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Case Number

Original Petition No. 44 of 1932.

Attorney(S)

Mr. M. Subbaraya Ayyar
Mr. M. Patanjali Sastri

Judges

Sir Owen Beasley Kt., C.J
Cornish
Bardswell JJ.

Acts

provisions of the Co-operative Societies Act
S. 8 of the Indian Income-tax Act,
CO OPERATIVE SOCIETIES ACT 1912
INCOME TAX ACT
INDIAN INCOME TAX ACT
INCOME TAX ACT

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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

The reference posed to the Court asked: “Whether on the finding that investment in Government securities forms a necessary part of the business of the assessee, the sum of Rs. 56,810 forms the ‘profits of any Co-operative Society’ within the meaning of the notification of the Government of India dated 25th August 1925.” The notification exempted from income-tax “The profits of any Co-operative Society ... registered under the Co-operative Societies Act, 1912 ... or the dividends or other payments received by the members of any such Society on account of profits.”

The assessees (a Co-operative Bank) invested large sums collected by them in Government securities and the income derived (interest/dividends) had been assessed to income-tax. The society's bye-laws listed principal objects including (1) collecting funds for financing Co-operative Societies, (2) serving as the Provincial Apex Bank for Madras, (3) purchasing and selling Government Promissory Notes, and (4) carrying on general banking business not repugnant to the Co-operative Societies Act. The bye-laws were amended on 21 December 1929 to include the specific object of purchasing and selling Government Promissory Notes.

The assessees claimed the interest/dividends received from investments in Government securities were profits of the society and exempt under the Government notification because the purchase and sale of Government Promissory Notes formed part of their business. The Commissioner of Income-tax took the position that interest on Government securities is taxable under S. 8 of the Indian Income-tax Act and that the notification exempts only profits of the business taxable under S. 10.

Legal Issues Presented

Whether, on the finding that investment in Government securities forms a necessary part of the business of the assessee, the sum of Rs. 56,810 constitutes “the profits of any Co-operative Society” within the meaning of the Government of India notification dated 25th August 1925.

Arguments of the Parties

Assessees' Arguments

The dividends/interest received from investments in Government securities are part of the “profits” of the society and therefore fall within the Government of India notification exempting profits of Co-operative Societies.
The purchase and sale of Government Promissory Notes is part of the society’s business, as reflected in the bye-laws (amended 21 December 1929 to include this object), and the Assistant Commissioner of Income-tax had found such investment to be a necessary part of the society’s business.
The investment of surplus collections in Government Promissory Notes arises from the society's business needs (e.g., to keep funds readily realisable) and thus the income from them should be treated as business profits.

Commissioner of Income-tax's Arguments

Interest on Government securities is always taxed under S. 8 of the Indian Income-tax Act (Interest on Securities), whereas profits of a business are taxed under S. 10; the notification exempts profits of the business (S. 10) and not interest taxable under S. 8.
The Income-tax Act sets out separate heads of income in S. 6 and specifies different charging sections (S. 7 through S. 12) for those heads; there is no other section that taxes “Interest on securities” besides S. 8.
Longstanding practice since 1904 has been to treat interest on Government securities as falling under S. 8 and not as exempt “profits” under similar notifications, and the assessees have not demonstrated an intention by Government to alter that practice in the notification relied upon.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioners for Special Purposes of Income-tax v. Pemsel	Lord Macnaghten's observations on statutory interpretation: repeated enactment and a continuous administrative practice may inform the intended meaning of statutory words on re-enactment.	The Court relied on this passage to support the view that the longstanding practice of taxing interest on Government securities under S. 8, repeated across re-enactments, was persuasive that the Government notification was not intended to alter that practice.
Commissioner of Income-tax, Madras v. Madras Central Urban Bank Ltd., Mylapore (Full Bench)	Held that investment in Government securities by the Bank to keep liquid assets in a readily realisable form was not part of the business of the Bank and that such investment fell under S. 8 (Interest on securities).	The present Court treated that Full Bench decision as directly analogous and controlling: the society here had continued the same practice and the Full Bench's conclusion that such investments were not business profits applied to this case.
Norwhich Union Fire Insurance v. Magee	Illustrated that where foreign law required maintenance of a reserve fund invested locally, interest on such investments (made necessarily for the trade) formed part of the gains of that trade.	The Court discussed this decision cited by the assessees but distinguished it on the ground that in that case investments were made because local law required them; the Court found no similar compulsion or necessity in the present facts.
Liverpool and London Globe Insurance Company v. Bennett	Held that interest on investments required by foreign laws and certain voluntary investments (as part of the mode of conducting business abroad) could be assessable as part of business profits; voluntary investments may still form part of the business where they are made to meet foreign liabilities and support the business.	The Court considered this authority and noted the Full Bench's clear distinction: where investments are voluntarily made merely to keep liquid funds productive (and are not integral or necessary to the business), they are not business profits; thus the decision did not support the assessees' position here.

Court's Reasoning and Analysis

The Court's analysis proceeded by examining the language of the Government notification and the statutory scheme of the Indian Income-tax Act. The Court emphasized the statutory separation of heads of income under S. 6 and the corresponding charging sections (S. 7–S. 12), noting specifically that “Interest on securities” is provided for and taxed under S. 8, while “Business” profits are dealt with under S. 10.

The Court accepted the Commissioner’s submission that the notification exempts the profits of a Co-operative Society arising from its business, and that the assessees had the burden of showing that the income in question fell within the exemption. The Court observed a long-standing administrative practice (dating from 1904) of treating interest on Government securities as falling under S. 8 rather than as business profits under S. 10.

The Court relied on the principle explained in Commissioners for Special Purposes of Income-tax v. Pemsel that repetition of statutory language and a continuous administrative practice across re-enactments may inform the intended meaning of the words. Applying that reasoning, the Court concluded it was unlikely that the Government by its notification intended to alter the established practice of taxing such interest under S. 8.

The Court then considered the factual matrix: the society's bye-laws, the nature of the investments, and prior Full Bench authority in Commissioner of Income-tax, Madras v. Madras Central Urban Bank Ltd., where similar investments of liquid assets in Government securities were held not to be part of the bank's business and were taxable under S. 8. The Court found the present case factually analogous: the society invested surplus collections in Government securities (including after an amendment to the bye-laws which expressly added purchase and sale of Government Promissory Notes), but there was no evidence that such investments were made as an essential or statutory requirement of the society's business akin to the foreign-law compelled investments in the insurance cases.

The Court examined the English insurance authorities relied upon by the assessees (Norwhich Union Fire Insurance v. Magee and Liverpool and London Globe Insurance Company v. Bennett) and distinguished them on their facts: in those cases, investments were necessary to carry on business in foreign jurisdictions (complying with local law or maintaining readily realisable funds abroad), whereas in the Bank/society's case the investments were prudent placements of idle funds and not integral to the carrying on of the society’s business.

Both the Chief Justice and the concurring judges (Cornish, J. and Bardswell, J.) concluded that mere investment of idle or temporarily surplus funds in Government securities does not convert the interest so earned into business profits of the society for the purpose of the notification. The amendment of the bye-laws to include purchase and sale of Government Promissory Notes did not, in the Court's view, alter the position established by the society's prior practice and the Full Bench authority.

Holding and Implications

Holding: The reference was answered in the negative. The Court held that the sum (interest/dividends) derived from investments in Government securities did not form “the profits of any Co-operative Society” within the meaning of the Government of India notification of 25th August 1925 and therefore was not exempt from income-tax under that notification.

Direct consequences as stated in the opinion:

The assessees' claim to exemption for the interest on Government securities was rejected; such interest is taxable as interest on securities (S. 8) rather than as business profits under the notification.
The assessees were ordered to pay the costs of the Commissioner of Income-tax in the amount of Rs. 250.

The opinion grounds this result on the statutory scheme (distinct taxing heads and charging sections), the long-established administrative practice treating such interest as falling under S. 8, and the precedent of the Full Bench decision in Commissioner of Income-tax, Madras v. Madras Central Urban Bank Ltd., applied to the facts of the present case.

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The Madras Provincial Co-Operative Bank, Ltd., Madras Petitioners (Assessees). v. The Commissioner Of Income-Tax, Madras .

The Chief Justice.—The question referred to us is as follows:

“Whether on the finding that investment in Government securities forms a necessary part of the business of the assessee, the sum of Rs. 56,810 forms the ‘profits of any Co-operative Society’ within the meaning of the notification of the Government of India dated 25th August 1925.”

The notification referred to exempts from income-tax:

“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-operative Societies Act, 1912 (II of 1912) or the dividends or other payments received by the members of any such Society on account of profits.”

The assessees invest large sums received by them in Government securities and the income derived from such investments has been assessed to income-tax. The main objects of the Society, as set out in its bye-laws, are (1) to collect funds for financing Co-operative Societies, (2) to serve as the Provincial Apex Bank for the province of Madras, (3) to purchase and sell Government Promissory Notes and (4) to carry on general business of banking not repugnant to the provisions of the Co-operative Societies Act and the rules framed thereunder for the time being in force. The society derives its income (1) from interest on the loans and advances made mainly to Central Banks and depositors, (2) from interest on investments in Government securities, (3) from interest on deposits and (4) from commission and fees. The money used, to purchase Government Promissory Notes is the money collected by the society in excess of the money required to finance Central Banks and depositors. The assessees claim that the dividends received from investments in Government securities are the profits of the society and are, therefore, under the Government of India Notification exempt from payment of income-tax. This claim is based upon the contention that the purchase and sale of Government Promissory Notes is part of the business of the Society and that the Assistant Commissioner of Income-tax has found that such investment is a necessary part of the business of the society. The bye-laws of the society were amended on the 21st December, 1929, by the inclusion of object 3 to bye-law No. 1, namely, “to purchase and sell Government Promissory Notes”. It is argued that the purchase and sale of Government Promissory Notes, therefore, is a part of the business of the assessee and that the profits derived from such purchase and sale are the profits of the society. With regard to this argument, the interest derived from such securities must, of course, be taken as an item of receipt in arriving at the society's profits and gains from the business but it does not, however, follow from this that the interest is a profit of the society.

It is contended by the Commissioner of Income-tax that interest on Government Securities has always to be taxed under S. 8 of the Indian Income-tax Act, whereas the profits of a business have always to be taxed under S. 10 of the Act, and that it is the latter profits alone that are exempt under the notification. The Indian Income-tax Act in S. 6 states the heads of income chargeable to income-tax as follows:—

1. Salaries.

2. Interest on Securities.

3. Property.

4. Business.

5. Professional earnings.

6. Other sources.

In respect of these the tax is payable on (i) under S. 7, on (ii) under S. 8, on (iii) under S. 9, on (iv) under S. 10, on (v) under S. 11 and on (vi) under S. 12. Thus all the six sources of income are dealt with by separate sections. S. 8, as before-mentioned, provides for the taxation of “Interest on securities” and there is no other section which does; and it has been the custom ever since 1904, when the exemption of profits similar to those contained in the Government notification came into force, to interpret the exemption as it has been in this instance; and it is argued that the observations of Lord Macnaghten in the Commissioners for Special Purposes of Income-tax v. Pemsel, bear usefully upon this case. They are as follows:—

“I cannot help reminding your Lordships, in conclusion, that the Income-tax Act is not a statute which was passed once for all. It has expired, and been revived, and re-enacted over and over again; every revival and re-enactment is a new Act. It is impossible to suppose that on every occasion the Legislature can have been ignorant of the manner in which the tax was being administered by a department of the State under the guidance of their legal advisers, especially when the practice was fully laid before Parliament in the correspondence to which I have referred (“Charities”, 1865).

It seems to me that an argument in favour of the respondent might have been founded on this view of the case. The point of course is not that a continuous practice following legislation interprets the mind of the Legislature, but that when you find legislation following a continuous practice and repeating the very words on which that practice was founded, it may perhaps fairly be inferred that the Legislature in re-enacting the statute intended those words to be understood in their received meaning. And perhaps it might be argued that the inference grows stronger with each successive re-enactment”.

There is nothing new in the exemption contained in the Government notification. For years, the practice has been to interpret “profits” as not including interest on Goverment Securities. Since 1904 such interest has always been taxed under S. 8 and it is difficult to imagine that Government's latest notification was intended to alter that practice. When an assessee is under a section of the Income-tax Act assessable to income-tax, it is for that person to show that he has been exempted; and in my view, the assessees here have failed to show that it was the intention of Government to exempt such interest. The mere fact that the bye-laws of the society have recently been amended making the purchase and sale of Government Promissory Notes one of its main objects does not, in my view, alter the position. It is conceded that for years this society has, even in the absence of such a bye-law, been investing its surplus collections in Government securities and that the interest received has been assessed to income-tax. An attempt was made recently by this society to challenge that position in O.P No. 202 of 1928, reported in Commissioner of Income-tax, Madras v. Madras Central Urban Bank, Ltd., Mylapore. There the meaning of the same notification had to be considered by a Full Bench of which I was myself a member. In that case, under orders of Government the society was bound to keep 40 per cent of its total liability under call deposits in a liquid or fluid form and instead of keeping these fluid assets in their safe or till, it kept them in as nearly a fluid form as possible in Government securities upon which as in the present case they received interest. It was claimed by the society that this was a part of the business of the Bank and that unless this interest was received the activities of the Bank would be seriously handicapped—exactly the same contention has been put forward here—and it was held that this investment in Government securities was not a part of the business of the Bank but that such investment fell under S. 8 of the Act. In the course of the Judgment reference is made to some English decisions, two of which were relied upon here by Mr. Subbaroya Ayyar, for the assessees, viz., Norwhich Union Fire Insurance v. Magee, and Liverpool and London Globe Insurance Company v. Bennett(3). In the former case the company besides carrying on business in the United Kingdom carried on business in America and elsewhere. The laws of the United States in reference to the carrying on of insurance business there required the maintenance of a reserve fund there and in order to provide that reserve fund investments were made and interest earned. It was clear that the business of insurance could not be carried on in America without those investments being made there and it followed that the interest on those investments necessarily made for the purpose of the trade was part of the gains of that trade. As appears from the judgment in that case the company did not invest in those foreign securities for the sake of investment or for the sake of making profit by those investments but for the sake of having a fund invested in America to answer the requirements of the American law. In the latter case the company carried on business at home and abroad. As in the former case, by the laws of certain of the foreign countries in which it conducted its business the company was required to deposit with the Governments of those countries certain sums of money and to invest those sums in accordance with the local laws. The company also voluntarily invested certain other sums. It was held that interest on both classes of investments was assessable as being part of the business. As is observed in the Judgment of the Full Bench, Hamilton, J., held that the voluntary investments were not for the sake of investments but for the sake of having a fund abroad readily realisable to meet the liabilities of their business and that the making of the investments was just as much part of their mode of conducting the business as the taking of risks and in the event of the current account at the bank being insufficient to meet the liabilities all the investment funds might have to be called upon at some time or other. The object of the investments was to extend the business, so the making of them was part of the business. This the Full Bench held clearly distinguished Liverpool and London Globe Insurance Company v. Bennett from the case before them. The Full Bench Judgment goes on as follows:

“It seems to me impossible, at least without a great deal more information than has been presented to us, to say that these investments of more or less amounts for a longer or shorter time on the part of the bank in order to prevent their fluid assets from lying absolutely idle in their coffers formed part of the business of the bank. It seems to me that they are in the same position as any private person who with a large credit balance in his private account desires to put it into a remunerative form which shall at the same time be readily realisable and therefore invests for shorter or longer periods in Government paper.”

and further:

“The obligation on the bank to keep 40 per cent of its total liabilities in a fluid form is in consequence of an administrative order of Government and does not oblige them, although it may permit them, to invest the fund at all and it seems to me that as they are to hold the fund in readiness to meet some particular liability which is specified, it cannot be said to be part of their business as a bank to invest these liquid assets in the interval.”

It seems to me that no new facts are present now. The society has continued to do that which it was then doing. No one suggests that the purchase and sale of Government Promissory Notes by the society was, before the amendment of its bye-laws, ultra vires, and, in my opinion, the amendment does not in the least alter the position as it was at the time of the Full Bench decision already referred to.

For these reasons, in my opinion, the question referred to us must be answered in the negative. The assessees must pay the costs of the Commissionsr of Income-tax, Rs. 250.

Cornish, J:—I am of the same opinion. I think there is no real substantial distinction between this case and Commissioner of Income-tax, Madras v. Madras Central Urban Bank Ltd., Mylapore. The exemption from income-tax given by the notification is to the profits made by the petitioner from its business of a Co-operative Bank. Unless, therefore, the interest derived by the Bank from its money invested in Government Promissory Notes can be regarded as profits from the business carried on by the Bank it will not be exempt from tax. The petitioner relies on R. 1 of the Bye-laws which states that one of the main objects of the Bank is “to purchase and sell Government Promissory Notes.” Taking this to mean that the Bank has been empowered to deal in Government Promissory Notes as part of its business, I should say that any profits made by the Bank from the purchase and sale of these securities on its own account or as broker for a constituent would be profits from the business of the Bank and exempt from tax under the notification. But in the case before us nothing else appears except that the Bank has invested part of its funds in Government Promissory Notes and derived interest therefrom. If there was no opportunity of employing the money by lending it out to Central Banks (which is by R. 12, of the Bye-laws declared to be the primary purpose for which the Bank's funds are to be utilized) or by lending it to share-holders or constituents of the Bank (which the Bank is authorized to do by R. 13), the prudent course would undoubtedly be to invest the money in some easily realizable security. But there is nothing peculiar to the business of banking in taking this course. As a matter of construction of the Bye-laws I hardly think that an investment in Government Promissory Notes of money lying idle in the Bank can be deemed to be one of the declared objects of the Bank. The petitioner having failed to show that the investment was made for carrying out some purpose for which the Bank has been founded, the only ground, as it seems to me, on which the interest from the investment might be held to be profits from the business disappears.

Bardswell, J.—I agree that the interest derived by a Co-operative Bank from its investments in Government securities is not to be regarded as part of the profits of its business qua such Bank. I would take it that the exemption is meant as an encouragement to the employing of as much capital as possible for the financing of Co-operative Societies and so extending the scope of Co-operation. The investing of money in Government securities does not further the cause of Co-operation but is only a means of keeping from lying idle funds that cannot immediately be used for such a purpose.

N.R.R Reference answered in the negative.

The Madras Provincia... v. The Commissioner Of ...