Taxability of surplus fund deposit interest: income from fixed deposits was treated as other sources, not exempt co-operative business profit.

Interest earned by a co-operative bank on short-term fixed deposits of surplus or fluid funds was treated as income from investment of idle assets, not as profit arising from its mutual co-operative banking business. That income therefore fell under the head of "other sources" under the Income-tax Act, 1922, and did not qualify for exemption under the relevant Central Board of Revenue notifications, which covered only profits from the society's mutual co-operative business. The result was that such deposit interest remained taxable and outside the claimed exemption.

---

---

Issues: Whether interest earned on short-term fixed deposits made from surplus or fluid assets of a co-operative bank was income from "other sources" under the Income-tax Act, 1922, and whether such interest was exempt under the relevant Central Board of Revenue notifications.

Analysis: The exemption covered profits of a co-operative society arising from its mutual co-operative business, but not income earned from transactions with third parties or from investment of surplus funds. Interest from fixed deposits was treated as income arising from the investment of fluid assets and not as profits generated in the ordinary course of the assessee's co-operative banking business. Such income therefore fell within the head "other sources" under section 12 of the Income-tax Act, 1922, and did not qualify for exemption under the notifications.

Conclusion: The interest on fixed deposits was taxable as income from "other sources" and was not exempt under the Central Board of Revenue notifications, and the finding was against the assessee and in favour of the Revenue.

Final Conclusion: The reference was answered against the assessee, affirming that income earned by investing surplus or fluid funds outside the mutual co-operative business does not enjoy the claimed exemption.

Ratio Decidendi: Income derived from the investment of surplus funds of a co-operative society in deposits or other external transactions is not income from its mutual co-operative business and is not protected by an exemption meant only for profits arising from that business.

---