The Bihar State Co-Operative Bank Ltd v. The Commissioner Of Income-Tax

[1960] 58 SUPREME COURT REPORTS z960 view of this Mr. Palkiwala for the Managed Company did not press C. A. No. 323 of 1957, which is therefore Commissioner af b "11 b h · · Income-tax. dismissed ut the parties w1 ear t. eir own costs m Bombay North that case because the result of that appeal is rea.lly v. dependent upon the result in C. A. No. 145 of 1958. /s H arivallabhdas Kaliaas Appeals dismissed ~i1 /s H arivallabhdas Kaliaas Kapur J. THE BIHAR STATE CO-OPERATIVE BANK LTD. v. THE COMMISSIONER OF INCOME-TAX (J. L. KAPUR, A. K. SARKAR AND M. HIDAYATULLAH, JJ.) Ig6o Income Tax-Co-operative Bank-Interest received on deposits February 32 with other banks-Exemption from taxation under Notification-Indian Income-tax Act, r922 (XI of r922) ss. IO, I2. The Appellant Bank which was registered under the Co-operative Societies 'Act, 1922, received, in the relevant account years, by way of interest on deposits with the Imperial Bank of India certain sums of money. The Income-tax Officer assess-ed the aforesaid sums under s. 12 of the Indian Income-tax Act 1922, as income from other sources, but the appellant claimed that the deposits were made not with the idea of making investments but for the purpose ·of carrying on its business as a bank and that as the interest received on the deposits was profit attributable to its business activities it was not subject to income-tax because of the Notification issued by the Central Government under s. 60 of the Act. Under the Notification profits of any Co-operative Society are exempt from the tax payable under the Act but not income derived from "other sources" referred to in s. 12 ofthe Act. IIeld, that the interest from <leposits received by the Appel-lant Bank in the present case arose out of a transaction entered into for the purpose of carrying on its banking business and fell within the income exempted under the Notification. The Punjab Co-operative Bank Ltd. v. The Commissioner of Income-tax, Punjab, [1940] 8 I.T.R. 635, relied on. CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 228 to 230 of 1958. Appeals Appeals from the judgment and decree dated July 2, 1957, of the Patna High Court in Misc. Judicial Case No. 640 of 1955. 3 S.C.R. SUPREME COURT REPORTS 59 Z9[60 ] N. A. Palkhivala, Thakur Prasad and R. 0. Prasad for the appellant. Bihar State Co-operative Bank Ltd. v. Commissioner of Income Tax Kapur J. 0. K. Daphtary, Solicitor :General of India, R. Gana- Co-operative Bank pathy Iyer and D. Gupta, for the respondent. Ltd. 1960. February 22. The Judgment of the Court v. d b Commissioner of WaS d 1e lVere [. ]y Income Tax 1960 ] 58 59 60 59 KAPUR, J.-The appellant is a Bank registered under the Co-operative Societies Act, 1912 (Act II of 1912) 11>nd is deemed to be registered under the Bihar & Orissa Co-operative Societies Act, 1935 (Bihar Acb VI of 1935) which in Bihar has replaced the Co-operative Societies Act of 1912. It was carrying on banking business in the State of Bihar. One of the objects of the Bank is to carry on general business of banking not repugnant to the provisions of the Bihar Act and rules framed thereunder for the time being in force (Bye-Law 3(a)vi). In the calendar years 1945, 1946 and 1947, the appellant Bank received by way of interest on deposits with the Imperial Bank of India the sums of Rs. 7,192, R(l. 20,250 and Rs. 22,600 respectively. It is these sums which are the subject matter of dispute in these three appeals which relate to the respective assessment years 1946-47, 1947-48 and 1948-49. These sums were not assessed when assessment was made under s. 23(3) of the Income-tax Act, but subsequently under s. 34 they were assessed as being ' income ' under the head 'other sources'. This order was upheld by the Appellate Assistant Commissioner and by the Income-tax Appellate Tribunal. A case was then stated to the High Court under s. 66(1) of the Act, but was decided against the appellant. The appella.nt brought three appeals in this Court in regard to the three assessment years. In each one of them the respondent is the Commissioner of Income-tax, Bihar & Orissa. As the appeals involve a common ques-tion of law they were consolidated and can convenient-ly be disposed of by one judgment: In its return the appellant showe\l these various sums as ' other sources ', but nothing turns on the manner in which the appellant chose to show this income in itlil return. The Income-tax Officer, however, assessed the interest for these three years 60 SUPREME COURT REPORTS [1960] under s. 12 of the Income-tax Act, as income from 'other sources'. The appellant took an appeal to the 1' ·k Appellate Assistant Commissioner where it was con-an ddh hb" fh 11 Bk ten e t at as t e usmess o t e appe ant an consisted oflending money and the deposits had been of made not for not for for the purpose of investment but for but for for that business and thereby fulfilling the purpose for which the Co-operative Bank was constituted, these various sums of interest were not subject to income-tax because of the Notification issued by the Central Government under s. 60 of the Income-tax Act. The relevant portion of that Notification, C.B.R. N otifica-tion No. 35 dated October 20, 1934, and No. 33 dated August 18, 1945, was:- r960' . 511' C o~opera [Bihar]1ive "8an Ltd. v. Commissioner Income Tax Kapur]. Commissioner of made not for not for for the purpose of investment but for but for for that "The following classes of income shall be exempt from the tax pa.yable under the said Act, but shall be taken into account in determining the total income of an assessee for the purpose of the said Act:- (2) The profits of any Co-operative Society other than the Sanikatta Salt Owners' Society in the Bombay Presidency for the time being registered under the Co-operative Societies Act, 1912 (Act II of 1912), the Bombay Co-operative Societies Act, 1925 (Bombay Act VII of 1925), or the Madras Co-operative Societies Act, 1932 (Madras Act VI of 1932), or the dividends or other payments received by the members of any such Society out of such profits. Explanation: For this purpose the profits of a· Co-operative Society shall not be deemed to include any income, profits or gains from :- (1) Investments in (a) securities of the nature 61 62 1945 . 63 referred to ins. 8 of the Indian Income-tax Act; or (b) property of the nature referred to in s. 9 of that Act; (2) dividends, or (3) the 'other sources' referred to in s. 12 of the Indian Income-tax Act". The Appellate Assistant Commissioner, however, repelled the contention of the appellant. He held that the business of the appellant consisted of 'lend- 3 S.O.R. SUPREME COURT REPORTS 61 ing money, and selling agricultural and other products ' I9[60 ]to its constituents' which could be planned ahead and n·ia state required no provision for extraordinary claims. He c0•0;.~:iive Bank remarked that it appeared from the balance-sheets Ltd. that in the accounting year 1945 the Bank invested v. Rs. 13,50,000 as fixed deposits, which_, in the following Commissioner [0]1 Income Tax year was raised to Rs. · 15,00,000 an d it was on y in 1 -< the, accounting year 1947 that the fixed deposits Kapur J. 'were realised on maturity with interest'. He was also of the opinion that the length of the period during which this money 'was kept locked in this way ' showed clearly that ' not the exigencies of pressing necessities, but the motives of investment of surplus fund had actuated the deposits'. He there->\' fore held that the fixed deposits with the Imperial Bank were held as an investment quite apart from the business of the appellant and the interest from these deposits was not exempt from income-tax. He further held that the exemption as to the profit of a Co-operative Society extended to its sphere of co-operative activities and therefore interest from investments was no part of the appellan.t's business i. profits exempt from taxation. Against this order an appeal was taken to the Income-tax Appellate Tribunal and it was there contended that the Bank did not make the deposits as investments, but in order that cash might be available to the appellant ' continuously ' for the carrying on of the purposes of its business, and that the deposits were intimately connected with the business of the appellant and " therefore the interest should have been held to be profits arising from the business activities of the Bank, and that the finding tb'at the short-term deposits in the Imperial Bank were separate from the appellant's banking business was erroneous. The Income-tax Appellate Tribunal, by its order dated April 11, 1955, held :- " (1) That the interest was an income rightly to be included under the head of 'other sources' . the head of 'other sources' . head of 'other sources' . of 'other sources' . 'other sources' . sources' . be included under the head of 'other sources' . the head of 'other sources' . head of 'other sources' . of 'other sources' . 'other sources' . sources' . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) The profits of a Co-operative Society indicates the profit derived from the business which can be truly called the business of the Co-operative zg6o Bihar State Co-operative Bank Ltd. v. Commissioner of Income Tax Kapu• J. 62 SUPREME COURT REPORTS Society. Investments by the society either in securities or in shares or in bank fixed deposits are made out of surplus funds. The interest or dividend derived from such investment cannot be regarded as part of the profits of the business (sic) qua such bank and therefore, it is not exempt from income.tax (Vide Hoshiarpur Central Co-operative Bank v. Commissioner of Income-tax ([1]),)" Against this order a case was stated at the instance of the appellant under s. 66(1) of the Act, and the following two questions of law were referred for the opinion of the High Court ; (1) Whether, in the facts and circumstances of 63 64 356 65 .......................................................................................................................................................................................................