1965 (2) TMI 95 - HC - Income Tax

Summary

Issues Involved:

1. Taxability of interest on Government securities held as stock-in-trade by a co-operative society.
2. Interpretation of the exemption notification under section 60 of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Taxability of Interest on Government Securities Held as Stock-in-Trade by a Co-operative Society:

The primary issue in this case revolves around whether the income from interest on Government securities held as stock-in-trade by the assessee, a co-operative society, is exempt from tax under the relevant Government notification issued under section 60 of the Indian Income-tax Act, 1922. The assessee argued that since the securities were held as stock-in-trade, the interest income should be considered part of its business profits and thus exempt under the notification. The Income-tax Officer, however, classified this interest income as taxable.

2. Interpretation of the Exemption Notification under Section 60 of the Indian Income-tax Act, 1922:

The notification in question exempts certain classes of income from tax but includes an Explanation that excludes income from investments in securities from the exemption. The Tribunal and the High Court had to interpret whether the interest on securities held as stock-in-trade falls under the category of "investments" as mentioned in the Explanation.

Detailed Analysis:

Taxability of Interest on Government Securities Held as Stock-in-Trade by a Co-operative Society:

The assessee, a co-operative society registered under the Co-operative Societies Act, carried on banking business and held Government securities as its stock-in-trade. For the assessment years 1953-54 and 1954-55, the assessee earned interest on these securities amounting to Rs. 9,32,657 and Rs. 6,26,610, respectively. The assessee claimed that this interest income was exempt from tax under the notification issued under section 60 of the Indian Income-tax Act, 1922. The Income-tax Officer, however, included this interest income in the taxable category, leading to the dispute.

Interpretation of the Exemption Notification under Section 60 of the Indian Income-tax Act, 1922:

The relevant notification under section 60 exempts "the profits of any co-operative society" from tax but includes an Explanation that excludes income from investments in securities. The assessee argued that the Explanation only excludes income from securities held as investments, not as stock-in-trade. The Tribunal agreed with the assessee, referencing the Surat Peoples' Co-operative Bank case, where it was held that the word "investment" in the Explanation related only to securities not forming part of the stock-in-trade.

The High Court upheld this interpretation, stating that the term "class of income" used in section 60 and the notification is broader than the specific heads of income under section 6 of the Act. The Court noted that the word "profits" in clause (2) of the notification includes all profits of a co-operative society, not just those computable under section 10. The Explanation's purpose was to clarify that certain types of income, such as from investments in securities, are excluded from the exemption. However, since the securities in question were held as stock-in-trade, the interest income derived from them did not fall under the excluded category of "investments."

The Court also rejected the department's argument that the term "investment" should be interpreted broadly to include all layings out of money, including those for stock-in-trade. It emphasized that the word "investment" in item No. 1 of the Explanation was intended to mean capital investments, not stock-in-trade. The Court cited the Surat Peoples' Co-operative Bank case, which distinguished between investments as capital and securities held as stock-in-trade.

Conclusion:

The High Court concluded that the interest on Government securities held as stock-in-trade by the assessee was not excluded from the exemption under the notification. Therefore, the income from such interest was exempt from tax. The Tribunal's decision to uphold the assessee's claim for exemption was affirmed. The question referred to the High Court was answered in the affirmative, and the department was directed to pay the costs of the assessee.