under the head 'Interest on securities' in respect of the interest receivable by him on any security of the Central Government Here again, it is to be noticed that no distinction is drawn between taxable and tax-free securities. Both are here declared to be subject to tax. But there are two provisos and the clause reproduced a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he has to borrow money and that on that money he pays ₹ 1,200 interest. Now that man's profit is only ₹ 1,300 and not ₹ 2,500. It is true he received ₹ 2,500 but he is obliged to pay out ₹ 1,200 to enable him to receive it. Therefore all he gains is ₹ 1,300. If he is taxed on ₹ 2,500 it means that he is taxed not only on the ₹ 1,300 which is his profit but also on the ₹ 1,200 which is an outgoing. Of course, there is nothing to prevent the legislature from directing that that should be done, but equally there is nothing to prevent it from relieving an assessee of this extra burden. It seems to us that the proviso is intended to exclude the outgoing ₹ 1,200 from tax. We cannot see how else any intelligible meaning can be assigned to it. We observe that that is the construction placed upon the proviso in Commissioner of Income-tax Madras v. Madras Provincial Co-operative Bank Ltd. [1942] 10 ITR. 490, at p, 490 Leach, C.J., observes:- In other words, the tax is only payable on the amount of interest received, less the interest which the assessee has to pay as the result of having borrowed to make the investment. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asuistry. He wants facts. He is the man who pays. He is the man who is hit, and no amount of argument will convince him that his income is other than A plus B-X, or to put it into figures, if A is ₹ 1,000 and B ₹ 1,500 and X ₹ 1,200 then his profit, that is to say, what is left over to him, is only ₹ 1,300. If he is told that ₹ 1,000 of this is tax-free, then, according to the lights of the ordinary man in the street, only ₹ 300 would be taxable and if he is made to pay tax upon more, it is no use telling him that neither his outgoings nor his tax-free securities are being taxed. He is the man with the coins in his hand and count them how you will, only ₹ 800 remains when ₹ 1,000 is excluded. The department, however, would split the ₹ 1,200 proportionately and assign ₹ 480 to the tax-free securities and ₹ 720 to the other, and after doing that they would tax ₹ 1,300 - ₹ 720, that is ₹ 580. Now where does the remaining ₹ 280 come from? It can only come from two sources. Either it comes from a part of the outgoing X in which case a part of the outgoing is being taxed contrary to the Act which on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is by excluding the interest wholly from the assessee's total income and that in our opinion holds good in the case of the first proviso too. We have explained at length how in reality an assessee would be paying tax on an outgoing unless it is wholly excluded from computation even though by a skilful jugglery with words and accounts it may appear otherwise; and we have pointed out that the legislature must have realised this too, otherwise it could not have used the language it has employed in proviso 1. On the face of it, it seems absurd to suggest that an outgoing is, or can be taxed. But the legislature obviously envisaged such a possibility, otherwise proviso 1 is meaningless. We have shown how the possibility can, in given circumstances, become a reality. The same analysis discloses that this could also happen in the case of tax-free securities unless the interest on them is wholly excluded. In our opinion the provisos mean that both X and A are to be excluded from computation. We can find no justification for the practice of splitting up X as the department has done. We may in this regard look to Section 10 also, though in an Act of this kind the construction of one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdly think that that would be the case. Giving the best consideration we can to all these matters, we are of opinion that the two provisos to Section 8 are independent and that they deal with different things. In our judgment, deductions are to be made under both heads. Turning now to the cases cited There are two from England namely, Hughes v. Bank of New Zealand [1937] 1 K.B. 419 and the House of Lords upholding this on appeal, Hughes v. Bank of New Zealand [1938] AC 366; 6 ITR 636. We doubt if much is to be gained by examining these cases, though the point involved was the same, because they turn upon a construction of the English Statute which is not quite the same as our Act. Still, so far as they go, the matter was decided against the Crown and the taxpayer was allowed to deduct the interest on tax-free securities as well as expenses which went towards the earning of it despite the fact that it gave the tax-payer a double advantage. (See Lord Wright's judgment at page 449 of the 1937 report). This upholds our contention that there is no reason why the tax-payer should not get a double advantage if that can reasonably be spelled out of enactment. And in so far as an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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