Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 7
PETITIONER:
MADRAS CO-OPERATIVE CENTRAL LAND MORTGAGE BANK LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, MADRAS
DATE OF JUDGMENT:
19/07/1967
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
SIKRI, S.M.
RAMASWAMI, V.
CITATION:
1968 AIR 55 1968 SCR (1) 30
ACT:
Indian Income-tax Act (11 of 1922), ss. 8. Explanation and
14(3)--Cooperative Society not doing banking business-
Interest from government securities-Apportionment of income
under taxable and. non-taxable heads.
HEADNOTE:
The Income-tax Act, 1922, as originally enacted did not give
to a cooperative society any exemption from payment of tax
in respect of income from its business activities. By
departmental instructions issued under s. 60 of the Act,
exemption from payment of tax in respect of certain receipts
of a co-operative society were given. The notification
provided inter alia that as regards interest received by it
from government securities, an amount which bears the same
proportion to the total interest paid on debentures etc. as
the capital invested in government securities bears to the
total working capital, shall be deducted from the interest
on government securities as being exempt from tax. The
departmental instructions were later withdrawn and sub-s.
(3) was added to s. 14 of the Act, by which, with effect
from April 1, 1955, a cooperative society was not liable to
pay tax in respect of the profits and. gains of business
carried on by it. In 1956, an Explanation, applicable to
banking companies, was added to s. 8. Clause (a) of the
Explanation provided for the allocation of business ex-
penditure between different sources of income of banking
companies; and cl. (b) provided for allocation of outgoings
in respect of " money borrowed" including money deposited
with the bank [33BH; 34C-F]
Thus, in spite of s. 14(3), for the assessment year 1956-57,
there were no departmental instructions governing the
apportionment of income from government securities between
business and non-business sources of income; and, in the
case of a cooperative society which did not carry on the
business of a banking company. there was no statutory rule
for such apportionment, the Explanation to s. 8 not being
applicable. Therefore, in the case of a cooperative society
which was not carrying on the business of a banking company
a rule of apportionment consistent with commercial
accounting for determining the income from government
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 7
securities attributable to the business activity of the
society had to be evolved. [35H; 35A-B]
The appellant was a cooperative society not carrying on
business of banking and for the assessment year 1956-57; it
claimed that out of its gross income from securities, only
Rs. 13,578 was chargeable to tax on the principle of the
departmental instruction. The Appellate Tribunal applied
the principle of the Explanation to S. 8 and computed the
taxable income at Rs. 59,498. The High Court held that the
benefit of the departmental notification was not available
to the appellant, because it must be deemed to have been
withdrawn and that, the Explanation to s. 8 did not in terms
apply to the appellant.
31
In appeal to this Court,
Held:In the absence of a statutory rule and departmental in-
structions, a rule of appointment which dismembers income in
pro"portion to the business and non-business components of
the source from which it arises would be more consistent
with principles of commercial accounting. The proportion of
income from securities which is exempt from taxation under
s. 14(3) will be that proportion which the capital of the
Society used for the purposes of the business bears to the
total working capital, and according to this rule, the gross
income from securities which would be liable to tax was only
Rs. 13,578. It was not open to the appellant to contend
that even this amount was not taxable. Such a question was
never raised either before the department or the Tribunal.
[33C-D; 36F-H]
The principles laid down in cls. (a) and (b) of the
Explanation to s, 8 are not Applicable. The rule in cl. (a)
is not a rule of apportionment for the purpose of taxation
of composite income which is partly taxable and partly not.
It is an artificial rule, specially evolved for determining
the appropriate outgoings for the purpose of realising
interest .,from securities held by a banking company in
computing income chargeable to tax. Clause (b) deals with
the proportion in which the outgoings are allocable. The
problem arising under s. 14(3) is not one relating to
allocation of outgoings to deter. mine taxable income, but
of apportionment of income under the taxable and non-taxable
heads. [36C-E]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1975 of 1966.
Appeal by special leave from the judgment and order dated
July 11, 1962 of the Madras High Court in Tax Case No. 84 of
1960.
S. Swaminathan and R. Gopalakrishnan, for the appellant.
Veda Vyasa, A. N. Kirpal, R. N. Sachtliey and S. P. Nayar,
for the respondent.
The Judgement of the Court was delivered by Shah, J.-This is
an appeal with special leave.
The appellant is a 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 1956-57:-
(i)Interest from Government securi-
ties. Rs.4,310,453.00
(ii) Total gross earnings..... Rs.21,00,99(4.00
(iii) Investments in Government
securities..... Rs.130,60,653-00
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 7
(iv) Total working. capital... Rs.473,42,603-00
(v) Interest paid on debentures, depo-
sits and other accounts Rs. 15,09,490-00
(vi) Total overhead expenses and es-
tablishment overhead charges Rs. 3,01,102-00
32
In a proceeding for assessment of the total income of the
Society to tax for the year 1956-57 it was claimed that
under S. 14 (3) of the Indian Income-tax Act, 1922 (as added
by S. 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
instructions issued under S. 60 of the Act, out of the gross
income from securities amounting to Rs. 4,30,053/-, Rs.
4,16,475/- being income attributable to the assets utilized
in the business, only the balance of Rs. 13,578/was
chargeable to tax. In support of its claim the ’Society
’relied upon the instructions published in the Income-tax
Manual, 1946. In the view of the Income-tax Officer the
Society could not claim the benefit of the Departmental
Instructions, since in the relevant year of assessment those
instructions had ceased to operate, and the Society’s claim
was governed by the Explanation to s. 8 of the Income-tax
Act as incorporated by the Finance Act of 1956, with effect
from April 1, 1956. He accordingly computed the taxable
income under the head--"interest on securities" in the sum
of Rs. 59,498/-. The Appellate Assistant Commissioner
modified the order of the Income-tax Officer and reduced the
taxable income under the head "interest on securities" to
Rs. 13,578/- applying the Departmental Instructions. He
held that the Explanation to s. 8 of the Act applied to
Banking Companies and not to Co-operative Societies.
In appeal by 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 s.
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:
"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 Part III of
the year 1946?",
and answered it in favour of the Commissioner.
33
Counsel for the Society in the first instance, contended
relying upon the judgment of this Court in Commissioner of
Incometax Andhra Pradesh v. Cocanada Radhaswami Bank
Ltd.,(1) contended that no part of the income of the
Society, even if it be earned from Government securities,
was liable to be taxed. It may be recalled that the Society
had claimed before the Departmental authorities and the
Tribunal that according to the instructions issued by the
Central Government under s. 60 of the Income-tax Act only
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 7
Rs. 13,578/ - out of the income from Government securities
were chargeable to tax. The Income-tax Officer and the Tri-
bunal held that Rs. 59,498/- were chargeable to tax. The
decision in Cocanada Radhaswami Bank’s case(1) relates to
the right of a Bank to carry forward the net loss incurred
by a Banking Company and to set it off in subsequent years
against income from securities held as part of its trading
assets. It is not a decision under s. 14(3) of the Act.
Again it is not open to the Society in this reference to
contend that the amount of Rs. 13,578/- itself is not
taxable. Such a question was never raised before the
Tribunal and cannot be permitted to be raised in this Court.
The Income-tax Act, 1922, as originally 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 s. 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 cooperative 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
cooperative 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 Include any
income, profits or gains from securities of the nature
referred to in s. 8 of the
(1)157 I.T.R. 306.
N)ISCI-4
34
Indian Income-tax Act. The Legislature by s. 10 of the
Finan Act of 1955 added sub-sec. (3) to s. 14, whereby it
was enacted. inter alia, that:-
"The tax shall not be payable by a co-
operative society, including a, co-operative
society carrying on the business of banking-
(i) in respect of profits and gains of
business carried on by it,
(ii) in respect of interest and dividends
derived from its investments with any other
cooperative society;
A co-operative society since the enactment of the Finance
Act, 1955, with effect from April 1, 1955, was therefore not
liable, by the express provisions in the Act, to pay tax in
respect of the profits and gains of business carried on by
it. Under s. 8 of the Incometax Act, 1922, tax is payable
by an assessee under the head "Interest on securities" in
respect of the interest receivable by him on any security of
the Central Government or of a State Government, or on
debentures or other securities for money issued by or on
behalf of a local authority or a company, subject to
exemption, inter alia, in respect of any sum deducted from
such interest by way of commission by a banker realizing
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 7
such interest on behalf of the assessee, or in respect of
any interest payable on money borrowed for the purpose of
investment in the securities by the assessee. The
Parliament by the Finance Act, 1956 amended the first
proviso, and added an Explanation to s. 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 clauses
(iii), (vi), (vi-a), (vi-b), (vii),
(viii), (xi), (xii), (xiii) and (xiv) th
ereof,
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 the profit
and loss account of the company, shall be
deemed to be the sum reasonably expended by it
for the purpose of realising such interest,,
and the amount for which allowance is
admissible under sub-section (2) of section 10
shall be reduced correspondingly; and
(b) money borrowed shall include moneys
received by way of deposits; and that amount
which bears to the amount of interest payable
on moneys borrowed 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 the profit and loss account of the
company, shall be deemed to be interest
payable on money borrowed for the purpose of
investment in the securities by the assessee,
and the amount of such interest for which
allowance is due under sub-section (2) of
section 10 shall be reduced correspondingly."
and
35
(b) money borrowed shall include moneys
received by way of deposits; and that amount
which bears to the amount of interest payable
on moneys borrowed 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 the profit and loss account of the
company, shall be deemed to be interest
payable on money borrowed for the purpose of
investment in the securities by the assessee,
and the amount of such interest for which
allowance is due under sub-section (2) of
section 10 shall be reduced correspondingly."
Broadly stated, under-cl. (a) the sum reasonably spent is
computed as that proportion of the aggregate of the expenses
admissible under the various clauses of sub-s. (2) of s. 10
mentioned therein which the gross receipts from interest on
securities bear to the gross receipts from all sources
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 7
included in the profit and loss account of the banking
company. Similarly under cl. (6) 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 s. 8 of the Income-tax
Act. The Income-tax Appellate Tribunal held that in terms,
the Explanation to s. 8 did not apply because the Society
was not a banking company, but the principle of the
Explanation furnished, after the Departmental Instructions
had been withdrawn, a reasonable basis for apportionment.
In the view of the Tribunal, the principle embodied in the
Explanation was an "improvement on the instructions", since
it co-related the income chargeable under the head with the
expenditure and also provided for proportionate allocation
of overhead charges. The High Court held that the benefit
of the departmental notification was not available to the
Society in the year of assessment, because it must be deemed
to be withdrawn and the Explanation to s. 8 did not in terms
apply to the Society.
It was common ground between the parties in this Court and
the High Court that Explanation to s. 8 has no application
to a co-operative society which does not carry on the
business of a banking company. There is also no dispute
that the departmental notification relied upon by the
company was withdrawn before the relevant assessment year.
There is, therefore, no statutory rule, and nor there are
departmental instructions, governing the apportionment of
income from Government securities between business
36
and non-business sources of income. It was never urged, and
it cannot be urged, that in the absence of a specific rule
for apportionment, the entire income from Government
securities should be brought to tax. Any attempt to bring
the entire income from Government securities would infringe
S. 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 cl.
(a) of the Explanation to S. 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 receipts 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 and partly not.
Clause (b) provides for allocation of outgoings in respect
of "money borrowed", which expression includes money
deposited with the Bank. Interest payable on borrowings is
directed to be allocated in the proportion in which income
is received from investments from securities and from other
sources. This clause also deals with the proportion in
which the outgoings are allocable. The problem arising
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 7
under s. ’14(3) is of apportionment of income under heads
taxable and nontaxable: it is not a problem relating to
allocation of outgoings to determine taxable income.
In our judgment, a rule of apportionment which dismembers
income in proportion to the business and non-business
components of the single source from which it arises would
be more consistent with principles of commercial accounting.
The 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.
It is admitted that Rs. 13,578/- is the gross income from
securities which is, according to that rule, liable to tax.
No question was raised in the High Court about any deduction
to be made in respect of expenses for collection of that
amount, and admissibility of deduction on that score does
not fall to be considered.
The appeal is allowed. Answer to the question as reframed
by the High Court is that Rs. 13,578 /- are taxable as
income of the Society received from Government securities
under s. 8 of the Income-tax Act. The Commissioner will pay
the costs of the Society in this Court.
V.P.S. Appeal
allowed.
37