9911796707
TMI Blog1996 (1) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in this clause, nothing contained herein shall apply to that part of its profits and gains as is attributable to such activities and as exceeds fifteen thousand rupees." On a plain reading of this provision it becomes clear that every income of a society carrying on banking business is not exempt from payment of tax : Only the income from banking business is exempt from tax. The question which we are required to answer is whether the income from interest accruing on Government sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest 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no part of the reserve fund can be utilised as working capital nor can any part of the reserve fund deposits be withdrawn except with the permission of the Registrar to meet losses or at the time of winding up and not otherwise. In the circumstances, the Revenue contends that the securities relating to the reserve fund can never be considered to be the circulating or working capital of the bank or its stock-in-trade to qualify for exemption under section 81 of the Income-tax Act. In so far as interest on provident fund deposits is concerned, admittedly, the same was included in the profit and loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come 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 spurt in withdrawals by depositors for diverse reasons. Investments which permit withdrawals at short notice would, therefore, be a part of the requirement of banking business and interest accruing on such investments would be outside the tax net. That is why this court in Bihar State Co-operative Bank Ltd. v. CIT [1960] 39 ITR 114, while dealing with income derived by way of interest on short-term deposits by the bank, held that it was income from normal banking business and was, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 noticed that the co-operative bank is legally obliged to place certain Government securities with the State Bank/Reserve Bank and these securities cannot be withdrawn by the said bank at its sweet will and can only be withdrawn in certain situations referred to earlier. That is because the investment of the reserve fund in securities is not to meet the probable eventuality to pay off the depositors should they demand the same. It is, therefore, difficult to comprehend how such Government securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, 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 members of the former. Thus, no agriculturist was the direct member of the appellant. So, the produce was received by the village level societies from its agriculturist-members and was then passed on to the primary societies which in turn made it over to the appellant. A commission was charged for the procuring activity which was divided between the three, the appellant and the village society each taking 19 paise in a rupee and the remaining 62 paise went to the primary society. The question was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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