TMI Blog1999 (4) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowed the exemption by holding that the dividend income earned on shares is not qualified under sec. 80P(2)(a)(i) as this exemption is only allowed to those assessees who does the business of banking. The assessee preferred first appeal before CIT(A). Detailed submissions were submitted and reliance was also placed on various decisions of various High Courts and decisions of various Benches of the Tribunal. The CIT(A) distinguished the present case with the facts of other cases. He found that in all cases on which the reliance is placed were found that the income of those assessees were attributable to the banking business. In all those cases income was earned as interest on Government securities whereas in the present case the income was earned as dividend on shares. He further observed that it is quite possible that sometime there may not be any income because of fluctuation in rate of shares and, therefore, there may be loss on account of shares. Therefore, he found that the facts are distinguishable and the claim of the assessee was dismissed on this account. 3. Now the assessee is in appeal here before us. 4. The lengthy arguments were put forth by both the parties, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely--- (a) in the case of a co-operative society engaged in (i) carrying on the business of banking or providing credit facilities to its members...." Provisions of law seems to be very clear which says the income earned by banking activity will be deducted while computing the total income of a co-operative society. In the present case the assessee is doing banking activity as well as the surplus funds are invested in purchasing shares of J.M.E.L. The shares were purchased by the assessee as per objects of the society. Sub-clause (e) of clause 4 of Bye-Laws of the Society says 'to raise funds or to take deposits from its members/employees of Jaipur Metals Electricals Limited(JMEL) for acquisition/purchase of shares of Jaipur Metals Electricals Ltd., its subsidiaries and associates on their behalf and to retain the acquired shares as trustees and deal in such shares etc. on behalf of the beneficiaries on reasonable price, and to invest generally the sums received from JMEL on behalf of its employees in shares, securities etc. of any nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd substance a business of banking. Under the provisions of the Banking Regulations Act or similar other laws, every banking company has to maintain a specified liquidity ratio or is statutorily required to invest in specified or approved securities or shares. This is done with a view to ensure the required liquidity on the part of the institution carrying on the business of banking. In such circumstances, that part of the activity of such institution cannot be held to be other than banking activity. The provisions of sub-clause (i) of clause (a) of sub-section (2) of section 80P would, therefore, clearly be applicable to the profits and gains attributable to the carrying on of such activity. Therefore, the dividend income of the assessee from the shares of Government Corporation was exempt under section 80P(2)(a)(i)". 5.6 In cases reported in Karnataka State Co-op. Apex Bank Ltd's case and Gujarat State Co-op. Land Development Bank Ltd.'s case, the findings are similar as in the case reported in Co-op. Cane Development Union Ltd, wherein it was held that "Interest earned on Government securities are attributable to assessee's banking activities and, therefore, exempt under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i). However, proportionate expenses pertaining to the said investments should be allowed as deduction and only the net interest should be subjected to tax'. 5.12 After considering the ratios of these valuable decisions, we find that the decisions are contradictory. Most decisions which are favouring assessee's plea are where the interest was earned on Government securities and in other cases which are not the case of the assessee are where the income earned from interest on advances to third parties or on balance amount which was against the members of the society and the interest was earned on that amount was considered that the income is not exempt under sec. 80P(2). In case of Kerala State Co-op. Marketing Federation Ltd v. CIT [1998] 231 ITR 814/98 Taxman 313, the Apex Court has decided the issue where the exemption under section 80P(2)(a)(iii) was involved. The Apex Court has observed that "Section 80P of the Income-tax Act, 196 1, is introduced with a view to encouraging and promoting the growth of the co-operative sector in the economic life of the country and in pursuance of the declared policy of the Government. The correct way of reading the different heads of exempti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention of the ld. D/R that the sanction of investment in any movable or immovable assets other than banking business activity do not alter the nature of income. Hence the dividend income on investment in shares of J.M.E.L. did not fall under the banking business activity of the assessee in any manner nor the same falls under credit facilities provided to its members. We further find weight in the contention of the ld. D/R that the assessee has borrowed funds from outside sources and paid more interest than earned. Therefore, there was no surplus funds with the assessee. The funds collected from the members were invested for purchase of shares and for banking activity the funds were borrowed from market and huge interest was paid. Therefore also assessee does not qualify for exemption under section 80P(2)(a)(i). 5.14 The banking activities are very clear. In our considered view they cannot be equated with the activity of share purchasing and earning of dividend out of the same as we have already stated that the dividend earned on share purchased by assessee are distinct from the income earned on as interest on Government securities and Government securities are encashable at any t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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