BROACH CO OPERATIVE BANK LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) -

(2.) THE assessee is a Co-operative Bank, and its working capital in the year of account was roughly Rs. 34,00,000 and the average deposits about Rs. 29,00,000. This Bank had invested in tax-free securities and taxable securities as large an amount as a sum approximately between Rs. 14,00,000 and Rs. 19,00,000. On the deposits that the Bank maintained it paid as interest in the year of account a sum of Rs. 61,788; and two questions arise for our determination in this reference. One is with regard to the true effect of the first proviso to Section 8 of the Income-tax Act to the extent that it is applicable to the facts of this case. Now section 8 deals with one of the heads which are chargeable to income-tax and that head is "Interest on securities", and the section provides that the tax shall be payable by an assessee on interest on securities, in respect of the interest receivable by him on any security of the Central of Provincial Government. THE rest of the section is not material. THEn we come to the first proviso and to the extent that it is material, it provides that no income-tax shall be payable in respect of any interest payable on money borrowed for the purpose of investment in the securities by the assessee. Now, I might straightaway pint out this this part of the proviso with which I am dealing is extremely clumsily drafted. THE proviso suggested as if income-tax was payable on an outgoing but the true meaning - and that is not disputed - of this part of the proviso is that it contemplates a permissible deduction in the case of interest received under the head of securities and the permissible deduction is that if an assessee has borrowed moneys in order to interest them in securities and if he has to pay interest of those borrowings, then the interest can be deducted by the assessee from the tax that he has to pay under the head "Interest on securities." THEn there are two more provisos to this section. THE second proviso deals with securities of the Central Government which are tax-free, and enacts that no income-tax shall be payable on the interest receivable on such tax-free securities of the Central Government; and the third proviso deals with the securities of the Provincial Government; and that also enacts that no income-tax shall be payable by the assessee in respect of the tax-free Provincial Government securities, but income-tax shall be payable by the Provincial Government itself.

(3.) THE second question which arises is what is the principle to be adopted in deciding what funds the Bank utilised in the investment of securities As I have stated earlier, the Bank has a large working capital and it has also got large deposits. It is only if the Bank utilised these deposits in investing them in taxable securities that it would get the benefit of the first proviso to Section 8; but if the Bank used capital in investing in securities, then the Bank could not claim the benefit of the first proviso. Now, as far as the books of account of the Bank are concerned, they throw no light on this point. THE Bank had treated both the capital and its deposits as a common fund and it is out of this common fund that investments have been made in taxable and tax-free securities. Sir Jamshedji contend that we must draw a presumption that the Bank would rather invest moneys out of its deposits than out of its capital; and what is urged by Sir Jamshedji is that the Banks primary business is to lend moneys and therefore for its primary business it would utilise its capital, and as far as its deposits are concerned, it would invest them both to earn interest and as security in case the deposits suddenly make a demand against the Bank for the return of the deposits. I am afraid it is not possible to say that any such presumption can arise in the case of a co-operative bank. Sir Jamshedji has not drawn our attention to any banking practice which makes it incumbent on bank to use its capital for a particular purpose and to use its deposits for a different purpose. As far as the business of the bank is concerned, not only would the bank utilise its capital but also the moneys which it receives from its depositors for the purpose of lending them to farmers and others. IT is only the surplus moneys which would be invested in Government securities is thesurplus which is constituted only out of the deposits and not out of capital. THE Tribunal has therefore applied a rule which it calls a rule of justice, enquiry and good conscience by suggesting that it should be deemed that the moneys were invested by the bank proportionately from its deposits and its capital. For want of any better rule or a more equitable rule we see no reason why we should differ from the view taken by the Tribunal.