TMI Blog2011 (6) TMI 215X X X X Extracts X X X X X X X X Extracts X X X X ..... inya and V.R. Badri for the Appellant. C. Kodanda Ram, K. Vasant Kumar, S. Ravi, N. Siva Reddy, K. Krishna Masthan, Y. Ratnakar, A.V. Raghu Ram, Dr. C.P. Ramaswami and Ms. Anjali Agarwal for the Respondent. JUDGMENT V.V.S. Rao. In this group of Income-tax Tribunal Appeals under section 260A of the Income-tax Act, 1961 (hereafter, the Act) the common question of law raised by the revenue is whether a cooperative society carrying on the business of banking is entitled to claim exemption under section 80P(2)(a)(i) of the Act in respect of the income derived out of the investments made from voluntary reserves of such society? At the outset, we may notice the factual background in ITTA No. 86 of 2003 filed by the Commissioner of Income-tax-III, Hyderabad against the Andhra Pradesh State Cooperative 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not, however, be necessary if the investments are made in SLR securities, and that in the absence of any prior sanction the investments made in non-SLR securities would not be eligible for exemption under section 80P(2)(a)(i) of the Act. He also held that, the income on the investments in securities against reserve fund not utilized for SLR purposes (non-SLR investments not being under any compulsion) under any provisions of the BR Act have to be treated at par with similar investments by any other business activity. They are, therefore, not attributable to banking business and consequently will not qualify for exemption. While holding that the interest income relatable to non-SLR investments accrued during the period from 31-10-1996 to 31-3-1997 will not qualify for exemption, the appeal was partly allowed 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 dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that when the question of law is neither raised before the Tribunal nor considered, it cannot be permitted to be raised before the High Court. The High Court cannot adjudicate such a question which was not raised before the Tribunal. He relies on the decision of the Supreme Court in Seth Pushalal Mansinghka (P.) Ltd. v. CIT AIR 1967 SC 1626. In support of their contention on the core issue the Counsel relied on Karnataka State Cooperative Apex Bank's case (supra), Mehsana District Central Co-operative Bank's Ltd.'s case (supra) CIT v. Sri Ram Sahakari Bank Ltd. [2004] 266 ITR 632/138 Taxman 45 (Kar.), CIT v. H.P. State Cooperative Bank Ltd. [2010] 323 ITR 1 (HP), CIT v. Muzaffar Nagar Kshetriya Gramin Bank Ltd. [2010] 323 ITR 202 (All.) and CIT v. Nawanshahar Central Cooperative Bank Ltd. [2007] 289 ITR 6/107 Taxman 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 powe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of banking and that the income therefrom is attributable to the main activity. Before the Tribunal the assessee filed appeal insofar as the department appeal went against them, and the revenue also filed appeals. The question was specifically raised and a specific issue was framed by the Tribunal touching upon this aspect. After perusing the orders of the CIT (Appeals) as well as the Tribunal, we are convinced that, the revenue specifically raised the issue and also tried to distinguish the decision of the Supreme Court relied on by the assessee. We, therefore, reject the submission of the Senior Counsel and hold that these appeals are maintainable and the question of law raised in these appeals was very much in issue before the CIT (appeals) as well as before the Tribunal. Whether the income from voluntary 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 deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s section shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. Explanation. For the purposes of this sub-section, (a) "co-operative bank" and "primary agricultural credit society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) "primary co-operative agricultural and rural development bank" means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities. [clauses (b) to (f) of sub-section 3 omitted as not relevant] 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 Industria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 6(1)(a) of the BR Act enumerates every conceivable activity of banking including, "the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities" and under section 6(1)(n) of the BR Act, the doing of all such other things as are incidental or conducive to the promotion or advancement of the business of the company. Thus reading of Sections 5(b), (c) and section 6 of the BR Act along with section 80P(2)(a) of the Act, it becomes clear that the income received by a cooperative bank from deposits, whether or not they are made in discharge of a statutory obligation or otherwise being income 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the working capital for the purpose of banking business which includes the deposits which yield interest. Further when a society is prohibited by its by-laws from borrowing either from its members or others, the whole of its reserve fund may be utilized in its business. If a cooperative bank derives income by lending money to its members the same being business of banking, is eligible for deduction. Therefore, to say that the income derived from voluntary non-statutory deposits would not be eligible for deduction is illogical and cannot be sustained. As a matter of fact, in all these cases, a finding was recorded that the RCS issued necessary permission to the assessees to use the surplus reserve fund for the banking 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 ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Marketing Society Ltd. [1989] 176 ITR 117/43 Taxman 328 (SC), Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC) and CIT v. N.C. Budharaja Co., [1993] 204 ITR 412/70 Taxman 312 (SC). Applying the settled rule of interpretation and liberally interpreting sub-section 2(a)(i) of section 80P of the Act, the conclusion is inevitable that whatever be the amount of profits and gains of business of a cooperative society attributable to its banking transactions or credit transactions with members is exempt from Income-tax. If section 80P(2)(a) of the Act is given restrictive meaning as including the interest earned only on the statutory deposits made by a cooperative society, it would amount to supplying causus omissus 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exemption of interest income from mandatory investment made out of the reserve fund. As there was a conflict between the Madhya Pradesh Cooperative Bank Ltd v. Addl. CIT [1996] 218 ITR 438/84 Taxman 640 (SC) and CIT v. Bangalore District Cooperative Central Bank Ltd. [1998] 233 ITR 282/99 Taxman 404 a three Judge Bench of the Supreme Court considered the matter and agreed with Bangalore Distt. Cooperative Central Bank Ltd.'s case (supra). In Madhya Pradesh Cooperative Bank Ltd.'s case (supra), it was held that the interest on Government securities placed with the State Bank or Reserve Bank would not qualify for exemption under section 80P of the IT Act and that such investment could not be regarded as an essential part of banking 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 secur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an authority for the proposition that dividend income also would qualify for exemption. 21. Nawanshahar Central Cooperative Bank Ltd.'s case (supra), a cooperative society registered under the Punjab Cooperative Societies Act, 1961, claimed deduction of interest from investment of amount in PSEB Bonds, 2003 First Series (the Bonds). The Assessing Officer disallowed the claim taking a view that the income from the Bonds could not be treated to be income attributable to the banking business within the meaning of section 80P(2)(a)(i) of the Income-tax Act. The assessee's appeal failed but the appellate Tribunal allowed the claim. Before the Punjab and Haryana High Court the question was whether the income from investment in the Bonds 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business providing credit facilities to its members and investing the sums deposited by the members of the society is part of banking business. ... ... We are, therefore, of the considered view that the investment of the funds by the banks including the non-reserves were part of the banking activities since no bank would like its reserve funds to remain idle and not earn any interest. This is not only prudent business management but is also a part of the activity of banking. Therefore, the interest earned on such deposits is directly attributable to the business of banking." 23. The Allahabad High Court also took a similar view in Muzaffar Nagar Kshetriya Gramin Bank Ltd.'s case (supra) observing that the deposit exceeding SLR was also 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 inco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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