M. C. Chagla, C. J. - (1.)THE assessee is a co-operative bank, and its working capital in the year of account was roughly Rs. 34,00,000 and the average deposits about Rs. 29,00,000. This bank had invested in tax-free securities and taxable securities as large an amount as a sum approximately between Rs. 14,00,000 and Rs. 19,00,000. On the deposits that the bank maintained it paid as interest in the year of account a sum of Rs. 61,788; and two questions arise for our determination in this reference. One is with regard to the true effect of the first proviso to Section 8 of the Indian Income-tax Act to the extent that it is applicable to the facts of this case. Now, Section 8 deals with one of the heads which are chargeable to income-tax and that head is "interest on securities," and the section provides that the tax shall be payable by an assessee on interest on securities, in respect of the interest receivable by him on any security of the Central or Provincial Government. THE rest of the section is not material. THEn we come to the first proviso, and to the extent that it is material, it provides that no income-tax shall be payable in respect of any interest payable on money borrowed for the purpose of investment in the securities by the assessee. Now, I might straightaway point out that this part of the proviso with which I am dealing is extremely clumsily drafted. THE proviso suggests as if income-tax was payable on an outgoing but the true meaningand that is not disputedof this part of the proviso is that it contemplates a permissible deduction in the case of interest received under the head of securities and the permissible deduction is that if an assessee has borrowed moneys in order to invest them in securities and if he has to pay interest on those borrowings, then the interest can be deducted by the assessee from the tax that he has to pay under the head "interest on securities. " THEn there are two more provisos to this section. THE second proviso deals with securities of the Central Government which are tax-free, and enacts that no income-tax shall be payable on the interest receivable on such tax-free securities of the Central Government; and the third proviso deals with the securities of the Provincial Government, and that also enacts that no income-tax shall be payable by the assessee in respect of the tax-free Provincial Government securities, but income-tax shall be payable by the Provincial Government itself.
(2.)NOW, the question that has been mooted at the bar is whether an assessee is entitled to deduct interest paid by him on his borrowings if he invests the sums so borrowed in tax-free securities. In other words, is it permissible to an assessee to borrow moneys, invest them in tax-free securities, receive interest on those securities, pay no tax on those securities, and still claim a deduction in respect of the interest which he has paid on the moneys borrowed by him? Sir Jamshedji contends that Section 8 must be construed in the light of the first proviso and that provisos 2 and 3 must be given effect to after due effect has been given to the first proviso. He says that the Legislature has put in these provisos in their due and proper order and they must be construed and given effect to in that order. Therefore, according to Sir Jamshedji, the first proviso is in essence absolute and it gives an absolute right to the assessee to deduct interest provided he utilizes the moneys borrowed by him on which interest is payable in the investment of securities. Whether those securities are tax-free or tax-bearing is immaterial. In my opinion such a construction, apart from the very great incongruity to which it leads, is not one which is proper to place upon the section. I agree with Sir Jamshedji that a taxing statute must be construed strictly and if an assessee gets an advantage which the Legislature may not have intendedand which he is entitled to on the construction of the statutethe Court should not deprive him of that advantage. But to my mind the proper canon of construing a section which has several provisos is to read the section and the provisos as a whole, try and reconcile them and give a meaning to the whole of the section along with the provisos which is a comprehensive and logical meaning. Therefore, if you construe this section according to that canon, it is clear that the securities referred to in Section 8 are not all securities but securities other than those which are exempted by the two subsequent provisos to the section. The securities referred to in Section 8 are only those securities on which tax is payable by the assessee; and when you come to provisos 2 and 3 and the Legislature enacts that no tax is payable by the assessee in respect of certain securities, then Section 8 does not apply to those securities. The function of a proviso is to take out of a section a part of the category to which that section applies and that function is performed by provisos 2 and 3 by removing as it were from Section 8 those securities on which no tax is payable by the assessee. If that is the true construction, then it is clear that the first proviso only applies to securities which are not tax-free and, therefore, the only right of the assessee is to claim deduction with regard to interest on moneys borrowed by him when he utilizes those moneys in investing them in securities on which he has got to pay tax, but if he uses moneys borrowed by him in investment of tax-free securities, then he cannot claim deduction given to him under the first proviso.
There are two decisions of two High Courts which have taken conflicting views on this point. There is the decision of the Madras High Court reported in Commissioner of Income-tax, Madras v. Madras Provincial Co-operative Bank, Ltd. [1943] Mad 390. That Court has taken the same view of the section and the provisos as I have suggested to be the correct view. The Nagpur High Court in a case reported in C. P. & Berar Provincial Co-oper. Bank v. Commr. of Inc.-tax (1945) 14 I. T. R. , 479 has taken a contrary view and has come to the conclusion that although the assessee does get what the learned Judges there call a "double advantage," still the assessee is entitled to that double advantage because, according to the Nagpur High Court, the section must be construed in favour of the assessee. With very great respect, in my opinion, the judgment of the Madras High Court is to be preferred to that of the Nagpur High Court.

The second question which arises is what is the principle to be adopted in deciding what funds the bank utilized in the investment of securities? As I have stated earlier, the bank has a large working capital and it has also got large deposits. It is only if the bank utilized these deposits in investing them in taxable securities that it would get the benefit of the first proviso to Section 8; but if the bank used its capital in investing in securities, then the bank could not claim the benefit of the first proviso. Now, as far as the books of account of the bank are concerned, they throw no light on this point. The bank had treated both the capital and its deposits as a common fund and it is out of this common fund that investments have been made in taxable and tax-free securities. Sir Jamshedji contends that we must draw a presumption that the bank would rather invest moneys out of its deposits than out of its capital; and what is urged by Sir Jamshedji is that the bank's primary business is to lend moneys and, therefore, for its primary business it would utilize its capital, and as far as its deposits are concerned, it would invest them both to earn interest and as security in case the depositors suddenly make a demand against the bank for the return of the deposits. I am afraid it is not possible to say that any such presumption can arise in the case of a co-operative bank. Sir Jamshedji has not drawn our attention to any banking practice which makes it incumbent on a bank to use its capital for a particular purpose and to use its deposits for a different purpose, As far as the business of the bank is concerned, not only would the bank utilize its capital but also the moneys which it receives from its depositors for the purpose of lending them to farmers and others. It is only the surplus moneys which would be invested in Government securities and it is impossible to say that the surplus which the bank invests in Government securities is the surplus which is constituted only out of the deposits and not out of capital. The Tribunal has therefore applied a rule which it calls a rule of justice, equity and good conscience by suggesting that it should be deemed that the moneys were invested by the bank proportionately from its deposits and its capital. For want of any better rule or a more equitable rule we see no reason why we should differ from the view taken by the Tribunal.

(3.)WE will re-formulate question No.1 which will therefore read as follows: Whether in the circumstances of the case the interest on borrowings, for the purpose of Section 8 of the Indian Income-tax Act, Should be computed on the basis that investments were made proportionately out of capital and deposits ?
We will, therefore, answer question No.1 in the affirmative.