Interest on fixed deposits made by a Co-operative Bank in the ordinary course of its business is exempt from income-tax under a Notification issued by the Central Government under S. 60 of the Income Tax Act.

Judgment

KAPUR, J. : The appellant is a Bank registered under the Co-operative Societies Act, 1912 (Act II of 1912) and is deemed to be registered under the Bihar and Orissa Co-operative Societies Act. 1935 (Bihar Act VI of 1935) which in Bihar has replaced the Co-operative Societies Act of 1912. It was carrying on banking business on the State o Bihar. One of the objects of the Bank is to carry on general business of banking not repugnant to the provisions of the Bihar Act and rules framed thereunder for the time being in force (Bye-Law 3(a) vi). In the calendar years 1945, 1946 and 1947, the appellant Bank received by way of interest on deposits with the Imperial Bank of India the sums of Rs. 7,192, Rs. 20,250 and Rs. 22,600 respectively. It is these sums which are the subject matter of dispute in these three appeals which relate to the respective assessment years 1946-47, 1947-48 and 1948-49. These sums were not assessed when assessment was made under S. 23(3) of the Income-tax Act, but subsequently under S. 34 they were assessed as being income under the head other sources . This order was upheld by the Appellate Assistant Commissioner and by the Income-tax Appellate Tribunal. A case was then stated to the High Court under S. 66(1) of the Act, but was decided against the appellant. The appellant brought three appeals in this Court in regard to the three assessment years. In each one of them the respondent is the Commissioner of Income-tax, Bihar and Orissa. As the appeals involve a common question of law they were consolidated and can conveniently be disposed of by one judgment.

2. In its return the appellant showed these various sums as other sources , but nothing turns on the manner in which the appellant chose to show this income in its return. The Income-tax Officer, however, assessed the interest for these three years under S. 12 of the Income Tax Act, as income from other sources . The appellant took an appeal to the Appellate Assistant Commissioner where it was contended that as the business of the appellant Bank consisted of lending money and the deposits had been made not for the purpose of investment but for that business and thereby fulfilling the purpose for which the Co-operative Bank was constituted these various sums of interest were not subject to income-tax because of the Notification issued by the Central Government under S. 60 of the Income Tax Act. The relevant portion of that Notification C.B.R. Notification No. 35 dated October 20. 1934, and No. 33 dated August 18, 1945. was :

"The following classes of income shall be exempt from the tax payable under the said Act but shall be taken into account in determining the total income of an assessee for the purpose of the said Act:

..... ..... ..... ..... ..... .....

2. 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 Society Act, 1912 (Act II of 1912), the Bombay Act VII of 1925), or the Madras Co-operative Societies Act, 1932 (Madras Act VI of 1932), or the dividends or other payments received by the members of any such Society out of such profits.

Explanation : For this purpose the profits of a Co-operative Society shall not be deemed to include any income, profits or gains from :

(1) Investment in (a) securities of the nature referred to in S. 8 of the Indian Income Tax Act : or (b) property of the nature referred to in S. 9 of that Act ;

(2) dividends, or

(3) the other sources referred to in S.12 of the Indian Income Tax Act".

The Appellate Assistant Commissioner, however, repelled the contention of the appellant. He held that the business of the appellant consisted of lending money and selling agricultural and other products to its constituents which could be planned ahead and required no provision for extraordinary claims. He remarked that it appeared from the balance-sheets that in the accounting year 1945 the Bank invested Rs. 13, 50,00