THE BIHAR STATE CO-OPERATIVE BANK LTD. vs. THE COMMISSIONER OF INCOME-TAX

CIVIL APPEAL No. 228/1958Supreme Court[1960] 3 S.C.R. 5822 February 1960Bench: 3 JudgesAuthor: J.L. KAPUR, A.K. SARKAR, M. HIDAYATULLAH SUPREME COURT REPORTS11 pages
AI SummaryAllowed

What were the facts?

The appellant, Bihar State Co-operative Bank Ltd., registered under the Co-operative Societies Act, 1912, carried on banking business in Bihar. In the calendar years 1945, 1946, and 1947, it received interest on deposits with the Imperial Bank of India amounting to Rs. 7,192, Rs. 20,250, and Rs. 22,600 respectively. These sums, relating to assessment years 1946-47, 1947-48, and 1948-49, were initially not assessed but later brought to tax under Section 34 of the Indian Income-tax Act, 1922, as income from other sources. The Income-tax Officer assessed these sums under Section 12. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld this assessment. A case was stated to the High Court, which also decided against the appellant. The appellant filed three appeals to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the interest received by the appellant Bank on deposits with the Imperial Bank of India arose out of transactions entered into for the purpose of carrying on its banking business. The Court reasoned that it is a normal mode of conducting a bank's business to place funds in deposit with other banks to ensure ready availability of cash to meet depositor demands. This is as much a part of conducting a bank's business as receiving deposits or lending money. The Court found that the moneys deposited did not cease to be part of the circulating capital of the appellant nor did they cease to form part of its banking business. The returns flowing from them would form part of its business profits. The Court disagreed with the High Court's view that the interest derived from deposits was not arising from the business of the Bank and therefore not falling within the income exempted under the Notification. The appeal was allowed, and the judgment and order of the High Court were set aside. The Court noted that Section 12 is a residuary section and does not come into operation until preceding heads are excluded.

What were the issues?

1. Whether the interest received by the appellant Bank on deposits with the Imperial Bank of India, in the context of its banking business, constitutes income from 'other sources' under Section 12 of the Indian Income-tax Act, 1922, or profit attributable to its business activities. 2. Whether such interest income is exempt from tax under the Notification issued by the Central Government under Section 60 of the Indian Income-tax Act, 1922, which exempts profits of any Co-operative Society, subject to certain exclusions. Assessee's Arguments: The appellant contended that the deposits were made not for investment but for the purpose of carrying on its banking business, ensuring liquidity to meet depositor demands. Therefore, the interest received was profit attributable to its business activities and exempt under the Notification. Revenue's Arguments: The revenue argued, and the lower authorities held, that the deposits were made as investments, separate from the appellant's core banking business. The High Court found the deposits were made with the motive of investment of surplus funds, not for pressing necessities, and thus the interest was income from 'other sources' and not exempt.

Which sections of the Income-tax Act were involved?

Section 12,Section 34,Section 60,Section 6,Section 8,Section 9

AI-generated summary — verify with the full judgment below

58 SUPREME COURT REPORTS [1960] z960 view of this Mr. Palkiwala for the Managed Company did not press C. A. No. 323 of 1957, which is therefore Commissioner af b "11 b h · · Income-tax. dismissed ut the parties w1 ear t. eir own costs m Bombay North that case because the result of that appeal is rea.lly v. dependent upon the result in C. A. No. 145 of 1958. ~i1 /s H arivallabhdas Kaliaas Appeals dismissed Kapur J.

Ig6o February 32 THE BIHAR STATE CO-OPERATIVE BANK LTD. v. THE COMMISSIONER OF INCOME-TAX (J. L. KAPUR, A. K. SARKAR AND M. HIDAYATULLAH, JJ.)

Income Tax-Co-operative Bank-Interest received on deposits with other banks-Exemption from taxation under Notification- Indian Income-tax Act, r922 (XI of r922) ss. IO, I2. The Appellant Bank which was registered under the Co- operative Societies 'Act, 1922, received, in the relevant account years, by way of interest on deposits with the Imperial Bank of India certain sums of money. The Income-tax Officer assess- ed the aforesaid sums under s. 12 of the Indian Income-tax Act 1922, as income from other sources, but the appellant claimed that the deposits were made not with the idea of making inves

The order continues below.

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