Hoshiarpur Central Co-Operative Bank Ltd vs Commissioner of Income Tax, Simla

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 238 of 1955

Decision Date: 2 August 1960

Coram: M. Hidayatullah, S.K. Das, J.C. Shah

In this case the Supreme Court of India delivered its judgment on 2 August 1960. The matter was titled Hoshiarpur Central Co‑Operative Bank Ltd. versus Commissioner of Income‑Tax, Simla. The judgment was authored by Justice M. Hidayatullah, and the bench also comprised Justices S. K. Das and J. C. Shah. The petitioner was Hoshiarpur Central Co‑Operative Bank Ltd., a cooperative bank, and the respondent was the Commissioner of Income‑Tax for the Simla jurisdiction. The citation for the decision is reported as 1960 AIR 1303. The legal issue concerned the applicability of a provision of the Income‑tax Act, 1921 (IX of 1921), specifically section 60, together with a notification issued under that section, to profits earned by a cooperative society in business dealings with persons who were not members of the society.

The headnote of the judgment explains that the Bank, being a cooperative society, carried on a business of trading in controlled commodities such as sugar, cloth and kerosene, and did so with the express approval of the Registrar of Co‑Operative Societies as evidenced by a letter dated 28 September 1954. The Bank claimed that the profits derived from this trading activity were exempt from income tax under the Government of India Notification F. D. (C. R.) Notification R. Dis. No. 291‑1. T/25 dated 25 August 1925, as subsequently amended, which was issued under section 60 of the Income‑tax Act. The notification provided that “the profits of any co‑operative society” were exempt from tax. The Revenue Department argued that the exemption applied only to profits earned by a cooperative society in the course of its pure cooperative business with its own members, within the limits of the Cooperative Societies Act, 1912 and the society’s own bylaws. The Court held that the wording of the notification was sufficiently wide to cover profits arising from transactions with non‑members as well. It observed that the appropriate Government could permit a cooperative society to extend its commercial activities to persons other than its members, and once such an extension took place the profits from those activities fell within the general language of the notification. The Court rejected the view that a presumed intention to limit the exemption was decisive. In reaching its decision, the Court distinguished earlier cases such as Madras Central Urban Bank Ltd. v. Commissioner of Income‑Tax (1929) I.L.R. 52 Mad. 640, The Madras Provincial Co‑operative Bank Ltd. v. Commissioner of Income‑tax (1933) I.L.R. 56 Mad. 837, and Commissioner of Income‑tax, Burma v. The Bengalee Urban Co‑operative Credit Society Ltd. (1933) I.L.R. 11 Ran. 521. The judgment was rendered in Civil Appeal No. 238 of 1955, which arose from an appeal against the Punjab High Court’s order dated 27 May 1953 in Civil Reference No. 3/1952. Counsel for the appellant were Deva Singh Bandhava and K. L. Mehta, while the Attorney‑General for India, M. C. Setalvad, together with K. N. Rajagopal Sastri and D. Gupta, appeared for the respondent.

The Income‑tax Officer had included in the Bank’s assessment the income that had arisen from the Bank’s trading activities in regulated commodities such as sugar, cloth and kerosene. The Bank was permitted to carry on these trades by virtue of a letter dated 28 September 1954 issued by the Registrar of Co‑operative Societies. The Bank asserted that the income should be exempt under a notification made pursuant to section 60 of the Income‑tax Act. The Officer rejected that claim. On appeal, the Appellate Assistant Commissioner set aside the Officer’s decision, and that reversal was again set aside by the Appellate Tribunal, Delhi Branch. The Tribunal, however, formulated a specific question and referred it to the High Court under section 66(1) of the Income‑tax Act, asking: when a co‑operative bank, with special permission from the authorities, deals in sugar and standard cloth and derives income from those dealings, does that income fall within the exemption provided by item 2 of Government of India Notification F. D. (C. R.) Notification R. Dis. No. 291‑1. T/25 dated 25 August 1925, as subsequently amended (referenced in the Income‑tax Manual, 10th Edition, Part II, pages 257‑258)? The High Court answered the question against the Bank but certified that the matter was suitable for appeal to this Court, leading to the present appeal.

All parties admitted that the profits were generated from trading certain commodities with the approval of the Registrar of Co‑operative Societies, and that there was no dispute about the amount or the manner in which those profits were earned. The core issue in this appeal was whether the exemption contained in the notification applied to the case. The notification declared that income included in total income but exempt from both income‑tax and super‑tax comprised, among other things, “the profits of any Co‑operative Society … registered under the Co‑operative Societies Acts” and the dividends or other payments made to the members of such a society out of those profits. The notification added an explanation stating that, for this purpose, the term “profits of a Co‑operative Society” would not include any income, profit or gain derived from (i) investments in securities referred to in section 8 of the Income‑tax Act or property referred to in section 9, (ii) dividends, or (iii) other sources referred to in section 12 of the Income‑tax Act.

The Income‑tax Officer concluded that the Bank’s profits were not the profits of a co‑operative venture but arose from trading with external parties, and therefore paragraph 2 of the notification did not apply. He further held that the income fell within the “other sources” mentioned in item (iii) of the explanation. This interpretation formed the basis of the Officer’s refusal to grant exemption.

In the present dispute, the Income‑tax Officer concluded that the earnings accrued by the bank did not constitute profits arising from a co‑operative undertaking, because they derived from transactions with parties external to the co‑operative. Accordingly, he held that paragraph 2 of the notification did not apply to those earnings. He further determined that such income fell within the category described as “other sources” in item (iii) of the Explanation to the notification. The Appellate Assistant Commissioner, however, disagreed with that view and held that the same earnings were indeed profits of a Co‑operative Society, that they therefore fell within paragraph 2, and consequently were exempt from income tax. Both the Tribunal and the High Court accepted the Income‑tax Officer’s reasoning with respect to paragraph 2, but the High Court abstained from expressing any view on whether the third component of the Explanation – the reference to “other sources” – was applicable in the facts of this case. When the matter came before this Court, the learned Attorney‑General appearing for the Department chose not to advance any argument concerning the Explanation, and therefore no further discussion on that point is required. It may nevertheless be noted that the term “other sources” alludes to the scheme of section 6 of the Indian Income‑tax Act, while profits generated from any kind of business activity are dealt with under section 10 of the same Act. The essential question, therefore, is whether paragraph 2 is limited strictly to profits earned by a Co‑operative Society from dealings with its own members, thereby excluding profits earned from commercial activities with outsiders. It is relevant that, prior to the amendment of the notification by the addition of the Explanation, several decisions had interpreted paragraph 2 as providing exemption only for profits arising from transactions with members and not for any other form of profit. The issue, then, is whether that earlier, narrowly‑fitted meaning can be ascribed to the broadly worded language employed in paragraph 2. This question is fundamentally one of statutory construction. In support of the Department’s position, the learned Attorney‑General presented two principal arguments. First, he highlighted the opening words of the second paragraph of the notification, namely “The profits of any Co‑operative Society”. He contended that these words were intended to refer solely to profits generated by a Co‑operative Society in the course of its pure co‑operative business, that is, business conducted exclusively with its members within the limits of the Co‑operative Societies Act, 1912 and the bylaws made thereunder. While it is true that a Co‑operative Society is principally established to conduct business with its members rather than with non‑members, the language of the notification, and particularly the words relied upon, are sufficiently wide to encompass any kind of business, whether conducted with members or with outsiders. It cannot be denied that the bank in question is a Co‑operative Society and that it is seeking the exemption on the basis of its status as such, further asserting that the exemption should apply to the profits earned from its business activities. For that reason, the Court had previously dismissed the attempt to categorize the earnings under “other sources” as defined in section 12 of the Income‑tax Act. If this interpretation is accepted as obvious, it follows that the phrase “the profits of any Co‑operative Society” is to be understood in a broad sense, capable of covering profits arising from any business venture undertaken by the Society.

The Court observed that the words “profits of any Co‑operative Society” were sufficiently wide to include profits arising from any kind of business activity. The Court noted that there was no evidence indicating that the term was intended to refer only to profits earned from business with the Society’s members. The appellant argued that a Co‑operative Society is principally established for conducting business with its members, and that both the Co‑operative Societies Act and the Bank’s bye‑laws reflected this character. It was submitted that the underlying intention of the Act and the bye‑laws should therefore limit the interpretation of the notification to profits derived solely from member transactions. To support this position, the appellant cited observations from The Madras Central Urban Bank Ltd. v. Commissioner of Income‑Tax (1), The Madras Provincial Co‑operative Bank Ltd. v. Commissioner of Income‑Tax (2), and Commissioner of Income‑Tax, Burma v. The Bengalee Urban (1), asserting that those decisions confined the exemption to profits from member business. The first two cited cases involved interest earned on government securities that societies were required to hold to keep forty percent of total liabilities readily available, and the courts had held that such interest did not arise from business with members. In the third case, the court explained that the exemption rested on the principle that a person cannot make a loss or profit out of himself, and consequently only profits generated from member business qualified for exemption. The Court held, however, that the legal position had been materially altered by the subsequent addition of an Explanation to the notification. The Explanation referred back to the classifications of income specified in section 6 of the Income‑Tax Act, where business profits formed a distinct head of income that was more exhaustively dealt with in section 10. It noted that other heads of income possessing separate characteristics were dealt with separately, while a residuary head comprising income from “other sources” covered innominate income. The Court emphasized that the Explanation did not amount to a blanket endorsement of the earlier decisions, because if the notification’s language had been unequivocally clear, the Explanation would have been unnecessary. According to the Court, the addition of the Explanation finally resolved any uncertainty concerning the scope of the term “profits”, confirming that it signified profits arising from business activities and not other types of income. The Court also observed that when the notification was originally issued and later amended, Parliament had not contemplated that Co‑operative Societies would be permitted to engage in the trade of scarce commodities for the purpose of equitable consumer distribution. Nevertheless, the Court remarked that it had always been within the power of the appropriate Government to allow a Co‑operative Society to extend its business to persons who were not members, subject to the conditions and restrictions laid down in section 31 of the Co‑operative Societies Act.

The Society was authorized to extend its business operations to trading with persons other than its members, subject to conditions and restrictions, as provided in section 31 of the Co‑operative Societies Act. The record demonstrates that the Society indeed carried out such an extension of its business in the present case. Once the business of a co‑operative society is extended in this manner, the general wording of the notification brings the profits arising from that business within the scope of the exemption. To deny that exemption would therefore require more than a merely alleged underlying intention to exclude the profits. Interpreting the notification by giving effect to a purported intention would reverse the well‑known canon of statutory construction. In the Court’s view, the profits in question were exempt under the notification, and the proper answer to the issue was affirmative. Accordingly, the appeal was allowed and costs were awarded both in these proceedings and in the earlier High Court suit. The order therefore permitted the appeal, with costs, and affirmed the decision of the High Court. The Court emphasized that the statutory provision did not limit the exemption to activities confined solely to members, and therefore trading with non‑members fell within the protected category. Consequently, no separate assessment of the profits could be justified on the basis of the alleged intention to exclude them.