1960 (2) TMI 8 - SC - Income Tax

Whether the investment by a co-operative bank of its assets in fixed deposits in the manner that the appellant bank had deposited its moneys falls within the term business and is therefore assessable under section 10 of the Income-tax Act, or it is an investment the interest from which would fall under the term other sources and therefore within section 12 of the Income-tax Act? Held that - High Court was in error in treating interest derived from deposits as not arising from the business of the bank and therefore not falling within the income exempted under the Notification. The appeal must therefore be allowed and the judgment and order of the High Court set aside. Appeal allowed.

Summary

Issues Involved:
1. Whether the receipt of interest on fixed deposits was income under the head of "other sources".
2. Whether the receipt of interest from the fixed deposits was income not exempt from taxation under the C.B.R. Notification No. 35 dated October 20, 1934, and No. 33 dated August 18, 1945.

Detailed Analysis:

1. Income Classification under "Other Sources":
The appellant, a co-operative bank, received interest on deposits with the Imperial Bank of India for the years 1945, 1946, and 1947. Initially, these sums were assessed under section 12 of the Income-tax Act as income from "other sources." The appellant contended that these deposits were made not for investment purposes but to fulfill its banking business objectives, thus should be exempt from income tax under the relevant C.B.R. notifications.

The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the classification under "other sources," arguing that the deposits were made out of surplus funds and were not part of the appellant's business activities. The High Court also supported this view, stating that the interest from such investments did not arise from the business of the co-operative society but from dealings with third parties.

2. Exemption from Taxation under C.B.R. Notification:
The relevant C.B.R. notifications exempted profits of co-operative societies from income tax but specified that this exemption did not include income from investments in securities, property, or other sources as defined in section 12 of the Income-tax Act. The High Court interpreted that the exemption applied to profits directly arising from the business activities of the co-operative society and not from investments of surplus funds.

The appellant argued that the deposits were short-term and necessary for the bank's operations, thus intimately connected with its business. The High Court, however, maintained that the investment of surplus assets was not part of the co-operative bank's business, and thus the interest income was not exempt from taxation.

Supreme Court's Judgment:
The Supreme Court examined whether the investment by a co-operative bank in fixed deposits could be considered part of its ordinary business activities. The Court referenced the Privy Council decision in Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax, which recognized that a bank's business includes dealing in money and credit. The Court noted that placing funds in deposits with other banks is a legitimate mode of conducting banking business, serving both to earn interest and to ensure liquidity to meet depositor demands.

The Court disagreed with the lower courts' emphasis on the term "surplus" and clarified that the deposits were a normal part of the bank's circulating capital and business operations. The interest from these deposits was thus considered part of the bank's business profits.

Conclusion:
The Supreme Court concluded that the interest derived from the deposits was part of the appellant bank's business activities and thus fell within the income exempted under the C.B.R. notifications. The High Court's judgment was set aside, and the appeal was allowed, with costs awarded to the appellant.

Appeal Allowed.