Income Tax Appellate Tribunal - Nagpur
Central Provinces And Berar Provincial ... vs Commissioner Of Income-Tax, C.P. & U.P. on 7 December, 1945
Equivalent citations: [1946]14ITR479(NAG)
JUDGMENT
This is a reference under Section 66(1) of the Income-tax Act. The assessee is the Central Provinces and Berar Provincial Co-operative Bank Ltd. It has various sources of income, among them interest from tax-free securities and that from taxable securities. In the year in question the income from the former source was Rs. 1,25,596 and from the latter Rs. 1,64,672. In order to earn these two items of income the assessee was obliged to borrow money and had to pay interest on the money so borrowed. This interest amounted to Rs. 1,58,515. The Income-tax Tribunal holds as regards this that : "In the case of a Bank it is very difficult to allocate any particular borrowing to any particular investment as the investments keep on changing from time to time."
We accept this as a finding of fact binding on us. The question is whether and how far the sum of Rs. 1,58,515 which is the money the bank spent to enable it to make the income set out above, can be taken into account in determining the taxable income of the bank.
The question at issue between the department and the assessee will be more easily appreciated if they are set out as algebraic formulae. Let A be the income from the tax-free securities and B the income from the taxable, and let X be the interest paid by the bank on the loans borrowed for the purchase of these securities.
The assessee claims that its income is A plus B. It claims that it is entitled to deduct X from this under proviso 1 to Section 8 and in addition to deduct A under proviso 2. Therefore according to the assessee its taxable income is A plus B-X-A, that is to say, B-X. The contention on behalf of the department is two-fold. In the first place, it says that as the assessee is not able to say which loan was borrowed for which security, it is not entitled to deduct any part of X because Section 8, read as a whole only permits deduction in respect of taxed securities when the borrowings can be ascribed specifically and with certainty to the purchase of the security. In the case of the other kind of security, namely the tax-free, no deductions are permissible because A is already excluded from the taxable income, and if something further is excluded it will give the assessee a double advantage.
The department contends further that if that argument does not hold good, then, though we do not know which particular loan was borrowed for which investment we do know that X was borrowed to enable both kinds of purchases to be made. Therefore, X can be appointed between the two types of security in proportion to their values as X1 and X2. The taxable income then becomes B-X2. The interest on tax-free securities A is excluded as also X1. This is what the department has done in the present case. It has split the Rs. 1,58,515 into Rs. 51,750 in respect of the tax-free securities and Rs. 1,06,765 in respect of the taxable.
The dispute centres around this Rs. 51,750 which we have termed X1. The assessee claims that this must be deducted from the taxable income, otherwise it is in effect being made to pay tax on a part of its tax-free interest.
We consider it idle to enquire whether the assessee obtains a "double advantage" upon this interpretation or that, or whether the Central Government stands to gain or lose. That is the wrong approach to the problem. The question of advantage or loss depends upon the rules, not the rules upon the outcome of the result, because we are not concerned here with abstract logic or the principles of pure reason. The Income-tax Act is fiscal measure and as such many of its provisions are of necessity arbitrary, and in almost any set of arbitrary rules an advantage here on a drawback there are almost certain to occur, nor indeed is there anything to prevent the legislature from desiring and prescribing for just such a result. Our duty is to interpret the provisions of the Act and, if they are plain, to give effect to them regardless of the consequences; and if there is ambiguity, to construe the provision in favour of the subject and this even if it results in his obtaining a "double advantage". This is how all fiscal enactments are to be construed.
The Act purports to tax income. But it has its own definition of the income and its own rules for determining what heads of income shall be subject to tax. All income is not taxable-only those expressly so declared. So far as the present matter is concerned we can proceed at once to Section 6, According to it, "Save as otherwise provided by this Act, the following heads of income, profits and gains, shall be chargeable to income-tax in the manner herein after appearing, namely :-
(ii) Interest on securities".
Now it will be observed that this draws no distinction between different kinds of securities. Both the taxable and the tax-free are covered but they are not necessarily both taxable because the section says "save as otherwise provided by this Act" and "in the manner hereinafter appearing". We have, therefore, to see whether there is any saving provision in other parts of the Act and whether "the manner hereinafter appearing" effects any modification. Section 8 is the next relevant provision. It commences thus :-
" The tax shall be payable by an assessee under the head Interest on securities in respect of the interest receivable by him on any security of the Central Government........"
Here again, it is to be noticed that no distinction is drawn between taxable and tax-free securities. Both are here declared to be subject to tax. But there are two provision and the clause reproduced above must be read subject to them. Proviso 1 runs :-
"Provided that no income-tax shall be payable under this section by the assessee in respect of any sum deducted from such interest by way of commission by a banker realising such interest on behalf of the assessee or in respect of any interest payable on money borrowed for the purpose of investment in the securities by the assessee...."
The provision is cumbrous but is, we think, divided into two parts which we consider should be separated. The part relating to the present matter should, we think, read as follows :-
"Provided that no income-tax shall be payable under this section by the assessee...in respect of any interest payable on money borrowed for the purpose of investment the securities by the assessee".
Here again, it will be necessary to split this up for purposes of analysis, First, we will take the last clause which runs : "for the purpose of investment in the securities". What are this securities ? Note the definite article. Obviously the provision relates to the securities specified in the body of Section 8 which says, "the tax shall be payable by an assessee under the head Interest on securities". We have already examined this part of the Act and have shown that the "securities" referred to embrace both taxable and tax-free securities. Therefore, the proviso must refer to both. Next we turn to the earlier clause of the proviso : "No income-tax shall be payable.............. in respect of any interest payable on money borrowed" etc. Now it is obvious that income-tax is not payable on sums which the assessee has to pay out to others. Such moneys are not "income, profits or gains." They are outgoing and not income. But the clause must have meaning and therefore there must be cases in which the legislature considers that an outgoing would in substance be taxable under the Act but for the provision here made however much it might appear otherwise on the surface. In our judgment the only way in which effect and meaning can be given to the proviso is by deducting these outgoings from the interest on the securities and taxing only so much of the remainder as is made taxable under the Act. Let us analyse this more closely. Take a simple case in which a mans only income is interest from taxable securities, say Rs 2,500. Let us assume that in order to purchase these securities he has to borrow money and that on that money he pays Rs. 1,200 interest. Now that mans profit is only Rs. 1,300 and not Rs. 2,500. It is true he received Rs. 2,500 but he is obliged to pay out Rs. 1,200 to enable him to receive it. Therefore all he gains is Rs. 1,300. If he is taxed on Rs 2,500 it means that he is taxed not only on the Rs. 1,300 which is his profit but also on the Rs. 1,200 which is an outgoing. Of course, there is nothing to prevent the legislature from directing that that should be done, but equally there is nothing to prevent it from relieving an assessee of this extra burden. It seems to us that the proviso is intended to exclude the outgoing Rs. 1,200 from tax. We cannot can see how else any intelligible meaning can be assigned to it. We observe that that is the construction placed upon the proviso in Commissioner of Income-tax, Madras v. Madras Provincial Co-operative Bank Ltd. Leach, C.J. observes :-
"In other words, the tax is only payable on the amount of interest received, less the interest which the assessee has to pay as the result of having borrowed to make the investment."
We also observe that that is the sense in which the department has construed this proviso. In the instructions issued at page 276 of the Income-tax Manual, 8th Edition, corrected up to 1st January, 1940, it is said :-
"When a bank or other concern engaged in business similar to that of a bank receives deposits on account of loans in the course of its business and invests the money so borrowed as occasion arises, the entire interest on such borrowings will be allowed as a deduction against its entire income liable to tax without attempting at allocation of the borrowed money to investments in tax-free and other securities."
These instructions have been overlooked in this case. It is true there are further instructions as to what should be done when "there is definite proof (not mere inference) that a certain sum was specifically borrowed for the purpose of tax-free securities and has been so invested," but, as we showed at the outset of our order, there is no proof here. We have accepted as binding the decision of the Tribunal regarding the facts. Now we must not be understood as endorsing these further instructions. We refrain from expressing any opinion on them one way or the other because the circumstances which they envisage are not present in this case. Our decision is confined to a case where, as the Tribunal has observed, "it is very difficult to allocate any particular borrowing to any particular investment." The argument addressed to us on behalf of the Commissioner was that when the Rs. 2,500 which we find on the receipt side of our hypothetical assessees budget is taxed, that does not amount to a taxing of the outgoing of Rs. 1,200. It merely means that the outgoing is ignored and the income of Rs. 2,500 alone is taxed. Of course the argument was not put in quite that way because we are dealing here with two kinds of securities, but that is what it amounts to when reduced to its simplest terms.
In order to follow the argument as it was put to us, it will be necessary to revert our algebraic notation. The department split up the outgoing X into X1 and X2 and assigned X1 to the tax-free securities whose interest is represented by A and X2 to the other. The argument was that as only B-X2 is taxed, it cannot be said that X1 or any portion of X is taxed. That sounds plausible but a man whose income is being taxed does not want casuistry. He wants facts. He is the man who pays. He is the man who is hit, and no amount of argument will convince him that his income is other than A plus B-X, or to put it into figures, if A is Rs. 1,000 and B Rs. 1,500 and X Rs. 1,200 then his profit, that is to say, what is left over to him, is only Rs. 1,300. If he is told that Rs. 1,000 of this is tax-free, then, according to the lights of the ordinary man in the street, only Rs. 300 would be taxable and if he is made to pay tax upon more, it is no use telling him that neither his outgoings nor his tax-free securities are being taxed. He is the man with the coins in his hand and count them how you will, only Rs. 300 remains when Rs. 1,000 is excluded. The department, however, would split the Rs. 1,200 proportionately and assign Rs. 480 to the tax-free securities and Rs. 720 to the other, and after doing that they would tax Rs. 1,300-Rs. 720, that is Rs. 580. Now, where does the remaining Rs. 280 come from ? It can only come from two sources. Either it comes from a part of the outgoing X in which case a part of the outgoing is being taxed contrary to the Act which only purports to tax "income, profits and gains," and contrary to the first proviso to Section 8, or it comes from the Rs. 1,000 in which case a part of the tax-free interest is being subjected to tax. As we have said the first proviso to Section 8 must have some meaning, cannot mean that an outgoing is not to be taxed because that is obvious from the fact that the Act only purports to tax "income, profits and gains." It must, therefore, mean that unless care is taken to exclude certain outgoings the result will be that in reality they will be taxed, however much surface calculations and philosophical speculations may appear to indicate the contrary. We have endeavoured to explain how that can come about. In our opinion the first proviso directs deduction of the outgoings X from the incomings A plus B. We say from A plus B because the proviso speaks of "the securities" and, as we have seen, "the securities" mean all kinds, the taxable as well as the tax-free. Therefore, up to that point there is no justification for treating the two differently, nor indeed was that seriously challenged. What the Commissioner contends is that the second proviso makes the difference. The second proviso runs :
"Provided further that no income-tax shall be payable on the interest receivable on any security of the Central Government issued or declared to be income-tax free."
The Commissioner contends that unless the first proviso is taken to refer to taxable securities only, there is an overlapping which will give the assessee a double advantage; therefore, the two must be construed in that sense. But as we have said that is putting the cart before the horse. There is no reason why the assessee should be get a double advantage if the Act can be so construed. If the language is plain, there is nothing more to be said. If it is ambiguous, then, being a fiscal enactment it must be so construed because that is the construction which most favours the subject.
In our opinion, it can be so construed, and of the two constructions the one contended for by the assessee is the one which strains language least. We consider, therefore that it should be so construed. The proviso is plain. It directs that no income-tax shall be payable on the interest receivable from this class of security. The only way of ensuring that no income-tax is charged on it either directly or indirectly is by excluding the interest wholly from the assessees total income and that in our opinion holds good in the case of the first proviso too. We have explained at length how in reality an assessee would be paying tax on an outgoing unless it is wholly excluded from computation even though by a skilful jugglery with words and accounts it may appear otherwise; and we have pointed out that the legislature must have realised this too, otherwise it could not have used the language it has employed in proviso 1. On the face of it, it seems absurd to suggest that an outgoing is, or can be taxed. But the legislature obviously envisaged such a possibility, otherwise proviso 1 is meaningless. We have shown how the possibility can, in given circumstances, become a reality. The same analysis discloses that this could also happen in the case of tax-free securities unless the interest on them is wholly excluded. In our opinion the provisos mean that both X and A are to be excluded from computation.
We can find no justification for the practice of splitting up X as the department has done. We may in this regard look to section 10 also, though in an Act of this kind the construction of one section does not necessarily assist in the elucidation of another. Under Section 10 tax is payable on the profits and gains of a business. Now if a dealer sells a motor car for Rs. 6,000 his profit on the that transaction is not Rs. 6,000 but is the selling price less what he had to pay. If he had to pay Rs. 5,000 in order to purchase the car so that he could sell it for Rs. 6,000 his profit is clearly only Rs. 1,000. Therefore the outgoing of Rs. 5,000 has to be deducted from the incoming of Rs. 6,000. The same applies in the case of securities. If a man has to to spend Rs. 1,200 in order to purchase a return of Rs. 2,500 his real income or profit is only Rs. 1,300, and that in our opinion is what proviso I to Section 8 recognises. Then Section 10 allows a further deduction in sub-section (2)(xii). The Act recognises that profits and gains cannot be fairly computed by simply deducting the purchase price of a commodity from its selling price. Other factors such as reasonable business expenses, the maintenance of an office, and so forth, must also be taken into consideration. In section 10(2)(xii) the whole of this is excluded without any attempt to allocate it between one kind of transaction and another.
Say a mans business consists wholly of the buying and the selling of shares and securities. If this was conducted on a large enough scale, it would be necessary for him to maintain an office. Say among the transactions he conducts is the purchase of taxable and tax-free securities which he is either unable to dispose of in a given year of assessment or considers it prudent to retain awaiting a rise in the market. It would be absurd to say that the sum allowed on account of office expenditure would have to be apportioned simply because he happens to receive interest on these two types of securities in the course of his business. In our opinion, similar considerations obtain in the case of Section 8. Take another example. Agricultural income is exempt under Section 4(3)(viii). But say a mans business is partly agricultural and partly commercial, the commercial end of it being mixed up with the agricultural. Say he runs one office and one staff to supervise both sections. Would he have to apportion the office expenses which are permissible as a good deduction under Section 10(2)(xii) between the two kinds ? We can hardly think that that would be the case.
Giving the best consideration we can to all these matters, we are of opinion that the two provisos to Section 8 are independent and that they deal with different things. In our judgment, deductions are to be made under both heads. Turning now to the cases cited. There are two from England namely, Hughes v. Bank of New Zealand and the House of Lords upholding this on appeal, Hughes v. Bank of New Zealand. We doubt if much is to be gained by the examining these cases, though the point involved was the same, because they turn upon a construction of the English Statute which is not quite the same as our Act. Still, so far as they go, the matter was decided against the Crown and the tax-payer was allowed to deduct the interest on tax-free securities as well as expenses which went towards the earning of it despite the fact that it gave the tax-payer a "double advantage." (See Lord Wrights judgment at page 449 of the 1937 report). This upholds our contention that there is no reason why the tax-payer should not get a double advantage if that can reasonably be spelled out of enactment. And in so far as any principle is to be deduced, the following observation of Lord Thankerton in the House of Lords (page 374) is relevant. He says that the contention of the Crown (similar to its contention here) "would involve the very serious frustration of what the parties, taking the securities from time to time might be assumed to have contemplated." And again at page 378, "If the policy of the Crown is otherwise, it is for them to rectify the ambiguities by amending legislation."
The latter remakes were made in connection with the noble Lords criticism that "I find the language of the sub-rule (2) of the rule 7 evasive and ambiguous; a slight alteration of the words could have clearly expressed either of the opposing constructions." That it is also the position here, and, following the lead of the House of Lords, we consider it proper to resolve the ambiguity in favour of the tax-payer.
Then again at page 378 Lord Thankerton says, after pointing out that the interest on borrowed capital was a proper deduction : "It does not require the presence of a receipt on the credit side to justify the deduction of an expense." That, in our opinion, is also the case here. The two matters are separable and distinct. Counsel for the Commissioner relies on Commissioner of Income-tax, Madras v. Madras Provincial Co-operative Bank Ltd., a decision of the Madras High Court. That ruling favours the contention of the department, but with the utmost respect we prefer our view. The learned Judges give no reasons and merely express it as their opinion that proviso 1 is intended to cover taxable securities only. For the reasons we have given, we do not think that is the case, and as we have said, if there is ambiguity the matter must be resolved in favour of the tax-payer. The question referred is :
" Whether on the facts of this case the assessees income from interest from tax-free securities has been properly computed after deducting the proportionate interest on borrowed capital at Rs. 73,846 for the assessment year 1940-41 and Rs. 47,788 for the assessment year 1941-42 ?"
Our answer is that the income has not been properly computed. We are of opinion (1) that the spliting up of the interest on borrowed capital and apportioning it between the taxable and tax-free securities is not justified; (2) that under proviso 1 to Section 8 the whole of the interest on such part of the borrowed capital as was expended on the purchase of these securities should have been deducted; and (3) that under proviso 2 the whole of the interest on the tax-free securities should have been excluded in addition to the deduction in respect of interest on borrowed capital. The costs of this reference will be paid by the Crown. Counsels fee Rs. 100.
Reference answered accordingly.