Bihar State Co-Operative Bank … vs Commissioner Of Income-Tax on 2 July, 1957

JUDGMENT

Ramaswami, C.J.

1. In this case the assessee is a Co-operative Bank registered under the Co-operative Societies

Act (Act 2 of 1912). The assessee was carrying on
banking business. Its principal activity was to serve as a General Provincial Co-operative Bank for the other State Co-operatiye Societies in the State of Bihar. Under notification R. Dis. No. 291-I.T./25, dated the 25th August, 1925, as amended by subsequent notifications No. 26, dated. the 25th June, 1927, No. 35, dated the 20th October, 1934, and No. 33, dated the 18th August, 1945, the profits of the Co-operative Bank were exempt from being taxed. The relevant portion of the notification is to the following effect : —

“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 :–

x x x x x

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-cperative Societies Act, 1912 (Act II of 1912), the Bombay Co-operative Societies Act, 1925 (Bombay Act VII of 1925), 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-

(1) investments in (a) securities of the nature referred to in Section 3 of the Indian Income-tax Act, or (b) property of the nature referred to. in Section 9 of that Act.

(2) dividends, or

(3) the ‘other-sources’ referred to in Section 12 of the Indian Income-tax Act.”

For the assessment years 1946-47, 1947-48 and 1948-49 the assessee Company received interest from fixed deposits to the extent of Rs. 7,192/-, Rs. 20,250/- and Rs. 22,600/-, respectively. When the assessments were made originally under Section 23(3) these amounts were not assessed to income-tax. Later on the Income-tax Officer received information about these fixed deposits and initiated proceedings Under Section 34 and held that these amounts were liable to be taxed as the notifications of the Central Board of Revenue did not apply to these amounts.

The assessee preferred an appeal before the Appellate Assistant Commissioner, but the appeal was dismissed. The case was then taken on appeal before the Income-tax Appellate Tribunal, but the appeal was unsuccessful.

2. At the instance of the assessee the Appellate Tribunal has referred the following questions of law for the opinion of the High Court under Section 66(1) of the Indian Income-tax Act : —

“(1) Whether, in the facts and circumstances. of this case, the receipt of interest on fixed deposits was an income under the head of ‘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 the 20th October, 1934, and No 33, dated the 18th, August 1945?”

3. On behalf of the assessee Mr. Mazum-dar put forward the argument that the fixed deposits were made with the Imperial Bank not with the motive of investment but for the reason that liquid money should be available to the assessee so that it might carry out the purpose

for which the Co-operative Bank was constituted. It was pointed out by learned Consel that the
deposits with the Imperial Bank were short term deposits and it was argued that the business of the Co-operative Bank could not be properly carried on without this bind of short deposits.

In other words, the contention of the assessee
was that the depositing activities were so intimate-ly connected with the business activities of the

Co-operative Bank that the interest received from
the fixed deposits should be held to be profits attributable to the business activities of the Co-operative Bank. In support of his contention Counsel referred to the statement of fixed deposits printed at page 15 of the papertoook as follows :-

“Statement of fixed deposit with Imperial Bank of India, Patna, for one year @ 1 1/2 per cent. p. a. General Ledger folio 469 and New L.F. 244.

Date.

Particulars.

Dr.

Cr.

Balance.

Rs.

Rs.

Rs.

1945 August 3
To amount deposited for one year @ 1½ % p.a.
2,00,000
 
2,00,000 Dr.

1945 August 18
Do
2,00,000
 
4,00,000 Dr.

1945 August 21
Do
2,00,000
 
6,00,000 Dr.

1945 August 22
Do
2,00,000
 
8,00,000 Dr.

September 10
Do
1,00,000
 
9,00,000 Dr.

September 21
Do
1,00,000
 
10,00,000 Dr.

September 26
Do
1,00,000
 
11,00,000 Dr.

October 1
Do
50,000
 
11,50,000 Dr.

October 22
Do
1,00,000
 
12,50,000 Dr.

October 29
Do
1,00,000
 
13,50,000 Dr.

December 31
By Balance
…

13,50,000
 

 
 
13,50,000
13,50,000″

4. I am unable to accept this submission of leraned Counsel as correct. The object of the assessee Bank was to lend money to its constituents and to sell agricultural and other products on behalf of its constituents (See the order of the Appellate Assistant Commissioner at page 6 of the paper book). It is no part of the business of the Co-operative Bank to invest the fluid assets. If income is derived by a Co-operative Society from the business of the Society as Co-operative Society, the profits are within the ambit of the exemption given by the notification of the Central Board of Revenue. But when profits arise out of some business with third parties, as in the present case by investment of surplus assets with the State Bank of India, then the exemption clause will not apply.

In my opinion, the investment of fluid assets is not a part of the business of the Co-operative Bank, and the interest derived from the investment of the fluid assets is, therefore, not profits exempt under the notifications of the Central Board of Revenue. I think the intention of the Central Government in issuing the notification was to exempt from income-tax profits accruing
to a Co-operative Society from carrying on the business of mutual Co-operative Society and upon the ground that a man cannot make loss or profits out of himself”.

That is based upon the principle of New York Life Insurance Co. v. Styles. (1889) 14 A.C. 381 (A). I am, therefore, of the opinion that in the facts and circumstances of this case the receipt of interest from fixed deposits was not the income of the assessee exempt from taxation under the provisions of the notifications of the Central Board of Revenue. This view is brone out by a decision of a Pull Bench of the Madras High Court in the Madras Central Urban Bank Ltd. v. Commissioner of Income-tax. Madras, 3 I.T.C, 357 : (AIR 1929 Mad 387) (B) and a later decision of another Full Bench of the same High Court in Madras Provincial Co-operative Bank Ltd. v. Commissioner of income-tax, Madras, 1933-1 ITR 158 : (AIR 1933 Mad 489) (C) . The same view has been expressed by the Rangoon High Court in Commi-

ssioner of Income-tax. Burma V. Bengalee Urban
Co-operative Credit Society, Ltd.. 1934-2 ITR 121 : (AIR 1934 Rang 27) (SB) (D). There is a similar

statement of principle in the Carlisle and, Silloth Golf Club v. Smith, (1913) 6 Tax Cas 198 (E) where a golf club, unincorporated, and admittedly a bona fide members’ club, was bound under a clause in its lease to admit non-members to play on its course on payment of green fees to be fixed by the lessors tout not to be below a minimum named in the lease.

It appears that these green fees were paid by the non-members and entered in the general account of the Club which showed an annual excess of receipts over expenditure. It was held by the Court of Appeal that the assessee was carrying on an enterprise which was beyond the scope of the ordinary functions of a club and that any profits derived from the visitors’ green fees were, therefore, taxable under Schedule D of the Income-tax Act. At page 200 Buckley, L.J. has stated the legal position as follows :-

“The club, that is to say, an association of persons paying subscriptions, invites or is by contract with the railway company obliged to admit third parties to play upon the links upon the terms of paying certain sums. The association receives these moneys. A person, said Lord Macnaghten in Tennant v. Smith, (1892) 3 Tax Cas 158 (F) is chargeable for Income Tax not on what saves his pokcet but on what goes into his pocket. These words are satisfied. The association puts into its pocket the sums received from visitors.”

The result no doubt is to save the pocket of the subscribing member but that is not the question. The club is here putting into its pocket money received not from its members but from outsiders.

A man cannot make a profit or loss out of himself and that was the ground of decision in Styles v. New York Life Insurance Co., (1889) 2 Tax Cas 460 (G). The present case resembles not that case but Last v. London Assurance Corporation, (1885) 2 Tax Cas 100 (H). We have not to decide what sum, if any, by way of expenditure ought to be debited against the receipts from visitors in ascertaining the balance of profits or gains. For the determination of this case, it is only necessary to pay that the club as an association (like ths proprietary owner of a golf links) is receiving payments from third parties, and that the balance of profits or gains after debiting against those receipts such sum as may be proper by way of expenditure is a profit going into the pocket, of the club in respect of which it is assessable.”

5. A similar view has been expressed in a later case, the Commissioners of Inland Revenue v. Sparkford Vale Co-operative Society, Ltd., (1928) 12 Tax Cas. 891 (I) where a Co-operative Society registered under the Act, dealing in milk, purchased milk exclusively from its own members tout sold the same or the products thereof in the open market. It was held in these circumstances by Rowlatt, J. that the profits arose by transactions of sale to outsiders and hence the surplus was a trading profit and hence was not profit arising from trading with its own members and the Society was, therefore, not entitled to exemption from Corporation Profits Tax.

6. On behalf of the assessee Mr. Mazumdar relied upon General Family Pension Fund v. Commissioner of Income-tax, Bengal, 1946-14 ITR 488 : (AIR 1946 Cal 539) (J) and Commissioner of Income-tax, Bombay City, v. Annuity and Co. Ltd., 1955-27 ITR 63 (Bom) (K). In my opinion the ratio of these cases has no application to the present case. In 1946-14 ITR 488 : (AIR 1946 Cal. 539) (J) the assessee was a mutual life assurance company limited by guarantee, and the question at issue was whether the company’s investments and the income dervied from them were part of its life assurance business. It wag held by the Calcutta High Court in that case that Rule 25 applied to all Indian Life Assurance Companies and that income profits and gains of the company should be assessed under Rule 25 of the Income-tax rules without reference to Sections 8, 10 or 12.

In the present case the facts are materially different and I do not think that the decision in 1946-14 ITR 488 : (AIR 1946 Cal 539) (J) has any bearing on the question presented for determination in this case. In the other case. 1955-27 ITR
63 (Bom) (K) the assessee company was a dealer in
shares which constituted its stock-in-trade, and it was held by the Bombay High Court that the
dividend income received by the sssessee in respect of the shares was income from business chargeable under Section 10 and the Income-tax authorities could not compel the assessee to show his income under Section 12. It is obvious that the material facts in the present case are wholly different and the ratio of 1255-27 ITR 63 (Bom) (K) cannot be applied to the present case.

7. For the reasons I have already expressed I hold that in the facts and circumstances of the case the receipt of interest from fixed deposits was an income from “other sources” referred to in Section 12 of the Income-tax Act; and also that the receipt of interest from fixed deposits was not exempt from taxation under the notifications of the Central Board of Revenue. I would accordingly answer both the questions of law referred by the Income-tax Appellate Tribunal in favour of the Income-tax Department and against the assessee. The assessee must pay the costs of this reference. Hearing fee Rs. 250 /-.

Raj Kishore Prasad, J.

8. I agree.