G.P. Singh, C.J.
1. This is a reference made by the Income-tax Appellate Tribunal, at the instance of the assessee, referring for our answer the following question of law :
' Whether, on the facts and in the circumstances of the case, it could be said that the Appellate Tribunal was justified in holding that the Government securities earmarked to reserve fund and to provident fund did not constitute the bank's stock-in-trade or business assets and the interest therefrom was exigible to tax ?'
2. The relevant assessment year is 1963-64. The corresponding previous year ended on 30th June, 1962. The assessee is the M. P. State Co-operative Bank Ltd., Jabalpur, which is the apex body of the district co-operative banks in the State of Madhya Pradesh. The bank in the present shape came to be formed under the M. P. Co-operative Societies (Amalgamation) Act, 1957. The bank is registered under the Co-operative Societies Act, 1912. At the relevant time, the bank was governed by the M. P. Co-operative Societies Act, 1960. under Section 43(2) of this Act, a society is required to transfer, unless exempted by a general or special order of the Registrar, at least twenty-five per cent, of its profits to its reserve fund. Section 44 of the Act deals with investment of funds. Sub-section (2) of this section provides that the reserve fund of a society shall be invested or utilised only in such manner and on such terms and conditions as may be laid down by the Registrar in this behalf. Section 46 deals with the constitution of the employees' provident fund. The section enacts that a society may establish a contributory provident fund for the benefit of its employees to which shall be credited all contributions made by the employees and the society in accordance with the bye-laws of the society. The section further enacts that a contributory provident fund established by a society shall not be used in the business of the society and shall not form part of the assets of the society. The Government of Madhya Pradesh issued a circular, dated 7th October, 1960. The circular states that 'the reserve fund of the apex bank shall be fully invested outside its business in Government securities '. The circular also states that no part of the reserve fund should be utilised as working capital. The circular further provides that ' no part of the reserve fund deposits shall be drawn without the previous sanction of the Registrar'. It also provides that the approval of the Registrar can be given ' when the amount is either required to meet losses, or when the society is to be wound up '.
3. The total break-up of the securities held by the bank during the relevant period in terms of face value as evidenced from the balance-sheet is as under :
(i) Securities pledgedwith the State Bank of India and shown under ' investment '
(ii) Securities pledgedwith the Reserve Bank of India and shown under ' investment '
(iii) Other unpledged securities shown under 'investment'
(iv) Securitiesearmarked to reserve fund
(v) Securities earmarkedto provident fund
4. Section 81(i) of the I. T. Act, 1961, as it stood on the relevant date, reads as follows I
'81. Income of co-operative societies.--Income-tax shall not be payable by a co-operative society-
(i) in respect of the profits and gains of business carried on by it, if it is--(a) a society engaged in carrying on the business of banking or providing credit facilities to its members;......
Provided that, in the case of a co-operative society which is also engaged in activities other than those mentioned in this clause, nothing contained herein shall apply to that part of its profits, and gains as is attributable to such activities and as exceeds fifteen thousand rupees.'
5. The Tribunal came to the conclusion that the first three items of investments in securities constituted the assessee's stock-in-trade and that the income from these secutities was income from the assessee's business of -banking. In respect of securities earmarked for reserve fund and provident fund, which constitute the remaining two items of investments, the Tribunal came to the conclusion that these investments did not form part of the assessee's stock-in-trade or circulating capital and, therefore, the interest from these investments did not amount to income from the business of banking.
6. A look at Section 81(i)(a) of the I. T. Act will show that all income of a society carrying on banking business is not exempt from taxation. It is only that income from banking business which is exempt and not the income arising from any other activity of the society. The question before us is, whether the interest income from the Government securities earmarked for reserve fund and provident fund was income of the assessce from the business of banking and was exempt under Section 81(i)(a) of the Act.
7. In the case of a bank, the business normally consists, in its essence, of dealing with money and credit. Depositors place their money with the bank and receive a small rate of interest. Borrowers from the bank receive loans of a large part of the deposits at somewhat higher rates of interest. The banker has always to keep enough cash or easily realisable securities to meet any probable demand by the depositors. Investments in easily realisable securities to meet withdrawals by depositors is a normal step in carrying on banking business. [Punjab Co-operative Bank Ltd. v. CIT 8 ITR 635 .]. In Bihar State Co-operative Bank Ltd. v. C1T : 39ITR114(SC) the Supreme Court observed (p. 122):
'......it is a normal mode of carrying on banking business to invest moneys in a manner that they are readily available and that is just as much a part of the mode of conducting a bank's business as receiving deposits or lending moneys or discounting hundies or issuing demand drafts. That is how the circulating capital is employed and that is the normal course of business of a bank. The moneys laid out, in the form of deposits ......would not cease to be a part of the circulating capital......nor wouldthey cease to form part of its banking business.'
8. It is not disputed that if circulating capital or stock-in-trade of a co-operative bank is invested in securities, interest earned on the securities would be a part of the income from banking business and would be exempt under Section 81(i)(a) of the Act. The point, however, is whether the investment in securities of the reserve fund can be said to be investment of circulating capital or the stock-in-trade of the bank. We have already noticed that as provided by Section 44(2) of the Co-operative Societies Act, the reserve fund can be utilised only as may be permitted by the Registrar in that behalf. We have also referred to the Government circular, the binding nature of which was not disputed before us, that the reserve fund cannot be utilised as a working capital and that it can be withdrawn only on the approval of the Registrar which can be given only when the amount is either required to meet losses or when the society is to be wound up. The investment of the reserve fund in securities is obviously not to meet withdrawals by depositors or other transactions as is the case with the circulating capital or stock-in-trade. Having regard to the aforesaid features, the reserve fund cannot be taken to be circulating capital or stock-in-trade of the assessee.
9. The entire capital of a bank cannot always be said to be employed in banking business. Income arising from investment of that part of the capital which is not needed for banking business cannot be said to be income arising from banking business. In Bihar State Co-operative Bank Ltd.'s case : 39ITR114(SC) , the bye-law provided that the bank would invest surplus funds when not required for the business of the bank. Referring to this bye-law, the Supreme Court observed that it had not been shown that the moneys which were in deposit with other banks were ' surplus within that bye-law so as to take it out of banking business '. It follows from this observation that had it been shown that the moneys were surplus, it would have been held that the income therefrom was not a part of the income from banking business. Similarly, in Madras Co-operative Central Land Mortgage Bank Ltd. v. CIT : 67ITR89(SC) , the co-operative society concerned had made investments in Government securities for trading purposes and also for non-trading purposes. It was held that in such a case the proportion of income from securities exempt from taxation will be that proportion which the capital of the society used for the purpose of the business bears to the total working capital. In Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd. v. CIT : 100ITR472(AP) , it was held by the Andhra Pradesh High Court that it was for the asses-see to establish that the income from investment in securities sought to be exempted was earned in carrying on the business of banking. A Division Bench of the Gauhati High Court in Assam Co-operative Apex Bank Ltd. v. CIT observed (p. 92) :
' All investments may not necessarily be part of the circulating capital of a bank. A bank may conceivably have certain securities which are its circulating capital and some which are not. For example, where the funds of a bank are lying idle and are not being utilised by it for its banking purposes as was the case in CIT v. Canara Bank Ltd. : 63ITR328(SC) , such funds will not be part of its trading assets. In other words, any investment by a banking concern would not necessarily represent its trading assets. There may well be cases where certain funds are idle or not utilised by the bank, in which case such funds will not be trading assets.'
10. We respectfully agree with these observations.
11. The learned counsel for the assessee referred to us U. P. Co-operative Bank Ltd. v. CIT : 61ITR563(All) , CIT v. Orissa Co-operative Housing Corporation Ltd. : 104ITR157(Orissa) , Malabar Co-operative Central Bank Ltd. v. CIT : 101ITR87(Ker) and AW. CIT v. Ahmedabad District Co-operative Bank Ltd. : 101ITR733(Guj) . In these cases, it was held that investment in securities was of circulatory capital or stock-in-trade of the society concerned and that income therefrom was income from banking business. These cases, however, do not hold that all income from investment in securities made by a society would be regarded as income from banking business. As earlier pointed out by us, the income would form part of banking business only when the investment in securities relates to circulating capital or stock-in-trade. The reserve fund in the instant case is not a part of the circulating capital of the assessee. It can be utilised only when permitted by the Registrar in case of loss or winding-up. Income from investment of reserve capital in securities is thus not a part of the income from banking business and does not qualify for exemption.
12. As regards investment of provident fund, it is expressly provided in Section 46 of the Co-operative Societies Act that provident fund cannot be used in the business of the society. It was contended before us that the provident fund does not belong to the assessee and, therefore, interest income from investment of provident fund in securities is not income of the assessee. The Tribunal negatived this contention by pointing out that interest from investment of provident fund was included in the gross interest shown in the profit and loss account of the assessee. The point that interest from investment of provident fund was not income of the assessee was not raised before the ITO or the AAC. The Tribunal held that as interest earned from investment of provident fund was included in the gross interest, it had to be held that the income was income of the assessee. The question referred to us does not cover the question whether interest from investment of provident fund is the assessee's income or not. We are, therefore, not entitled to go into this question. We have to proceed on the assumption that this income was income of the assessee. This income, however, cannot be a part of the income from banking business as the provident fund cannot be utilised in the business of banking. The income from interest of investment of provident fund also, therefore, does not qualify for exemption under Section 81(i)(a) of the Act.
13. For the reasons given above, we answer the question referred to us in the affirmative. There shall be no order as to costs.