DESAI, J. - (1.) THE assessee in this case is a co -operative society registered under the Bombay Co -operative Societies Act, 1925. It carries on the business of banking and in the course of its business it holds Government securities as its stock -in -trade. It also derives income from interest on securities, property and other sources. During the asst. yrs. 1953 -54 and 1954 -55, for which the corresponding accounting years were the years ending 30th June, 1952, and 30th June, 1953, respectively, the assessee's income included interest on Government securities amounting to Rs. 9,32,657 in the asst. year 1953 -54 and Rs. 6,26,610 for the asst. year 1954 -55. The assessee claimed that those amounts were parts of its profits, which were exempted from tax under the notification issued under S. 60 of the Indian IT Act by the Central Government on the 25th of August, 1925. The claim of the assessee for exemption was disallowed by the Departmental authorities on the ground that the said amounts were not profits, which were exempted under cl. (2) of the said notification, but, on the other hand, they fell under item No. 1 of the Explanation to the said clause, and were excluded from the exemption. In the appeal before the Tribunal, the Tribunal allowed the appeal of the assessee holding in its favour that the said amounts were exempted from tax under cl. (2) of the notification and the exemption was not excluded under item No. 1 of the Explanation to the said clause. Thereafter at the instance of the Department the Tribunal has drawn up a statement of the case and referred the following question to this Court: "Whether, on the facts and circumstances of the case, the income from interest on Government securities held as stock -in - trade by the assessee for the asst. yrs. 1953 -54 and 1954 -55 is exempt from tax under the Explanation to the Government Notification F. D. (C. R.) Notification R. Dis. No. 291 -I.T./25 dated 25th August, 1925, as amended, under S. 60 of the Indian IT Act?"
(2.) SEC . 60 of the Indian IT Act empowers the Central Government, by notification in the official gazette, to make an exemption, reduction in rate or other modification, in respect of income -tax in favour of any class of income, or in regard to the whole or any part of the income of any class of persons. The power given by this section has been exercised by the Central Government by issuing certain notifications and the one with which we are concerned in the present case is as follows: The following classes of income shall be exempt from the tax payable under the said Act, but shall be taken into account in determining the total income of an assessee for the purposes of the said Act: (1) The interest on Government securities purchased through the Post Office, and held in the custody of the Accountant -General, Posts and Telegraphs, provided that the exemption shall apply only to interest on securities so held on account of any one assessee up to a face value of Rs. 22,500 (Finance Department Notification No. 878 -F, dated the 21st March, 1922). (This shall cease to have effect in respect of interest paid after the 31st March, 1939, vide Government of India, Finance Department (Central Revenues) Notification No. 6 -Income -tax, dated 18th March, 1939). (2) The profits of any co -operative society other than the Sanikatta Salt -Owners' Society in the Bombay Presidency for the time being registered under the Co -operative Societies Act, 1912 (II of 1912), the Bombay Co -operative Societies Act, 1925 (Bombay Act VII of 1925 ) or the Madras Co - operative Societies Act, 1932 (Madras Act VI of 1932), or the dividends or other payments received by the members of any such society out of such profits."
(3.) EXPLANATION . -For this purpose the profits of a co - operative society shall not be deemed to include any income, profits or gains from -(1) Investments in (a) securities of the nature referred to in S. 8 of the Indian IT Act, or (b) property of the nature referred to in S. 9 of that Act, (2) Dividends, or (3) The 'other sources' referred to in S. 12 of the IT Act." It is the assessee's contention that all income, profits and gains of a co - operative society, such as is mentioned in cl. (2), is exempted from tax except such of it as is included in the 3 items of the Explanation. The assessee being admittedly a dealer in Government securities, the interest on securities is a part of its profits from its activity of business, and qualifies for exemption under cl. (2) of the notification. It is not excluded from the said exemption under item No. 1 of the Explanation because that item is only restricted to the exclusion from exemption of interest on securities, which are held by a co - operative society as investments and not as stock -in -trade. The assessee, therefore, is entitled to the exemption as claimed by it.;