Exempt security income and trade expense deduction remain separate: exempt receipts did not require proportionate disallowance.

Interest on the specified securities was treated as exempt under the relevant Income Tax Act provisions and connected rules, including War Loan and India Government Stock, with the disputed exemptions extended to the credit items in question. The court also held that no proportionate disallowance of borrowing and related expenses was required merely because the corresponding receipts were exempt, since the expenditure was incurred wholly and exclusively for the trade and no statutory provision justified a matching reduction. The assessment was therefore reduced for the exempt income, but the expense deduction was maintained, so the appeal failed overall.

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Issues: (i) Whether the interest on the relevant securities was exempt from tax under the cited provisions of the Income Tax Act, 1918 and the connected rules. (ii) Whether, if the exempt credit items were excluded, a proportionate part of the borrowing and related expenses had also to be excluded from the computation of profits.

Issue (i): Whether the interest on the relevant securities was exempt from tax under the cited provisions of the Income Tax Act, 1918 and the connected rules.

Analysis: The exemption for War Loan interest was accepted. The exemption for India Government Stock was held not to be confined to Schedule C alone, and the relevant rule operated generally. As to the Grand Trunk Pacific and Auckland Electric Power securities, the Court held that the language of the incorporating rule was ambiguous, but agreed that the later legislative provision supported the construction adopted by the Court of Appeal. The claimed exemptions therefore applied to the credit items in dispute.

Conclusion: The exemption contention succeeded in relation to the disputed credit items.

Issue (ii): Whether, if the exempt credit items were excluded, a proportionate part of the borrowing and related expenses had also to be excluded from the computation of profits.

Analysis: The expenditure was incurred in the course of the trade and was wholly and exclusively laid out for the purposes of that trade. The fact that the associated receipts were exempt did not prevent the expense from being deducted. No statutory provision supported the Crown's contention for a corresponding reduction.

Conclusion: The proportionate borrowing and related expenses were not required to be excluded from deduction.

Final Conclusion: The assessment was reduced in accordance with the exempt credit items, but the associated expense deduction was maintained, and the appeal failed overall.

Ratio Decidendi: Where statutory language extends an exemption to particular income or securities, the exemption applies according to its terms and, in computing trading profits, expenditure incurred wholly and exclusively for the purposes of the trade remains deductible even if the corresponding receipts are exempt.

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