MADRAS CO-OPERATIVE CENTRAL LAND MORTGAGE BANK LTD. versus COMMISSIONER OF INCOME-TAX, MADRAS

Citation: [1968] 1 S.C.R. 30 · Decided: 19-07-1967 · Supreme Court of India · Bench: J.C. SHAH · Disposal: Appeal(s) allowed

Judgment (excerpt)

30 
MADRAS CO.OPERATIVE CENTRAL LAND MORTGAGE A 
BANK LID. 
v. 
COMMISSIONER OF INCOME-TAX, MADRAS 
July 19, 1967 
(J. C. SHAH, S. M. S1KRI AND V. RAMASWAMI, JJ.] 
Indian Income-tax Act (11 of 1922), ss. 8. Explanation and 14(3}-
Cooperative Society not doing banking business-Interest from gov• 
er11ment securities-Apportionment of income under taxable 
and 
non-taxable heads. 
I 
The Income-tax Act, 1922, as originally enacted did not give to a 0 
cooperative society any exemption from payment of tax in respect 
of income from its bu9iness activities. By departmental 'instructions 
issued under s. 60 of the Act, exemption from payment of tax in res-
pect of certain receipts of a cc-operative society were given. 
The notification provided in1er alia that as regards interest 
received by it from government securities, an amount which bears 
the same proportion to the total interest paid on deben- D 
lures etc. as the capital invested in government securities bears 
to the total working 
capital. 
sha,11 be · deducted from 
the 
interest on government securities as being exempt from tax. The 
departmental instructions were later withdrawn and sub-s. (3) 
was added to s. 14 of the Act. by which, with effect from April 
1, 1955, a cooperative society was not liable to pay tax in respect of 
the profits and gains of business carried on by it. In 1956. an Expla-
nation, applicable to banking companies. was added to s. 8. Clause E 
(a) qf the Explanation provided for the allocation of business ex· 
penditure between different sources of income of banking compa-
nies; and cl. (b) provided for allocation of outgoings in respect of 
"money borrowed" including money deposited with the bank [33B-
H; 34C-F) 
Thus, in spite of s. 14(3), for the assessment year 1951Hi7, there 
were no departmental instructions governing the apportionment of p 
income from government securities between business and non-busi-
ness sources of income; and. in the case of a cooperative society 
which did not carry on the business of a banking company, there 
was no statutory rule for such apportionment. the Explanation to 
s. 8 not being applicable. Therefore. in the case of a cooperative 
society which was not carr)•ing on the busines. of a banking com-
pany a rule of apportionment consistent with commercial accounting 
for determining the income from government securities attributable G 
to thf' business activity of the society had to be evolved. "35H; 
35A-BJ 
The appellant was a cooperative society not carrying on busi-
ness of banking and for the assessment year 1956-57: it claimed that 
out of its gross income from securities. only Rs. 13.578 was charge-
able to tax on the principle cf the departmental instruction. The Ap... 
pel1ate_ Tribunal applied the principle of the Explanation to s. 8 ~nc! H 
computed the taxable income at Rs. 59,498. 
The High Court held 
that the benefit of the departmental notification was not available 
to the appellant. because it must be deemed to have been with-
drawn and that. the Explanation to s. 8 did not in terms apply to the 
appellant. 
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COOP, BANK ll. 0.1.T. (Sha/i, J,) 
31 
A 
In appeal to this Court, 
Held: In the absence of a statutory rule and departmental in-
structions, a rule of appointment which dismembers income in pre.-
portion 1lo the business and non-business components of the source 
from which it arises would be more consistent with principles of 
commercial accounting. The proportion of income from securities 
which is exempt from taxation under s. 14(3) will be that pJ!oportion 
B which the capital of the Society used for the purposes of the business 
bears to the total working capital, and according to this rule, the 
gross income from securities which would be liable to tax was only 
Rs. 13,578. It was not open to the appellant to contend that even this 
amount was not taxable, Such a question was never raised either be-
c 
D 
fore the department or the Tribunal. [33C-D; 36F-H] 
The principles laid down in els. (a) and (b) of the Explanation 
to s. 8 are not applicable. The rule in cl. (a) is not a rule of appor-
tionment· for the purpose of taxation of composite income which is 
partly taxable and partly not. It is an artificial rule, specially evol-
ved for determining the appropriate outgoings for, the purpose of 
realising interest .from securities held by a banking company in 
computing income chargeable to tax. Clause (b) deals with the pre.-
portion in wh

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