Strict construction of securities income rules rejected artificial apportionment of borrowed-interest and tax-free security exclusions.

A fiscal provision on income from securities was construed strictly, with ambiguity resolved in favour of the assessee. Interest paid on borrowed capital used to invest in securities was held deductible in full under the first proviso where the borrowing could not be specifically traced to particular investments, and the department's attempt to apportion that interest between taxable and tax-free securities was rejected. The second proviso was treated as independently excluding the whole of the interest on income-tax-free securities from computation. The result was that artificial proportionate allocation was not permitted unless the Act clearly required it.

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Issues: Whether, in computing income from interest on securities, the interest paid on borrowed capital had to be apportioned between taxable and tax-free securities, or whether the whole amount of such interest and the whole interest on tax-free securities were to be excluded from computation.

Analysis: The Act was treated as a fiscal enactment requiring strict construction, and any ambiguity was held to operate in favour of the subject. Section 8 was read as applying to all securities within the charge, and its first proviso was understood to allow deduction of interest paid on money borrowed for the purpose of investment in securities without apportionment where the borrowing could not be specifically allocated to particular investments. The second proviso was held to exclude interest on income-tax free securities wholly from computation. The two provisos were treated as independent, dealing with different matters, and the departmental method of splitting the borrowed interest between taxable and tax-free securities was rejected.

Conclusion: The apportionment of interest on borrowed capital was not justified. The whole of the interest attributable to borrowed capital used for purchasing securities had to be deducted under the first proviso, and the whole interest on tax-free securities had to be excluded under the second proviso. The answer was against the Revenue and in favour of the assessee.

Final Conclusion: The reference was answered by holding that the assessee's taxable income had been wrongly computed because the borrowed-interest deduction and the exemption for tax-free securities could not be curtailed by proportionate allocation.

Ratio Decidendi: Where a fiscal provision allows deduction of interest on borrowed capital used for investment in securities and separately exempts tax-free securities, ambiguity must be resolved in favour of the assessee and the statutory exclusions applied without artificial apportionment unless the Act clearly requires it.

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