1967 (7) TMI 5 - SC - Income Tax

Proportion of income from securities which is exempt from taxation under s. 14(3) of the Act will be that proportion which the capital of the society used for the purpose of the business bears to the total working capital - explanation to s. 8 would not be applicable.

Summary

Issues:
Interpretation of section 14(3) of the Indian Income-tax Act, 1922 for exemption of income from business activities for a cooperative society. Applicability of departmental instructions for tax exemption on income from Government securities. Apportionment of income between business and non-business activities of a cooperative society. Interpretation and application of the Explanation to section 8 of the Income-tax Act for determining taxable income from securities.

Analysis:
The case involved an appeal by a cooperative society registered under the Co-operative Societies Act, 1912, regarding the assessment of its total income for the year 1956-57. The society claimed tax exemption on income from business activities under section 14(3) of the Income-tax Act and relied on departmental instructions for tax calculation on income from Government securities. The Income-tax Officer and the Appellate Tribunal differed on the taxable income, leading to an appeal by the Commissioner of Income-tax. The Tribunal submitted a question of law to the High Court of Madras regarding the taxable income from interest on securities, which was reframed by the High Court.

The High Court analyzed the historical context of tax exemptions for cooperative societies based on departmental notifications and legislative amendments. The Finance Act of 1955 exempted cooperative societies from paying tax on profits and gains of business activities. However, the application of the Explanation to section 8 of the Income-tax Act for determining taxable income from securities was disputed. The society argued for tax exemption based on the departmental instructions, while the Tribunal and High Court emphasized the legislative provisions.

The Supreme Court interpreted the provisions of the Income-tax Act and the applicability of the Explanation to section 8 in the context of cooperative societies. It was established that the society was not a banking company and thus the Explanation did not directly apply. The Court emphasized the need for a rule of apportionment to determine the taxable income from securities for a cooperative society engaging in both business and non-business activities.

The Court concluded that a rule of apportionment based on the proportion of capital used for business activities to total working capital would be appropriate. The taxable income from securities was determined to be Rs. 13,578, in line with this apportionment rule. The judgment clarified the distinction between allocation of outgoings and apportionment of income for taxation purposes, emphasizing the need for consistency with commercial accounting principles.

In summary, the Supreme Court allowed the appeal, confirming the taxable income from Government securities for the cooperative society. The judgment provided clarity on the interpretation and application of relevant provisions of the Income-tax Act for tax assessment of cooperative societies, emphasizing the need for a consistent and fair apportionment rule.