26 October 1964
Supreme Court


Case number: Appeal (civil) 1095 of 1963






DATE OF JUDGMENT: 26/10/1964


CITATION:  1965 AIR 1473            1965 SCR  (1) 833  CITATOR INFO :  RF         1971 SC2434  (8)

ACT: 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.    10(2) (iii).

HEADNOTE: 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. 210, distinguished.

JUDGMENT: 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 respondent. 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 following:               "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 it. 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 business. 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 indivisible. In   Chellappa  Chettiar  v.  Commissioner  of  Income   Tax Madras(6),   the   assessee  carrying  on  business   as   a moneylender (1) 40 T.C. II. (2) [1930] 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  agricultural  lands. 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.   N.S.A.R. 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 I.T.R. 194. (3) (1937) 5 I.T.R. 97.   (4) [1962] 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. Appeal dismissed. 841