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TMI Blog2016 (12) TMI 560X X X X Extracts X X X X X X X X Extracts X X X X ..... n holding that deduction u/s 80P(2)(a)(i) of the Income-tax Act is allowable on the provision for non performing assets? 3. Whether the Tribunal is right in law in holding that the interest on reserve funds is attributable to the business of providing credit facility to members and is eligible for deduction u/s 80P(2)(a)(i) of the Income-tax Act? 4. Whether the Hon'ble Tribunal is right in law in holding that interest on account of call deposits is attributable to the activity of providing credit facility to the members and is eligible for deduction u/s 80P(2)(a)(i) of the Income-tax Act?" 3. As is evident from the questions of law, the dispute essentially centers around Section 80P(2)(a)(i) which in so far as it is relevant to this appeal reads as under: - "Deduction in respect of income of co-operative societies. 80P. (1) Where, in the case of an assessee being a co-operative 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 subsection (2), in computing the total income of the assessee. (2) The sums referred to in sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry to refer to what transpired before the authorities in the assessee's case for other assessment years. 7. In this appeal which pertains to the assessment year 2003-04, the assessee admittedly raised the contention that it is engaged in carrying on the business of banking. This is evident from the order of the CIT(A) which deals with the issue in considerable detail. That there are contradictory findings in this regard is another matter. The CIT(A) partly allowed the assessee's appeal. However, on the items which are the subject matter of this appeal, the CIT(A) held in favour of the assessee. It may only be noted that the CIT(A) held that the AO was not justified in assessing the income of interest on reserve fund under the head "income from other sources" as it is income from baking business and is exempt under Section 80P(2)(a)(i). 8. We now refer to what transpired in respect of the proceedings relating to the other assessment years which pertain to the period prior to the decision of the Tribunal in the present case which is dated 25.03.2009. (A) Ms.Dhugga in support of her contention that that the assessee had abandoned the plea of banking before the Tribunal in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d before us. In grounds No.1 and 6 the assessee had admittedly clearly contended that it is doing the business of banking and its entire income is, therefore, liable to be exempted under Section 80P(2) (a)(i). The original ground Nos.1 and 6 read as under: - "1. That the order of the learned Assessing Officer that the assessee is not doing the business of Banking is erroneous. Since inception for more than 30 years it is accepted by the Department that assessee is doing the business of Banking and its entire income has been held exempt under Section 80-P(2)(a)(i) has been held to be exempt not only by the learned Assessing Officer but also by Hon'ble Tribunal following Supreme Court judgments. The learned Assessing Officer was, therefore, not justified in not allowing its entire income of Rs. 32,25,35,660/- (as computed) exempt under Section 80-P(2)(a)(i). 6. That the learned Assessing Officer was further not justified in assessing income of Rs. 4,31,53,411/- under head "Other Sources". It is income from Banking business and is exempt under Section 80- P(2)(a)(i)." (E). The case was, therefore, expressly pleaded in the appeal. The order of the Tribunal does not state that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... never have been raised by the Revenue. In that event, it would not have been necessary for the Revenue to have raised this contention. On the contrary, it would have been contented on behalf of the Revenue, as it was before us, that the assessee had abandoned its case or had in fact conceded this point. 9. It is difficult to imagine the assessee having abandoned its case that it also carried on the business of banking. It is even more difficult to accept the contention that the assessee admitted that it did not carry on the business of banking. Apart from the order of the CIT(A) which we have quoted above, our attention was not invited to any other material which could be of assistance in deciding this issue. Considering the facts and circumstances of the case, we would lean in favour of permitting a party, be it the Revenue or the assessee, of having its case decided on merits rather than on a concession. 10. To us it appears obvious that the Tribunal decide the appeal on the present issue in favour of the assessee on the basis that it was engaged in carrying on the business of providing credit facilities to its members and, therefore, did not consider it necessary to deal with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any case in which any respondent has under this rule filed a memorandum of objection, the original appeal is withdrawn or is dismissed for default, the objection so filed may nevertheless be heard and determined after such notice to the other parties as the court thinks fit, (5) The provisions relating to appeals by indigent persons shall, so far as they can be made applicable, apply to an objection under this rule." 14. Mr.Bansal's reliance upon the following observations in judgment of the Supreme Court in Ravinder Kumar Sharma v. State of Assam, (1999) 7 SCC 435 is well founded. Paragraphs 20, 21, 22 and 23 of the judgment read as follows: - "20. So far as the explanation was concerned, the Law Commission stated (p. 298) that it was necessary to "empower" the respondent to file crossobjection against the adverse finding. That would mean that a right to file cross-objections was given but it was not obligatory to file crossobjections. That was why the word "may" was used. That meant that the provision for filing cross-objections against a finding was only an enabling provision. 21. These recommendations of the Law Commission are reflected in the Statement of Objects a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng upon which a decree in part has been passed against the respondent, for the purpose sustaining the decree to the extent the lower Court had dismissed the suit against the defendants-respondents. The filing of cross-objection, after the 1976 Amendment is purely optional and not mandatory. In other words, the law as stated in Venkata Rao's case (supra) by the Madras Full Bench and Chandre Prabhuji's case (supra) by this Court is merely clarified by the 1976 Amendment and there is no change in the law after the Amendment." 15. The assessee's case is stronger for there is no finding by the Tribunal against it on the issue as to whether it is engaged in the business of carrying on banking. The Tribunal, as we noted earlier, did not think it necessary to decide this issue as it found that the assessee was entitled to succeed on another basis. There is in fact, therefore, nothing in the order of the Tribunal on this issue. In such a situation, there is no question of requiring the assessee to file cross-objections or an independent appeal. It often happens that certain issues are not dealt with by a Court or Tribunal although they may have been pressed especially where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banks to earn income. The CIT(A) allowed the claim on the ground that interest invested out of reserve funds is to be treated as arising on account of the activity attributable to the assessee's business of providing credit facilities to its members. The Tribunal dealt with the term "attributable" in Section 80P(2)(a)(i) and held that the income may be said to be incidental and in proximity to the business of the assessee of providing credit facilities to its members. The Tribunal relied upon its earlier judgment including the judgment of the Special Bench of the Tribunal. The Tribunal rejected the department's contention that the surplus funds had been invested not for providing further credit to their members but to maximize profits for utilization in other areas. 24. The assessee also earned interest income of about Rs. 5.84 crores from call deposits made with various banks. This income was also earned by the assessee placing its surplus funds as deposit with banks for short terms with a view to ensure that the funds did not remain idle. The AO declined this claim also on the ground that interest was not earned from the business of providing credit facilities to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich, in turn, deals with "Deductions in respect of certain incomes". The headnote to Section 80-P indicates that the said section deals with deductions in respect of income of cooperative societies. Section 80-P(1), inter alia, states that where the gross total income of a cooperative society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee Society. An income, which is attributable to any of the specified activities in Section 80-P(2) of the Act, would be eligible for deduction. The word "income" has been defined under Section 2(24)(i) of the Act to include profits and gains. This sub-section is an inclusive provision. Parliament has included specifically "business profits" into the definition of the word "income". Therefore, we are required to give a precise meaning to the words "profits and gains of business" mentioned in Section 80-P(2) of the Act. 17. In the present case, as stated above, the assessee Society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s" emphasise 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." 26. The judgment cannot be restricted to cases where the amount invested was the sale proceeds of the produce of an assessee's members marketed by the assessee. The judgment applies to funds not immediately required for business purposes. Funds not immediately required for business purpose include the amounts received towards the sale price of the produce. However, it is not such funds alone that can be said to be not immediately required for business purposes. An assessee such as the respondent may have funds from other sources which are not immediately required for business purpose as well. They would include advances from other entities for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revenue, the Tribunal did not have advantage of the law laid down therein. The matter is, thus, covered in favour of revenue by the judgment of Hon'ble Supreme Court. Contrary view of the Tribunal cannot be sustained. 5. In view of above, following the judgment of the Hon'ble Supreme Court in The Totgars Cooperative Sale Society Ltd. case (supra), we decide the question in favour of the revenue. The appeal is allowed." 28. By an order dated 03.09.2012, the Supreme Court granted leave to appeal against this judgment in Petition(s) for Special Leave to Appeal (Civil) No(s). 22745/2011 but declined to grant any stay. We are bound by this judgment. It is not open to us to refuse to follow it on the ground that it has not considered the judgment of the Supreme Court in its correct perspective. We are, in any event, in respectful agreement with the interpretation of the Division Bench of Totgar's case. 29. Our view is also supported by a judgment of the Gujarat High Court in the case of State Bank of India (SBI) vs. Commissioner of Income Tax (Guj.), (2016) 142 DTR (Guj.). (The name of the appellant in the reported case is incorrectly shown as State Bank of India (SBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that such interest income cannot be said to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce to its members. The court further held that the words "the whole of the amount of profits and gains of business" emphasise 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. The court observed that in that particular case, the evidence showed that the assessee-society earned interest on funds which were not required for business purpose at the given point of time. Therefore, in the facts and circumstances of the case, the court was of the view that, such interest income falls in the category of "Other income" which had rightly been taxed by the Department under section 56 of the Act. 13. In the opinion of this court, in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall in any of the categories mentioned under section 80P(2)(a) of the Act. In the case of Totgars Co-operative Sale Society (supra), as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbers which was retained in many cases and invested in short term deposit/security and that the said decision was confined to the facts of the said case and did not lay down any law. 14. Thus, in the light of the principles enunciated by the Supreme Court in Totgars Co-operative Sale Society (supra), in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) of the Act.... .... .... 15. On behalf of the appellant, reliance has been placed upon byelaw 7 of its Bye-laws, which as translated into English reads thus: "When the funds of the society are not in use, the same shall be invested or kept in deposit in accordance with the provisions of section 71 of the Co-operative Societies Act." The objects of the society as stated in the Bye-laws are: (1) to encourage thrift, self-sufficiency and co-operation amongst members of the society; (2) to inculcate the concept of savings amongst the members; (3) to give credit to the members at reasonable rates when the occasion arises; and (4) to carry out all activities for achieving the objects of the society. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal is not being considered on the basis that banking is the assessee's business either. 32. Mr.Bansal relied upon the judgment of the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Ltd. vs. Income-tax Officer, Word-V, Tumkur [2015] 55 taxmann.com. 447 (Karnataka). In that case, the assessee-Cooperative Society provided credit facilities to its members and earned interest from short term deposits with banks and from savings bank accounts. The interest income earned by the assessee by providing credit facilities to its members was deposited in banks for a short duration which earned interest. The question was whether this interest was attributable to the business of providing credit facilities to the members. The Division Bench held as follows: - "8. Therefore, the word "attributable to" is certainly wider in import than the expression "derived from". Whenever the legislature wanted to give a restricted meaning, they have used the expression "derived from". The expression "attributable to" being of wider import, the said expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount which is in the nature of profits and gains, was not immediately required by the assessee for lending money to the members, as there were no takers. Therefore they had deposited the money in a bank so as to earn interest. The said interest income is attributable to carrying on the business of banking and therefore it is liable to be deducted in terms of Section 80P(1) of the Act. In fact similar view is taken by the Andhra Pradesh High Court in the case of COMMISSIONER OF INCOME-TAX III, HYDERABAD vs. ANDHRA PRADESH STATE COOPERATIVE BANK LTD., reported in (2011) 200 TAXMAN 220/12. In that view of the matter, the order passed by the appellate authorities denying the benefit of deduction of the aforesaid amount is unsustainable in law. Accordingly it is hereby set aside. The substantial question of law is answered in favour of the assessee and against the revenue. Hence, we pass the following order. Appeal is allowed." (The reproduction is from the original website of the Karnataka High Court). There is an important distinction. The Division Bench expressly held in paragraph 10 that interest income was attributable to the business of banking and, therefore, liable to be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 2(n) of the Co-operative Societies Act...." 37. We must, therefore, turn to the provisions of the Punjab Cooperative Societies Act, 1961 which we were informed, applies to the assessee. Section 2(g) of the Punjab Cooperative Societies Act, reads as follows:- "2. Definitions. ... ... ... (g) "members" means a person joining in the application for the registration of a cooperative society and a person admitted to membership after such registration in accordance with this Act, the rules and the bye-laws and includes a nominal and an associate member and the Government when it subscribes to the share-capital of a society." The definition of members does not include employees. 38. In the circumstances, question No.1 is also answered in favour of the Revenue and against the assessee. 39. In these circumstances, the order of the Tribunal is set aside. The questions of law are decided in favour of the assessee but only on the basis that the assessee is engaged in carrying on the business of providing credit facilities to its members. The Tribunal shall decide the appeal afresh only on the question as to whether the assessee is also engaged in carrying on the business of banking ..... X X X X Extracts X X X X X X X X Extracts X X X X
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