Case: Madras Co-Operative Central Land Mortgage Bank Ltd Vs. Commissioner Of Income-Tax, Madras

2. The appellant is a Society registered under the Co-operative Societies Act, 1912. The following table sets out the data relating to the earnings, investments, working capital, outgoing and expenditure of the Society for the year ending June 30, 1955, relevant to the assessment year 1956-57(i) Interest from Government securities- Rs. 4.30,453-00(ii) Total gross earnings - Rs. 21,00,994-00(iii) Investment in Government securities - Rs.130,60,653-00(iv) Total working capital - Rs.473,42,603-00(v) Interest paid on debentures, deposits and other accounts - Rs. 15,09,490-00(vi) Total overhead expenses and establishment overhead charges - Rs. 3,01,102-003. In a proceeding for assessment of the total income of the Society to tax for the year 1956-57 it was claimed that under Section 14(3) of the Indian Income-tax Act, 1922 (as added by Section 10 of the Finance Act, 1955, with effect from April 1, 1955) the income of the Society from business was exempt from payment of tax, and that in accordance with the instructions issued under Section 60 of the Act, out of the gross income from securities amounting to Rs. 4,30,053/-, Rs. 4,16,475/- being income attributable to the assets utilized in the business, only the balance of Rs. 13,578/ was chargeable to tax. In support of its claim the Society relied upon the instructions published in the Income-tax Manual, 1946. In the view of the Income-tax Officer the Society could not claim the benefit of the Departmental Instructions, since in the relevant year of assessment those instructions had ceased to operate, and the Societys claim was governed by the Explanation to S. 8 of the Income-tax Act as incorporated by the Finance Act of 1956, with effect from April 1, 1956. He accordingly computed the taxable income under the head "interest on securities" in the sum of Rs. 59,498/-. The Appellate Assistant Commissioner modified the order of the Income-tax Officer and reduced the taxable income under the head "interest on securities" to Rs. 13,578 applying the Departmental Instructions. He held that the Explanation to S. 8 of the Act applied to Banking Companies and not to Co-operative Societies4. In appeal by the Commissioner of Income-tax the Appellate Tribunal reversed the order of the Appellate Assistant Commissioner, and restored the order of the In come-tax Officer. In the view of the Tribunal, the Explanation to S. 8 of the Act cannot be invoked as the Society was not a Banking Company, but the principle of the Explanation may well be called in aid and that the relief granted by the Income-tax Officer was the only relief to which the Society was entitled5. The following question of law was submitted by the Tribunal to the High Court of Madras:Whether the Tribunal is justified in law in holding that the taxable income of the assessee from interest on securities is Rs. 59,498/- ?"The High Court reframed the question to read:"Whether the taxable income of the assessee from interest on securities is Rupees 13,578/- as contended by the assessee and as worked out on the basis of the Departmental instructions contained at pages 248 and 249 in Part III of the year 1946?"and answered it in favour of the Commissioner.

Reasoning:
It may be recalled that the Society had claimed before the Departmental authorities and the Tribunal that according to the instructions issued by the Central Government under S. 60 of the Income-tax Act only Rs. 13,578/- out of the income from Government securities were chargeable to tax. The Income-tax Officer and the Tribunal held that Rs. 59,498 were chargeable to tax. The decision in Cocanada Radhaswami Banks case 1965-57 ITR 306  = (AIR 1966 SC 47 ) relates to the right of a Bank to carry forward the net loss incurred by a Banking Company and to set it off in subsequent years against income from securities held as part of its trading assets. It is not a decision under S. 14 (3) of the Act. Again it is not open to the Society in this reference to contend that the amount of Rs. 13,578 itself is not taxable. Such a question was never raised before the Tribunal and cannot be permitted to be raised in this CourtBroadly stated, under Clause (a) the sum reasonably spent is computed as that proportion of the aggregate of the expenses admissible under the various clauses of sub-s. (2) of Section 10 mentioned therein which the gross receipts from interest on securities bear to the gross receipts from all sources included in the profit and loss account of the banking company. Similarly under Clause (b) interest payable on money borrowed for the purpose of investment in Government securities is that proportion of the total interest paid on borrowings which gross receipts from securities bear to gross receipts from all sourcesThere is also no dispute that the departmental notification relied upon by the Company withdrawn before the relevant assessment year. There is, therefore, no statutory rule, and nor there are departmental instructions, governing the apportionment of income from Government securities between business and non-business sources of income.It was never urged, and it cannot be urged, that in the absence of a specific rule for apportionment, the entire, income from Government securities should be brought to tax. Any attempt to bring the entire income from Government securities would infringe Section 14 (3) of the Act. A rule of apportionment consistent with commercial accounting must be evolved for determining the income from Government securities attributable to business activity of the Society.The rule contained in Clause (a) of the Explanation to Section 8 has specially been evolved for determining the appropriate outgoings for the purpose of realizing interest from securities held by a Banking Company in computing income chargeable to tax: it seeks to exempt on the footing that it is deemed to be the sum reasonably expended for the purpose of realizing interest, a part thereof which is equal to the proportion which the gross receipts from interest on securities chargeable to tax bear to the gross receipts from all sources. The rule is an artificial rule for allocating business expenditure between different sources of income of Banking Companies. It is not a rule for apportionment for the purpose of taxation of composite income which is partly taxable and partly not. Clause (b) provides for allocation of outgoings in respect of "money borrowed" which expression includes money deposited with the Bank. Interest payable on borrowings is directed to be allocated in the proportion in which income is received from investments from securities and from other sources. This clause also deals with the proportion in which the outgoings are allocable. The problem arising under Section 14 (3) is of apportionment of income under heads taxable and non-taxable; it is not a problem relating to allocation of outgoings to determine taxable income10. In our judgment, a rule of apportionment which dismembers income in proportion to the business and non-business components of the single source from which it arises would be more consistent with principles of commercial accounting. The proportion of income from securities which is exempt from taxation under Section 14 (3) of the Act will be that proportion which the capital of the Society used for the purpose of the business bears to the total working capital11. It is admitted that Rs. 13,587 is the gross income from securities which is, according to that rule, liable to tax. No question was raised m the High Court about any deduction to be made in respect of expenses for collection of that amount, and admissibility of deduction on that score does not fall to be considered.