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PETITIONER: THE BIHAR STATE CO-OPERATIVEBANK LTD.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX

DATE OF JUDGMENT: 22/02/1960

BENCH: KAPUR, J.L. BENCH: 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 Notification-        Indian Income-tax Act, 1922 (XI Of 1922) SS. 10, 12.

HEADNOTE: 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 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 incometax  because of  the Notification issued by the Central Government  under s. 6o 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 of the Act. Held, that the interest from deposits 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.

JUDGMENT:        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.

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      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  Co-        operative 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 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, 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

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      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 lend-        61        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  Co-        operative  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,

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      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  there-        fore 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  co-        operative  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

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      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  Co-        operative  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  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  above-        mentioned,, it was held that interest derived therefrom  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

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      Government  authorised  the Bank to deal in sugar,  oil  and        standard   cloth  and  it  made  profit  thereform.    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   Co-        operative        (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  co-        operative 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 Incometax, Lahore (3) where  the        profites  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  suffi-        cient  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.

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      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 therefrom 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 Co-        operative 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.