IMPORTANT POINT
The ITO rightly included in taxable income of the assessee Co-operative Society interest earned on securities earmarked against reserves and interest earned on P.F. Deposits as such assessee was not entitled to exemption on them under Section 81 (now S. 80P) of Income-tax Act.

JUDGMENT

Ahmadi, CJI-Special leave granted in SLP (C) Nos. 5813-14 of 1982.

2. The assessee in all these cases is a Co-operative Society registered under the Madhya Pradesh Co-operative Societies (Amalgamation) Act, 1957 hereinafter called the Act . While framing assessment for the relevant assessment years in question, the Income Tax Officer, included in the taxable income of the assessee interest earned on securities earmarked against reserves and interest earned on Provident Fund deposits. The assessee contended that it was entitled to the benefit of Section 81 of the Income Tax Act as in force at all material times. The Income Tax Officer rejected this claim of exemption from tax put forward by the assessee. Since the assessee s contention did not find favour at the higher levels also, including the reference to the High Court, the assessee has approached this Court.

3. Section 81 of the Income-Tax Act on which the assessee s case is based read thus at all material times :

"Income of co-operative societies-Income Tax shall not be payable by a co-operative society-

(i) in respect of the profits and gains of business carried on by it, if it is-

(a) a society engaged in carrying on the business of banking or providing credit facilities to its members;

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Provided that, in the case of a co-operative society which is also engaged in activities other than those mentioned in this clause, nothing contained herein shall apply to that part of its profits and gains as is attributable to such activities and as exceeds fifteen thousand rupees."

On a plain reading of this provision it becomes clear that every income of a society carrying on banking business is not exempt from the payment of tax. Only the income from banking business is exempt from tax. The question which we are required to answer is whether the income from interest accruing on government securities ear-marked for Reserve Fund/Provident Fund can be said to be income derived by the assessee from the business of banking within the meaning of Section 81 to qualify for exemption. This question arises in the backdrop of the following facts.

4. The assessee is an Apex Body controlling all District Co-operative Banks. It is registered under the provisions of the Co-operative Societies Act, 1912 read with Section 6 of the Act. The assessee filed returns for the relevant years claiming that the entire income was from banking business and, therefore, exempt from tax under Section 81 of the Income Tax Act. The Income Tax Officer rejected the claim in regard to interest being exempt under the said provision. There is no dispute, and indeed there can be none, that the assessee is engaged in carrying on the business of banking which, inter alia, includes the activity of providing credit facilities to its members. In the course of its business it receives deposits and makes advances to borrowers at a rate of interest higher than what it pays on deposits. A part of these deposits are, however, invested in the form of government securities with the State Bank of India or the Reserve Bank. Under Section 44 of the Co-operative Societies Act, the assessee is required to invest or deposit its funds to maintain a cover to the extent necessary and further provides that the Reserve Fund of the Society shall be invested and utilised as may be laid down by the Registrar, which it does by investing in government securities purchased with the bank s funds. The question is whether the interest earned by the assessee from government securities placed with the State Bank or the Reserve Bank can qualify for exemption under Section 81 of the Income Tax Act?

5. Before we proceed to answer this question we may refer to the M.P. Government s instructions No. CR 25/26 dated October 7, 1960 which, insofar as it concerns Apex Banks, reads as under :

"(C) APEX BANK

The Reserve Fund of the Apex Bank shall be fully inves