COMMISSIONER OF INCOME-TAX, MADRAS vs. INDIAN BANK LTD.

CIVIL APPEAL No. 1095/1963Supreme Court[1965] 1 S.C.R. 83326 October 1964Bench: 3 JudgesAuthor: K. SUBBA RAO, J.C. SHAH, S.M. SIKRI B8 pages
AI SummaryDismissed

What were the facts?

The assessee, Indian Bank Ltd., Madras, received deposits and invested in securities, including tax-free Mysore Government securities. The bank claimed the entire interest paid to depositors as a deduction under Section 10(2)(iii) of the Indian Income-tax Act, 1922. The Income-tax Officer partially disallowed this claim, excluding interest attributable to money invested in tax-free securities. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld this disallowance. The assessee referred the matter to the High Court, which ruled in favor of the assessee. The Revenue appealed this decision to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the assessee was entitled to claim the entire interest paid on fixed deposits as a deduction under Section 10(2)(iii) of the Indian Income-tax Act, 1922. The Court emphasized adherence to the plain language of the Act. It reasoned that Section 10(2)(iii) expressly allows deduction of interest on capital borrowed for the purpose of business, and there is no provision that justifies looking behind the expenditure to see if it directly or indirectly produced taxable income. The Court noted that while the legislature might assume most business expenditures produce taxable income, this assumption does not override the express allowance in the section. Furthermore, the Court found that the profits and losses from the sale and purchase of the securities in question were included in the assessment, thus establishing that these securities were capable of producing taxable income. The Court distinguished several cited cases, finding that the principle laid down in Hughes v. Bank of New Zealand was correctly applied in Chellappa Chettiar v. Commissioner of Income-tax, Madras, and was not distinguishable on the grounds presented by the Revenue. The appeal was dismissed.

What were the issues?

1. Whether, on the facts and circumstances, the Bank was entitled to claim the deduction of the entire interest paid on fixed deposits under Section 10(2)(iii) or 10(2)(xv) of the Indian Income-tax Act, 1922, despite a portion of the investment being in tax-free securities? Assessee's contention: The assessee argued that even if a general principle exists that expenditure must be attributable to taxable income, it does not apply here because profits and losses from the sale and purchase of securities were included in the assessment, meaning the tax-free securities were capable of producing taxable income. They also relied on the express language of Section 10(2)(iii) allowing deduction of interest on borrowed capital for business purposes. Revenue's contention: The Revenue contended that no expenditure can be allowed as a deduction unless the part of the business to which it is attributable is capable of producing income or profits liable to be taxed under the Act. They argued that if a portion of profits is not taxable, expenditure incurred for earning those profits should not be deductible.

Which sections of the Income-tax Act were involved?

Section 10(2)(iii),Section 10(2)(xv),Section 8,Section 60,Section 4,Section 10(2)(ix),Section 14(2)(c),Section 4(1)(a),Section 4(1)(c),Section 24

AI-generated summary — verify with the full judgment below

A B c D COMMISSIONER OF INCOME·TAX, MADRAS v. INDIAN BANK LTD.

October 26, 1964 (K. SUBBA RAo, J. C. 'SHAH AND$. M. SIKRI JJ.)

Income Tax-Deductible expenditure-Tax~free income from securities -Interest paid on 1noney borrowed for investment in such securities- Whethtr deductible ?-Indian Income-tax Act, 1922 (11 of 1922), S, 10(2) (Iii), The Indian. Bank Ltd., Madras, in the course of its business received money in deposit from its constituents and invested the same, inter alia. ill Mysore Government securities which were free from Income-taX and super-tax. The Bank claimed the whole of the interest paid by it to its depositors .•• 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 bad been invested in the tax-free securities was not an admissible deduction. The Appellate Assis- tant Commissioner and the Income-tax Appellate Tribunal having affirmed the above order, a reference under s. 66( 1) was, at the instance of the assessee, made to the High Court. The reference was answered in favour of the assessee. The Revenue appealed to this

The order continues below.

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