Commissioner of Income-tax v. Bengalee Urban Co-Operative Credit Society Ltd.

Page, CJ — The question propounded is:

"What portion of the income of the society shown in its assessment order for 1932-33 is exempt from income-tax by virtue of the notification of the Government of India, dated 25th August, 1925."

Under the notification the Governor-General in Council directed that the following class of income shall be exempt from the tax payable under the said Act, namely—

"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), the Bombay Co-operative Societies Act, 1925 (Bombay Act VII of 1925), or the Burma Co-operative Societies Act, 1927 (Burma Act VI of 1927), or the dividends or other payments received by the members of any such society on account of profits."

The Income-tax Officer determined the assessee's total income for the year of assessment 1932-33 to be as follows:

Income-tax was assessed upon heads I, II and IV, of the assessee's income upon the ground that such income was not part of the "profits" of the assessee exempted from income-tax under the notification of 25th August, 1925. Now it appears to me that the intention of the Governor-General in Council was to exempt from income-tax under the notification the profits accruing to co-operative societies from carrying on the business of a mutual co-operative society, upon the ground that "a man cannot make a loss or profit out of himself," per Buckley, L. J., in Carlisle and Silloth Golf Club v. Smith [1913] 3KB 75: see also Gresham Life Assurance Society v. Styles [1892] AC 309, New York Life Assurance Company v. Styles [1889] 14 AC 381, United Service Club, Simla v. Emperor AIR 1921 Lah. 208 and Board of Revenue v. Mylapore. Hindu Permanent Fund AIR 1923 Mad. 684, and in this way to encourage and foster co-operative societies which were brought into being as the result of a movement to improve the conditions under which cultivators of the land in India and Burma lived and worked. Mutual co-operative undertakings have always' been held liable to pay income-tax upon income derived from investments and house property : see Styles' s case (supra ), Emperor's case (supra) and Commissioner of Income-tax v. National Mutual Life Association of Australasia AIR 1931 Bom. 448. Moreover, the Governor-General in Council while the notification of 1925 was under consideration must have been aware that before the year 1925 it had been the practice of the income-tax authorities to assess and levy income-tax upon the income of co-operative societies derived from interest on securities (see Income-tax Manual, 1923, p. 77, and Income-tax Manual, 1932, p. 146) and as Lord Macnaghten observed in connection with the Income-tax Act in England:

"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. It seems to me that an argument in favour of the respondent right 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" : Income-tax Commissioners v, Pemsel [1891] AC 531 and Madras Provincial Co-operative Bank, Ltd. v. Commissioner of Income-tax, Madras [1933] ITR 158.

It is urged that the assessee society has not previously been assessed upon the income it has received from investments or house property, but in considering what was the intention of the legislature when it issued the notification in question that fact does not appear to me to be of importance. The main contention on behalf of the assessee is that what matters is not what the Governor-General in Council intended but what he did; that "income," "profits" and "gains" as used in the Income-tax Act are synonymous terms, and that the whole of the society's income is exempt from income-tax under the notification. In support of his argument the learned advocate for the assessee cited the following passage from the judgment of the Judicial Committee of the Privy Council in Commissioner of Income-tax Bengal v. Shaw Wallace & Co. AIR 1932 PC 138 at p. 1350 (of 59 Cal.):

"The object of the Indian Act is to tax "income," a term which it does not define. It is expanded, no doubt into "income, profits and gains," but the expansion is more a matter of words than of substance. Income, their Lordships think, in this Act, connotes a periodical monetary return "coming in" with some sort of regularity or expected regularity from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field."

Now, in that case the Judicial Committee were considering the meaning of "income" as contrasted with capital," and no doubt as income-tax is a tax upon income, in the wide sense of the term, "income" when contrasted with "capital" means and includes not only income in its strict meaning, but also profits and gains. But in my opinion, it is not true to say that in the strict meaning of those terms as appears from an examination of the various sections of the Income-tax Act "income" is used in the same sense as "profits" or "gains." In Section 6 six heads of income, profits and gains are made chargeable to income-tax as therein provided, head (ii) being "interest on securities," (iii) "property," (iv) "business," and under Section 10 income-tax is "payable by an assessee under the head "business" in respect of the profits and gains of any business carried on by him," whereas the tax upon "interest on securities" is payable under Section 8 and upon "property" under Section 9. In my opinion, "income," as contrasted, not with capital, but with "profits" or "gains" in the Income-tax Act means "a periodical monetary return 'coming in' " and accruing to the assessee independently and not as the net proceeds of a business carried on by the assessee as defined in Section 2(4) of the Act. "Income" in this sense connotes incomings without regard to outgoings. On the other hand "profits" in this connexion are; "the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts: per Lord Hershell in Russell v. Town and County Bank [1883] 2 Tax Cas. 321 , Alianza Co. Ltd. v. Bell [1904] 2 KB 666 and Naval Colliery Co. Ltd. v. Commissioners of Income-tax [1928] 12 Tax Cas. 1017."

In my opinion, the term "profits" in the notification of 25th August, 1925, is used in this latter sense, and prima facie there fore neither interest from securities nor income derived from property are "profits" within the meaning of that term as used in the notification. The learned Government Advocate on be half of the Commissioner of Income-tax contended that as the income derived from investments and from property is classed and chargeable under separate heads of income in S. 6 of the Act, it is nihil ad rent that such income may also in the circumstances of any particular case fall within the head "business," for such income, being chargeable as "interest on securities" or as "property" is not to be regarded or treated as "profits," but as "in come" in the strict meaning of those terms, and therefore is out side the ambit of the notification. I am not able to accept this contention. It may be that the investment of capital in property or securities is part of the business of an assessee, and in such a case, in my opinion, the net income accruing from such investments would be, and be chargeable as profits of the business. Whether such investments are profits of a business carried on by an assessee, in my opinion, is a question that depends upon the circumstances of each case, and in considering that question the fact that such income appears as part of the profits in the profit and loss account of the assessee is not conclusive : Coltness Iron Co. v. Black [1880] 6AC 315 and Naval Colliery Co.' s case (supra) .

In the present case where the assessee is claiming an exemption from income-tax in respect of income that prima facie is chargeable to income-tax, the onus, of course, lies upon the assessee to prove that the income for which the society claims exemption is "profits" within the notification: Madras Central Urban Bank, Ltd. v. Commissioner of Income-tax AIR 1929 Mad. 387 ; Madras Provincial Co-operaiive Bank Ltd.'s case (supra) , Norwich Union Fire Insurance v. Magee [1896] 73 LT 733 and Liverpool and London and Globe Insurance Co. v. Bennett [1911] 2 KB 577. Neither the income-tax Authorities nor the assessee appear to us to have approached the consideration of the case from the right point of view, the Commissioner of Income-tax relying upon the classification of heads of income under Section 6, the assessee upon the contention that the words "income," "profits" and "gains" in the Income-tax Act bear the same meaning. The income-tax authorities, upon such material as is or may be placed before them, must now determine whether or not the income accruing to the society under items I, II and or IV forms part of the profits of the business carried on by the society. That question, in our opinion, has not yet been fully ventilated, and after determining it the assessment will be made in accordance with the construction that the Court has put upon the term "profits" as used in the notification. I would answer the question propounded in this sense.

Das J.—I agree.

Mya Bu, J.—I agree.