Commercial apportionment of Government securities income governed taxable allocation for a co-operative society

Income from Government securities held by a co-operative society whose business income was exempt had to be segregated between business and non-business components. In the absence of any operative statutory rule or departmental direction, apportionment was required on commercial accounting principles. The Explanation to section 8 of the Indian Income-tax Act, 1922 applied only to banking companies and could not govern the society. The correct basis was the proportion that capital employed for the business bore to total working capital, not the artificial allocation method in the Explanation. On that basis, only the apportioned amount was taxable, and the assessee's appeal succeeded.

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Issues: Whether the income of a co-operative society from Government securities, when the society's business income was exempt, had to be apportioned on a commercial basis and, if so, what portion was taxable.

Analysis: The relevant exemption for co-operative societies under section 14(3) of the Indian Income-tax Act, 1922 excluded profits and gains of business, but the society's receipts from Government securities required segregation between business and non-business components. The departmental instructions earlier used for apportionment had been withdrawn, and the Explanation to section 8 of the Act applied only to banking companies, not to the assessee society. In the absence of any statutory rule or operative departmental direction, the Court held that the apportionment had to be made consistently with commercial accounting. The proper basis was the proportion which the capital employed for the business bore to the total working capital, and not the artificial allocation mechanism in the Explanation to section 8.

Conclusion: The taxable income from Government securities was confined to Rs. 13,578, and the assessee's appeal succeeded.

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