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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 ..... society registered under the Co-operative Societies Act, 1912. The following table sets out the data relating to the earnings, investments, working capital, outgoings and expenditure of the society for the year ending June 30, 1955, relevant to the assessment 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Commissioner of Income-tax the Appellate Tribunal reversed the order of the Appellate Assistant Commissioner, and restored the order of the Income-tax Officer. In the view of the Tribunal, the Explanation to section 8 of the Act cannot be invoked as the society was not a banking company, but the principle of the Explanation may 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 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nally enacted, did not give to a co-operative society exemption from payment of tax in respect of income from its business activities. But by departmental instructions issued under section 60 of the Act, certain exemptions were given by a notification issued on August 25, 1925, and modified by notifications dated June 25, 1927, October 20, 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 ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany, subject to exemption, inter alia, in respect of any sum deducted from such interest by way of commission by a banker realizing such interest on behalf of the assessee, or in respect any interest payable on money borrowed for the purpose of investment in the securities by the assessee. Parliament, by the Finance Act, 1956, amended the first proviso, 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 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which the gross receipts from interest on securities bear to the gross receipts from all sources included in the profit and loss account of the banking company. Similarly, under clause (b) interest payable on money borrowed for the purpose of investment in Government securities is that proportion of the total interest paid on borrowings which gross receipts 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 secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment securities should be brought to tax. Any attempt to bring the entire income from Government securities would infringe section 14(3) of the Act. A rule of apportionment consistent with commercial accounting must be evolved for determining the income from Government securities attributable to business activity of the society. The rule contained in clause (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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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