ADDITIONAL COMMISSIONER OF INCOME TAX Vs. AHMEDABAD DISTRICT CO OPERATIVE BANK LIMITED

JUDGEMENT

(1.) THE assessee is a co -operative bank carrying on general banking business. For the assessment years 1966 -67 to 1968 -69, the Income -tax Officer while computing chargeable income allowed proportionate interest on investment, viz., Government securities and municipal debentures in accordance with the Board's instructions contained in Circular letter F. No. (108) -62/TPL dated November 3, 1962. According to the said circular, it was enjoined that a fraction of the amount of interest paid by the co -operative bank on total capital borrowed by (or deposited with) it, the fraction being proportional to the total capital invested in securities in relation to the total working capital, should be allowed to be deducted on account of interest on money borrowed for purposes of investment in securities. The Additional Commissioner of Income -tax was of the opinion that the orders of the Income -tax Officer were prejudicial to the revenue as they where not according to the provisions contained in section 20 of the Income -tax Act, 1961, and he, therefore, issued a notice to the assessee for all the three years under consideration to show cause why action should not be taken under section 263 of the Income -tax Act, 1961. The assessee filed its written explanation before the Additional Commissioner, contending, inter alia, that since securities and debentures formed part of the stock -in -trade, the income from interest on such securities is part of the business income of the co -operative society and, therefore, exempt under section 81(1) of the Income -tax Act, 1961, which section is applicable for the first two years under consideration. The learned Additional Commissioner, however, rejected the contention of the assessee on the ground that the Government securities and municipal debentures were held as part of the investment of the co -operative society and were not in the nature of stock -in -trade. For purposes of reaching this conclusion, the Additional Commissioner relied on the fact that the investment figures stood at more or less identical figures and were in the range from Rs. 37 to 38 lakhs for all these three years. The Additional Commissioner also did not think fit to uphold the orders of the Income -tax Officer as, in his opinion, the notification relied on by the Income -tax Officer was under the Act of 1922. In that view of the matter, the Additional Commissioner held that in accordance with section 20(1)(ii) deduction on account of interest on borrowed money is admissible on an amount which bears to the amount of total interest payable on all moneys borrowed by the bank, the same proportion as the gross receipts from interest on securities bears to the gross receipts from all the circuses which are included in the profit and loss account. He, therefore, varied the orders of the Income -tax Officer and held that only the following deductions were admissible : Assessment year Admissible deductions Rs. 1966 -67 1,13,783. 1967 -68 1,49,405. 1968 -69 1,75,188.

(2.) THE assessments were accordingly modified. The assessee being aggrieved by the order of the Additional Commissioner carried the matter in appeal before the Tribunal. The Tribunal after considering the facts in the case and reviewing the case law on the point, upheld the contention of the assessee -bank that the Government securities and municipal debentures in question were not as and by way of investment of the assessee -bank but formed part of the stock -in -trade or were in the nature of circulating capital and, therefore, the assessee -bank was entitled to exemption of interest income by virtue of section 81 or section 80P of the Income -tax Act, 1961. The Tribunal also upheld the orders of the Income -tax Officer on the ground that the assessee -bank was entitled to deduction according to the aforesaid circular of the Government so far as the assessment year 1966 -67 was concerned and for the assessment year 1967 -68, the assessee -bank was entitled to deduction as per the instructions contained in a subsequent circular dated November 9, 1967. In the view of the matter, the Tribunal, therefore, set aside the order of the Additional Commissioner and restored the orders of the Income -tax Officer. At the instance of the Additional Commissioner, the Tribunal has, therefore, referred the following three question to us :

(3.) THE Additional Commissioner also noted the fact that no evidence was adduced by the assessee -bank to show that the securities under reference were held by the assessee as stock -in -trade.