TMI Blog1974 (8) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... icer were prejudicial to the revenue as they were not according to the provisions contained in section 20 of the Income-tax Act, 1961, and he, therefore, issued a notice to the assessee for all the three years under consideration, to show cause why action should not be taken under section 263 of the Income-tax Act, 1961. The assessee filed its written explanation before the Additional Commissioner, contending, inter alia, that since securities and debentures formed part of the stock-in-trade, the income from interest on such securities is part of the business income of the co-operative society and, therefore, exempt under section 81(1) of the Income-tax Act, 1961, which section is applicable for the first two years under consideration. The learned Additional Commissioner, however, rejected the contention of the assessee on the ground that the Government securities and municipal debentures were held as part of the in vestment of the co-operative society and were not in the nature of stock-in-trade. For purposes of reaching this conclusion, the Additional Commissioner relied on the fact that the investment figures stood at more or less identical figures and were in the range from Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of its stock-in-trade or circulating capital ? 2. Whether, on the facts and in the circumstances of the case, the interest on the securities is exempt from tax by virtue of section 81 or section 80P of the Income-tax Act, 1961 ? 3. Whether, on the facts and in the circumstances of the case, the instructions contained in the Board's circular dated 3rd November, 1962, are applicable ? " At the time of hearing of this reference, Mr. K. H. Kaji, the learned advocate, appearing on behalf of the revenue, urged that, if the answer to question No. 1 is given against the revenue, answer to question No. 2 would follow the result and in that case answer to question No. 3 need not be given. On behalf of the revenue it was urged that the Additional Commissioner considered the relevant facts for purposes of reaching the conclusion that the Government securities and municipal debentures held by, the assessee-bank were more or less in the nature of investment. In paragraph 1 of the order of the Additional Commissioner, he observed under : " As a matter of fact, a perusal of the figures of investment in Government securities for the above assessment years and the preceding year show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal held that the interest was rightly treated as income from other sources as it did not form part of the bank's business profits and, herefore, was not exempt from income-tax. On reference, the Patna High Court held that the only income derived from the business of the cooperative society as such fell within the exemption and that the exemption was not available in regard to income derived from investment of fluid assets with third parties. Reversing this decision, the Supreme Court held that since the appellant was a bank having as one of its objects to carry on the general banking business which consists of dealing in money and giving credit, and was not restricted only to receiving deposits and lending money to its members or other societies, it became a normal mode of carrying on banking business for the said bank to invest moneys in such manner that they are readily available. The moneys laid out in the form of deposits did not cease to be part of the appellant's circulating capital and, therefore, interest earned from the deposits arose from the business of the bank and was exempt from income-tax under the notifications, and nothing turned on the manner in which the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid out its surplus funds in the Government securities which were held by the bank as stock-in-trade and, therefore, entitled to exemption under Notification F. D. (C. R.) R. Dis. No. 291-I.T./ 25, dated August 25, 1925, issued under section 60 of the Indian Income-tax Act, 1922. Mr. Justice Shah, as he then was, speaking for the court, referred to the decision in Bihar State Co-operative Bank v. Commissioner of Income-tax with approval, and observed as under : " Under the Act income from different sources has, it is true, to be computed in the manner and according to the provisions of the Act applicable to the source from which the income is received. Income from property will be computed in the manner provided by section 9 ; income from securities of the Central Government or the State Government or debentures or other securities for money issued by or on behalf of a local authority or a company will be computed in the manner provided by section 8 ; income from business, profession or vocation will be computed in the manner provided by section 10 ; and income from sources other than those expressly specified will be computed in the manner provided by section 12. But the tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase of the Government securities. Notwith standing this fact, it cannot be urged that the Government securities and municipal debentures held by the assessee-bank were not a part of stock-in-trade. As has been said by the Supreme Court in Bihar State Co-operative Bank v. Commissioner of Income-tax, it is normally the business of a bank to lay out its idle and surplus funds in such securities and debentures as will be easily realisable for purposes of its main business of banking, namely, of giving credit to its customers. One of the most important factors which would help in distinguishing whether Government securities and debentures or fixed deposits held by a bank are in the nature of investments or are part of stock-in-trade is whether such securities or debentures are easily realisable or not. The laying out by a bank of its surplus and idle funds in easily realisable securities or debentures or deposits may be with twin objectives, viz., to encash them readily in case of need and not to lose interest by keeping them idle. Merely because they are the securities or debentures payable at a certain specified period or that there was no variation in them would not convert them in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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