TMI Blog2011 (11) TMI 180X X X X Extracts X X X X X X X X Extracts X X X X ..... nd was paid, the write back of the unclaimed dividend cannot be treated as income under the provisions of the Act, just because the same was credited to the P&L account. - Revenue's appeals are partly allowed. - IT APPEAL NOS. 6061 & 6514 (MUM.) OF 2008 - - - Dated:- 30-11-2011 - D. MANMOHAN, B. RAMAKOTAIAH, JJ. Arun Sathe and Ms. Aarti Sathe for the Appellant. Mrs. Usha Nair for the Respondent. ORDER B. Ramakotaiah, Accountant Member These two appeals are by the Assessee and Revenue contesting various issues, centered around the question whether the assessee is entitled for deduction u/s 80P on banking business. 2. The grounds of Revenue are as under : "1. Whether on facts and circumstances and in law, the CIT (A) erred in directing the Assessing Officer to allow the deduction under section 80P(2)(a)(i) of the Act holding that the cancellation of assessee's banking license will not have any effect on the admissibility of deduction under Section 80-P in respect of the income from alleged banking business. 2. Whether on facts and circumstances and in law the CIT (A) erred in directing the Assessing Officer to allow the deduction under section 80- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the meaning of the term "the whole of Profits and Gains of business". (iv) The CIT (A) failed to appreciate that (a) Incentive deductions of the nature mentioned in Section 80P need to be interpreted liberally to promote the purpose and not to defeat it. (b) There is nothing in the provisions of clause 9(a) of Section 9-P (2) which restricts the scope of deduction so as to deny deduction in respect of Profits realized on sale of securities. (c) There is a complete interlacing, inter connection, interdependence and absolute nexus and live link between the activities of providing credit facilities and recoveries of advances as also funds realized by sale of securities so as to make it the same business giving rise to "whole of profits". (d) The qualifying term "Whole" must receive full effect so as to encompass all types of profits related to a business. The appellant, therefore, contends that the term "whole of the profits attributable to" which includes gains realized in respect of securities is deductible under section 80P(2)(a)(i). Ground II The appellant craves leave to add to, alter or amend any or all the above ground of appeal". 4. Briefly stated, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 5(b) of the B.R. Act. The term 'banking company' means any company which transacts the business of banking in India. Since the assessee has been barred from transacting banking business, benefit under section 5(b) is not available and as such benefit under section 6 will also not be available. 8. He further observed that Section 22 of the B.R. Act states that no company shall carry on a banking business in India unless it holds a license issued on that behalf by the RBI. The right to carry on activities mentioned in Section 6(a) to 6(o) of the B.R. Act, 1949 flows from the issue of license to any company. Section 80P of the I.T. Act states that the income earned from the banking business by cooperative society will qualify for deduction. Since the assessee is not a banking company during the year under consideration, income earned from such activity will not qualify for exemption under section 80P(2)(a)(i). The Assessing Officer further observed that the assessee's existence as a State Co-Operative Bank has ended as the relevant notification has been already struck down by the Bombay High Court. Since the assessee is not a banking company and also not a cooperative bank, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in carrying on the business of the banking or providing credit facilities to its members. The appellant was registered as a State Cooperative Bank by the notification of Govt. of Maharashtra. In his assessment order at page 7 the Assessing Officer has accepted that it is a cooperative society which has granted loans to various member cooperative societies from which it was earning income. The relevant portion of the assessment order is as under: As regards the alternative contention that the provisions of section 36(viia), apply to the assessee as it is a non-scheduled bank, it is to be stated that the assessee's license to conduct banking business was cancelled and the assessee did not hold any license during the financial year under consideration. Therefore, question of application of provisions of section 36(1)(viia) to the case of the assessee does not arise. As regards the contention that the assessee being a cooperative society, it was undertaking the activity of providing credit facilities to its members, there is merit in it. As stated earlier, the assessee was registered under the Multi State Cooperative Societies Act, 1984 as a cooperative society. This statu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having been debarred from the business of banking cannot be said to be involved in the business of banking. Therefore, the incomes cannot be considered as incomes from banking business. On the incomes earned in the course of providing credit facilities to the members, Assessing Officer himself allowed deduction. It was her contention that the CIT (A) without examining the nature of the income allowed deduction under section 80P(2)(a)(i) on the reason that the assessee is a cooperative society, even though the assessee is not a cooperative bank to be allowed deduction on banking business. She relied on the decision of the Hon'ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd. v. ITO 322 ITR 283/188 Taxman 282. It was the submission that since the assessee is a cooperative society, the incomes from the so called banking activities cannot be allowed as a deduction without there being any banking business. 15. The learned Counsel however, reiterated the submissions made before the CIT(A) that the assessee continued to have income from business of banking, even though the licenses were cancelled as it is in the process of winding up and the incomes earned on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .123 of 2010 of Hon'ble Bombay High Court dated 28.7.2011 to submit that interest on fixed deposits placed with other banks other than cooperative banks qualified for deduction under section 80P(2)(a)(i) distinguishing judgment of the Apex Court in the case of Totgars Co-operative Sales Society Ltd. (supra). (f) The decision of the Hon'ble Supreme Court in the case of Karnataka State Cooperative Apex Bank (supra) for the proposition that interest arising from investment made in compliance with the statutory provisions to enable it to carry on banking business is exempt under section 80P(2)(a)(i) of the Income Tax Act. The placement of such funds being for the purpose of carrying on banking business, the income there from would be the income from the assessee's business. There is nothing in the phraseology of Section 80P(2)(a)(i) which makes it applicable only to the income derived from working or circulating capital. The learned Counsel also placed the list of chronological dates and events from 10.10.1994 to 2.12.2005 i.e. from registration of the assessee as a Multi state cooperative society under the Multi State Cooperative Societies Act 1984 to order of winding up of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e miscellaneous income is nothing but crediting the unclaimed dividend provided earlier. The Assessing Officer not only disallowed the claim u/s 80P on the balance of incomes but also brought to tax the miscellaneous income pertaining to reversal of unclaimed dividend. As briefly stated earlier, the CIT(A) allowed deduction of the incomes pertaining to interest on investment as income earned in banking business and profit on sale of investment treated as capital gains while deleting the miscellaneous incomes. The issues before us for consideration as contested in Ground 1 2 are whether (a) the incomes earned on interest on investment can be considered as income from banking business and (b) if so whether deduction under section 80P(2)(a) on the above incomes is eligible for deduction under 80P(2)(a)(i). 18. As stated above, the assessee was in the business of banking till the license was cancelled by the RBI in the previous year relevant to the Assessment Year 2004-05. It was the contention of the Assessing Officer, after analyzing the provisions of Sections 5A and 6A of the Banking Regulation Act, that the assessee is not in the business of banking as the assessee was not a St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... labour of its members, or (vii) fishing or allied activities, that is to say, the catching, curing, processing preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities: Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:- (1) The individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities; (2) The co-operative credit societies which provide financial assistance to the society; (3) The State Government;". As can be seen from the above, the deduction is eligible for a cooperative society engaged in carrying on the business of banking or providing credit facilities to its members. The use of word 'or' in Section 80P(2)(a)(i) indicate that these two are mutually exclusive deductions. Either a cooperative society is engaged in carrying on the business of ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nking Regulation Act, 1949 permits a Banking Company in engaging in or more of the following forms of business listed from "a to o" in the section. Those activities are as under: "6. Forms of business in which banking companies may engage. (1) In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely:- (a) The borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hoondees, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (l) Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company; (m) Acquiring and undertaking the whole or any part of the business of any person or company, when such business is of a nature enumerated or described in this sub-section; (n) Doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; (o) Any other form of business which the Central Government may, by notification in the official gazette, specify as a form of business in which it is lawful for a banking company to engage". 22. As can be seen from the sub-section (1) of Section (6) of the Banking Regulation Act, in addition to business of banking, a 'banking company' may engage in any one or more of the listed forms of business. This means that the assessee should be in the business of banking to engage in any one or more of the forms of business listed above. The 'banking company' has been defined under section 5 as under: "5. (c) "Banking Company" means any company which transacts the business of bankin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... society; (cciii-a) 'multi State Cooperative Bank" means a multi-state cooperative society which is a primary cooperative bank; (cciii-b) "multi state cooperative society" means a multi state cooperative society registered as such under any Central Act for the time being in force relating to the multi-state cooperative societies but does not include a national cooperative society and a federal cooperative; (cciv) "primary agricultural credit society" means a cooperative society- (i) The primary object or principal business of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities (including the marketing of crops) and (ii) The bye-laws of which do not permit admission of any other cooperative society as a member; Provided that this sub-clause shall not apply to the admission of a cooperative bank as a member by reason of such cooperative bank subscribing to the share capital of such cooperative society out of funds provided by the State Government for the purpose; (ccv) "primary cooperative bank" means a cooperative society other than a primary agricultural credit society- (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulation Act. The definitions stated in Section 56 define a cooperative bank, a cooperative credit society, the multi-State Cooperative Bank and a multi-State Cooperative Society separately. The assessee being a multi-State Cooperative Society cannot fall under the definition of the cooperative bank. Therefore, references to 'banking company' or 'the company' or 'such company' in the Bank Regulations Act cannot be made applicable to the assessee society. Therefore, the contention that the assessee was indulging in other activities permitted by Section 6 of the Banking Regulations Act, 1949 cannot be accepted, as the said provisions is not applicable to cooperative society, which is not a cooperative bank. Therefore, the incomes arising to the assessee consequent to the cancellation of the banking license cannot be considered as incomes from the business of banking on the reason that the assessee is not a state cooperative bank. Such incomes cannot be allowed deduction under 80P(a)(i). 25. Hon'ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd. (supra) had an occasion to analyse various incomes arising to cooperative society. In the above referred case the issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to one of the activities specified in section 80P(2)(a) of the Act. An important point needs to be mentioned. The words "the whole of the amount of profits and gains of business" emphasize that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the society. In this particular case, the evidence shows that the assessee society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income falls in the category of "other income" which has been rightly taxed by the Department under section 56 of the Act". 27. Therefore, the incomes on which deduction was claimed under 80P should be operational income attributable to one of the activity of Society. On the principles established by the Hon'ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd. (supra), it is to be held that the income earned in the case of providing credit facilities to its members is rightly allowed as deduction under section 80P(2)(a)(i) by the Assessing Officer and the CIT (A) was wrong in allowi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment is eligible for deduction under section 80P(2)(a)(i) as of banking business. Therefore, we are of the opinion that provisions of section 176(3)A does not help the case of assessee. 30. We have already considered Part V of the Banking Regulations Act, while considering the provisions of section 56 applicable to cooperative bank. Provisions of section 22A were introduced in the Banking Regulations Act, 1949 by the Act 24 of 2004 w.e.f. 24.09.2004 which are as under: "22A. Validation of licenses granted by Reserve Bank to multi-State cooperative societies. Notwithstanding anything contained in any law or judgment delivered or decree or order of any Court made:- (a) No license, granted to a multi-State cooperative society by the Reserve Bank under section 22 which was subsisting on the date of commencement of the Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004 shall be invalid or be deemed ever to have been invalid merely by the reason of such judgment, decree or order; (b) Every license, granted to a multi-State Cooperative society by the Reserve Bank under section 22 which was subsisting on the date of commencement of the Banking Regulation (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulation Act, 1949. In view of the judgment in the above case, doubts have been expressed about the legality of the license issued to other MSCBs. 4. In order to remove the doubts about the legality of the licenses issued to other MSCBs and to resolve any difficulties which might arise in the future, it had, therefore, become necessary to urgently carry out necessary amendments in the Banking Regulation Act, 1949 and the Deposit Insurance and Credit Guarantee Corporation Act, 1961 (DICGC Act) to make specific legal provision with retrospective effect, for the validity of the licenses issued to other MSCBs by the RBI and also to enable the RBI to issue in future the licenses to the Multi-State Cooperative Societies to carry on banking business and make the multi-State cooperative banks eligible for insurance of their deposits under the Deposit Insurance Credit Guarantee Corporation Act, 1961. This will protect the interests of small depositors. 5. Since Parliament was not in session and it had become necessary to take immediate action to provide for the above matters, the Banking Regulation (Amendment) and Miscellaneous Provisions Ordinance, 2004 was promulgated by the Presid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of BR Act. In view of that reason also the incomes arising from investment from RBI cannot be considered as arising from the business of banking. Since the incomes are not arising from the business of banking, such incomes cannot be allowed as deduction under section 80P(2)(a)(i) as the same also can not be considered as operational income of providing credit facilities to its members. 33. In view of this, we are not in a position to uphold the orders of the CIT (A) in granting deduction to the assessee under section 80P(2)(a)(i) on the reason that the assessee is a cooperative society. Therefore, the revenue's appeal contesting granting of deduction under section 80P(2)(a)(i) to income of Rs. 10,07,82,579/- being the amount contested in ground Nos. 1 and 2 is to be upheld. We reverse the orders of the CIT (A) on this issue and uphold the action of the Assessing Officer in this regard. 34. The next issue for consideration is whether the CIT (A) is right in treating the gain on sale of investments in govt. securities as capital gain. As briefly stated, the assessee earned gains on sale of securities. The assessee had an investment of Rs. 433.55 crores as on 31.03.2004 which has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. But there is no claim of deduction in computation of income as incomes are to be computed as per the Income Tax Act. Therefore, the CIT (A)'s directions in treating the amounts as long term capital gain/short term capital has to be upheld. In case the assessee has claimed any deduction in value of securities in any earlier year(s) by treating it as a tradeable stock/current assets, such reduced value only can be considered as value for the purpose of arriving the gains. However, as seen from the details filed before the CIT (A) which were referred to the Assessing Officer for examination, there is no such claim and accordingly the contentions raised by the revenue are only academic in nature and not supported by facts. In view of the above, we uphold the orders of the CIT (A) to that extent and dismiss the grounds raised by the revenue as well as by the assessee respectively. 36. The next ground for consideration is exclusion of an amount of Rs. 1,90,88,857/- contested by the Revenue in Ground No. 4. The assessee had written back unclaimed dividend declared by the assessee in earlier years to P L account under the head "miscellaneous income". It was submitted that these amoun ..... 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