Proviso-based allowance cannot fictionalise non-existent expenditure, and Mysore Durbar securities fell outside the income-tax securities rule.

The first proviso to section 8 of the Income-tax Act, 1922, with its Explanations, applied only where actual expenditure on realising interest or a borrowing cost for investment in securities existed; it could not create a fiction of expenditure or borrowing where none had been incurred. On the facts stated, that proviso did not apply and the assessee succeeded on that point. Securities issued by the then Mysore Durbar were also held to fall outside section 8, because the provision was confined to interest on securities of the Central Government or a State Government of the relevant kind. The disallowance was therefore excluded and the reference went against the revenue.

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Issues: (i) Whether the first proviso to section 8 of the Income-tax Act, 1922, with its Explanations, applied where no actual expenditure was incurred for realising interest on securities and no borrowed money was used for investment in the securities; (ii) whether securities issued by the then Mysore Durbar fell within the scope of section 8 of the Income-tax Act, 1922.

Issue (i): Whether the first proviso to section 8 of the Income-tax Act, 1922, with its Explanations, applied where no actual expenditure was incurred for realising interest on securities and no borrowed money was used for investment in the securities.

Analysis: The proviso speaks of any sum actually expended for realising interest and of interest payable on money borrowed for investment. The Explanations do not create a fiction that expenditure or borrowing exists where none in fact exists; they only supply a formula for quantifying the reasonable sum to be allowed where such expenditure or liability exists. Their function is ancillary to the proviso and not independent of it.

Conclusion: The first proviso and its Explanations did not apply on the facts found, and the contention of the assessee succeeded.

Issue (ii): Whether securities issued by the then Mysore Durbar fell within the scope of section 8 of the Income-tax Act, 1922.

Analysis: Section 8 applies to interest on securities of the Central Government or of a State Government, and the third proviso indicates that the relevant securities must be those issued income-tax free by the Government concerned. Securities issued by the then Mysore Durbar were not securities issued by the State Government within that scheme. On that construction, the substantive provision itself did not extend to those securities.

Conclusion: The Mysore Durbar securities were outside section 8, so the assessee was not liable under that head.

Final Conclusion: The reference was answered against the revenue, and the assessee's claim to exclusion of the impugned disallowance under section 8 succeeded.

Ratio Decidendi: A deeming provision attached to a proviso for quantifying allowable expenditure cannot be used to fictionalise the existence of expenditure or borrowing where none has actually occurred, and securities fall within section 8 only if they are of the kind to which that provision, read with its provisos, is directed.

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