Case: Madras Co-Operative Central Land Mortgage Bank Ltd Vs. Commissioner Of Income-Tax, Madras

of Section 10, other than clauses (iii), (vi), (vi-a), (vi-b), (vii), (viii), (xi), (xii), (xiii) and (xiv) thereof, the same proportion as the gross receipts from interest on securities (inclusive 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 the sum reasonably expended by it for the purpose of realising such interest: and the amount for which allowance is admissible under sub-section (2) of Section 10 shall be reduced correspondingly: and (b) money borrowed shall include moneys received by way of deposits; and that amount which hears to the amount of interest payable on moneys borrowed the same proportion as the gross receipts from interest on securities (inclusive of tax deducted at source) chargeable to tax under this section bears to the gross receipts from all sources which are included m the profit and loss accounts 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." Broadly stated, under Clause (a) the sum reasonably spent is computed as that proportion of the aggregate of the expenses admissible under the various clauses of sub-s. (2) of Section 10 mentioned therein which the gross receipts from interest on securities bear to the gross receipts from all sources included in the profit and loss account of the banking company. Similarly under Clause (b) interest payable on money borrowed for the purpose of investment in Government securities is that proportion of the total interest paid on borrowings which gross receipts from securities bear to gross receipts from all sources. 8. Income of the Society from its trading activity being exempted from tax, its income from Government securities had, it was common ground, to be apportioned between income earned from investment for trading purposes and for non-trading purposes. The Income-tax Officer applied the first proviso read with the Explanation to Section 8 of the Income-tax Act. The Income-tax Appellate Tribunal held that in terms, the Explanation to Section 8 did not apply because the Society was not a banking company, but the principle of the Explanation furnished, after the Departmental Instructions had been withdrawn, a reasonable basis for apportionment. In the view of the Tribunal, the principle embodied in the Explanation was an "improvement on the instructions," since it co-related the income chargeable under the head with the expenditure and also provided for proportionate allocation of overhead charges. The High Court held that the benefit of the departmental notification was not available to the Society in the year of assessment because it must be deemed to be withdrawn and the Explanation to Section 8 did not in terms apply to the Society. 9. It was common ground between the parties in this Court and the High Court that Explanation to Section 8 has no application to a co-operative society which does not carry on the business of a banking company. There is also no dispute that the departmental notification relied upon by the Company withdrawn before the relevant assessment year. There is, therefore, no statutory rule, and nor there are departmental instructions, governing the apportionment of income from Government securities between business and non-business sources of income.It was never urged, and it cannot be urged, that in the absence of a specific rule for apportionment, the entire, income from Government securities should be brought to tax. Any attempt to bring the entire income from Government securities would infringe Section 14 (3) of the Act. A rule of apportionment consistent with commercial accounting must be evolved for determining the income from Government securities attributable to business activity of the Society.The rule contained in Clause (a) of the Explanation to Section 8 has specially been evolved for determining the appropriate outgoings for the purpose of realizing interest from securities held by a Banking Company in computing income chargeable to tax: it seeks to exempt on the footing that it is deemed to be the sum reasonably expended for the purpose of realizing interest, a part thereof which is equal to the proportion which the gross receipts from interest on securities chargeable to tax bear to the gross receipts from all sources. The rule is an artificial rule for allocating business expenditure between different sources of income of Banking Companies. It is not a rule for apportionment for the purpose of taxation of composite income which is partly taxable and partly not. Clause (b) provides for allocation of outgoings in respect of "money borrowed" which expression includes money deposited with the Bank. Interest payable on borrowings is directed to be allocated in the proportion in which income is received from investments from securities and from other sources. This clause also deals with the proportion in which the outgoings are allocable. The problem arising under Section 14 (3) is of apportionment of income under heads taxable and non-taxable; it is not a problem relating to allocation of outgoings to determine taxable income. 10. In our judgment, a rule of apportionment which dismembers income in proportion to the business and non-business components of the single source from which it arises would be more consistent with principles of commercial accounting. The proportion of income from securities which is exempt from taxation under Section 14 (3) of the Act will be that proportion which the capital of the Society used for the purpose of the business bears to the total working capital. 11. It is admitted that Rs. 13,587 is the gross income from securities which is, according to that rule, liable to tax. No question was raised m the High Court about any deduction to be made in respect of expenses for collection of that amount, and admissibility of deduction on that score does not fall to be considered.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]It may be recalled that the Society had claimed before the Departmental authorities and the Tribunal that according to the instructions issued by the Central Government under S. 60 of the Income-tax Act only Rs. 13,578/- out of the income from Government securities were chargeable to tax. The Income-tax Officer and the Tribunal held that Rs. 59,498 were chargeable to tax. The decision in Cocanada Radhaswami Banks case 1965-57 ITR 306  = (AIR 1966 SC 47 ) relates to the right of a Bank to carry forward the net loss incurred by a Banking Company and to set it off in subsequent years against income from securities held as part of its trading assets. It is not a decision under S. 14 (3) of the Act. Again it is not open to the Society in this reference to contend that the amount of Rs. 13,578 itself is not taxable. Such a question was never raised before the Tribunal and cannot be permitted to be raised in this CourtBroadly stated, under Clause (a) the sum reasonably spent is computed as that proportion of the aggregate of the expenses admissible under the various clauses of sub-s. (2) of Section 10 mentioned therein which the gross receipts from interest on securities bear to the gross receipts from all sources included in the profit and loss account of the banking company. Similarly under Clause (b) interest payable on money borrowed for the purpose of investment in Government securities is that proportion of the total interest paid on borrowings which gross receipts from securities bear to gross receipts from all sourcesThere is also no dispute that the departmental notification relied upon by the Company withdrawn before the relevant assessment year. There is, therefore, no statutory rule, and nor there are departmental instructions, governing the apportionment of income from Government securities between business and non-business sources of income.It was never urged, and it cannot be urged, that in the absence of a specific rule for apportionment, the entire, income from Government securities should be brought to tax. Any attempt to bring the entire income from Government securities would infringe Section 14 (3) of the Act. A rule of apportionment consistent with commercial accounting must be evolved for determining the income from Government securities attributable to business activity of the Society.The rule contained in Clause (a) of the Explanation to Section 8 has specially been evolved for determining the appropriate outgoings for the purpose of realizing interest from securities held by a Banking Company in computing income chargeable to tax: it seeks to exempt on the footing that it is deemed to be the sum reasonably expended for the purpose of realizing interest, a part thereof which is equal to the proportion which the gross receipts from interest on securities chargeable to tax bear to the gross receipts from all sources. The rule is an artificial rule for allocating business expenditure between different sources of income of Banking Companies. It is not a rule for apportionment for the purpose of taxation of composite income which is partly taxable and partly not. Clause (b) provides for allocation of outgoings in respect of "money borrowed" which expression includes money deposited with the Bank. Interest payable on borrowings is directed to be allocated in the proportion in which income is received from investments from securities and from other sources. This clause also deals with the proportion in which the outgoings are allocable. The problem arising under Section 14 (3) is of apportionment of income under heads taxable and non-taxable; it is not a problem relating to allocation of outgoings to determine taxable income10. In our judgment, a rule of apportionment which dismembers income in proportion to the business and non-business components of the single source from which it arises would be more consistent with principles of commercial accounting. The proportion of income from securities which is exempt from taxation under Section 14 (3) of the Act will be that proportion which the capital of the Society used for the purpose of the business bears to the total working capital11. It is admitted that Rs. 13,587 is the gross income from securities which is, according to that rule, liable to tax. No question was raised m the High Court about any deduction to be made in respect of expenses for collection of that amount, and admissibility of deduction on that score does not fall to be considered.