FACTS :- The following questions were referred to the High Court :

(1) Whether in the circumstances of the case the interest on borrowings, for the purpose of S. 8, Income-tax Act, should be computed on the basis of the average working capital or on the basis of the average deposits in the bank ?

(2) Whether in the circumstances of the case the interest deductible under the first proviso should be apportioned between the taxable and tax-free securities on the basis of their values ?

The facts leading to these questions will be found in the judgment of the High Court.

Chagla, C.J. :- The assessee is a co-operative bank, and its working capital in the year of account was roughly Rs. 34,00,000 and the average deposits about Rs. 29,00,000. This bank had invested in tax-free securities and taxable securities as large an amount as a sum approximately between Rs. 14,00,000 and Rs. 19,00,000. On the deposits that the bank maintained it paid as interest in the year of account a sum of Rs. 61,788; and two questions arise for our determination in this reference. One is with regard to the true effect of proviso 1 to s. 8, Income-tax Act to the extent that it is applicable to the facts of