Report No. 12
Notes to clauses 18 to 21
B. Interest on securities.-The existing section 8 is now covered by four clauses.1 The first clause relates to the charge, the second relates to deduction, the third relates to deductions in the case of banking companies and the last clause relates to amounts not deductible.
1. Clause 18 to 21.
Clause 18
The word "receivable" in the present section 8(1) has been interpreted to mean "received".1 This decision has been given effect to and the word "received" has been substituted for the word "receivable" in the draft clause to make the intention clear.
1. Seth Lalbhai Dalpatbhai v. C.I.T., (1953) 12 ITR 13. Thaigaraja Chettiar v. C.I.T. Madras, (1953) 24 ITR 593.
Clause 19
This clause and draft clause 21 incorporate the substance of existing section 8, first proviso. The language of the present proviso is involved1. A rough analysis will show that it deals with three things:-
1. See the criticism in United Commercial Bank Ltd. v. C.I.T., (1953) 24 ITR 425.
(i) Allowance for realisation expenses and interest on money borrowed for investment;
(ii) Exception to the allowance at (i) above, in respect of interest payable outside the taxable territories; and
(iii) Counter-exception to the exception at (ii) above, for interest for which tax is deducted at source or an agent can be appointed under section 43.
In the draft, therefore, the proviso has been split up. Item (i) above has been incorporated in this clause, while items (ii) and (iii) have been embodied in a subsequent clause.
The provisos to existing section 8, which exclude certain items of expenditure incurred for realising interest etc., do not express the exclusion as "deductions". Since, in the draft, these have been treated as deductions, it is possible that the deductions might, in a particular case, exceed the total gross income. In such cases, the excess will be treated as a loss. We do not think that this result should be avoided. Deductions under the head "Interest on securities" should be treated on the same lines as deductions under other heads; if the income is a loss, it should be dealt with as a loss under any other head.
Clause 20
This embodies the Explanation to section 8, recast in form so as to make it less complex and state the various aspects distinctly.
Clause 21
Item (i) gives effect to the latter part of section 8, first proviso (see notes to the clause relating to deductions, above)
Item (ii) is new. The Madras1 and Bombay2 High Courts have held that expenditure pertaining to interest on tax-free securities is not deductible, while the Nagpur High Court has taken a contrary view in C. P. and Berar Provincial Co-operative Bank Ltd. v. C.I.T., (1946) 14 ITR 489. Effect has been given to the view taken by the Bombay and Madras High Courts.
1. Madras Provincial Co-operative Bank's case, (1942) 10 ITR 490.
2. Branch Co-operative Bank Ltd. v. C.I.T., (1949) 17 ITR 489.
Item (iii) is also new and seeks to make it clear that interest paid on money borrowed for investment in tax-free securities is not deductible.
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