Expenditure incurred for the purpose of earning tax-free income is not necessarily outside the purview of S. 10 of the Indian Income-tax Act, 1922.

Judgment

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.

2. 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)?"

3. The relevant facts and circumstances are these. The respondent 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 securities 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 Section 10 (2) (iii) of the Act. The Income-tax Officer for 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 the formula adopted for calculating the proportionate interest for nothing turns on it.

4. 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 S. 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.

5. At the instance on the assessee the Appellate Tribunal referred the question reproducer 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) of the Act

6. It is common ground among the parties that S. 8 of the Act does not apply. The learned counsel for the Revenue. Mr. Rajagopal Sastri, submits that there is a general principle that as 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.

7. 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. Th