Capital investment versus trading stock determines tax exemption for co-operative bank profits on Government securities.

Profits from purchase and sale of Government securities by a co-operative bank were treated as exempt under the exemption notification because the word "investments" in the exclusion was read in its commercial and tax sense as capital investment. The HC distinguished an investor from a dealer in securities and held that profits arising from trading stock remain business income, not income from investment in securities. As the assessee held the securities as part of its stock-in-trade in the course of banking business, the exclusion for investments in securities under the explanation did not apply. The referred question was answered in the assessee's favour.

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Issues: Whether the profit earned by a co-operative bank on purchase and sale of Government securities was exempt from tax under the exemption notification read with section 60 of the Indian Income-tax Act, 1922.

Analysis: The exemption notification granted relief to the profits of co-operative societies registered under the Bombay Co-operative Societies Act, 1925, but its explanation excluded income, profits or gains from investments in securities of the nature referred to in section 8 of the Indian Income-tax Act, 1922. The decisive question was whether the expression "investments in securities" covered only securities held as capital investments or also securities forming part of the society's stock-in-trade. The Court held that the word "investment" in the notification was used in the commercial and tax sense of a capital investment, not in the sense of trading assets. A distinction had to be drawn between an investor in securities and a dealer in securities, because profits from trading stock are business income, whereas profits from capital investment are not treated in the same way. Since the assessee, carrying on banking business, held the securities as part of its stock-in-trade, the resulting profit did not fall within the exclusion in the explanation.

Conclusion: The profit on purchase and sale of Government securities was exempt from tax and the answer to the referred question was in the affirmative in favour of the assessee.

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