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TMI Blog1967 (7) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment year 1956-67 : Rs. (i) Interest from Government securities 4,30,453.00 (ii) Total gross earnings 21,00,994.00 (iii) Investment in Government securities 1,30,60,653.00 (iv) Total working capital 4,73,42,603.00 (v) Interest paid on debentures, deposits and other accounts 15,09,490.00 (vi) Total overhead expenses and establishment overhead charges 3,01,102.00 In a proceeding for assessment of the total income of the society to tax for the year 1956-57 it was claimed that under section 14(3) of the Indian Income-tax Act, 1922 (as added by section 10 of the Finance Act, 1955, with effect from April 1, 1955) the income of the society from business was exempt from payment of tax, and that in accordance with the ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well be called in aid and that the relief granted by the Income-tax Officer was the only relief to which the society was entitled. The following question of law was submitted by the Tribunal to the High Court of Madras: " Whether the Tribunal is justified in law in holding that the taxable income of the assessee from interest on securities is Rs. 59,498 ? " The High Court reframed the question to read : " Whether the taxable income of the assessee from interest on securities is Rs. 13,578 as contended by the assessee and as worked out on the basis of the departmental instructions contained at pages 248 and 249 in Paxt III of the year 1946 ? " and answered it in favour of the Commissioner. Counsel for the society in the first in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1934, and August 18, 1945. Among the classes of income exempt from liability to pay tax under the notification was : " (2) The profits of any co-operative society other than... or the dividends or other payments received by the members of any such society out of such profits. Explanation.--For this purpose the profits of a co-operative society shall not be deemed to include any income, profits or gains from (1) investments in (a) securities of the nature referred to in section 8 of the Indian Income-tax Act, or (b)...... (2) dividends, or (3) the 'other sources' referred to in section 12 of the Indian Income-tax Act. " By the notification, profits of a co-operative society were exempt from tax, but those profits were not to inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roviso, and added an Explanation to section 8 providing for the computation of the sum reasonably spent for the purpose of realising interest and of interest paid on sums borrowed for the purpose of investment by a banking company. The Explanation provides : " Explanation.--In the case of a banking company,-- (a) the amount which bears to the aggregate of its expenses as are admissible under sub-section (2) of section 10, other than under clauses (iii), (vi), (via), (vib), (vii), (viii), (xi), (xii), (xiii) and (xiv) thereof, the same proportion as the gross receipts from interest on securities (inclusive of tax deducted at source) chargeable to tax under this section bears to the gross receipts from all sources which are included in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipts from securities bear to gross receipts from all sources. Income of the society from its trading activity being exempt from tax, its income from Government securities had, it was common ground, to be apportioned between income earned from investments for trading purposes and for non-trading purposes. The Income-tax Officer applied the first proviso read with the Explanation to section 8 of the Income-tax Act. The Income-tax Appellate Tribunal held that in terms, the Explanation to section 8 did not apply because the society was not a banking company, but the principle of the Explanation furnished, after the department instructions had been withdrawn, a reasonable basis for apportionment. In the view of the Tribunal, the principle e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se (a) of the Explanation to section 8 has specially been evolved for determining the appropriate outgoings for the purpose of realizing interest from securities held by a banking company in computing income chargeable to tax : it seeks to exempt on the footing that it is deemed to be the sum reasonably expended for the purpose of realizing interest, a part thereof which is equal to the proportion which the gross receipts from interest on securities chargeable to tax, bear to the gross receipt from all sources. The rule is an artificial rule for allocating business expenditure between different sources of income of banking companies. It is not a rule for apportionment for the purpose of taxation of composite income which is partly taxable a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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