Interest from deposits of Co-operative Bank held, arising from its business. SC

1.  The appellant/assessee bank registered under the Co-operative Societies Act, 1912, received interest on deposits. The said interest was assessed as 'income from other sources'. The assessee filed appeal to AAC contending 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 cooperative bank was constituted, these various sums of interest were not subject to income-tax because of the notification issued by the Central Government under section 60 of the 1922 Act. The AAC held that fixed deposits were held as an investment quite apart from the business of the assessee and thus interest from these deposits was not exempt from income-tax. 

2.  He further held that the exemption as to the profit of a co-operative society extended to its sphere of co-operative activities and, therefore, interest from investments was no part of the appellant's business profits exempt from taxation. The appeal before the Tribunal failed.

3.  On reference, the High Court held that if the income derived by a co-operative society was from the business of the co-operative society as such, it fell within the exemption, but if it arose out of the business with third parties as in the case of investment of surplus assets, the exemption was inapplicable because the investment of fluid assets was not a part of the business of the co-operative bank and the reason for the notification was to exempt profits accruing to a co-operative society from carrying on business of a mutual co-operative society and upon the ground that a man cannot make profit or loss out of himself. 

On appeal to the Supreme Court held as under:

4.  In the instant case the co-operative society was a bank. One of its objects was to carry on the general business of banking. Like other banks money was its stock-in-trade or circulating capital and its normal business was to deal in money and credit. It could not be said that the business of such a bank consisted only in receiving deposits and lending money to its members or such other societies as were mentioned in the objects and that when it laid out its moneys so that they might be readily available to meet the demand of its depositors if and when they arose, it was not a legitimate mode of carrying on of its banking business.

5.  In the instant case, it had not been shown that the moneys which were in deposit with other banks were "surplus" within the law so as to take it out of banking business.

6.  The moneys laid out in the form of deposits would not cease to be a part of the circulating capital of the assessee nor would they cease to form part of its banking business. The returns flowing from them would form part of its profits from its business. In a commercial sense the directors of the company owed it to the bank to make investments which earned them interest instead of letting moneys lie idle.

7.  It could not be said that the funds of the bank which were not lent to borrowers but were laid out in the form of deposits in another bank to add to the profit instead of lying idle necessarily ceased to be a part of the stock-in-trade of the bank, or that the interest arising there from did not form part of its business profits. Under the bye-laws one of the objects of the appellant bank was to carry on the general business of banking and therefore, subject to the Co-operative Societies Act, it had to carry on its business in the manner that ordinary banks do.

8.  The High Court was in error in treating interest derived from the deposits as not arising from the business of the bank and, therefore, not falling within the income exempted under the notification. The appeal must, therefore, be allowed and the judgment and order of the High Court be set aside.