Madras Co-Operative Central Land
Mortgage Bank Ltd. Vs. Commissioner of Income-Tax, Madras [1967] INSC 158 (19
July 1967)
19/07/1967 SHAH, J.C.
SHAH, J.C.
SIKRI, S.M.
RAMASWAMI, V.
CITATION: 1968 AIR 55 1968 SCR (1) 30
ACT:
Indian Income-tax Act (11 of 1922), ss. 8.
Explanation and 14(3)--Cooperative Society not doing banking businessInterest
from government securities-Apportionment of income under taxable and.
non-taxable heads.
HEADNOTE:
The Income-tax Act, 1922, as originally
enacted did not give to a cooperative society any exemption from payment of tax
in respect of income from its business activities. By departmental instructions
issued under s. 60 of the Act, exemption from payment of tax in respect of
certain receipts of a co-operative society were given. The notification
provided inter alia that as regards interest received by it from government
securities, an amount which bears the same proportion to the total interest
paid on debentures etc. as the capital invested in government securities bears
to the total working capital, shall be deducted from the interest on government
securities as being exempt from tax. The departmental instructions were later
withdrawn and sub-s. (3) was added to s. 14 of the Act, by which, with effect
from April 1, 1955, a cooperative society was not liable to pay tax in respect
of the profits and. gains of business carried on by it. In 1956, an
Explanation, applicable to banking companies, was added to s. 8. Clause (a) of
the Explanation provided for the allocation of business expenditure between
different sources of income of banking companies; and cl. (b) provided for
allocation of outgoings in respect of " money borrowed" including
money deposited with the bank [33BH; 34C-F] Thus, in spite of s. 14(3), for the
assessment year 1956-57, there were no departmental instructions governing the
apportionment of income from government securities between business and
non-business sources of income; and, in the case of a cooperative society which
did not carry on the business of a banking company. there was no statutory rule
for such apportionment, the Explanation to s. 8 not being applicable.
Therefore, in the case of a cooperative society which was not carrying on the
business of a banking company a rule of apportionment consistent with
commercial accounting for determining the income from government securities
attributable to the business activity of the society had to be evolved. [35H;
35A-B] The appellant was a cooperative society not carrying on business of
banking and for the assessment year 1956-57; it claimed that out of its gross
income from securities, only Rs. 13,578 was chargeable to tax on the principle
of the departmental instruction. The Appellate Tribunal applied the principle
of the Explanation to S. 8 and computed the taxable income at Rs. 59,498. The
High Court held that the benefit of the departmental notification was not
available to the appellant, because it must be deemed to have been withdrawn
and that, the Explanation to s. 8 did not in terms apply to the appellant.
31 In appeal to this Court, Held: In the
absence of a statutory rule and departmental instructions, a rule of
appointment which dismembers income in proportion to the business and
non-business components of the source from which it arises would be more
consistent with principles of commercial accounting. The proportion of income
from securities which is exempt from taxation under s. 14(3) will be that
proportion which the capital of the Society used for the purposes of the
business bears to the total working capital, and according to this rule, the
gross income from securities which would be liable to tax was only Rs. 13,578.
It was not open to the appellant to contend that even this amount was not
taxable. Such a question was never raised either before the department or the
Tribunal.
[33C-D; 36F-H] The principles laid down in
cls. (a) and (b) of the Explanation to s, 8 are not Applicable. The rule in cl.
(a) is not a rule of apportionment for the purpose of taxation of composite
income which is partly taxable and partly not.
It is an artificial rule, specially evolved
for determining the appropriate outgoings for the purpose of realising interest
.,from securities held by a banking company in computing income chargeable to
tax. Clause (b) deals with the proportion in which the outgoings are allocable.
The problem arising under s. 14(3) is not one relating to allocation of
outgoings to deter. mine taxable income, but of apportionment of income under
the taxable and non-taxable heads. [36C-E]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1975 of 1966.
Appeal by special leave from the judgment and
order dated July 11, 1962 of the Madras High Court in Tax Case No. 84 of 1960.
S. Swaminathan and R. Gopalakrishnan, for the
appellant.
Veda Vyasa, A. N. Kirpal, R. N. Sachtliey and
S. P. Nayar, for the respondent.
The Judgement of the Court was delivered by
Shah, J.-This is an appeal with special leave.
The appellant is a Society registered under
the Co-operative Societies Act, 1912. The following table sets out the data
relating to the earnings, investments, working capital, outgoings and
expenditure of the Society for the year ending June 30, 1955, relevant to the
assessment year 1956-57:(i)Interest from Government securities. Rs.4,310,453.00
(ii) Total gross earnings..... Rs.21,00,99(4.00 (iii) Investments in Government
securities..... Rs.130,60,653-00 (iv) Total working. capital...
Rs.473,42,603-00 (v) Interest paid on debentures, deposits and other accounts
Rs. 15,09,490-00 (vi) Total overhead expenses and establishment overhead
charges Rs. 3,01,102-00 32 In a proceeding for assessment of the total income
of the Society to tax for the year 1956-57 it was claimed that under S. 14 (3)
of the Indian Income-tax Act, 1922 (as added by S. 10 of the Finance Act, 1955,
with effect from April 1, 1955) the income of the Society from business was
exempt from payment of tax, and that in accordance with the instructions issued
under S. 60 of the Act, out of the gross income from securities amounting to
Rs. 4,30,053/-, Rs. 4,16,475/being income attributable to the assets utilized
in the business, only the balance of Rs. 13,578/was chargeable to tax. In
support of its claim the 'Society 'relied upon the instructions published in
the Income-tax Manual, 1946. In the view of the Income-tax Officer the Society
could not claim the benefit of the Departmental Instructions, since in the
relevant year of assessment those instructions had ceased to operate, and the
Society's claim was governed by the Explanation to s. 8 of the Income-tax Act
as incorporated by the Finance Act of 1956, with effect from April 1, 1956. He
accordingly computed the taxable income under the head--"interest on
securities" in the sum of Rs. 59,498/-. The Appellate Assistant
Commissioner modified the order of the Income-tax Officer and reduced the
taxable income under the head "interest on securities" to Rs. 13,578/applying
the Departmental Instructions. He held that the Explanation to s. 8 of the Act
applied to Banking Companies and not to Co-operative Societies.
In appeal by the Commissioner of Income-tax
the Appellate Tribunal reversed the order of the Appellate Assistant
Commissioner, and restored the order of the Income-tax Officer. In the view of
the Tribunal, the Explanation to s. 8 of the Act cannot be invoked as the
Society was not a Banking, Company, but the principle of the Explanation may
well be called in aid and that the relief granted by the Income-tax Officer was
the only relief to which the Society was entitled.
The following question of law was submitted
by the Tribunal to the High Court of Madras:
"Whether the Tribunal is justified in
law in holding that the taxable income of the assessee from interest on
securities is Rs. 59,498/-?" The High Court reframed the question to read:
"Whether the taxable income of the
assessee from interest on securities is Rs. 13,578/as contended by the assessee
and as worked out on the basis of the Departmental instructions contained at
pages 248 and 249 in Part III of the year 1946?", and answered it in
favour of the Commissioner.
33 Counsel for the Society in the first
instance, contended relying upon the judgment of this Court in Commissioner of
Income tax Andhra Pradesh v. Cocanada Radhaswami Bank Ltd.,(1) contended that
no part of the income of the Society, even if it be earned from Government
securities, was liable to be taxed. It may be recalled that the Society had
claimed before the Departmental authorities and the Tribunal that according to
the instructions issued by the Central Government under s. 60 of the Income-tax
Act only Rs. 13,578/ out of the income from Government securities were
chargeable to tax. The Income-tax Officer and the Tribunal held that Rs.
59,498/were chargeable to tax. The decision in Cocanada Radhaswami Bank's
case(1) relates to the right of a Bank to carry forward the net loss incurred
by a Banking Company and to set it off in subsequent years against income from
securities held as part of its trading assets. It is not a decision under s.
14(3) of the Act.
Again it is not open to the Society in this
reference to contend that the amount of Rs. 13,578/itself is not taxable. Such
a question was never raised before the Tribunal and cannot be permitted to be
raised in this Court.
The Income-tax Act, 1922, as originally
enacted, did not give to a Co-operative Society exemption from payment of tax
in respect of income from its business activities. But by Departmental
Instructions issued under s. 60 of the Act, certain exemptions were given by a
notification issued on August 25, 1925 and modified by notifications dated June
25, 1927, October 20, 1934 and August 18, 1945. Among the classes of income
exempt from liability to pay tax under the notification was:
"(2) The profits of any cooperative
society other than . . . 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
cooperative society shall not be deemed to include any income, profits or gains
from:-(1) investments in (a) securities of the nature referred to in section 8
of the Indian Income-tax Act, or (b).....
(2) dividends, or (3) the 'other sources'
referred to in section 12 of the Indian Income-tax Act".
By the notification, profits of a
Co-operative Society were exempt from tax, but those profits were not to
Include any income, profits or gains from securities of the nature referred to
in s. 8 of the (1)157 I.T.R. 306.
N)ISCI-4 34 Indian Income-tax Act. The
Legislature by s. 10 of the Finan Act of 1955 added sub-sec. (3) to s. 14,
whereby it was enacted. inter alia, that:"The tax shall not be payable by a
cooperative society, including a, co-operative society carrying on the business
of banking(i) in respect of profits and gains of business carried on by it,
(ii) in respect of interest and dividends derived from its investments with any
other cooperative society;
A co-operative society since the enactment of
the Finance Act, 1955, with effect from April 1, 1955, was therefore not
liable, by the express provisions in the Act, to pay tax in respect of the
profits and gains of business carried on by it. Under s. 8 of the Income tax
Act, 1922, tax is 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,
subject to exemption, inter alia, in respect of any sum deducted from such
interest by way of commission by a banker realizing such interest on behalf of
the assessee, or in respect of any interest payable on money borrowed for the
purpose of investment in the securities by the assessee. The Parliament by the
Finance Act, 1956 amended the first proviso, and added an Explanation to s. 8
providing for the computation of the sum reasonably spent for the purpose of
realising interest and of interest paid on sums borrowed for the purpose of
investment by a Banking Company. The Explanation provides:
"Explanation-In the case of a banking
company,(a) the amount which bears to the aggregate of its expenses as are
admissible under subsection (2) of section 10, other than clauses (iii), (vi),
(vi-a), (vi-b), (vii), (viii), (xi), (xii), (xiii) and (xiv) thereof, the same
proportion as the gross receipts from interest on securities inclusive of tax
deducted at source) chargeable to tax under this section bears to the gross
receipts from all sources which are included in the profit and loss account of
the company, shall be deemed to be the sum reasonably expended by it for the
purpose of realising such interest,, and the amount for which allowance is
admissible under sub-section (2) of section 10 shall be reduced
correspondingly; and (b) money borrowed shall include moneys received by way of
deposits; and that amount which bears to the amount of interest payable on
moneys borrowed the same proportion as the gross receipts from interest on
securities (inclusive of tax deducted at source) chargeable to tax under this
section bears to the gross receipts from all sources which are included in the
profit and loss account of the company, shall be deemed to be interest payable
on money borrowed for the purpose of investment in the securities by the
assessee, and the amount of such interest for which allowance is due under
sub-section (2) of section 10 shall be reduced correspondingly." and 35
(b) money borrowed shall include moneys received by way of deposits; and that
amount which bears to the amount of interest payable on moneys borrowed the
same proportion as the gross receipts from interest on securities (inclusive of
tax deducted at source) chargeable to tax under this section bears to the gross
receipts from all sources which are included in the profit and loss account of
the company, shall be deemed to be interest payable on money borrowed for the
purpose of investment in the securities by the assessee, and the amount of such
interest for which allowance is due under sub-section (2) of section 10 shall
be reduced correspondingly." Broadly stated, under-cl. (a) the sum
reasonably spent is computed as that proportion of the aggregate of the
expenses admissible under the various clauses of sub-s. (2) of s. 10 mentioned
therein which the gross receipts from interest on securities bear to the gross
receipts from all sources included in the profit and loss account of the
banking company. Similarly under cl. (6) interest payable on money borrowed for
the purpose of investment in Government securities is that proportion of the
total interest paid on borrowings which gross receipts from securities bear to
gross receipts from all sources.
Income of the Society from its trading
activity being exempt from tax, its income from Government securities had, it
was common ground, to be apportioned between income earned from investments for
trading purposes and for non trading purposes. The Income-tax Officer applied
the first proviso read with the Explanation to s. 8 of the Income-tax Act. The
Income-tax Appellate Tribunal held that in terms, the Explanation to s. 8 did
not apply because the Society was not a banking company, but the principle of
the Explanation furnished, after the Departmental Instructions had been
withdrawn, a reasonable basis for apportionment.
In the view of the Tribunal, the principle
embodied in the Explanation was an "improvement on the instructions",
since it co-related the income chargeable under the head with the expenditure
and also provided for proportionate allocation of overhead charges. The High
Court held that the benefit of the departmental notification was not available
to the Society in the year of assessment, because it must be deemed to be
withdrawn and the Explanation to s. 8 did not in terms apply to the Society.
It was common ground between the parties in
this Court and the High Court that Explanation to s. 8 has no application to a co-operative
society which does not carry on the business of a banking company. There is
also no dispute that the departmental notification relied upon by the company
was withdrawn before the relevant assessment year.
There is, therefore, no statutory rule, and
nor there are departmental instructions, governing the apportionment of income
from Government securities between business 36 and non-business sources of
income. It was never urged, and it cannot be urged, that in the absence of a
specific rule for apportionment, the entire income from Government securities
should be brought to tax. Any attempt to bring the entire income from
Government securities would infringe S. 14(3) of the Act. A rule of
apportionment consistent with commercial accounting must be evolved for
determining the income from Government securities attributable to business
activity of the Society. The rule contained in cl.
(a) of the Explanation to S. 8 has specially
been evolved for determining the appropriate outgoings for the purpose of
realizing interest from securities held by a Banking Company in computing
income' chargeable to tax; it seeks to exempt, on the footing that it is deemed
to be the sum reasonably expended for the purpose of realizing interest, a part
thereof which is equal to the proportion which the gross receipts from interest
on securities chargeable to tax, bear to the gross receipts from all sources.
The rule is an artificial rule for allocating business expenditure between
different sources of income of Banking Companies. It is not a rule for
apportionment for the purpose of taxation of composite income which is partly
taxable and partly not.
Clause (b) provides for allocation of
outgoings in respect of "money borrowed", which expression includes
money deposited with the Bank. Interest payable on borrowings is directed to be
allocated in the proportion in which income is received from investments from
securities and from other sources. This clause also deals with the proportion
in which the outgoings are allocable. The problem arising under s. '14(3) is of
apportionment of income under heads taxable and nontaxable: it is not a problem
relating to allocation of outgoings to determine taxable income.
In our judgment, a rule of apportionment
which dismembers income in proportion to the business and non-business
components of the single source from which it arises would be more consistent
with principles of commercial accounting.
The proportion of income from securities
which is exempt from taxation under S. 14 (3) of the Act will be that
proportion which the capital of the Society used for the purpose of the
business bears to the total working capital.
It is admitted that Rs. 13,578/is the gross
income from securities which is, according to that rule, liable to tax.
No question was raised in the High Court
about any deduction to be made in respect of expenses for collection of that
amount, and admissibility of deduction on that score does not fall to be
considered.
The appeal is allowed. Answer to the question
as reframed by the High Court is that Rs. 13,578 /are taxable as income of the
Society received from Government securities under s. 8 of the Income-tax Act.
The Commissioner will pay the costs of the Society in this Court.
V.P.S. Appeal allowed.
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