Case: The Bihar State Co-Operativebank Ltd Vs. The Commissioner Of Income-Tax

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 respondents argument in this Court and the case therefore has no application to the facts of the present case. The decision in 1956-30 ITR 356 (Trav-Co) 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.8. In the Surat Peoples Co-operative Bank Ltd. v. The Commissioner of Income-tax, Ahmedabad, 1958-33 ITR 396 : (AIR 1958 Bom 443 ) 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.9. 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 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 1940-8 ITR 635 : (AIR 1940 PC 230 ) where the profits arose from the sale of Government securities pointed out at page 645 (of ITR ) : (at p. 236 of AIR), 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 interest and in order to meet their demands if and when they arise the Bank has always to keep sufficient cash or easily realisable securities. That is a normal step in the carrying on of the banking business. In other words 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 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.10. Stress was laid on the use of the word surplus both by the tribunal as well as by the High Court and it was also contended before us that in the bye-laws under the heading business of the bank it was provided, that the bank could 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 III (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 surplus within that bye- law so as to take it our 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 Banks 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 stockin-trade of the bank, or that the interest arising therefrom did not form part of its business profits.Under the bye-laws 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, 1933-1 ITR 197 at p. 201 : (AIR 1933 PC 180 , 182).11. 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.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]4. The ground of mutuality was not relied upon before us by the learned Solicitor-General who appeared for thecontention 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 waynone of these cases supports the argument raised on behalf of theIn 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 demand of its depositors if and when they arise, it is not a legitimate mode of carrying on of its bankingwe 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 Banks 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 stockin-trade of the bank, or that the interest arising therefrom did not form part of its business profits.Under the bye-laws 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 excluded11. 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.