The Bihar State Co-Operative Bank Ltd.
Vs. The Commissioner of Income-Tax [1960] INSC 28 (22 February 1960)
KAPUR, J.L.
SARKAR, A.K.
HIDAYATULLAH, M.
CITATION: 1960 AIR 789 1960 SCR (3) 58
ACT:
Income Tax-Co-operative Bank-Interest
received on deposits with other banks-Exemption from taxation under
NotificationIndian Income-tax Act, 1922 (XI Of 1922) SS. 10, 12.
HEADNOTE:
The Appellant Bank which was registered under
the Cooperative 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 Incometax Officer assessed 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. 6o of the Act. Under the Notification profits of any Cooperative
Society are exempt from the tax payable under the Act but not income derived
from "other sources" referred to in S. 12 of the Act.
Held, that the interest from deposits
received by the Appellant 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 from the judgment and decree dated July 2, 1957, of the Patna High Court in Misc. Judicial Case No. 640 of 1955.
59 N. A. Palkhivala, Thakur Prasad and R. C.
Prasad for the appellant.
C. K. Daphtary, Solicitor General of India,
R. Ganapathy Iyer and D. Gupta, for the respondent.
1960. February 22. The Judgment of the Court
was delivered by KAPUR, J.-The appellant is a. Bank registered under the Cooperative
Societies Act, 1912 (Act II of 1912) and is deemed to be registered under the
Bihar & Orissa Co-operative Societies Act, 1935 (Bihar Act VI of 1935)
which in Bihar has replaced. the Cooperative 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 there under 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, Rs. 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 appellant 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 question of
law they were consolidated and can conveniently be disposed of by one judgment.
In its return the appellant showed these
various sums as I other sources', but nothing turns on the manner in which the
appellant chose to show this income in its return. The Income-tax Officer,
however, assessed the interest for these three years 60 under s. 12 of the
Income-tax Act, as income from I other sources'. The appellant took an appeal
to the Appellate Assistant Commissioner where it was contended that as the
business of the appellant Bank consisted of lending money and the deposits had
been made not for the purpose of investment but 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. Notification No. 35
dated October 20, 1934, and No. 33 dated August 18, 1945, was :" The
following classes of income shall be exempt from the tax payable 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 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) Investments in (a) securities of the nature referred to in s. 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 I lend61 ing money, and selling agricultural and
other products to its constituents' which could be planned ahead and required
no provision for extraordinary claims. He remarked that it appeared from the
balance-sheets that in the accounting year 1945 the Bank invested Rs. 13,50,000
as fixed deposits, which, in the following year was raised to Rs. 15,00,000 and
it was only in the accounting year 1947 that the fixed deposits ` were realised
on maturity with interest'. He was also of the opinion that the length of the
period during which this money I was kept locked in this way' showed clearly
that I not the exigencies of pressing necessities, but the motives of
investment of surplus fund had actuated the deposits'. He therefore 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 Cooperative Society extended to its sphere of co operative
activities and therefore interest from investments was no part of the
appellant's business 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 that 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 I other 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 62 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 Hoshiarvur 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 this case, the receipt of interest on fixed deposits was an income under the
head of I other sources': and (2) Whether in the facts and circumstances of
this case, the receipt of interest from the fixed deposits was an income not
exempt from taxation under the C. B. R. Notification No. 35 dated 20th October,
1934 and No. 33 dated the 18th August, 1945.
In the High Court the appellant's contention
was that the fixed deposits were made with the Imperial Bank of India not with
the idea of making investments, but for the reason that cash should be
available to the appellant is and when it was needed for the purposes of its
business. It was also contended that the deposits were short-term deposits and
that the Bank could not carry on its business without such short-term deposits.
In other words, the contention was that making deposits with the Imperial Bank
was intimately connected with the business activities of the appellant Bank and
that the interest received on the deposits was profit attributable to its
business activities. But the High Court did not accept this contention. It held
that if the income derived by a Co-operative Society was from the business of
the Co-operative Society as such, it fell within the exemption, but if it arose
out of the business with third parties as in the case of investment of surplus
assets, the exemption was inapplicable because the (1) [1933] 24 I.T.R. 346.
350.
63 investment of fluid assets was not a part
of the business of the Co-operative Bank and the reason for the Notification
was to exempt profits accruing to a Cooperative Society from ` carrying on
business of a mutual co-operative society and upon the ground that a man cannot
make profit or loss out of himself.
The ground of mutuality was not relied upon
before us by the learned Solicitor-General who appeared for the respondent.
So the sole question for determination is
whether the investment by a Cooperative Bank of its assets in fixed deposits in
the manner that the appellant Bank had deposited its moneys falls within the
term I business' and is therefore assessable under s. 10 of the Income-tax Act,
or it is an investment the interest from which would fall under the term I
other sources' and therefore within s. 12 of the Income-tax Act. It was
contended by the learned Solicitor General that the finding of the Appellate
Tribunal as to the nature of these deposits was one of fact. This contention is
not sustainable. It has not been treated as a finding of fact either by the
Appellate Tribunal or by the High Court.
They have both treated it as a question of
law and it is on that basis that the reference was made. The decision of the
question depends on what is comprised within the ordinary business of a bank
and whether the business of the appellant bank is in any way different.
Relying upon the decision of the Privy
Council in The Punjab Co-operative Bank Ltd v. The Commissioner of Income-tax,
Punjab (1), counsel for the appellant submitted that the business of a bank is
one of dealing in money and credit and that laying out moneys in deposit with
other banks is just as much a mode of conducting business as lending moneys to
borrowers whether members of the society or to other cooperative societies, and
is therefore a part of the appellant's business. Therefore, where out of moneys
in deposit with a bank a portion is put away or laid out in securities or in
deposits with another banker, two objects are served: (1) the moneys which are
not immediately required do not remain idle but (1) (1940] 8 I.T.R, 635 64 earn
interest; and (2) if and when money is required to meet any demand, the
investment i. e. the deposits as well as the securities provide a source from
which these requirements can easily be met. Thus the credit of the bank remains
unimpaired and its moneys continue to earn interest.
Counsel for the respondent argued that where
moneys are so laid out they cannot be termed ` carrying on business of the
bank' and therefore any sums coming in from such investments cannot be termed
profits arising from business, but they are income from I others sources,. In
support of this argument reliance was placed by counsel on The Madras Central
Urban Bank Ltd. v. Commissioner of lncome Tax (1); The Madras Provincial
Co-operative Bank Ltd., Madras v. Commissioner of Income Tax, Madras (2) ;
Commissioner of Income Tax, Burma v. Bengalee Urban Co-operative Credit Society
Ltd. (3) ;
Commissioner of Income Tax, Madras V. Madras
Provincial Cooperative Bank Ltd. (4); Hoshiarpur Central Co-aperative Bank Ltd.
v. Commissioner of Income Tax, Simla (5); Cochin Cottage Industries Cooperative
Marketing Society Ltd. v. Commissioner of Income Tax, Mysore &C. (6). But
none of these cases supports the argument raised on behalf of the respondent.
In the Madras Central Urban Bank case (1) the society was required to invest 40
per cent. of its total liability under call deposits in a liquid or fluid form
and the society invested it in Government securities which produced interest.
It was held that interest from securities was not part of the profits of the
business of the society as it was not obliged to invest in such securities.
Similarly in the Madras Provincial Co-operative Bank Case (2) also the income
which was the subject matter of dispute was interest received by the bank from
its investments in Government securities and it was held that it was not part
of the income derived from its business. The Rangoon case, Commissioner of
Income-tax, Burma v. Bengalee Urban Co-operative Credit Society (3) was also a
case relating
(1) I.L.R. 52 Mad. 640 F.B.
(2) I.L.R. 56 Mad. 837 F.B.
(3) [1934] 2 I.T.R. 121.
(4) I.L.R. 1943 Mad. 390.
(5) [1953] 24 I.T.R. 346.
(6) (1956] 30 I.T.R. 356.
65 to income derived from interest on capital
invested in Government securities. At p. 128, Page, C. J., said: from neither
securities nor income derived from CO property are I profits' within the
meaning of that term as used in the notification........................ It Cc
may be that investment of capital in properties or securities is part of the
business of an assessee, and in such a case, in my opinion, the net income
accruing from such investments would be, and be chargeable as, profits of the
business ".
(As the matter had not been considered from
this point of view the case was sent back for doing so).
These cases before the amendment of the
Notification show that the income which was exempted was profit from business
and not income from sources which fell under ss. 8 and 9 of the Income-tax Act.
The Commissioner of Income-tax, Madras v. The Madras Provincial Co-operative
Bank Ltd. (1) was a case where moneys had been invested in debentures and for
reasons similar to the ones given in the cases abovementioned,, it was held
that interest derived there from was not profits of the business.
Counsel for the respondent relied on a
judgment of the Punjab High Court in Hoshiarpur Central Cooperative Bank v. Commissioner
of Income-tax, Simla (2). In that case the Government authorised the Bank to
deal in sugar, oil and standard cloth and it made profit there form. Those
activities were neither its business under the bye-laws nor within its objects.
The question was whether this profit was exempt from income-tax on account of
its being profits of a co-operative society and it was held that the decided
cases showed that where income was derived by a co-operative society, the
profits were within the exemption, but not if the business was of the nature
not covered by the objects of the society. This line of reasoning has not
formed part of the respondent's argument in this Court and the case therefore
has no application to the facts of the present case. The decision in Cochin
Cottage Industries Cooperative (1) I.L.R. [1943] Mad. 390 (2) [1953] 24 I.T.R.
346 9 66 Marketing Society Ltd. v. Commissioner of Income-tax, Mysore & c.
(1) proceeded on the same ground. In that case the profit which was held not to
be exempt under the Notification was the apportioned profit of the society from
its dealings with non-members. In the Surat Peoples' Co-operative Bank Ltd. v.
The Commissioner of Income-tax, Ahmedabad (2) the profit arose during the
course of banking business out of the sale of Government securities which
formed part of the stock-in-trade and as it was a cooperative bank the profits
made from such sales were held to be exempt from taxation under the
Notification.
In the instant case the co-operative society
(the appellant) is a Bank. One of its objects is to carry on the general
business of banking. Like other banks money is its stock-in-trade or
circulating capital and its normal business is to deal in money and credit. It
cannot be said that the business of such a Bank consists only in receiving
deposits and lending money to its members or such other societies as are
mentioned in the objects and that when it lays out its moneys so that they may
be readily available to meet the demand of its depositors if and when they
arise, it is not a legitimate mode of carrying on of its banking business. The
Privy Council in The Punjab Cooperative Bank Ltd. v. The Commissioner of Income
tax, Lahore (3) where the profits arose from the sale of Government securities
pointed out at p. 645 that in the ordinary cases the business of a Bank
essentially consists of dealing with money and credit. Depositors put their
money in the Bank at a small rate of interest and in order to meet their
demands if and when they arise the Bank has always to keep sufficient cash or
easily realizable securities. That is a normal step in the carrying on of the
banking business. In other words I that is an act done in what is truly the
carrying on or carrying out of a business'. It may be added that another mode
of conducting business of a Bank is to place its funds in deposit with other
banks and that also is to meet demands which may be made on it. It was however
argued (1) [1956] 30 I.T.R. 356 (2) [1958] 33 I.T.R. 396.
(3) [1940] 8 I.T.R. 635 67 that in the
instant case the moneys had been deposited with the Imperial Bank on long term
deposits inasmuch as they were deposited for one year and were renewed from
time to time also for a year; but as is shown by the accounts these deposits
fell due at short intervals and would have been available to the appellant had
any need arisen.
Stress was laid on the use of the word I
surplus' both by the tribunal as well as by the High Court and it was also
contended before us that in the byelaws under the heading I business of the
bank' it was provided that the bank could I invest surplus funds when not
required for the business of the bank in one or more ways specified in s. 19 of
the Bihar Act (Cl. 4 111(i) of the Bye-Laws). Whether funds invested as
provided in s. 19 of the Bihar Act would be surplus or not does not arise for
decision in this case, but it has not been shown that the moneys which were in
deposit with other banks were I surplus' within that bye-law so as to take it
out of banking business. As we have pointed out above, it is a normal mode of
carrying on banking business to invest moneys in a manner that they are readily
available and that is just as much a part of the mode of conducting a Bank's
business as receiving deposits or lending moneys or discounting hundies or
issuing demand drafts. That is how the circulating capital is employed and that
is the normal course of business of a bank. The moneys laid out in the form of
deposits as in the instant case would not cease to be a part of the circulating
capital of the appellant nor would they cease to form part of its banking
business. The returns flowing from them would form part of its profits from its
business. In a commercial sense the directors of the company owe it to the bank
to make investments which earn them interest instead of letting moneys lie
idle. It cannot be said that the funds of the Bank which were not lent to
borrowers but were laid out in the form of deposits in another bank to add to
the profit instead of lying idle necessarily ceased to be a part of the
stock-in-trade of the bank, or that the interest arising there from did not
form part of its business profits. Under the bye-laws 68 one of the objects of
the appellant bank is to carry on the general business of banking and therefore
subject to the Cooperative Societies Act, it has to carry on its business in
the manner that ordinary banks do. It may be added that the various heads under
s. 6 of the Income Tax Act 'and the provisions of that Act applicable to these
various heads are mutually exclusive. Section 12 is a residuary section and
does not come into operation until the preceding heads are excluded.
Commissioner of Income-tax v. Basant Rai Takhat Singh (1).
In our opinion, the High Court was in error
in treating interest derived from deposits as not arising from the business of
the Bank and therefore not falling within the income exempted under the
Notification. The appeal must therefore be allowed and the judgment and order
of the High Court set aside. The appellant will have its costs in this Court
and in the Court below.
Appeal allowed.
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