BIHAR STATE CO Vs. COMMISSIONER OF INCOME

JUDGEMENT

(1.) In this case the assessee is a Co-operative Bank registered under the Co-operative Societies Act (Act 2 of 1912). The assessee was carrying on banking business. Its principal activity was to serve as a General Provincial Co-operative Bank for the other State Co-operatiye Societies in the State of Bihar. Under notification R. Dis. No. 291-I. T. /25, dated the 25th August, 1925, as amended by subsequent notifications No. 26, dated. the 25th June, 1927, No. 35, dated the 20th October, 1934, and No. 33, dated the 18th August, 1945, the profits of the Co-operative Bank were exempt from being taxed. The relevant portion of the notification is to the following effect : --"the following classes of income shall be exempt from the tax payable under the said Act, but shall be taken into account in determining the total income of an assessee for the purpose of the said Act :-- 2 The profits of any Co-operative Society other than the Sanikatta. Salt-owners' Society in the Bombay Presidency for the time being registered under the Co-cperative Societies Act, 1912 (Act II of 1912) , the Bombay Co-operative Societies Act, 1925 (Bombay Act VII of 1925) , or the Madras-Co-operative Societies Act, 1932 (Madras Act VI of 1932) , 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 3 of the Indian Income-tax Act, or (b) property of the nature referred to. in Section 9 of that Act. (2) dividends, or (3) the 'other-sources' referred to in Section 12 of the Indian Income-tax Act. "for the assessment years 1946-47, 1947-48 and 1948-49 the assessee Company received interest from fixed deposits to the extent of Rs. 7,192/-, Rs. 20,250/- and Rs. 22,600/-, respectively. When the assessments were made originally under Section 23 (3) these amounts were not assessed to income-tax. Later on the Income-tax Officer received information about these fixed deposits and initiated proceedings Under Section 34 and held that these amounts were liable to be taxed as the notifications of the Central Board of Revenue did not apply to these amounts. The assessee preferred an appeal before the Appellate Assistant Commissioner, but the appeal was dismissed. The case was then taken on appeal before the Income-tax Appellate Tribunal, but the appeal was unsuccessful.

(2.) At the instance of the assessee the Appellate Tribunal has referred the following questions of law for the opinion of the High Court under Section 66 (1) of the Indian Income-tax Act : --" (1) Whether, in the facts and circumstances. of this case, the receipt of interest on fixed deposits was an income under the head of 'other sources', and (2) Whether in the facts and circumstances of this case, the receipt of interest from the fixed deposits was an income not exempt from taxation under the C. B. R. Notification No. 35, dated the 20th October, 1934, and No 33, dated the 18th, August 1945 -

(3.) On behalf of the assessee Mr. Mazum-dar put forward the argument that the fixed deposits were made with the Imperial Bank not with the motive of investment but for the reason that liquid money should be available to the assessee so that it might carry out the purpose for which the Co-operative Bank was constituted. It was pointed out by learned Consel that the deposits with the Imperial Bank were short term deposits and it was argued that the business of the Co-operative Bank could not be properly carried on without this bind of short deposits. In other words, the contention of the assessee was that the depositing activities were so intimate-ly connected with the business activities of the Co-operative Bank that the interest received from the fixed deposits should be held to be profits attributable to the business activities of the Co-operative Bank. In support of his contention Counsel referred to the statement of fixed deposits printed at page 15 of the papertoook as follows :-"statement of fixed deposit with Imperial Bank of India, Patna, for one year @ 1 1/2 per cent. p. a. General Ledger folio 469 and New L. F. 244. <FRM>JUDGEMENT_19_LAWS(PAT)7_1957.html</FRM>