THE MADHYA PRADESH CO-OPERATIVE BANK LTD. JABALPUR ETC. versus THE ADDITIONAL COMMISSIONER OF INCOME TAX. ETC.

Citation: [1996] 1 S.C.R. 773 · Decided: 19-01-1996 · Supreme Court of India · Bench: A.M. AHMADI · Disposal: Dismissed

Judgment (excerpt)

~ ... 
THE MADHYA PRADESH CO-OPERATIVE· 
A 
BANK LTD. JABALPllR ETC. 
v. 
THE ADDITIONAL COMMISSIONER OF INCOME TAX. ETC. 
JANUARY 19, 1996 
B 
, 
[A.M. AHMADI, CJ! AND B.L. HANSARIA, J.] 
< 
Income Tax Act, 1961 
S.Sl(New s.SOP)-Income of Co-operative society-Exemption from c 
tax-Co-operative society engaged in banking business-Govenunent 
secwities placed with State Bank of lndia/Rese1Ve Bank of India-Held, not 
an essential pa1t of assessees banking activity as the same does not fom1 part 
of its stock-in-trade or working/circulating capital--lncome de1ived therefrom 
cannot qualify for exemption from tax. 
D 
The appellant-assessee, a co-operative society controlling all the 
District Co-operative Banks in the State of Madhya Pradesh, filed retnrns 
for the relevant assessment years claiming that the entire income was from 
banking business and, therefore, exempt from tax under s.81 of the Income 
Tax Act, 1961. The Income Tax Officer rejected the claim in respect of the . E 
interest earned on securities earmarked against resenres and the interest 
earned on Provident Fund deposits. The assessee having unsuccessfully 
challenged the order before the higher authorities under the Act as also 
before the High Court, filed the appeals before this Court. 
It was contended for the assessee that Government securities placed F 
with the State Bank or the Reserve Bank form part of the bank's stock-in· 
trade and interest earned thereon would be the income earned by the Bank 
from its circulating capital and cannot, therefore, be brought to tax. 
Dismissing the appeals, this Court 
G 
-~ 
HELD : 1. The income derived by the assessee from the investment 
in Government securities placed with the State Bank of India/Reserve 
Bank of India cannot be regarded as an essential part of assessee's 
banking activity inasmuch as the same does not form part of its stock-in· 
trade or working/circulating capital and, therefore, it cannot qualify for H 
773 
774 
SUPREME COURT REPORTS 
[1996] 1 S.C.R. 
A exemption under s.8l(new s.80 P) of the Income Tax Act. (780-D] 
Commissioner of Income Tax, Lucknow v. U.P. Cooperative Federation 
Ltd., (1989) 176 ITR 435 (SC) and Assam Co-operative Apex Ma1keting 
Society Ltd. v. CIT (Addi.), (1995) 201 ITR 338 (SC), relied on. 
B 
2. The object of s.81 was to encourage the co-operative movement in 
the country by providing tax exemption to those co-operatives engaged in 
activities set out in clauses (a) to (I) thereof. One such activity is the 
carrying on of the business of banking or providing credit facilities to its 
members by a co-operative society. The section, therefore, provides that 
C income- tax shall not be payable by a co-operative society in respect of the 
profits and gains of business carried on by it, if it arises from the business 
of banking or providing credit facilities for its members. However, in view 
of the proviso to s.81 even if a co-operative society is engaged only in the 
business of banking, but part of its activity is not attributable to engage-
ment in such activity, income derived from that part of activity would 
( 
D become taxable. (778-F-H] 
-' 
E 
3.1 There is no dispute, 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. A co- operative Bank is Iecally obliged to 
place certain government securities with the State Bank/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 it further provides that the Reserve Fund of the Society shall be 
, 
invested and lfiilised as may be laid down by the Registrar, which it does 
by investing in government securities purchased with the bank's funds. As 
F 
per the M.P. Government's instructions No. C.R.25/26 dated 7.10.1960 no 
part of the Reserve Fund can be utilised as working capital nor can any 
part of the Reserve Fund deposits be withdrawn except with the permission 
of the Registrar to meet losses or at the time of winding up and not 
otherwise. (776-H, 777-A-B, G] 
G 
3.2. It is clearly understood in banking parlance that circulating 
capital is that which is put into circulation or turned over to earn profits. 
Government securities coming out of Reserve Fund which cannot be easily 
encashed and which can be utilised only when the contingencies mentioned 
therein arise cannot be considere

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