Case: Commissioner Of Income-Tax, Madras Vs. Indian Bank Lid

3. The relevant facts and circumstances are these. The respondent the Indian Bank Ltd., Madras, hereinafter referred to as the assessee, carried on the business of banking. In the normal course of its business, it received deposits from constituents and paid interest to them. It invested a large sum in securities both of the Central and State Governments (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 purchase and sale of such securities were duly taken into account in computing the income of the assessee under the head Business. For the assessment year 1951-52 (accounting year Calendar Year 1950) it claimed a deduction of Rs. 25, 91,565 as interest paid to various depositors under Section 10 (2) (iii) of the Act. The Income-tax Officer for Appellate Assistant Commissioner and the Income-tax Appellate Tribunal disallowed interest amounting to Rs. 2,80,194. This amount was arrived at by calculating the proportionate interest which would be payable on money borrowed for the purchase of Mysore securities for Rs. 2,49,93,511. We need not describe the formula adopted for calculating the proportionate interest for nothing turns on it.4. The grounds given by the Appellate Tribunal for disallowing the deduction of the proportionate interest were two-fold: first, as "income from securities can be taxed only under S. 8, the 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 Departments 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.5. At the instance on the assessee the Appellate Tribunal referred the question reproducer above to the High Court. 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) of the Act

Reasoning: 20. The decision of this Court in Indore Malwa United Mills v. Commr. of Income-tax, (Central) Bombay, 1962-45. ITR 210 (SC), is distinguishable. It appears to us that it was because S. 14 (2) (c) and S. 4 (1) (a) and (c) existe 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 in British India or the taxable territories. This is apparent from the judgment and from the fol1owing observations of Das,the provisions in S. 24 with the provision in S. 4 (1) (a) and (c) and S. 14 (2) (e) it seems clear to us that S. 24 (1) when 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 accruing or arising without British India or without taxable territories which were not liable to be assessed in the case ofWe 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.is force in the contention of Mr. Venkatram and the appeal must fail on this ground alone. But 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.Then is there such a principle as has been formulated above ? 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 must naturally be had toprinciples of construction but it is not permission first to create an artificial ambiguity and then try to resolve the ambiguity by resort to some generalit seems to its that their is nothing in the language of S. 10 from which it can be fairly implied that an expenditure or allowance falling without the section must fulfil some other condition before it can be allowed.