The proportion of income from securities which is exempt from taxation under Section 14 (3) of the Act will be that proportion which the capital of the Society used for the purpose of the business bears to the total working capital.

Judgement

SHAH, J.:- This is an appeal with special leave granted by the High Court of Madras.

2. The appellant is a Society registered under the Co-operative Societies Act, 1912. The following table sets out the data relating to the earnings, investments, working capital, outgoing and expenditure of the Society for the year ending June 30, 1955, relevant to the assessment year 1956-57.

(i) Interest from Government securities Rs. 4.30,453-00.

(ii) Total gross earnings Rs. 21,00,994-00.

(iii) Investment in Government securities Rs.130,60,653-00.

(iv) Total working capital Rs.473,42,603-00.

(v) Interest paid on debentures, deposits and other accounts Rs. 15,09,490-00.

(vi) Total overhead expenses and establishment overhead charges Rs. 3,01,102-00.

3. In a proceeding for assessment of the total income of the Society to tax for the year 1956-57 it was claimed that under Section 14(3) of the Indian Income-tax Act, 1922 (as added by Section 10 of the Finance Act, 1955, with effect from April 1, 1955) the income of the Society from business was exempt from payment of tax, and that in accordance with the instructions issued under Section 60 of the Act, out of the gross income from securities amounting to Rs. 4,30,053/-, Rs. 4,16,475/- being income attributable to the assets utilized in the business, only the balance of Rs. 13,578/ was chargeable to tax. In support of its claim the Society relied upon the instructions published in the Income-tax Manual, 1946. In the view of the Income-tax Officer the Society could not claim the benefit of the Departmental Instructions, since in the relevant year of assessment those instructions had ceased to operate, and the Society s claim was governed by the Explanation to S. 8 of the Income-tax Act as incorporated by the Finance Act of 1956, with effect from April 1, 1956. He accordingly computed the taxable income under the head "interest on securities" in the sum of Rs. 59,498/-. The Appellate Assistant Commissioner modified the order of the Income-tax Officer and reduced the taxable income under the head "interest on securities" to Rs. 13,578 applying the Departmental Instructions. He held that the Explanation to S. 8 of the Act applied to Banking Companies and not to Co-operative Societies.

4. In appeal by the Commissioner of Income-tax the Appellate Tribunal reversed the order of the Appellate Assistant Commissioner, and restored the order of the In come-tax Officer. In the view of the Tribunal, the Explanation to S. 8 of the Act cannot be invoked as the Society was not a Banking Company, but the principle of the Explanation may well be called in aid and that the relief granted by the Income-tax Officer was the only relief to which the Society was entitled.

5. The following question of law was submitted by the Tribunal to the High Court of Madras:

Whether the Tribunal is justified in law in holding that the taxable income of the assessee from interest on securities is Rs. 59,498/- ?"

The High Court reframed the question to read:

"Whether the taxable income of the assessee from interest on securities is Rupees 13,578/- as contended by the assessee and as worked out on the basis of the Departmental instructions contained at pages 248 and 249 in Part III of the year 1946?"

and answered it in favour of the Commissioner.

6. Counsel for the Society in the first instance, contended relying upon the judgment of this Court in Commissioner of Income-tax, Andhra Pradesh, Hyderabad v. Cocanada Radhaswami Bank Ltd., Kakinada, 1965-57 ITR 306 that no part of the income of the Society, earned from Government securities, was liable to be taxed. It may be recalled that the Society had claimed before the Departmental authorities and the Tribunal that according to the instructions issued by the Central Government under S. 60 of the Income-tax Act only Rs. 13,578/- out of the income from Government securities were chargeable to tax. The Income-tax Officer and the Tribunal held that Rs. 59,498 were chargeable to tax. The de