Interest on Government Securities classified as income under the interest head, not cooperative business profits, for tax exemption scope.
Whether interest or dividends from investments in Government promissory notes or securities constitute "profits of any Co-operative Society" for a historical exemption notification was resolved by treating the income under the statutory heads of income: interest on securities versus business profits. The court applied the principle that investments of surplus or idle funds in Government securities, authorised by bye laws, are not integral to the bank's business and prior bench authority supports assessment under the specific head for interest on securities. Outcome: such interest or dividends are not "profits of any Co operative Society" for the notification and are taxable as interest on securities.
Issues: Whether interest or dividends derived by a co-operative bank from investments in Government promissory notes or securities constitute "profits of any Co-operative Society" within the meaning of the Government of India notification dated 25th August 1925 and are therefore exempt from income tax.
Analysis: The society's bye laws include power to purchase and sell Government promissory notes, and the society has invested surplus funds in Government securities from time to time. The heads of income are separately classified under the Income tax law, with "interest on securities" falling under the specific head for interest on securities and business profits falling under the separate head for business. Longstanding practice and earlier Full Bench authority dealing with identical factual situations treated interest on Government securities as assessable under the head dealing with interest on securities rather than as business profits. The investments in Government securities were held to be the utilisation of idle or liquid funds and not an activity integral to the carrying on of the bank's business; no sufficient factual basis was shown to treat such interest as profits arising from the bank's business proper.
Conclusion: Answer: No. Interest or dividends derived from investments in Government promissory notes or securities do not constitute "profits of any Co-operative Society" under the notification dated 25th August 1925 and are assessable as interest on securities rather than exempt business profits.
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