1998 (8) TMI 129 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of additions representing income earned by the assessee from investment of reserve fund.
2. Non-entertainment of additional grounds of appeal by the assessee claiming deduction as business expenditure.
3. Delay in filing cross-objections by the assessee.
4. Validity of reassessment proceedings under section 148.
5. Taxability of interest income earned on securities earmarked against statutory reserve fund.
6. Claim of deduction of business expenditure by the assessee.

Issue-wise Detailed Analysis:

1. Deletion of Additions Representing Income Earned by the Assessee from Investment of Reserve Fund:
The revenue's appeals contested the CIT(Appeals) decision to delete additions of Rs. 1,83,508, Rs. 1,74,408, and Rs. 1,79,750 for assessment years 1989-90, 1990-91, and 1991-92, respectively. The CIT(Appeals) held that the security deposits made by the co-operative society in compliance with section 24 of the Banking Regulation Act, 1949, constituted stock-in-trade, and the interest received on such deposits was income arising from the business of banking, thus exempt under section 80P(2)(a)(i). The revenue argued that the CIT(Appeals) erred by not considering precedents such as Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT, CIT v. Jila Sahakari Kendriya Bank Maryadit, and CIT v. Rajasthan State Co-operative Bank, which held that interest on securities earmarked against reserve funds was not exempt under section 80P.

2. Non-entertainment of Additional Grounds of Appeal by the Assessee Claiming Deduction as Business Expenditure:
The assessee's cross-objections claimed that the CIT(Appeals) erred in not entertaining additional grounds of appeal for deductions of Rs. 12,58,066, Rs. 10,38,570, and Rs. 17,34,292 as business expenditure for the assessment years 1989-90, 1990-91, and 1991-92, respectively. The CIT(Appeals) did not adjudicate on these additional grounds as they necessitated investigation into facts, which was not permissible at the appellate stage.

3. Delay in Filing Cross-objections by the Assessee:
The Registry reported an 8-day delay in filing cross-objections. The assessee contended that the delay was due to postal transit beyond their control and provided postal certificates as evidence. The Tribunal condoned the delay, admitting the cross-objections.

4. Validity of Reassessment Proceedings under Section 148:
The assessee argued that the reassessment proceedings were invalid as they were based on a mere change of opinion without any new information. The Tribunal held that since the original returns were processed under section 143(1)(a) without considering the legal position on the taxability of interest on securities, the reopening did not amount to a change of opinion. The Tribunal cited A.L.A. Firm v. CIT, where reopening based on subsequent consideration of a jurisdictional High Court decision was deemed valid.

5. Taxability of Interest Income Earned on Securities Earmarked Against Statutory Reserve Fund:
The Tribunal noted that the assessee, a co-operative bank, invested in securities as mandated by section 24 of the Banking Regulation Act, 1949, to comply with statutory requirements. The Tribunal found that these investments were part of the assessee's stock-in-trade and necessary for carrying on the banking business. The Tribunal referred to the Supreme Court decision in CIT v. Bangalore District Co-operative Central Bank Ltd., which held that such interest income was attributable to the business of the assessee and exempt under section 80P(2)(a)(i).

6. Claim of Deduction of Business Expenditure by the Assessee:
The assessee's note in the returns claimed that if the interest income from securities was not exempt, then proportionate business expenditure should be allowed. The Tribunal found that the CIT(Appeals) was justified in not entertaining this additional ground as it required factual investigation. However, since the Tribunal upheld the exemption of interest income under section 80P, the issue of business expenditure became academic.

Conclusion:
The Tribunal dismissed the revenue's appeals and upheld the CIT(Appeals) decision to delete the additions. The Tribunal also dismissed the assessee's cross-objections, finding them academic in light of the decision on the revenue's appeals. The reassessment proceedings were deemed valid, and the interest income earned on statutory reserve fund investments was held to be exempt under section 80P(2)(a)(i).