BIHAR STATE CO-OPERATIVE BANK LTD. vs COMMISSIONER OF Income Tax, BIHAR and ORISSA.

In this case the assessee is a co-operative society registered under the Bihar and Orissa Co-operative Societies Act. During the accounting year the assessee carried on business in credit agricol, text books, salt and cloth, both with its members as well as with non-members. The assessee claimed exemption of the income earned from the business under the Government of India Notification No. R. Dis. 291-I. T./25, dated the 25th August, 1925, issued u/s 60 of the Income Tax Act. The relevant portion of the notification which exempts the income of the co-operative societies from tax states as follows :

"The profits of any co-operative society other than the Sanikatta Salt-owners Society in the Bombay Presidency for the time begin registered under the Co-operative Societies Act, 1912 (II of 1912)....... or the dividends or other payments received by the members of any such society out of such profits".

In an explanation to the main clause it is stated that "the profits of a co-operative society shall not be deemed to include any income, profits or gains from.... (3) and other sources referred to in section 12 of the Income Tax Act". During the assessment year the Income Tax Officer bifurcated the profits of the society as between members and non-members on the basis of proportionate turnover. The Income Tax Officer did not accept the full claim of the assessee for exemption but only granted exemption to the profits earned by the assessee from dealings with the members only. In other words, the Income Tax Officer did not grant exemption with regard to dealings of the petitioner with non-members. The view of the Income Tax Officer has been affirmed by the Appellate Assistant Commissioner and also by the Income Tax Appellate Tribunal in appeal. u/s 66(1) of the Income Tax Act the Income Tax Appellate Tribunal has stated a case and referred to the High Court the following question of law :

"Whether, on the facts and in the circumstances of the case, the income derived by the Bihar State Co-operative bank Ltd. from the dealing with non-members is exempt from tax under the Government of India Notification No. R. Dis. 291 - I. T./25, dated the 25th August, 1925 ?"

It was submitted by learned counsel on behalf of the assessee that the present case is governed by the decision of the Supreme Court in Hoshiarpur Central Co-operative bank Ltd. v. Commissioner of Income Tax. And in view of that decision the question of law referred by the Income Tax Appellate Tribunal in this case must be answered in favour of the assessee. In our opinion the argument addressed on behalf of the assessee is well founded and must be accepted as correct. The question of law which arises for decision in this case is covered by the decision of the Supreme Court referred to above where it was held by the Supreme Court that a co-operative bank which dealt in sugar and standard cloth with special permission of the authorities and earned the income from such activities was entitled to exemption from tax in respect of such income under item No. 2 of the Notification No. R. Dis. 291 - I. T./25, dated the 25th August, 1925. It was held by Hidayatullah J. in that case that the expression "the profits of any co-operative society" in the notification was wide enough in its scope to cover profits from any business and was not restricted to profits from business with members. Once a co-operative society is allowed by the appropriate authority to extend its business operations to trading with persons other than its members and there is such an extension of the business of the society, the general words of the notification include the profits from the business with non-members within the exemption clause. In view of the principle laid down by the Supreme Court in this case, we hold that in the facts and circumstances of this case the income derived by the Bihar State Co-operative Bank Limited from the dealings with non-members is exempt from tax under the Government of India Notification No. R. Dis 291 -.I. T./25, dated the 25th August, 1925. We accordingly answer the question of law referred by the Income Tax Appellate Tribunal in favour of the assessee and against the Income Tax department. There will be no order as to costs with regard to this reference.

Order accordingly.