Section 60A exemption for interest on tax-free securities prevails over section 8 computation and its Explanation

A valid notification under section 60A granting full exemption for specified interest on tax-free securities prevailed over the computational machinery of section 8 of the Indian Income-tax Act, 1922. Because the notification separately governed inclusion of the interest for section 16 purposes, the Explanation to section 8 could not be used to reduce the exemption or restrict the rebate. The broader argument that "State Government" in the third proviso should be confined to former Provincial Governments was rejected as unsupported by the statutory language. The interest was accordingly entitled to rebate of income-tax, and the reference was answered in favour of the assessee.

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Issues: Whether the Explanation to section 8 of the Indian Income-tax Act, 1922 applied to interest earned on securities issued by the former Native States where a notification under section 60A granted exemption and directed inclusion only for the purposes of section 16.

Analysis: The notification issued under section 60A exempted the entire interest receivable on the specified tax-free loans, subject only to its inclusion in total income for the purposes of section 16. Once the notification operated, section 8 itself was not attracted to that interest, and the Explanation to section 8 could not be invoked to reduce the exemption. The reference to inclusion under section 16 was governed by the notification, not by the computational machinery of section 8. The broader contention that the expression "State Government" in the third proviso should be confined to former Provincial Governments was rejected as unsupported by the statutory language and inconsistent with the body of section 8.

Conclusion: The Explanation to section 8 did not apply, and the entire interest of Rs. 44,720 was entitled to rebate of income-tax; the question was answered in the affirmative and against the department.

Ratio Decidendi: Where a valid notification under section 60A wholly exempts specified interest income and separately governs its inclusion for section 16 purposes, the computational provisions and explanation attached to section 8 cannot be applied to diminish that exemption.

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