COMMISSIONER OF INCOME-TAX, MADRAS versus INDIAN BANK LTD.

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COMMISSIONER OF INCOME·TAX, MADRAS v. INDIAN BANK LTD.

October 26, 1964 (K. SUBBA RAo, J. C. 'SHAH AND$. M. SIKRI JJ.)

Income Tax-Deductible expenditure-Tax~free income from securities -Interest paid on 1noney borrowed for investment in such securities Whethtr deductible ?-Indian Income-tax Act, 1922 (11 of 1922), S, 10(2) (Iii),

The Indian. Bank Ltd., Madras, in the course of its business received money in deposit from its constituents and invested the same, inter alia. ill Mysore Government securities which were free from Income-taX and super-tax. The Bank claimed the whole of the interest paid by it to its depositors .•• a deduction under s. 10(2) (iii) of the Indian Income-tax Act, 1922. The Income-tax Officer disallowed the claim in part, holding that interest paid in respect of money which bad been invested in the tax-free securities was not an admissible deduction. The Appellate Assis- tant Commissioner and the Income-tax Appellate Tribunal having affirmed the above order, a reference under s. 66( 1) was, at the instance of the assessee, made to the High Court. The reference was answered in favour of the assessee. The Revenue appealed to this Court by special leaYe.

It Wa• contended on behalf of the Revenue that no expenditure could be allowed as a deduction from the profits of a business unless the part of the bus.iness to which the expenditure was attributable was capabl« of producing income or profits liable to be taxed under the Act.

HELD : In construing an Act ·it is necessary to adhere closely to the E · language employed in it. Only if the terms of a provision are ambiguous It is not permissible first to create an artificial ambiguity and then try to resolve it by some general principles. [836 B]

· can recourse be had to the well-esl•blished principles of construction.

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There is nothing in the language of s. 10 of the Indian Income-tax Act. 1922 from which it can be fairly implied that an expenditure or allowance falling within the section must fulfil some other condition before it can be allowed. Sub-section (1) of s. 10 direc~ that an assessee must be taxed in respect of the .profits and gains of bus.iness carried on by him. Then under sub-s. (2) all the allowances permissible to him must be deducted. Th~ is no provision which would justify looking behind the expenditure, if it fell within the term of sub-s. (2), to see whether it had the quality of directly or indirectly producing taxable income. Perhaps the legislature asstlllled that most types of expenditure which are laid out wholly and exclusively for the purpose of business would directly or indirectly produce taxable income. · [836 C-H]

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In the instant case, however,

it was controverted that the profits and losses accruing from the sale and purchase of the securities in question had been induded ill the assessment. It followed that the said securitie• were capable of producing taxable income and the appeal by the Revenue, could be dismissed on this ground alone. [835 G-H]

Hughes v. Bank of New Zealand, 21 T.C. 472, relied on. Chellappa Chettiar v. Commissioner of Income-tax, Madras, approved. Commissioner of Income~tax v. Somasundaran. Chettiar, A.l.R. t 928 Mad. 487, Provident.Investment Co. Ltd. v. C.I.T., Bombay, 6 I.T.C. 21 and

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[1%5] I S.C.R.

Indore Malwa Mills v. C.I.T. (Ce11tral) Bombay, 45 l.T.R. 210, dJStingu:sh- ed.

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CIVIL APPELLATE JURISDICTION: Civil Appeal J\'.o. 1095 of

1963.

Appeal by special leave from the judgment dated November

9, 1960 of the Madras High Court in T. C. No. 41 of 1959.

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S. V. Gupte, Solicitor-General, K. N. Rajagopala Sa<tri, R. fl.

Dhebar and R. N. Sac/11hey, for the appellant.

R. Venkarram and R. Gopa/akris/man, for the respondent.

The Ju<lgmcnt .. of the Court was delivered by

Sikri J. This is an appeal by special lc~vc :igainst the jud~­ ment of the Madras High Court. :mswering a question refcrr~d to it under s. 66(-1) of the Indian Income Tax Act, 1922, herein after referred to as the Act, against the Revenue.

The q 11estion referred to it was the following:

· Whether on the facts and circumstances of the case the Bank was entitled to claim the deduction of the entire interest paid by it on fixed deposits, either under s. 10(2) (iii) or 10(2) (xv)?"

The relevant facts and circumstances are these. The respon dent, the Indian Bank Ltd., Madras, hereinafter referred to as the In the nonnal course assessee, carried on the business of banking. of its business, it receil'ed deposits .from constituents and paid It invested a large sum in 'ecurities both of the interest to them. Central and State Uo,·ernments (including Mysore Government). The interest on Mysore Government securities was exempt from income tax and super tax under the provisions of a notification issued under s. 60 of the Act. It bought and sold these securities and the profits and losses on the p~rchasc and sale of such securi ties were duly taken into account in computing the income of the f<1r the asse~sment vc:ir asst"Ssec. under the hettd 'Business". 1951-52 (accounting year Calendar Year 1950) it claimed a deduction of Rs. 25.91,565 as interest paid to various depositors, und~r s. 10 ( 2) (iii) of the Act. The Income Tax Officer. the Appellate Assistant Commissioner und the Income Tax Appellate Tnbunal disa!lowl'd interest amounting tCJ Rs. 2.80. J 94. This am<'Unt wus arrived at hy calculatir.g the proportionate interest which would be payable on money borrowed for the purchase of :'v!ysore securities for Rs. 2,49,93,511. We need not describe

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C.l.T. v. INDIAN BANK (Sikri J.)

835

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the formula adopted for calculating the proportionate interest for nothing turns on it.

The grounds given by the Appellate Tribunal for disallowing the deduction of the proportionate interest were two-fold: fir5t, as 'income from securities can be taxed only under section 8, the B allowance that could be a charge on that income can only come under that section and no other'; and secondly, 'the trend of authorities also seems to .be 'in favour of Department's view that the assessee is not entitled to a double benefit, (i) exemption from tax in respect of certain securities, and (ii) to an allowance of interest on the money utilised to purchase those securities'.

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At the instance of the assessee, the Appella~e Tribunal referred the question reproduced above tp the High CQurt. The High Court has answered the question in favour of the assessee on the ground that the entire interest paid by the Bank was a permissible deduction under s. 10(2) (iii) of the Act.

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It is common ground among the parties that s. 8 of the Act does not apply. The learned counsel for the Revenue, Mr. Raja gopala Sastri, submits that there is a general principle that no expenditure can be allowed as a deduction from the profits of a· business unless the part of the business to which the expenditure is attributable is capable of producing income or profits liable to In other words, he contends that if a be taxed under the Act. part of profits of a business is not taxable, no expenditure incurred for the purpose of earning those profits can be allowed as a deduction. He says this is the position specially after the amend ments made in the Act by the Amending Act of 1939, in s. 4, F whereby all income accruing or deemed to accrue to a person resident in India is attributed a taxable quality. He goes on to say that if a particular income has no taxable quality, it also loses quality for qualifying for expenditure allowable under s. 1 O.

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The learned counsel for the assessee, Mr. R. Venkatram, says that even if the proposition be accepted, it does not assist the Revenue in this case. He points out that in the case before us it is n<;>t controverted that the profits and losses accruing from the sale and purchase of securities have been included in the assess ment. Therefore, the tax free securities are capable of producing profits and losses. There is force in the contention of Mr. Ven- H katram, and the appeal must fail on this ground alone. !Jut as the question has been debated before the High Court, and before us, we do not desire to rest our decision on this narrow ground.

L2Sup./65-10

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Then is there such a principle as has been formulated above? A

If there is one, can it be invoked to cut down the express language of s. 10(2) (iii), which expressly allows as a deduction interest on capital borrowed for the purpose of the business ? In our opinion. in construing the Act, we must adhere closely to the language of the Act. If there is ambiguity in the terms. of a provision, recourse B must naturally be had to well-established principles of construe· tion but it·is not permissible first to create an artificial ambiguity and then try to resolve the ambiguity by resort to some general principle.

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We are concerned with the interpretation of s. 10. Let us then look at the language employed. ~ub-section ( 1 ) directs that C an assessee be taxed in respect of the profits and gains of business carried on by him. What is the business of the assessec must first be looked at. Does he carry on one business or two businesses along with the business carried on by him some activity which is not a business? If he is carrying on an activity which is not business, we must leave out of account the receipts of that activity. That is the first step. Secondly, we must look at s. 10(2) and deduct all the allowances permissible to him. In allowing a deduction which is permissible the question arises: Do we look behind the expenditure and see whether it has the quality of directly or indirectly produc- ing taxable income? The answer must be in the negative for two E reasons: First, Parliament has not directed us to undertake this enquiry. There are no words in s. 10(2) to that effect. On the other hand, indications are to the contrary. In s. 10(2)(xv), what Parliament requires to be ascertained is whether the expen diture has been laid out or expended wholly and exclusively for the purpose of the business. The legislature stops short at directing F that it be ascertained what was the purpose of the expenditure. If the answer is that it is for the purpose of the business, Parliament is not concerned to find out whether the expenditure has produced or will produce taxable income. Secondly, the reason may well be that Parliament assumes that most types of expenditure which G are laid out wholly and exclusively for the purpose of business would directly or indirectly produce taxable income, and it is not wnrth the administrative effort involved to go further and trace the expenditure to some taxable income.

Therefore, it seems to us that there is nothing in the language Qf s. 10 from which it can be fairly implied that an expenditure or allow1nce falling within the section must fulfil some other condition before it cal!_ be allowed.

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C.I.T. v. INDIAN BANK (Sikri J.)

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A similar question arose in England in Hughes v. Bank of New Zealand (1 ), and all the Judges took the view that interest paid by the Bank on capital borrowed in the course of its busine~ and utilised in buying tax-free securities had to be deducted m arriving at the taxable profits of the business notwithstanding that the interest earned by the Bank on the tax-free securities could not be taxed.

Lord Thankerton put the reason shortly thus :

"It is perhaps enough to say that the Crown are un able to point to any statutory provision in support of their contention, whereas the Respondents find full justi fication for their resistance in the provisions of Rule 3 of the rules applicable to cases I and II of Schedule D''.

This rule is similar to s. l O ( 2) (xv) of the Indian Income Tax Act. After setting out the rule and noticing its effect he says :

''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 and 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 It does not require the presence purposes of the trade. of a receipt on the credit side to justify the deduction of an expense."

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Although the Master of Rolls found force in the argument of the Crown, he could find nothing in the language of the English Act to eliminate a part of the expenses of an indivisible trade. Similarly, Greene L.J., could find no warrant in the language of the Statute to give effect to the contention of the Crown. He observed that "when the Statute says that interest is to be exempt, G I am quite unable to read it as meaning that in giving effect to that exemption by imp!:cation, some repercussion is to take place on a different provision of the Act altogether. . . . . . . I can find nothing in the Statute which requires this interest to be treated, so to speak, as a trade within a trade. This is really what the Crown H contend that in some way this interest which is to be brought into account as an. ite.m of receipt is to be taken out of it with some

(I) 21 TC 472

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SUPREME COURT REPORTS

[1965) I S.C.R.

apportioned expenses appropriated to it as though it were a trade A by itself."

Mr. Sastri urges that the authority of the above decision has been shaken in Mitchell and Edon (H. M. Inspectors of Taxes) v. Ross('), but we are unable to accept this contention. The point urged in this case was that the authority of Fry v. Salisbury House Estate(') had been qualified by the decisiou in Hughes v. Bank of New Zealand('), but this was negatived.

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A number of Indian cases have been cited before us and we

will now proceed to examine them.

The Madras High Court's decision in Commissioner of Income C

Tax v. Soniasundaran Chettiar(') does not assist Mr. Sastri. The assessee carried on business at Madras, where his head office was, and Ipoh, a place in the Federated Malay. Money was borrowed at Madras and part of it sent to Ipoh where it was used as capital in the conduct of Ipoh business. The High Court held that interest on the part of the borrowed money used at Ipoh was rightly dis allowed as a deduction because the business which was being taxed was the business at Madras and not the business at Ipob.. No exception can be taken to the decision but it docs not advance the appellant's case because we are concerned with one indivisible business.

In Provident Investment Co. Ltd. v. C.l.T. Bombay('), the assessee, an Indian Finance Company, borrowed some money in India and purchased sterling securities out of it and retained them in India. The Bombay High Court held that interest on the bor rowed money could not be deducted because "qua the capital which it (the company) is using outside British India and retain ing for that length of time outside British India, is not carrying on business in respect of which profits assessable to Indian Incom~ tax can be earned so that allowaP1ce can be claimed for interest on capital borrowed within the meaning of s. 10(2) (iii). It appears to us that the Bombay High Court divided the business in two separate businesses. But the business of the present assessee cannot be divided into two separate businesses. lt is one and indivisible.

In Clie//appa Chettiar v. Commissioner of

Income Tax Madmst "), the assessce carrying on business as a moneylender

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\' J .l.J TC. 11. \J' 21 T.C. 4i'.".. ~) 61.T.C. 21.

(2) )J930) A.C. 432. (4) A.l.R. 1928 Mad. 487. (6) 11937) S 1.T.R. 97.

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C.I.T. V. INDIAN BANK (Sikri J.)

839

A had borrowed money and lent it out to constituents. He was obliged to receive agricultural lands in repayment of his debts from such constituents. The question arose whether he was entitled to a deduction in respect of the interest paid by him on capital represented by the agricultural lands. The Court, follow ing Hughes v. Bank of New Zealand (1) held that he was entitled 1 notwithstanding that agricultural income was not taxable undoc the Income Tax Act. Mr. Sastri says that this was wrongly decided and was in fact dissented from by the Rangoon High Court in C.I.T. Burma v. N.S.A.R. Concern('). Dunkley J., in the Rangoon case, distinguished Hughes v. Bank of New Zealand(') c because he thought that the scheme of the Burma Income Tax Act was entirely different from the scheme of the English Income Tax Act, 1918. He observed that "in England a person is assess ed to income tax in respect of his income, while under the Burma Act it is the income which is taxed. Under the English Act no class of income is outside the scope of the Act whereas bys. 4(3) D af the Burma Act the Act is made inapplicable to a number of classes of income. The English Act merely confers certain exemp tions on a person in respect of his income up to a certain amount or certain kinds, similar to the exemptions conferred on certain classes of income by the provisos to Secs. 8 and 9 of the Burma I: Act." Then he noted the difference between the wording of s. 10 (2) (ix) of the Burma Act and the corresponding clause in tho English Act. But we are unable to appreciate that these differ ences necessitate the rejection of the principle laid down in Hughe~ ). It is true that under the Indian v. The Bank of New Zealand ( 1 in Income Tax Act it is income that is taxed but it is not taxed In England .. tho interest of tax-free securities was exempted much in the same way It did not matter there who held them. Hughes v. as in India. tho Tiu: B«nk of New Zealand(') cannot be distinguished on grounds mentioned by the Rangoon High Court. In our judgment Chel/apa Chettiar v. C.l.T. Madras( 3

It is taxed in the hands of a person.

) was correctly decided.

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The decision of this Court in Indore Malwa United Mills v. It appears to us C.I.T. (Central) Bombay(') is distinguishable. that it was because s. 14(2)(c) ands. 4(l)(a) and (c) existed at the relevant time that the words 'profits and gains' in s. 24 were limited to such profits and gains as would have been assessable

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(I) 21 T.C. 472. (3) (1937) S I.T.R. 97.

(2) (1938) 6 I.T.R. 194. (4) (1962] Supp. 3 S.C.R. 310

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[ 1965] l S.C.R.

in British India or the taxable territories. This is apparent from A the judgmem and from the following observations of Das J.

"Reading the provisions in section 24 with the provi sion in section 4 ( 1 )(a) and ( c) and section 14 (2 )( c) it seems clear to us that section 24 (1) wl:.en it talks of profits or gains has reference to taxable profits and gains; in other words, it has reference to such profits and gains as would have been assessable in British India or the taxable territories. It has no reference to income accru- ing or arising without British India or without taxable territories which were not liable to be assessed in the case of non-residents."

We cannot imply from this judgment that there is a general principle that if a part of the income of a business is tax-free, expenditure incurred for the purpose of earning this income is outside the purview of s. 10.

In the result we agree with the High Court that the answer to the question is in the affirmative. The appeal is accordingly dismissed with costs.

Appeal dismisstd.

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