TMI Blog1960 (2) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... erative Societies Act, 1935 (Bihar Act VI of 1935), which in Bihar has replaced the Co-operative 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 3(a)(vi)). 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. 7,192, Rs. 20,250 and Rs. 22,600 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 23(3) 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 66(1) of the Act, but was decided against the appellant. The appellant brought three appeals in this cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of the appellant consisted of " lending 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. 13,50,000 as fixed deposits, which, in the following year was raised to Rs. 15,00,000 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 " was kept locked in this way " showed clearly that " not the exigencies of pressing necessities, but the motives of investment of surplus fund had actuated the deposits." He therefore hold 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds, 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 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 co-operative 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 co-operative bank of its assets in fixed deposits in the manner that the appellant bank had deposited it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Co-operative Bank Ltd. ; Hoshiarpur Central Co-operative Bank Ltd. v. Commissioner of Income-tax ; Cochin Cottage Industries Co-operative Marketing Society Ltd. v. Commissioner of Income-tax. But none of these cases supports the argument raised on behalf of the respondent. In the Madras Central Urban Bank case, 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, 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 v. Bengalee Urban Co-operative Credit Society, was also a case relating to income derived from interest on capital invested in Government securities. At page 128, Page, C.J., said : "... and prima facie therefore n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax, where the profits arose from the sale of Government securities, pointed out at page 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 sufficient cash or easily realisable securities. Tha ..... 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