MADRAS CO-OPERATIVE CENTRAL LAND MORTGAGE BANK LTD. vs. COMMISSIONER OF INCOME-TAX, MADRAS

CIVIL APPEAL No. 1975/1966Supreme Court[1968] 1 S.C.R. 3019 July 1967Bench: 3 JudgesAuthor: J.C. SHAH, S.M. SIKRI, V. RAMASWAMI MADRAS7 pages
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What were the facts?

The assessee, Madras Cooperative Central Land Mortgage Bank Ltd., is a cooperative society not engaged in banking business. For the assessment year 1956-57, it claimed that out of its gross income from securities (Rs. 4,30,053), only Rs. 13,578 was taxable, based on departmental instructions from 1946. The Income-Tax Officer computed taxable income at Rs. 59,498, considering the Explanation to Section 8 of the Income-Tax Act, 1922, as applicable. The Appellate Assistant Commissioner reduced this to Rs. 13,578, applying the departmental instructions. The Appellate Tribunal restored the Income-Tax Officer's figure, holding that while the Explanation to Section 8 didn't strictly apply, its principle was a reasonable basis for apportionment. The High Court ruled in favour of the Commissioner, holding that the departmental notification was withdrawn and the Explanation to Section 8 was not applicable.

What did the Supreme Court hold?

The Supreme Court held that in the absence of a statutory rule and departmental instructions, a rule of apportionment consistent with commercial accounting should be evolved. The proportion of income from securities exempt from taxation under Section 14(3) should be that proportion which the capital of the Society used for business purposes bears to the total working capital. Applying this rule, the gross income from securities liable to tax was Rs. 13,578. The Court found that the principles laid down in clauses (a) and (b) of the Explanation to Section 8 were not applicable as they were evolved for banking companies and dealt with allocation of outgoings, not apportionment of income between taxable and non-taxable heads. The Court noted that it was not open to the appellant to contend that even Rs. 13,578 was not taxable, as this question was never raised before the department or the Tribunal. The appeal was allowed, and the taxable income from interest on securities was determined at Rs. 13,578.

What were the issues?

1. Whether the Tribunal was justified in law in holding that the taxable income of the assessee from interest on securities is Rs. 59,498? (Question of law) 2. Whether the taxable income of the assessee from interest on securities is Rs. 13,578 as contended by the assessee and worked out on the basis of the Departmental instructions contained at pages 248 and 249 in Part III of the year 1946? (Question of mixed law and fact) Assessee's contentions: - Relied on the judgment in Commissioner of Income-tax, Andhra Pradesh v. Cocanada Radhaswami Bank Ltd. to argue that no part of the Society's income, even from Government securities, was liable to tax. - Claimed that Rs. 13,578 was the only amount chargeable to tax based on departmental instructions. Revenue's contentions: - Argued that the departmental instructions were withdrawn and the Explanation to Section 8 of the Income-Tax Act, 1922, as incorporated by the Finance Act of 1956, governed the claim. - Contended that the Tribunal was justified in holding the taxable income at Rs. 59,498.

Which sections of the Income-tax Act were involved?

Section 8,Section 14(3),Section 60,Section 10(2)

AI-generated summary — verify with the full judgment below

30 MADRAS CO.OPERATIVE CENTRAL LAND MORTGAGE A BANK LID. v. COMMISSIONER OF INCOME-TAX, MADRAS July 19, 1967 (J. C. SHAH, S. M. S1KRI AND V. RAMASWAMI, JJ.] Indian Income-tax Act (11 of 1922), ss.

8.

Explanation and 14(3}- Cooperative Society not doing banking business-Interest from gov• er11ment securities-Apportionment of income under taxable and non-taxable heads. I The Income-tax Act, 1922, as originally enacted did not give to a 0 cooperative society any exemption from payment of tax in respect of income from its bu9iness activities. By departmental 'instructions issued under s. 60 of the Act, exemption from payment of tax in res- pect of certain receipts of a cc-operative society were given. The notification provided in1er alia that as regards interest received by it from government securities, an amount which bears the same proportion to the total interest paid on deben- D lures etc. as the capital invested in government securities bears to the total working capital. sha,11 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

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