Case: Commissioner Of Income-Tax, Kerala Vs. South Indian Bank Ltd. Trichur

1. The respondent, the South India Bank Limited, Trichur, is a banking company. This appeal is concerned with the assessment year 1956-57, corresponding previous year being the calendar year 1955. During the accounting year the Bank received a sum of Rs. 44,720 towards interest in respect of tax-free Cochin and Travancore Securities. During the course of the assessment of its income to tax, it claimed that rebate should be allowed on the entire sum of Rs. 44,720 received as interest from the said securities. But, the Income-tax Officer, while completing the assessment, arrived at the figure of Rs. 33,444 as the sum representing two items, viz., (i) reasonable sum expended by the assessee in realizing the said interest; and (ii) the interest payable on the money borrowed for the purpose of investment. After deducting the said sum from the interest receivable from the said securities, he granted only a sum of Rs. 7,276 as rebate for income- tax. On appeal, the Appellate Assistant Commissioner upheld the view of the Income-tax Officer. On a further appeal, the Income-Tax Appellate Tribunal, Madras Bench, held that the Bank was entitled to a rebate on the gross amount of interest amounting to Rs. 44,720. At the instance of the Department, the Tribunal referred the following question to the High Court of Kerala for its decision:Whether, on the facts and circumstances of the case, the Tribunal was right in holding that Explanation to S. 8 is not applicable in this case and that the entire interest of Rs. 44,720 earned by the assessee from securities issued by the former Native States, etc., is entitled to rebate of income-taxA Division Bench of the High Court expressed the opinion that the entire interest of Rs. 44,720 was entitled to rebate for income-tax under the notification issued by the Central Government in exercise of its powers under S. 60-A of the Indian Income-tax Act, 1922. Hence the appeal.

Reasoning: It is common case that this notification applies to the securities in question. It will be noticed that this notification does not refer to the provisions of S. 8 of the Income-Tax Act at all. It gives a total exemption from income-tax to an assessee in respect of the interest receivable on income-tax free loans mentioned therein. It gives that exemption subject to two conditions, namely, (i) that the interest is received within the territories of the State of Travancore-Cochin, and (ii) that it is not brought into any other part of the taxable territories. It includes the said exempted interest in the total income of the assessee for the purpose of S. 16 of the Income-tax Act. Shortly stated, the notification is a self-contained one; it provides an exemption from income-tax payable by an assessee on a particular class of income subject to specified conditions. Therefore, there is no scope for controlling the provisions of the notification with reference to S. 8 of the Income-tax Act. The expression interest receivable on income-tax free loans is clear and unambiguous. Though the point of time from which the exemption works when it is received within the territories of the State of Travancore-Cochin, what is exempted is the interest receivable Interest receivable can only mean the amount of interest calculated as per the terms of the securities. It cannot obviously mean interest receivable minus the amount spent in receiving the same. We, therefore, hold agreeing with the High Court, that no income-tax is payable in respect of the entire interest of Rs. 44,720 earned by the assessee from securities issued by the former native States.