The profits from the purchase and sale of Government securities by a co-operative society are not exempt from tax under the Explanation to Notification R.Dis. No. 291-IT/25 dated 25-8-1925, as amended subsequently, if the securities are held as stock-in-trade by the society.

Tendolkar,J.

1. The assessee in this case is the Surat Peoples Co-operative Bank Ltd., which is registered under the Bombay Co-operative Societies Act, 1925. Among the objects of the Bank is Object No. 5 "To undertake every kind of banking and shroffi business" and the assessee in the relevant year of account ending 30th June, 1949 was carrying on banking business. During the course of its banking business, the assessee purchased Government securities in the year of account and a profit of Rs. 53,229/- was earned by the assessee. The assessee claimed exemption from tax in respect of the said amount under an Explanation to F.D. (C.R.) Notification R.Dis. No. 291-1. T./25, dated 25th August, 1925, as amended by Notification No. 26, dated 25th June, 1927. The Notification is in the following terms :

"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 purposes of the said Act:

1. * * *

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 Societies Act, 1912 (2 of 1912) the Bombay Co-operative Societies Act, L925 (Bombay Act 7 of 1925), or the Madras Co-operative Societies Act, 1932 (Madras Act 6 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 :

(i) investments in (a) securities of the nature referred to in Section 8 of the Indian Income-tax Act, or (b) property of the nature referred to in Section 9 of that Act,

2. dividends, or

3. the other sources referred to in Section 12 of the Indian Income-tax Act."

It was the contention of the assessee that under Sub-clause (2) of the Notification, the income of the assessee was exempt from tax and what was taken out from this provision by the explanation was merely "interest on securities and not profits made by the dealer in securities. The Tribunal rejected this contention, and it is against the decision of the Tribunal that the present reference has been made. The question referred to us is :

"Whether the profit amounting to Rs. 53,229/- on the purchase and sale of Government Securities is exempt from tax under the Explanation to Notification R.Dis. No. 291-IT/25 dated 25-8-1925 as amended subsequently, under Section 60 of the Indian Income-tax Act?"

2. Now, turning to the Notification, it is clear that under Sub-clause (2), the profits of any co-operative society registered under the Bombay Co-operative Societies Act are exempt from tax, and since the assessee is a society registered under that Act, all its profits are exempt from tax. But to this sub-clause, there is an explanation; and the relevant part of the Explanation with which we are concerned on this Reference directly is Sub-clause (1). The explanation indicates that what is comprised in the explanation shall not be deemed to be profits of the society for the purpose of exemption from tax, in other words, it will be liable to tax, and the question is what is included in Sub-clause (1). The relevant words to construe are

"any income, profits or gains from-- (1) investments in (a) securities of the nature referred to in Section 8 of the Indian Income-tax Act, or (b) property of the nature referred to in Section 9 of that Act."

The contention of Mr. Joshi for the Income-tax Department is that what is liable to tax under this Explanation is income, profits or gains from securities held by the Society and such income, profits or gains do not merely include interest on securities but also include profits realised from purchases and sales of securities. On the other hand. Mr. Kolah for the assesses contends that all that is included under the Explanation is "interest from securities and not the profits made