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Issues Involved:
1. Whether the securities held by the assessee were part of its stock-in-trade or circulating capital. 2. Whether 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 the instructions contained in the Board's circular dated 3rd November, 1962, are applicable. Issue-wise Detailed Analysis: 1. Whether the securities held by the assessee were part of its stock-in-trade or circulating capital: The Tribunal upheld the contention of the assessee-bank that the Government securities and municipal debentures in question were not as and by way of investment of the assessee-bank but formed part of the stock-in-trade or were in the nature of circulating capital. The Tribunal noted that these securities were easily realisable and could be converted into cash at any time, which is a normal banking practice to meet the demands of depositors. The Tribunal's decision was influenced by the Supreme Court's ruling in Bihar State Co-operative Bank Ltd. v. Commissioner of Income-tax, which established that investments made by a bank in easily realisable securities for meeting customer demands are part of the bank's circulating capital. Consequently, the Tribunal found that the securities were part of the stock-in-trade. 2. Whether the interest on the securities is exempt from tax by virtue of section 81 or section 80P of the Income-tax Act, 1961: Given the Tribunal's determination that the securities were part of the stock-in-trade, it followed that the interest income from these securities was part of the business income of the co-operative society. Therefore, the interest income was exempt under section 81(1) of the Income-tax Act, 1961, for the relevant assessment years. The Tribunal's reliance on the Supreme Court's interpretation in Bihar State Co-operative Bank Ltd. v. Commissioner of Income-tax further supported this conclusion, as it was established that interest earned from deposits or easily realisable securities held by a bank is part of the bank's business income and thus qualifies for exemption. 3. Whether the instructions contained in the Board's circular dated 3rd November, 1962, are applicable: The Tribunal upheld the orders of the Income-tax Officer, which were based on the Board's circular dated 3rd November, 1962, for the assessment year 1966-67 and a subsequent circular dated 9th November, 1967, for the assessment year 1967-68. However, since the answers to the first two questions were in favor of the assessee-bank, indicating that the securities were part of the stock-in-trade and the interest income was exempt, the Tribunal deemed it unnecessary to address the applicability of the Board's circular further. Conclusion: The Tribunal concluded that the securities held by the assessee-bank were part of its stock-in-trade, and the interest income from these securities was exempt from tax under section 81 or section 80P of the Income-tax Act, 1961. Consequently, the Tribunal restored the orders of the Income-tax Officer and set aside the order of the Additional Commissioner. The answers to the first two questions were in favor of the assessee-bank, and the third question was deemed unnecessary to address. The Commissioner was ordered to pay the costs of the reference to the assessee.
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