1965 (11) TMI 40 - SC - Income Tax

Bank entitled to full interest rebate on tax-free securities as per clear Supreme Court ruling

The High Court ruled in favor of a banking company, allowing a rebate on the full interest amount of Rs. 44,720 received from tax-free securities. The ... Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the Explanation to section 8 is not applicable in this case and that the entire interest of ₹ 44,720 earned by the assessee from securities issued by the former Native States, etc., is entitled to rebate of income-tax? Held that:- Though the point of time from which the exemption works is when it is received within the territories of the State of Travancore-Cochin, what is exempted is the interest receivable.' Interest receivable ' can only mean the amount of interest calculated as per the terms of the securities. It cannot obviously mean interest receivable minus the amount spent in receiving the same. We, therefore, hold agreeing with the High Court, that no income-tax is payable in respect of the entire interest of ₹ 44,720 earned by the assessee from securities issued by the former Native States. Appeal dismissed. Issues:1. Interpretation of section 8 of the Income-tax Act regarding income-tax computation on interest received from specific securities.2. Application and scope of the notification issued by the Central Government under section 60A of the Income-tax Act.3. Determination of the entitlement to income-tax rebate on interest earned from securities issued by former Native States.Analysis:The case involved a banking company appealing against the assessment of income tax for the year 1956-57 related to interest received on tax-free securities. The Income-tax Officer allowed a rebate on a reduced sum after deducting certain expenses, contrary to the bank's claim for a rebate on the entire interest amount. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the Income-tax Officer's decision. The Tribunal referred the matter to the High Court of Kerala, which ruled in favor of the bank's entitlement to a rebate on the full interest amount of Rs. 44,720. The issue revolved around the interpretation of section 8 of the Income-tax Act and the notification issued by the Central Government under section 60A.The Revenue contended that section 8 mandated the computation of income tax on interest from securities after deducting expenses, and the exemption under the third proviso was only applicable to the taxable portion of the interest. On the other hand, the bank argued that section 8 did not apply to income-tax free securities, and the interest was solely governed by the notification issued by the Central Government, exempting the entire interest from income tax. The Supreme Court agreed with the High Court's interpretation of the notification, stating that the exemption provided was clear and unambiguous, exempting the interest receivable on specific loans without reference to section 8 of the Income-tax Act.The notification issued by the Central Government under section 60A exempted the bank from paying income tax on the interest received from specific securities issued by former Native States, subject to certain conditions. The Court emphasized that the notification was self-contained, providing an exemption from income tax on a particular class of income without the need to refer to section 8 of the Income-tax Act. The Court held that the bank was entitled to a rebate on the entire interest amount of Rs. 44,720 earned from the securities issued by the former Native States, affirming the decision of the High Court.In conclusion, the appeal was dismissed, and the bank's entitlement to a rebate on the full interest amount was upheld. The judgment clarified the application and scope of the notification issued by the Central Government under section 60A in exempting specific interest income from income tax, independent of the provisions of section 8 of the Income-tax Act.