TMI Blog1960 (11) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... ire interest charges paid by the bank were deducted, apparently under section 10(2)(iii) of the Income-tax Act, in computing its taxable income, and no attempt was made to apportion those charges on the basis that a portion of the monies borrowed by the bank had been utilised for the purchase of or investment in securities, the income from which was tax free. In the year of account 1950, the bank received in the usual course interest on the Mysore Government securities it held, which interest was tax free. In the same year it sustained a loss of ₹ 6,616 in the sale of some of these Mysore securities. That was allowed as an item of expenditure under section 10(2). Out of the total sum of ₹ 25,91,565 paid in the year of account as interest charges, a sum of ₹ 2,80,194 was apportioned by the Department as the interest payable on the portion of the borrowed monies, that is, deposits of various kinds, computed and deemed to have been utilised for the-purchase of these tax free Mysore securities. The average value of the holdings in the Mysore securities in the year of account was worked out at a little less than two and a half crores of rupees. The Department took the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sive of tax deducted at source) chargeable to tax under this section bears to the gross receipts from all sources which are included in the profit and loss account of the company', shall be deemed to be interest payable on money borrowed for the purpose of investment in the securities by the assessee, and the amount of such interest for which allowance is due under sub-section (2) of section 10 shall be reduced correspondingly. The position thus was that even in the case of a banking company there was no express statutory provision for any apportionment of interest payments before Explanation (b) was added to section 8 in 1956. Nor was there any express provision for apportionment on the distinction between securities the interest on which was liable to be taxed and securities which were tax free. The courts, however, held that monies borrowed for purposes of investment in tax free securities lay outside the scope of the proviso to section 8. The departmental instructions in force in the relevant assessment year ran: When a bank or other concern engaged in business similar to that of a bank receives deposits on account of loans in the course of its business, and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 94, represented or must be deemed to represent interest paid on monies borrowed by the bank for purposes of investment in the Mysore securities within the scope of the proviso to section 8 as it stood in the assessment year 1951-52 or whether it was but a part of the interest paid on capital borrowed by the bank for purposes of its business within the scope of section 10(2)(iii). We shall confine ourselves to a determination of that question. And we should like to set out even at the outset that nothing we say should be construed as an attempt to evolve a formula for universal application, in delimiting the respective fields in which proviso to section 8 and section 10(2)(iii) operate. We have already pointed out that the bank received its deposits in the usual course of its banking business, and that it did not borrow any amount for the express purpose of investment in securities in general or in the Mysore securities with which we are concerned now. The monies deposited with the bank by its constituents merged with its general funds, and practically all the monies in the hands of the bank constituted its stock-in-trade on circulating capital. So did the securities which it pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of interest on deposits brought the assessee before us within the scope of the proviso to section 8, as it stood before the Explanation was added in 1956, though factually the assessee had purchased securities, interest from which, had it been taxable, would have to be computed for the purpose of taxation only under section 8 of the Act. This conclusion of ours, based on the language of the proviso to section 8 before the addition of Explanation (b) to section 8 in 1956, is strengthened by the legal fiction enacted by that Explanation. What was deemed by implication to be money borrowed for the purpose of investment in securities was not in fact money borrowed for the purpose before the enactment of the legal fiction. But for that legal fiction, how can holding of securities purchased, let us assume, in 1949, be correlated to deposits received in 1950, and how can the deposits received in 1950 be viewed as monies borrowed for the purpose of investment in those securities ? It was the average holding of the Mysore securities in the year of account 1950 that was taken into consideration for apportioning the interest charges, independent of the date of the acquisition of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew Zealand [1938] 6 ITR 636. The relevant facts in the Bank of New Zealand case were as follows : A bank registered and resident in New Zealand was assessed to income-tax for the year 1927-28 under Case I of Schedule D in the sum of 94,448 on the profits arising from the business of its London branch, the assets of which included holdings of tax free securities. The tax free securities had all been purchased partly out of the floating capital of the branch and partly out of the monies obtained in New Zealand, to borrow which it had expended 41,262. In the period in question, these holdings produced 78,556 interest. The Court of Appeal held that this interest receipt was tax free. The Court of Appeal further held that though this interest was exempt from taxation, the bank was entitled for purposes of assessment to include in its trading expenses to be deducted from profits, the sum of 41,262 as expenses particularly attributable to earning it. Lord Wright said at page 566: The expenses which are dealt with here by the Commissioners are interest on the money borrowed and used to purchase these particular securities, and it would be a suitable conclusion if that could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x are to be given effect to by then removing altogether that item from the statement of profits and gains, and removing with it something which clings to it in the process of removal, namely, some apportioned part of the expenses of the company. Now I can find no warrant whatever in the language of the statute to produce that result. When the statute says that interest is to be exempt I am quite unable to read it as meaning that in giving effect to that exemption by implication some repercussion is to take place on a different provision of the Act altogether. It seems to me quite improper to read any such implication into it. Counsel for the appellant says, and says with truth, that there are many cases in the working of the Act where it is necessary to make apportionments, and he instances, as one the case where a non-resident company carries on business both in England and abroad and its accounts have to be dissected in order to bring in only that part of the business which is appropriate for the purpose of taxation. That is perfectly true, and the reason why the dissection has to be made there is that the statute quite clearly requires it and cannot be effective unless it is mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the War Loan, which we have, produced no income at all.' The result of that would be, of course, in the illustration I have given, that a company would be taxed under Case I merely on 1,400. Now, I confess that the first of those two alternative views possesses for me a certain attraction. On the other hand, the Master of the Rolls-and Greene, L.J., I understand, agrees with him-has taken the view that the second of those alternatives is to be preferred. I am not so enamoured of the first alternative as to differ from them. When the House of Lords confirmed this decision on appeal in Hughes (Inspector of Taxes) v. Bank of New Zealand [1938] 6 ITR 636 , Lord Thankerton stated at pages 643-4 : ........... it seems to me to be incontrovertible, that in the present case, the investments in question were part of the business of the respondents' trade, and that the expense connected with them was wholly or exclusively laid out for the purposes of the trade. Expenditure in course of the trade which is unremunerative is none the less a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 10(2)(iii) provides. No apportionment is permissible where the deduction is under section 10(2)(iii). In United Commercial Bank Ltd. v. Commissioner of Income-tax [1953] 24 ITR 425 the bank's income from the securities it held was computed under section 8 of the Act, and the net assessable income under the head amounted to ₹ 23,62,815. The bank also derived income from tax free securities. A loss of ₹ 8,86,972 was ascertained when its business income was computed under section 10. One of the contentions of the bank based on this proviso to section 8 was : It was lastly contended by the assessee that it should be allowed a deduction from its interest income of not only the interest payable on borrowings which it had invested in taxable securities, but also of the interest payable on the borrowings invested in securities which were tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TC 505 which was followed by the Bombay High Court in Provident Investment Co. Ltd. v. Commissioner of Income-tax [1931] 6 ITC 21 and by the Lahore High Court in Macnabb v. Commissioner of Income-tax, Punjab [1936] 4 ITR 306 . In that case the assessee carried on a money-lending business in British India and in Ipoh in the Federated Malay States. He borrowed money in Madras and sent it out to Ipoh and used it there as capital of the business. The interest paid on amounts borrowed in India and remitted to Ipoh was claimed as a deduction under section 10(2)(iii) of the Act. That claim was disallowed. At page 509 the learned Chief Justice, however, observed: ..........in my view, 'the business' means the business whose profits are being assessed, and whose profits are being assessed, moreover, in the year under consideration. Earlier he had observed : ... the only reasonable construction of the section is to construe 'capital borrowed for the purposes of the business' as meaning capital borrowed and used for the purposes of the business. Even that test is satisfied in this case. That a particular item of its business income is not taxable does not m ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
