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TMI Blog2011 (6) TMI 215X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bank Limited (the APCOB). 2. The APCOB is a cooperative society engaged in the business of banking. For the assessment year 1997-98 they filed return declaring Rs. 57,652 as income from the property and Rs. 83,60,46,867 as income from the business of banking. The assessee claimed deduction of business income under section 80P(2)(a)(i) of the Income-tax Act. The Assessing Officer, namely, the Deputy Commissioner of Income-tax took up the return for scrutiny and found that the assessee had Rs. 61,87,16,546 as statutory reserve invested in short term and long term deposits. During the assessment year the interest income from the deposits stood at Rs. 7,02,69,336. This was claimed as deduction being interest from the business of banking. Out of this, an amount of Rs. 6,95,66,643 was disallowed by the Assessing Officer on the ground that the assessee did not obtain prior approval in respect of investments against statutory reserves as required under section 46 of the Andhra Pradesh Cooperative Societies Act, 1964 (the Societies Act) and Rule 37(2) of the Andhra Pradesh Cooperative Societies Rules, 1964 (the Societies Rules). The Assessing Officer came to the conclusion that the inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directing the Assessing Officer to modify the assessment order accordingly. 4. APCOB's appeal being ITA No. 694/Hyd/2000 under section 253 of the Act before the ITAT, Hyderabad Bench "A" was heard along with the cross appeals filed by the Revenue. By common order dated 25-9-2001, the appeals filed by the assessees were allowed and the appeals filed by the revenue were dismissed. The learned Tribunal held that no distinction can be made of income earned from SLR securities and non-SLR securities with the income arising from investments made out of reserve fund under section 80P(2)(a)(i) of the Act. In coming to this conclusion, the learned Tribunal relied on the decision of the Supreme Court in CIT v. Karnataka State Cooperative Apex Bank [2001] 251 ITR 194/118 Taxman 321. 5. The Senior Counsel for the Income-tax, Mr. S.R. Ashok, would rely on Karnataka State Cooperative Apex Bank's case (supra), Mehsana District Central Cooperative Bank Ltd v. ITO [2001] 251 ITR 522/119 Taxman 785 (SC) and CIT v. Nainital District Cooperative Bank [2009] 318 ITR 62 (Uttarakhand) to submit that every cooperative society engaged in the business of banking is regulated by the Societies Act and the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 48 (SC). Maintainability of appeal 6. Before taking up the core issue, we would address the question of maintainability. Section 260A of the Act was inserted by the Finance (No. 2) Act, 1998 with effect from 1-10-1998. Sections 256, 257, 260 and 261 were also amended to provide an appeal to the High Court directly against orders of the Tribunal. The appellate power, however, was limited to consideration of a substantial question of law. Section 260A(2)(c) of the Act mandates that proceedings under section 260A(1) of the Act shall be in the form of memorandum of appeal precisely stating the substantial question of law involved in the case. Prior to amendments introduced by the Finance (No. 2) Act, 1998, the Tribunal was the final adjudicatory forum insofar as finding of facts are concerned. If any question of law is raised either by the revenue or by the assessee, the Tribunal was empowered under sections 256(1) and (2) of the Act to state the case and refer the question of law arising out of the order of the Tribunal in appeal to the jurisdictional High Court. The answer by the High Court on the question of law would then be the basis for the Tribunal to dispose of the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reserves is exempted 7. Chapter VIA of the Act stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80C to 80U. The chapter is divided into four distinct parts, namely, A to D. Part D deals with deductions in respect of certain incomes. Section 80P is a special provision providing for the deduction in respect of income of co-operative societies. As defined in section 2(19) of the Act, "co-operative society" means "a co-operative society registered under the Co-operative Societies Act, 1912, or under any other law for the time being in force in any State for the registration of co-operative societies". Insofar as relevant for the purpose, sub-sections (1) and (2) of section 80P of the Act read as under. "80-P. Deduction in respect of income of cooperative societies.-(1) Where, in the case of an assessee being a cooperative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant] 8. The whole of amount of profits and gains of business 'attributable to' one or more such activities is eligible for exemption under the above provision. In plain terms, if a cooperative society is engaged in carrying on the business of banking the amount earned from any one or more such activities in relation to the business of banking can be claimed as deduction. The word 'attributable' was considered by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd v. CIT [1978] 113 ITR 84 holding that, "the expression 'attributable to' is certainly wider in import than the expression 'derived from'." It was also held that by using the expression 'attributable to', the legislature intended to cover receipts from sources other than the actual conduct of business. 9. Section 80P of the Act grants deduction in respect of various categories of income of a cooperative society. If any cooperative society carries on the business of banking, the interest income received by a cooperative society on its investment/deposits is attributable to banking business. The provision does not make any distinction insofar as the interest earned by deposit in a bank and interest earned on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome from banking business, would be eligible for exemption under the said provision. 11. Does section 80P(2)(a) of the Act make a distinction between income received by a cooperative bank from statutory deposits and the income from non-statutory deposit of surplus funds? The answer must be in the negative. The income earned by the cooperative bank either by deposit of the prescribed percentage of its reserves or by deposit of their surplus funds is exempted. The income from either category of the deposits is certainly attributable to the business of banking. Indeed as a prudent business practice, no banking company or no entity engaged in the business of banking would keep its amount idle. By parking the funds, immediately not required for the business in other banks, interest can be earned to the benefit of the cooperative society. Every cooperative society is expected to make profits for the benefit of its members. As long as the deposit of the surplus funds in the other banks for the purpose of earning interest is not unauthorized or not barred by any of the applicable statutes, the income is certainly attributable to the business of banking. There is no concept of voluntary or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. Assuming that there is no such sanction of the RCS for utilization of the reserve fund in the business of the society the same will not make any difference insofar as deduction allowed by section 80P(2)(a)(i) of the Act. 13. The assessee cooperative banks are scheduled banks as defined under section 2(e) of the RBI Act read with the Second Schedule thereto. As per section 42 of the RBI Act, every schedule bank shall maintain with RBI an average daily balance, the amount of which shall not be less than such percentage of the total demand and time liabilities in India as may be notified by the RBI. In addition to the cash reserve to be maintained by the RBI, every banking company is required to create a reserve fund and, before declaration of dividend, transfer to the reserve fund a sum equivalent not less than 20 per cent of such profit. Further, under section 18 of the BR Act, every banking company, not being a scheduled bank, shall maintain cash reserve with itself or by way of balance in a current account with the RBI. Such cash reserve shall be equivalent to at least 3 per cent of total of its demand and time liabilities as on the last Friday of the second preceding f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and has to be avoided by the Court. 15. In Bihar State Co-operative Bank Ltd v. CIT [1960] 39 ITR 114 the Supreme Court considered the scope of the notification issued by the Central Board of revenue under section 60 of the Income-tax Act, 1922 (1922 Act) which exempted the profits of any cooperative society from the tax payable under the 1922 Act. The Assessing Officer granted exemption but, in the reassessment proceedings, the order of the Assessing Officer was reversed, and the Income-tax Appellate Tribunal (ITAT) referred the matter to the High Court under section 66(1) of the 1922 Act. The revenue argued that moneys laid out in deposit in other banks stand apart and, therefore, do not get the benefit of exemption. Repelling the submission, the unanimous Division Bench of the Supreme Court held as follows. "As we have pointed out above, 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng activity. On the contrary Bangalore District Cooperative Central Bank Ltd.'s case (supra) took the view that the interest income on the investment made in compliance with the statutory provisions in order to carry on the business of banking are part of the business activities falling within the scope of section 80P(2)(a)(i) of the Income-tax Act. This decision is an authority for the proposition that, even though the investment made in the Government securities in compliance with the statutory provisions does not form part of stock in trade or working capital, still the interest income therefrom would qualify for exemption under section 80P of the Income-tax Act. 18. In Mehsana District Central Co-operative Bank Ltd.'s case (supra) the Supreme Court reiterated the test observing that to be able to answer the question whether deduction under section 80P(2)(a)(i) of the IT Act can be allowed, it is necessary to ascertain whether the income derived by a cooperative society from the investment of its voluntary reserves has been utilized by it in the course of its ordinary business. It was held therein that interest income upon statutory reserves is eligible for deduction. 19. In C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is entitled to deduction under the IT Act. Observing that the investment was in accordance with the mandatory provisions of section 44 of the Punjab Co-operative Societies Act, 1961 the Punjab and Haryana High Court in CIT v. Nawanshahar Central Cooperative Bank Ltd. [2003] 263 ITR 320/138 Taxman 196 ruled that, "such income would be automatically entitled to deduction and that it is only in respect of the voluntary reserves that it is necessary to find as to whether the investment had been made in the ordinary course of banking business". The decision of the Punjab and Haryana High Court was affirmed in Nawanshahar Central Cooperative Bank Ltd.'s case (supra), wherein the Supreme Court observed as under. "This Court has consistently held that investments made by a banking concern are part of the business of banking. The income arising from such investments would, therefore, be attributable to the business of bank falling under the head "Profits and gains of business" and thus deductible under section 80-P(2)(a)(i) of the Income-tax Act, 1961. This has been so held in Bihar State Coop. Bank Ltd. v. CIT [1960] 39 ITR 114 (SC) : AIR 1960 SC 789, CIT v. Karnataka State Coop. Apex Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o in relation to banking activity, and hence income accrued out of such deposit is also attributable to the banking business which is deductible under section 80P(2)(a)(i) of the Act. 24. The Senior Counsel for the revenue brought to our notice the decision of Uttarakhand High Court in Nainital District Cooperative Bank's case (supra) wherein it was held that the income received by a cooperative bank from house property is not covered under income from banking business. Our attention has also been invited to Totgars' Cooperative Sale Society Ltd. v. ITO [2010] 188 Taxman 282 (SC) in support of his contentions. As observed by the Supreme Court therein the said decision was confined to the facts of the said case and their Lordships were not dealing with cases relating to cooperative banks. Both the decisions, therefore, do not assist the learned Senior Counsel. In all these appeals, the learned Tribunal correctly recorded a finding that the income earned by the respondents/cooperative banks is attributable to the business of banking and, therefore, exempt from income-tax under section 80P(2)(a)(i) of the Act. We do not find any reason to disagree with the view of the learned Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X
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