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PETITIONER: HOSHIARPUR CENTRAL CO-OPERATIVE BANK LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, SIMLA.

DATE OF JUDGMENT: 02/08/1960

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. DAS, S.K. SHAH, J.C.

CITATION:  1960 AIR 1303

ACT: 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.

HEADNOTE: 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 thereunder. 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 non- members also.  It was always open to the appropriate Govern- ment 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.

JUDGMENT:

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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 appellant. 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 said Act:- 1.................. 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 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:-

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(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 or not. 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 Co- operative  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

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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 Bank  Ltd. v. Commissioner of Income-tax (1), The Madras Provincial Co- operative  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 innominate.   The Explanation  cannot be said to imply a general  approval  of the  earlier decisions.  Such a conclusion does  not  neces- sarily 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  Co- operative  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

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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  the affirmative. In  the result, we allow the appeal with costs here  and  in the High Court.                                        Appeal allowed.