JAGDISH SAHAI J. - (1.) THIS is a reference made under section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as the "Act"), at the instance of the assessee, the Benaras State Bank Ltd. The question referred to us are as follows : "1. Whether the interest on securities issued by the erstwhile Indian States of Travancore and Cochin is assessable under section 8 of the Act or under section 12 of the Act ?
(2.) WHETHER the dividend of Rs. 23,000 in respect of shares held by the assessee in the Vibhuti Glass Works Ltd. is liable to inclusion in the total income of the company for the assessment year 1951-52, either in view of the provisions of section 16(2) of the Act or as income accruing or arising to the assessee within the meaning of section 4(i)(b) of the Act ?" The assessment giving rise to the reference relates to the year 1951-52, the accounting period being the calendar year 1950. The assessee, the Benaras State Bank Ltd. (hereinafter referred to as the "bank"), carries on its business at Ramnagar which was the capital of the erstwhile States of Benaras. The bank held securities issued by the erstwhile State of Travancore and Cochin. The The bank was also getting some dividends from Vibhuti Glass Works Ltd., a company carrying on the business of production of glassware, On September 27, 1950, the Vibhuti Glass Works Ltd. declared its dividend by means of a resolution which reads : "To consider the declaration of a dividend : The recommendation of the board of directors for making provision for payment of the dividend on ordinary shares free of income-tax was approved, with the qualification that if the court allows only then payment will be made, otherwise not." In the balance-sheet "as on 30th of September, 1950" of the Vibhuti Glass Works Ltd., a sum of Rs. 30,000 was shown as "unpaid dividend and bonus". This included the sum of Rs. 23,000 dividend payable to the bank. The statement of the case is clear on the point that a litigation was going on in which the bank was a party and the right of the bank to receive the dividend was in dispute. On November 18, 1954, the Vibhuti Glass Works issued the following certification to the bank : "Certified that a sum of Rs. 23,000 (Rupees twenty-three thousand) only payable to Benaras State Bank Ltd., being the 10% dividend declared by the company for the year ended 30th September, 1949, has not yet been paid to them, although a provision has been made to this effect in our balance-sheet." During the accounting year, the bank also received a sum of Rs. 69,000 as interest on the securities issued by the erstwhile States of Travancore and Cochin. The Income-tax Officer included Rs. 23,000 as dividend received from the Vibhuti Glass Works and Rs. 69,000 as income from interest on securities issued by the Travancore and Cochin States, in the total income received by the assessee. On appeal by the assessee, the order of the Income-tax Officer was affirmed by the Appellate Assistant Commissioner, and on a second appeal by him by the Income-tax Appellate Tribunal (hereinafter referred to as the "Tribunal"). We will deal with the questions referred to us serially.
(3.) ADMITTEDLY the securities were issued by the erstwhile States of Travancore and Cochin some time before 1947, and certainly before the erstwhile State of Benaras merged in the Union of India on October 15, 1949. The taxation laws were made applicable to the areas forming part of the erstwhile State of Benaras on December 1, 1949. Section 8 of the Act, so far as it is relevant for our purpose, reads : "8. Interest on securities. - The tax shall be payable by an assessee under the head Interest on securities in respect of the interest receivable by him on any security of the Central Government or of a State Government, or on debentures or other securities for money issued by or on behalf of a local authority or a company : Provided that no income-tax shall be payable under this section by the assessee in respect of any reasonable sum expended by him for the purpose of realising such interest or in respect of interest payble on money borrowed for the purpose of investment in the securities by the assessee except interest chargeable under this Act which is payble without the taxable territories, not being interest on a loan issued for public subscription before the 1st day of April, 1983, unless in respect of interest which is so chargeable, tax has been paid or deducted under section 18, or unless there is a person in the taxable territories who may be appointed an agent under section 43 in respect of such interest : Provided further that no income-tax shall be payable on the interest received on any security of the Central Government issued or declared to be income-tax free : Provided further that the income-tax payable on the interest receivable on any security of a State Government issued income-tax free shall be payable by the State Government. The submission on behalf of the assessee is that the expression "State Government" should be read so as to be inclusive of the State of Kerala in which the States of Travancore and Cochin have merged resulting in the securities of these States being the securities of the Kerala State. At the time of the assessment the State of Kerala did not exist. It was formed later. This submission of the learned counsel, therefore, is unfounded.;