JUDGMENT
1. In these references relating to the assessment years 1962-63, 1963-64, 1964-65 and 1965-66, the following common question of law has been referred by the Income-tax Appellate Tribunal to this court under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”).
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of Section 81(v) of the Income-tax Act, 1961, were not applicable to the interest received by the assessee on Government securities which were held by it as part of its stock-in-trade ? ”
2. The Rajasthan State Co-operative Bank Limited, (hereinafter referred to as “the assessee”) is a co-operative society registered under the Rajasthan Cooperative Societies Act, 1953. In functions as an apex bank to take loans from the Government and from the Reserve Bank of India and in its turn, advances
loans to Central Co-operative Banking institutions. In the accounting years relevant to the assessment years in question, the assessee was holding securities and was also holding cash and bank balances. The assessee earned interest on the securities held by it. The assessee claimed that the aforesaid income earned by it from the securities was exempt from tax under the provisions of Section 81(i)(a) of the Act, as it stood at the relevant time, inasmuch as the said income constituted profits and gains through business carried on by the assessee. In this regard, the case of the assessee was that the securities held by it formed part of the stock-in-trade of the assessee. The Income-tax Officer disallowed the said claim of the assessee on the view that the securities held by the assessee represented only investment of surplus funds and they were taxable as interest on securities as the conditions laid down in Section 81(v) of the Act were not satisfied, The aforesaid orders of the Income-tax Officer were affirmed in appeal by the Appellate Assistant Commissioner. The Tribunal, on appeal, however, held that the securities held by the assessee formed part of fluid resources of the assessee and were part of the stock-in-trade of the assessee inasmuch as the assessee has to keep easily realisable securities to meet probable demand from the depositors. The Tribunal further held that the income derived by the assessee from the Government securities held by it represent income earned in the course of its banking business and that the provisions of Section 81(i)(a)of the Act were applicable to this income so as to take it out of the operation of Section 81(v) and that the income derived by the assessee from such securities should be treated as exempt from tax. The Tribunal, therefore, held that the income derived by the assessee by way of interest from the securities was exempt from tax. Thereupon the Additional Commissioner of Income-tax moved the Tribunal for referring the question of law arising out of the order of the Tribunal to this court and the Tribunal has referred the question mentioned above for the opinion of this court.
3. We have heard Shri R. N. Surolia, the learned counsel for the Department and Shri S. M. Mehta, the learned counsel for the assessee.
4. The question as to whether the income derived from securities or deposits held by a co-operative banking institution can be regarded as income from business and is exempt under Section 80(l)(i)(a) of the Act, has come up for consideration before the courts in a number of cases. In this connection, reference may be made to the decision of the Allahabad High Court in U. P. Co-operative Bank Ltd. v. CIT [ 1966] 61I TR 563. In that case, the provisions of Section 14 of the Indian Income-tax Act, 1922, were considered. Clause (i) of Sub-section 3 of Section 14 of the Indian Income-tax Act, 1922, was in pari materia with Section 81(i)(a) of the Act The Allahabad High Court has held that interest on securities earned by a co-operative banking society is exempt from tax under Clause (i) of Sub-section (3) of Section 14 of the Indian Income-tax Act, 1922,
if the securities are held by the society as stock-in-trade of a business carried on by it and that Clause (v) of Sub-section (3) of Section 14, which was in pari materia with Section 81(v) of the Act, and which restricted such exemption of interest chargeable under Section 8 of the Indian Income-tax Act, 1922, was applicable only to cases not covered by Clause (i), i.e., where the securities were not held by the banking society as part of its stock-in-trade of the business of the society. In taking the said view, the Allahabad High Court has placed reliance on the decision of the Privy Council in Punjab Co-operative Bank Limited v. CIT [1940] 8 ITR 635 and the decision of the Supreme Court in Bihar State Co-operative Bank Ltd. v. CIT [1960] 39 ITR 114. The same view has been taken by the Orissa High Court in Berhampur Co-operative Central BankLtd. v. Addl. CIT[1974] 93 ITR 168 and the Gujarat High Court in Addl. CIT v. Ahmedabad District Co-operative Bank Ltd. [1975] 101 ITR 733.
5. In view of the aforesaid decisions, the legal position is well settled that income by way of interest earned on Government securities held by a banking institution are exempt from income-tax under Section 81(i)(a) of the Act if the said securities were held by the assessee as part of its stock-in-trade. In the present case, the Tribunal has found that the Government securities that were held by the assessee were part of its stock-in-trade. In these circumstances, the Tribunal was justified in holding that the income earned by the assessee from the Government securities held by it were exempt from tax under Section 81(i)(a) of the Act and that the provisions of Section 81(v) of the Act were not applicable. It must, therefore, be held that on the facts and circumstances of the case, the Tribunal was right in holding that the provisions of Section 81(v) of the Income-tax Act, 1961, were not applicable to the interest received by the assessee on Government securities which were held by it as part of its stock-in-trade. The question referred is answered in the affirmative. There will be no order as to costs.
