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Issues Involved:
1. Whether the net income received by the assessee in the assessment years 1958-59 and 1959-60 on account of interest on securities is exempt from tax under section 14(3) of the Income-tax Act. Detailed Analysis: Issue 1: Tax Exemption on Interest on Securities The primary question referred to the High Court was whether the net income received by the assessee in the assessment years 1958-59 and 1959-60 on account of interest on securities is exempt from tax under section 14(3) of the Income-tax Act. The assessee, a co-operative society engaged in banking, claimed exemption under section 14(3)(i) of the Income-tax Act for the interest earned on government securities held as part of its banking business. The Commissioner of Income-tax contended that the income was chargeable under section 8 and, since the total income exceeded Rs. 20,000, the exemption under clause (iv) of section 14(3) was not applicable. The court analyzed the structure of the Income-tax Act, specifically the heads of income listed under section 6, which includes: 1. Salaries. 2. Interest on securities. 3. Income from property. 4. Profits and gains of business, profession or vocation. 5. Income from other sources. 6. Capital gains. The court emphasized that these heads are mutually exclusive, and income must be categorized under one specific head for tax computation purposes. The court noted that while interest on securities and income from property could also be profits and gains of business, they should be computed under the specific heads of sections 8 and 9, respectively, rather than under section 10. The court referenced several Supreme Court decisions to support its analysis: - United Commercial Bank Ltd. v. Commissioner of Income-tax: The Supreme Court held that interest on securities held as stock-in-trade of a banking business is to be taxed under section 8 and not under section 10. - Commissioner of Income-tax v. Chugandas and Co.: The court held that income from interest on securities, even if earned in the course of business, should be shown under the head "interest on securities" for tax purposes. - Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd.: The court reiterated that interest on securities forming part of trading assets is part of business income, but for tax computation, it falls under section 8. The court concluded that the phrase "profits and gains of business" in section 14(3)(i) includes income from interest on securities held as stock-in-trade, even if it is chargeable under section 8. The court clarified that the exemption under section 14(3)(i) is not confined to income computed under section 10 and applies to all profits and gains of business. The court further explained that the clauses under section 14(3) enumerate different sources of exempted income for a banking co-operative society. The fact that the income exceeds Rs. 20,000 and is not exempt under clause (iv) does not preclude it from being exempt under clause (i) if applicable. The court also discussed the distinction between the heads of income and the clauses of exemption, emphasizing that while an income cannot be charged under two heads, it can be exempt under multiple clauses. The court rejected the argument that clause (iv) is more specific than clause (i) and excludes it. In conclusion, the court held that the interest on securities earned by the assessee, a banking co-operative society, is exempt from tax under section 14(3)(i) of the Income-tax Act, despite being chargeable under section 8. The court directed that a copy of the judgment be sent to the Income-tax Appellate Tribunal and awarded costs to the assessee. Separate Judgments: - M.C. Desai C.J. delivered the detailed judgment. - S.C. Manchanda J. concurred with the judgment. Final Decision: The net income received by the assessee in the assessment years 1958-59 and 1959-60 on account of interest on securities is exempt from tax under section 14(3)(i) of the Income-tax Act.
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