B.K. Mehta, J.
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 :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the securities held by the assessee were part of its stock-in-trade or circulating capital
2. Whether, on the facts and in the circumstances of the case, the interest on the securities is exempt from tax by virtue of section 81 or section 80P of the Income-tax Act, 1961
3. Whether, on the facts and in the circumstances of the case, the instructions contained in the Board's circular dated November 3, 1962, are applicable ?'
3. At the time of hearing of this reference, Mr. K. H. Kaji, the learned advocate, appearing on behalf of the revenue, urged that, if the answer to question No. 1 is given against the revenue, answer to question No. 2 would follow the result and in that case answer to question No. 3 need not be given. On behalf of the revenue is was urged that the Additional Commissioner considered the relevant facts for purposes of reaching the conclusion that the Government securities and municipal debentures held by the assessee-bank were more or less in the nature of investment. In paragraph 1 of the order of the Additional Commissioner, he observed as under :
'As a matter of fact, a perusal of figures of investment in Government securities for the above assessment years and the preceding year show that this investment remained more or less stationary. For the years 1966-67, 1967-68 and 1968-69, the figures of investment under this had remained identical at Rs. 38,34,811. In the year 1965-66, this investment was shown at Rs. 37,67,936. These facts show that there are hardly any dealings of purchase and sale of Government securities by the society. Simply the fact that the society has to invest part of its fund in a particular manner does not necessarily prove that such investment is in the nature of stock-in-trade. On the other hand, the futures quoted above clearly show that the Government securities were held as part of thee investment of the society.'
4. 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.
5. It was, therefore, urged by Mr. Kaji on behalf of the revenue that in all the case where co-operative banks invest their moneys in Government securities or municipal debentures, it cannot be inferred as a matter of course that the banks have done so for purposes of maintaining liquid capital to meet with the demands of the customers of those banks. According to Mr. Kaji, the very fact that the value of the Government securities and municipal debentures in the present case remained almost static for all these assessment years, clearly indicated that they were, for all intents and purposes, investment of the bank rather than part of their stock-in-trade. We are not inclined to accept this broad submission of Mr. Kaji in view of the decision of the Supreme Court in Bihar State Co-operative Bank Ltd. v. Commissioner of Income-tax, where the court was concerned in an appeal by the Bihar State Co-operative Bank which had as one of its objects the carrying on of general bank in business not contrary to the provisions of the Co- operative Societies Act. The said bank received interest on short-term deposits which it had made with the Imperial Bank of India.
6. The bank in that case showed the interest as income from other sources in its return and the Income-tax Officer assessed it to income-tax as such under section 12 of the Act. The bank contended that the interest was exempt form income-tax under the notifications of the Central Board of Revenue No. 35 dated October 20, 1934, and No. 33 dated August 18, 1945. The Appellate Tribunal held that the interest was rightly treated as income from other sources as it did not form part of the bank's business profits and, therefore, was not exempt form income-tax. On reference, the Patna High Court held that the only income derived from the business of the co-operative society as such fell within the exemption and that the exemption was not available in regard to income derived from investment of fluid assets with third parties. Reversing this decision, the Supreme Court held that since the appellant was a bank having as one of its objects to carry on the general banking business which consists of dealing in money and giving credit, and was not rusticated only to receiving deposits and lending money to its members or other societies, it became a normal mode of carrying on banking business for the said bank to invest moneys in such manner that they are readily available. The moneys laid out in the form of deposits did not cease to be part of the appellant's circulating capital and, therefore, interest earned from the deposits arose from the business of the bank and was exempt from income-tax under the notifications, and nothing turned on the manner in which the appellant-bank chose to show this income in its return.
7. Mr. Justice Kapur, speaking for the court, observed in his judgment after referring to the decision of the Privy Council with approval in Punjab Co-operative Bank v. Commissioner of Income-tax and after distinguishing the cases cited on behalf of the revenue as under :
'In the instant case the co-operative society (the appellant) is a bank. One of its objects is to carry on the general business of banking. Like other banks money is its stock-in-trade or circulating capital and its normal business is to deal in money and credit. It cannot be said that the business of such a bank consists only in receiving deposits and lending money to its members or such other societies as are mentioned in the objects and that when it lays out its moneys so that they may be readily available to meet the demands of its depositors if and when they arise, it is not a legitimate made of carrying on of its banking business. The Privy Council in Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax, where the profits arose from the sale of Government securities, pointed out at page 645 that in ordinary case the business of a bank essentially consists of dealing with money and credit. Depositors put their money in the bank at a small rate of interest and in order to meet their demands if and when they arise the bank has always to keep sufficient cash or easily realisable securities. That is a normal step in the carrying on of the 'banking-business. In other words 'that is an act done in what is truly the carrying on or carrying out of a business.' It may be added that another mode of conducting the business of a bank is to place its funds in deposit with other banks and that also is to meet demands which may be made on it. It was, however, argued that in the instant case the moneys had been deposited with the Imperial Bank on long term deposits inasmuch as they were deposited for one year and were renewed from time to time also for a year; but as is shown by the accounts these deposits fell due at short intervals and would have been available to the appellant had any need arisen.'
8. Again, in Commissioner of Income-tax v. Bombay State Co-operative Bank Ltd., the court was concerned with the question of liability to pay tax on interest received by a co-operative bank from Government securities. The bank claimed that it laid out its surplus funds in the Government securities which were held by the bank as stock- in-trade and, therefore, entitled to exemption under Notification F.D.(C.R.) R. Dis. No. 291-I.T. 25, dated August 25, 1925, issued under section 60 of the Indian Income-tax Act, 1922. Mr. Justice Shah, as he then was, speaking for the court, referred to the decision in Bihar State Co-operative Bank v. Commissioner of Income-tax with approval, and observed as under :
'Under the Act income from different sources has, it is true, to be computed in the manner and according to the provisions of the Act applicable to the source from which the income is received. Income from property will be computed in the manner provided by section 9; income from securities of the Central Government or the State Government or debentures or other securities for money issued by or on behalf of a local authority or a company will be computed in the manner provided by section 8; income from business, profession or vocation will be computed in the manner provided by section 10; and income from sources other than those expressly specified will be computed in the manner provided by section 12. But the total income received from different sources, computed in the manner provided by the diverse provisions of the Act is, under the Notification, profit of the society and qualifies for exemption, unless the operation of the exemption is expressly excluded by the Explanation.
It was clearly intended by the Explanation that in giving the benefit of the exemption, income received by a co-operative society from investments in securities of the nature referred to in section 8 will not be excluded, but securities held as stock-in-trade of the business and not as investments will be admissible to the benefit of the exemption......'
9. On the facts of the case, therefore, the Supreme Court in that case held that Government securities held by the bank were not in the nature of investments but were in the nature of stock-in-trade.
10. In view of these two decisions, it cannot be gainsaid that if the assessee-bank here laid out its surplus funds in Government securities and municipal debentures as easily realisable securities for purposes of meeting with the needs and demands of the bank and its customers, such Government securities or municipal debentures were not investment, and they must be held in effect and substance to be part of their stock-in-trade. In its order, the Tribunal has observed in paragraph 3 as under while considering the first and foremost question, whether in the instant case, the assessee-bank held Government securities and municipal debentures as a part of stock-in-trade. :
'There is no dispute that Government securities. In other words, they can be converted into cash at any time the bank desires to do so. Normally, a banking organisation receives deposits from customers but the deposits are never kept in cash in the bank. They are invested in such securities which are easily realisable so that in the case of exigency they can be disposed of and the demands of thee depositors met. Therefore, it is the normal bank in practice to keep amounts as investments in easily realisable securities, similar to the position in the instant case before us.'
11. It is not doubt true, as contended by Mr. Kaji on behalf of the revenue, that for all the three assessment years the value of the Government securities and municipal debentures remained static and there were no appreciable instances of sale and purchase of the Government securities. Notwithstanding this fact, it cannot be urged that the Government securities and municipal debentures held by the assessee-bank were not a part of stock-in-trade. As has been said by the Supreme Court in Bihar State Co-operative Bank v. Commissioner of Income-tax, it is normally the business of a bank to lay out its idle and surplus funds in such securities and debentures as will be easily realisable for purposes of its main business of banking, namely, of giving credit to its customers. One of the most important factors which would help in distinguishing whether Government securities and debentures or fixed deposits held by a bank are in the nature of investments or are part of stock-in-trade is whether such securities or debentures are easily realisable or not. The laying out by a bank of its surplus and idle funds in easily realisable securities or debentures or deposits may be with twin objectives, viz., to in cash them readily in case of need and not to lose interest by keeping them idle. Merely because they are the securities or debentures payable at a certain specified period or that there was no variation in them would not convert them into investment pure and simple. In Bihar State Co- operative Bank v. Commissioner of Income-tax, even fixed term deposits, which can be encased as and when need arises, have been held by the Supreme Court to be part of stock-in-trade. In view of the finding of fact by the Tribunal that the instant Government securities and municipal debentures held by the assessee-bank were easily realisable securities, we are of the opinion that they cannot be treated as otherwise then as stock-in-trade. The Tribunal was, therefore, justified in holding that they were stock-in-trade in fact and not in the nature of investments. In that view of the matter, was answers the first question in the affirmative and in favour of the assessee-bank and against the revenue. The answer to the second question will necessarily follow the answer to the first question, and therefore, it is answered in the affirmative in favour of the assessee-bank and against the revenue. In view of the answer the questions Nos. 1 and 2, the answers to question No. 3 need not be given. The Commissioner shall pay the costs of this reference to the assessee.