Hoshiarpur Central Co-Operative Bank
Ltd. Vs. Commissioner of Income-Tax, Simla  INSC 117 (2 August 1960)
CITATION: 1960 AIR 1303
Income-tax--Co-operative Society--Profits earned
in business with non-members--Whether exempt from tax--Income-tax Act, 1921 (IX
of 1921), s. 60, notification.
The assessee Bank, which was a co-operative
society, did business is controlled commodities with the approval of the
Registrar of Co-operative Societies and earned profits. it claimed that these
profits were also exempt from taxation under F. D. (C. R.) Notification R. Dis.
NO. 291-1. T./25 dated August 25, 1925, as subsequently amended, issued under
s. 60 of the income-tax Act. This notification exempted "the profits of
any co-operative society " from tax. It was urged for the Department that
these words referred to profits made by a co-operative society in its business
as a pure co-operative society, i.e., in business with its own members within
the four corners of the Cooperative Societies Act, 1912, and the bye-laws made there
Held, that the said profits were exempt from
tax. The words of the Notification were wide enough to include profits of
business of a co-operative society in transactions with nonmembers also. It was
always open to the appropriate Government to allow a society to extend its
business operations to trading with persons other than its members. Once there
was such 108 extension, the profits of the society from such business fell
within the general words of the Notification and it required more than a
supposed underlying intention to negative the exemption.
The Madras Central Urban, Bank Ltd. v.
Commissioner of Income-tax, (1929) I.L.R. 52 Mad. 640, F. B., The Madras
Provincial Co-operative Bank Ltd. v. Commissioner of Income tax, (1933) I.L.R.
56 Mad. 837 F. B. and Commissioner of Income-tax, Burma v. The Bengalee Urban
Co-operative Credit Society Ltd., (1933) I.L.R. 11 Ran. 521, distinguished.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 238 of 1955.
Appeal from the judgment and order dated May
27, 1953, of the Punjab High Court in Civil Reference No. 3/1952.
Deva Singh Bandhava and K. L. Mehta, for the
M. C. Setalvad, Attorney-General for India,
K. N. Rajagopal Sastri and D. Gupta, for the respondent.
1960. August 2. The Judgment of the court was
delivered by HIDAYATULLAH J.-This is an appeal against the judgment and order
of the High Court of Punjab with the certificate of the Court granted under s.
66A(2) of the Indian Income-tax Act.
The Hoshiarpur Central Co-operative Bank,
Ltd., Hoshiarpur, hereinafter referred to as the Bank, is the appellant., and
the Commissioner of Income-tax, Simla, is the respondent.
For the assessment years 1948-49 and 1949-50,
the Income-tax Officer included in the assessment of the Bank certain income
which had accrued to the Bank as profits from trading in controlled commodities
like sugar, cloth, kerosene, etc., which the Bank was allowed to deal in, with
the approval of the Registrar of Co-operative Societies conveyed in a letter
dated September 28, 1954. The Bank claimed exemption under a notification
issued Under s. 60 of the Income-tax Act, but the contention was not accepted.
On appeal, the Appellate Assistant Commissioner reversed the decision, which,
on further appeal, was reversed by the Appellate Tribunal, Delhi Branch. The
Appellate Tribunal, however, raised, 109 and referred the following question to
the High Court under s. 66(1) of the Income-tax Act:
" Where a co-operative Bank deals in
sugar and standard cloth with special permission of the authorities and earns
income from such activities, is such income exempt from tax under item 2 of the
Government of India Notification F. D. (C. R.) Notification R. Dis. No. 291-1.
T/25 dated 25th August, 1925, as subsequently amended (Income-tax Manual, 10th
Edition, Part II, pages 257-258) ?" The High Court answered the question
against the Bank, but certified the case as fit for appeal to this Court, and
hence this appeal.
It is admitted on all bands that the profits
were made from trading in certain commodities with the approval of the
Registrar of Co-operative Societies. The quantum and the manner in which those
profits were made, are not in dispute.
The short question in this appeal is whether
the exemption granted by the notification covers the case. The notification
reads as follows:
" Income included in total income but
exempt from both income-tax and super-tax:
The following classes of income shall be
exempted from the tax payable under the said Act, but shall be taken into
account in determining the total income of an assessee for the purposes of the
2. The profits of any Co-operative Society
other than the Sanikatta Saltowners' Society in the Bombay Presidency for the
time being registered under the Co-operative Societies Act, 1912 (11 of 1912),
the Bombay Co-operative Societies Act, 1925 (Bombay Act VII of 1925), the Burma
Co-operative Societies Act, 1927 (Burma Act VI of 1927) or the Madras Cooperative
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) Investment in (a) securities of the nature 110 referred to in
Section 8 of the Indian Income-tax Act, or (b) property of the nature referred
to in Section 9 of that Act;
(ii) dividends, or (iii) the other sources'
referred to in Section 12 of the Indian Income-tax Act." The Income-tax
Officer held that the profits made by the Bank were not the profits in a
co-operative venture but from trading with outsiders, and that, therefore, para
2 of the notification did not cover them. He also held that this income fell
within it other sources " referred to in item (iii) of the Explanation.
The Appellate Assistant Commissioner held that these were profits of a
Co-operative Society, and were within para 2, and were, therefore, excempt from
tax. Both the Tribunal and the High Court accepted the reasoning of the
Income-tax Officer with regard to para 2, but the High Court did not express
any opinion as to whether the third item of the Explanation applied to the case
Before us, the learned Attorney-General
appearing for the Department did not put his case on the Explanation, and
nothing more need be said about it. It may, however, be mentioned that "
other sources " there has reference to the scheme of s. 6 of the Indian
Income-tax Act, and profits from business of whatever kind, are dealt with
under s. 10 of the Act. The short question thus is whether para 2 is confined
only to profits made by a Co-operative Society from transactions with its own
members and does not cover profits made in business with outsiders.
It may be pointed out that there are some
cases to be found, in which it was held, before the notification was amended by
the addition of the Explanation, that the second para exempted profits made by
a Cooperative Society in transaction with its members and not to profits made
in any other way. The question is whether such a restricted meaning can be
imputed to the very wide and general terms in which para 2 is couched.
The question is plainly one of construction
of the notification. In support of the case of the Department, 111 the learned Attorney-General
relies on two arguments. He first refers to the opening words of the second
para of the notification, viz., " The profits of any Cooperative Society
". These words, it is argued, refer to profits made by a Cooperative
Society in its business as a pure Co-operative Society, or, in other words, in
business with its own members within the four corners of the Co-operative Societies
Act, 1912 and the byelaws made under that Act.
No doubt, a Co-operative Society primarily
exists for business with members and not for business with non-members;
but the words of the notification and even
those more specifically relied upon, are wide enough to include any business
whether of the one kind or other. It cannot be denied that the Bank is a
Co-operative Society and is claiming the exemption only as such, and further
that it is claiming the exemption in respect of profits from a business carried
on by it. It was for this reason that the attempt to bring the profits within
" other, sources " covered by s. 12 of the Indian Income-tax Act was
rightly abandoned in this Court. If this is the obvious position, it follows that
the words " the profits of any Co-operative Society " are wide enough
to cover profits-from any business, and there is nothing to show that the
profits there mentioned are only the profits from business with members.
It is next argued that a Co-operative Society
exists for business with members, and that the Co-operative Societies Act and
the bye-laws of the Bank reflect this character of the business undertakings.
This intention underlying the Co-operative Societies Act and the bye-laws, it
is urged, is the key to the interpretation of the notification, and it must,
therefore, be limited to profits from business with members only. In support of
this argument, reference is made to observations in The Madras Central Urban
v. Commissioner of Income-tax (1), The Madras
Provincial Cooperative Bank Ltd. v. Commissioner of Income-tax(2) and
Commissioner of Income-tax, Burma v. The Bengalee Urban (1) (1929) I.L.R. 52
Mad. 640 F.B. (2) (1933) I.L.R. 56 Mad. 837 F.B. 112 Co-operative Credit
Society, Ltd. (1), where it was pointed out that the notification covered only
profits from business with members. The first two cases were of interest
derived from moneys invested in Government Securities to comply with orders of
Government to the Societies to keep 40 per cent of the total liabilities always
ready at hand, and it was said that the profits were not from business with
members. In the last of the three cases, it was pointed out that the exemption
was grounded on the principle that a person cannot make a loss or profits out
of himself', and strictly speaking, only such profits as were made in business
with members were exempt.
The position since these cases were decided
has been materially altered by the addition of the Explanation. The Explanation
now takes us back to the kinds of income to be found in s. 6 of the Indian
Income-tax Act where business profits are, in a category by themselves, more
exhaustively treated in s. 10. There are other heads of income of distinct
characteristics which are treated separately, and then there is a residuary head
which includes income from ,other sources" which for that reason are in
nominate. The Explanation cannot be said to imply a general approval of the
earlier decisions. Such a conclusion does not necessarily follow, because if
the paragraph of the notification was clear enough there was hardly any need
for the Explanation. The addition of the Explanation clears once for all any
doubt that might have arisen as to the ambit of the word " profits".
After the addition of the Explanation and even before it, the word denoted
profits from business and not income which arose, apart from business.
It must not be overlooked that at the time
when the notification was first issued and also when it was amended, it was not
even contemplated that Co-operative Societies would be permitted to deal in
commodities in short supply with a view to ensuring their equitable
distribution among the consumers. It was, however, always open to the
appropriate Government to allow a Society to extend its business operations to
(1) (9133) I.L.R. 11 Ran. 521 113 trading with persons other than its members
subject to conditions and restrictions, vide s. 31 of the Co-operative Societies
Act. This has, in fact, been done here.
Once there is this extension of the business
of a Cooperative Society, the general words of the notification include the
profits from such business within the exemption, and it would require more than
a supposed underlying intention to negative the exemption. To gather the
meaning of the notification in the light of an alleged intention is to reverse
the well-known canon of interpretation. In our opinion, the profits were exempt
under the notification, and the answer to the question ought to have been in
In the result, we allow the appeal with costs
here and in the High Court.