TMI Blog1996 (1) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... nafter called "the Act"). While framing assessment for the relevant assessment years in question, the Income-tax Officer included in the taxable income of the assessee, interest earned on securities earmarked against reserves and interest earned on provident fund deposits. The assessee contended that it was entitled to the benefit of section 81 of the Income-tax Act, 1961, as in force at all material times. The Income-tax Officer rejected this claim of exemption from tax put forward by the assessee. Since the assessee's contention did not find favour at the higher levels also, including the reference to the High Court, the assessee has approached this court. Section 81 of the Income-tax Act on which the assessee's case is based read thus at all material times : " Income of co-operative societies.--Income-tax shall not be payable by a co-operative society,-- (i) in respect of the profits and gains of business carried on by it, if it is-- (a) a society engaged in carrying on the business of banking or providing credit facilities to its members ; or . . . . Provided that, in the case of a co-operative society, which is also engaged in activities other than those mentioned i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich, in so far as it concerns apex banks, reads as under : " (C) Apex -Bank : The reserve fund of the apex bank shall be fully invested outside its business in the Government securities. No part of its reserve fund should be utilised as its working capital. 3. All investments of reserve fund shall be specially marked as ' Reserve fund investment ' and shall be shown separately in the annual balance-sheets. The reserve fund deposits at every level shall carry the maximum rate of interest which a Central Bank or apex bank pays on fixed deposits for longest period or three per cent., whichever is higher. No part of the reserve fund deposits shall be drawn without the previous sanction of the Registrar, in the case of apex bank, Central Banks and large-sized societies and in the case of other primary societies without the permission of the Deputy Registrars. Such approval can be given when the amount is either required to meet losses, or, when the society is to be wound up. These eventualities will, however, be very rare." Obviously, as per the above instructions, no part of the reserve fund can be utilised as working capital nor can any part of the reserve fund deposits be wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall not be payable by a co-operative society in respect of the profits and gains of business carried on by it, if it arises from the business of banking or providing credit facilities for its members. However, if such a co-operative society also engages itself in activities other than the business of banking or providing credit facilities the profits derived from such business shall not be exempt from tax if it exceeds rupees fifteen thousand. It is, therefore, obvious that the entire income derived by a co-operative society from the business of banking or providing credit facilities to its members is exempt from income-tax, but if that society also engages itself in any other activity and earns-profit therefrom, the income so derived becomes liable to assessment and payment of income-tax, if it exceeds the ceiling amount. The normal banking activity is to receive deposits and utilise such deposits by advancing loans, etc., to borrowers. Since the rate at which interest is paid to depositors is lower than the rate charged from borrowers, the difference in the rates generates income for the banks. The banks may have to maintain certain reserves to meet with emergencies, e.g., a sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver went out of circulation, but was kept apart to meet a probable eventuality and, therefore, a business obligation. He pointed out that in the case of reserve fund investments no part of the deposits was permitted to be withdrawn unless the money was required to meet losses or the society had to be wound up and that too with the Registrar's permission only. Therefore, he submitted, these securities could not be utilised as working capital nor did they form part of the circulating capital or stock-in-trade of the bank and, hence, the interest earned thereon and shown as forming part of the income of the society cannot qualify for exemption. Counsel for the Revenue did not join issue on the proposition that if circulating capital or stock-in-trade of a co-operative bank is invested in securities, interest earned thereon would be income from banking business and would, therefore, qualify for exemption. However, can the investment in securities of the reserve fund be said to be investment of circulating capital or stock-in-trade, more so when it is noticed that the co-operative bank does not have an absolute and unfettered right to withdraw the same whenever it liked ? We have not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount did not qualify for exemption because it represented only interest on security deposit and could not be mixed up with the other sums received in the course of business. Even learned counsel for the assessee did not press for exemption so far as that claim is concerned. The second claim was allowed on the ground that the money had to be provided to run the business and generate profit and the funding was, therefore, in the nature of "investment" within the meaning of the relevant provision, in that, the money was ultimately to be utilised by the member society for the purchase of stocks. The distinction is obvious, namely, where the money is ultimately to be used for business purpose, either directly or through the member-bank, the interest thereon would qualify for exemption and not otherwise. The second case to which our attention was drawn is of Assam Co-operative Apex Marketing Society Ltd. v. CIT (Addl.) [1993] 201 ITR 338 (SC). In that case, the appellant was appointed as the procuring agent for paddy by the Assam Government. The members of the appellant were primary marketing societies and societies at the village level, with membership of agriculturists, being the mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest on the Government securities placed with the State Bank of India/Reserve Bank of India, cannot qualify for exemption under section 81 (now section 80P) of the Income-tax Act. Before we part, we must take note of Shri Salve's contention that the proviso to section 81 would apply in the case of that co-operative society alone which is engaged in an activity other than those mentioned in clauses (a) to (f) which not being so as regards the appellants, the proviso has no application ; and so, no part of its profit or gain can attract income-tax. We do not think this to be the correct reading of the proviso, notwithstanding the use of the word "also". According to us, what the proviso seeks to convey is that even if a co-operative society is engaged only in the business of banking, but part of its activity is not attributable, to engagement in such activity, income derived from that part of activity would become taxable. And as held above, the income derived from the investment in Government securities placed with the State Bank of India/ Reserve Bank of India cannot be regarded as an essential part of its banking activity inasmuch as the same does not form part of its stock- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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