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
C K Daphtary Solicitor General of India R Ganapathy Iyer and D Gupta for the respondent
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 3avi
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 7192 Rs 20250 and Rs 22600 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 section 233 of the Income tax Act but subsequently under section 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 section 661 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 section 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 section 60 of the Income tax Act
The relevant portion of that Notification CBR 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 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
ExplanationFor 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 8 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 
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 1350000 as fixed deposits which in the following year was raised to Rs 1500000 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 vs Commissioner of Income tax 1  Against this order a case was stated at the instance of the appellant under section 661 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 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 1 350 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 section 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 section 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 vs 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 64 earn interest and 2 if and when money is required to meet 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 vs Commissioner of lncome Tax 1 The Madras Provincial Co operative Bank Ltd Madras vs Commissioner of Income Tax Madras 2  Commissioner of Income Tax Burma vs 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 vs Commissioner of Income Tax Simla 5 Cochin Cottage Industries Cooperative Marketing Society Ltd vs 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 vs Bengalee Urban Co operative Credit Society 3 was also a case relating 1 ILR FB 2 ILR FB 3 4 ILR 5 6 1956 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 sections 8 and 9 of the Income tax Act
The Commissioner of Income tax Madras vs 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 vs Commissioner of Income tax Simla 2
In that case the 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 ILR 2 9 66 Marketing Society Ltd vs 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 vs 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 vs 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 2 3 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
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 section 19 of the Bihar Act Cl
4 111i of the Bye Laws
Whether funds invested as provided in section 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 section 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 vs 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


Summary:
A dispute relating to a workman in the appellant sugar mill situate in Bihar was raised by the Workers Union and a reference was made by the State Government
Under section 2 a 1 of the   Appropriate Government  means in relation to any industrial dispute concerning any industry carried on by or under the authority of the Central Government or concerning any such controlled industry as may be specified in this behalf by the Central Government the Central Government 
The question was whether the State Government was competent to make the reference as sugar was a controlled industry under the Industries Development and Regulation Act 1951
Held that in order that the appropriate government under section 2 a 1 of the  may be the Central Government for a controlled industry it is necessary that such controlled industry should be specified by the Central Government and that in the absence of a notification for the 215 purposes of section 2 a 1 of the Act the State Government was competent to make the reference
The Bijoy Colton Mills Ltd vs Their Workmen and Another   followed