Commissioner of Income-Tax, Madras Vs.
Indian Bank Lid  INSC 235 (26 October 1964)
26/10/1964 SIKRI, S.M.
CITATION: 1965 AIR 1473 1965 SCR (1) 833
RF 1971 SC2434 (8)
Income Tax-Deductible expenditure-Tax-free
income from securities -Interest paid on money borrowed for investment in such
securities Whether deductible ?-Indian Income-tax Act, 1922 (11 of 1922), s.
The Indian Bank Ltd., Madras, in the course
of its business received money in deposit from its constituents and invested
the same, inter alia, in Mysore Government securities which were free from
lncome-tax and super-tax. The Bank claimed the whole of the interest paid by it
to its depositors as 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 had been invested in the tax-free
securities was not an admissible deduction. The Appellate Assistant
Commissioner and the Income-tax Appellate Tribunal having affirmed the above
order, a reference under s. 66(1) was, at the instance of the a , made to the
High Court. The reference was answered in favour of the assessee. The Revenue
appealed to this Court by special leave.
It was 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 business to which the expenditure was
attributable was capable 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 language employed in it. Only if the terms of a
provision are ambiguous can recourse be had to the well-established principles
of construction. It is not permissible first to create an artificial ambiguity
and then try to resolve it by some general principles. [836 B] 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 fulfill some other condition before it can be allowed.
Sub-section (1) of s. 10 directs that an
assessee must be taxed in respect of the profits and gains of business carried
on by him. Then under sub-s. (2) all the allowances permissible to him must be
deducted. There 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 assumed 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] 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 included in the assessment. it followed
that the said securities 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, 1 A.I.R. 1928 Mad. 487, Provident Investment Co. Ltd. v.
C.I.T., Bombay, 6 I.T.C. 21 and 834 Indore
Malwa Mills v. C.I.T. (Central) Bombay, 45 I.T.R.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 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.
S. V. Gupte, Solicitor-General, K. N.
Rajagopala Sastri, R. H. Dhebar and R. N. Sachthey, for the appellant.
R. Venkatram and R. Gopalakrishnan, for the
The Judgment of the Court was delivered by
Sikri J. This is an appeal by special leave against the judgment of the Madras
High Court, answering a question referred to it under S. 66(1) of the Indian
Income Tax Act, 1922, hereinafter referred to as the Act, against the Revenue.
The question referred to it was the
"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 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 securi- ties 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 S.
10(2) (iii) of the Act. The Income Tax officer. the 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 835 the
formula adopted for calculating the proportionate interest for nothing turns on
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 section 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 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'.
At the instance of the assessee, the
Appellate Tribunal referred the question reproduced 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) (iii) of the Act.
It is common ground among the parties that s.
8 of the Act does not apply. The learned counsel for the Revenue, Mr. Rajagopala
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 be taxed under the Act. In other words, he contends
that if a 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 amendments made in the Act by the
Amending Act of 1939, in s. 4, 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. 10.
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 not
controverted that the profits and losses accruing from the sale and purchase of
securities have been included in the assessment. Therefore, the tax free
securities are capable of producing profits and losses.
There 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.
2Sup./65-10 836 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 to well-established principles of construc- 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.
We are concerned with the interpretation of
S. 10. Let us then look at the language employed. Sub-section (1) directs that
an assessee be taxed in respect of the profits and gains of business carried on
by him. What is the business of the assessee 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 producing taxable income ? The answer
must be in the negative for two 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 expenditure has been
laid out or expended wholly and exclusively for the purpose of the business.
The legislature stops short at directing 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 are laid out wholly and
exclusively for the purpose of business would directly or indirectly produce
taxable income, and it is not worth 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 of S. 10 from which it can be fairly implied that an
expenditure or allowance falling within the section must fulfill some other
condition before it can be allowed.
837 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 business and
utilised in buying tax-free securities had to be deducted in 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 unable to point to any
statutory provision in support of their contention, whereas the Respondents
find full justification 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. 10(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 purposes of the trade. It does not require the presence of a
receipt on the credit side to justify the deduction of an expense."
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, 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....... 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 contend that in some way this interest which is to be brought
into account as an item of receipt is to be taken out of it with some (1) 21 T
C 472 838 apportioned expenses appropriated to it as though it were a trade 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(1), but we
are unable to accept this contention. The, point ,urged in this case was that
the authority of Fry v. Salisbury House Estate (2) had been qualified by the
decision in Hughes v. Bank of New Zealand(3), but this was negatived.
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 'Tax v. Somasundaran Chettiar (4) does not assist Mr.
sastri. The 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 lpoh was rightly disallowed as a deduction because
the business which was being taxed was the business at Madras and not the
business at Ipoh. No exception can be taken to the decision but it does not
advance the appellant's case because we are concerned with one indivisible
In Provident Investment Co. Ltd. v. C.I.T.
Bombay(5), 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 borrowed money could not be
deducted because "qua the capital which it (the company) is using outside
British India and retaining for that length of time outside British India, is
not carrying on business in respect of which profits assessable to Indian Income,tax
can be earned so that allowance 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. It is one and
In Chellappa Chettiar v. Commissioner of
Income Tax Madras(6), the assessee carrying on business as a moneylender (1) 40
(2)  A.C. 432.
(3) 21 T.C. 472.
(4) A.I.R. 1928 Mad. 487.
(5) 6 I.T.C. 21 (6) (1937) 5 I.T.R. 97.
839 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
The Court, following Hughes v. Bank of New
Zealand(1) held that he was entitled notwithstanding that agricultural income
was not taxable under the Income Tax Act. Mr. Sastri says that this was wrongly
and was in fact dissented from by the Rangoon High Court in C.I.T. Burma v.
Concern(2). Dunkley J., in the Rangoon case,
distinguished Hughes v. Bank of New Zealand(1) 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
assessed 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 by s. 4(3) of the Burma Act the Act is
made inapplicable to a number of classes of income. The English Act merely
confers certain exemptions 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 Act." Then he
noted the difference between the wording of s. 10 (2) (ix) of the Burma Act and
the corresponding clause in the English Act.
But we are unable to appreciate that these
differences necessitate the rejection of the principle laid down in Hughes v.
The Bank of New Zealand(1). It is true that under the Indian Income Tax Act it
is income that is taxed but it is not taxed in vacuo. It is taxed in the hands
of a person. In England, the interest of tax-free securities was exempted much
in the same way as in India. It did not matter there who held them. Hughes v.
The Bank of New Zealand(1) cannot be distinguished on the grounds mentioned by
the Rangoon High Court. In our judgment Chellapa Chettiar v. C.I.T. Madras(3)
was correctly decided.
The decision of this Court in indore Malwa
United )Wills v. C.I.T. (Central) Bombay (4 ) is distinguishable. It appears to
us that it was because s. 14 (2) (c) and s. 4 (1 ) (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 (1) 21 T.C 472. (2) (1938) 6
(3) (1937) 5 I.T.R. 97. (4)  Supp. 3
S.C.R. 310 840 in British India or the taxable territories. This is apparent
from the judgment and from the following observations of Das J.
"Reading the provisions in section 24
with the provision in section 4 (1) (a) and (c) and section 14 (2) (c) it seems
clear to us that section 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 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.