TMI Blog2005 (7) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... nding counsel has taken the lead while Mr. B.B. Naik and Mr. T.U. Bhatt, learned standing counsel have supplemented the contentions on behalf of the Revenue. On the other hand, on behalf of the respondent-assessees Mr. S.N. Soparkar, learned senior advocate has taken the lead. Mr. R.K. Patel, Mr. S.N. Divetia, Mr. K.R. Dixit and Mr. T.P. Hemani, learned advocates, have also addressed the court. Mr. K.H. Kaji, learned advocate, has been permitted to intervene and address the court. The assessment year in Tax Appeal No. 208 of 2003 is 1995-96 and the relevant accounting period is the financial year 1994-95. The assessee, a cooperative society, filed return of income declaring total income at Rs. nil. The Assessing Officer called upon the assessee to furnish particulars of investments relating to circulating capital and particulars of investments relating to fixed capital. The assessee furnished such particulars pointing out that it had earned interest (both accrued and received) to the tune of Rs. 25,41,289.53 from investments in (i) IDBI Bonds, (ii) SBI Bonds, (iii) Sardar Sarovar Narmada Bonds, and (iv) Kisan Vikas Patra. It was contended that the bank is duly registered under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Mehsana District Central Co-operative Bank Ltd. v. ITO [2001] 251 ITR 522 on the issue of interest on voluntary reserves. It was submitted that this court had formulated three questions: The first one relating to income earned from utilization of statutory reserves under section 67(2) of the GCS Act, 1961; the second one in respect of income earned from utilization of voluntary reserves other than statutory reserves mentioned above; and the third one in respect of deduction of locker rent. That the first and third questions have been answered in favour of the assessee and on these two counts, the decision of this court has been reversed by the apex court; in so far as the second issue relatable to interest from voluntary reserves is concerned, the apex court having restored the issue to the Commissioner (Appeals), a presumption would arise that the apex court has not reversed the decision of this High Court. Therefore, it was urged that the interest income per se was not entitled to deduction under section 80P(2)(a)(i) of the Act, as not being attributable to the "business of banking". That only in the event of the assessee producing evidence to show that the said interest inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the terms "banking business" and "providing credit facilities" are read together the intention of the Legislature becomes clear and that is to provide benefit of deduction to a co-operative society which actually provides credit/finance to its members in furtherance of the co-operative movement and not for the purposes of profit making. That strictly speaking only activities specified in the definition of "banking" as per section 5(b) of the BR Act can give rise to income which can be claimed to be deductible under section 80P(2)(a)(i) of the Act and not the other activities enumerated in section 6(1)(a) of the BR Act. On behalf of the assessee it was submitted that the width and scope of income governed under section 80P(2)(a)(i) of the Act is such which would take within its fold all income arising from investments in securities considering the definition of "banking" under section 5(b) of the Act and section 6(1)(a) of the BR Act. That investment in securities is part of ordinary banking business; it is normally a mode of carrying on banking business to invest monies in such a manner that they are readily available and that is just as much part of conducting the bank's busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproved. None of the assessee-banks have carried on any business which is not permissible under the provisions of the BR Act, or made any investments in any mode prohibited by the provisions of the BR Act or the GCS Act. This is apparent from the fact that no action for any such violation has been initiated/taken against any of the assessee-banks. That in fact, all interest income earned from utilization of reserves has been taxed under the head "Business" and not under the head "Income from other sources". Therefore, once income is from a business and the assessee is admittedly not carrying on any other business except business of banking, income is deductible under section 80P of the Act. It is an accepted position that the income earned by all co-operative banks was held to be eligible for deduction under section 80P(2)(a)(i) of the Act since a number of years but when the apex court rendered its decision in the case of Madhya Pradesh Co-operative Bank Ltd. [1996] 218 ITR 438 the Revenue undertook an exercise to distinguish between fixed capital and circulating capital. It is in the backdrop of this position that the controversy arose, but the said issue is now no longer res i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the apex court: "Now, as to the second question, we have heard learned counsel and been referred to various decisions, including the decision of this court in Bihar State Co-operative Bank Ltd. v. CIT [1960] 39 ITR 114. To be able to answer the question, it is necessary to ascertain, as a fact, whether the income derived by the assessee from the investment of its voluntary reserves has been utilised by it in the course of its ordinary banking business. Though the assessee placed before the assessing authority its books of account and balance-sheets, the fact aforestated was not considered at any stage, for one or other reason on which it is not necessary for us to dilate. We think that it is in the interests of justice that the assessee should have the opportunity to lead evidence before the Commissioner (Appeals) to establish as a fact what is stated above. So far as the second question is concerned, therefore, the matter stands restored to the Commissioner (Appeals) for being decided afresh. He shall also decide any consequential issue that may arise." It is in the aforesaid backdrop that this court is required to determine as to whether income arising from utilization of v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 67(1) of the Gujarat Co-operative Societies Act cannot be said to be profits and gains of banking activity applies with much greater force to the voluntary reserves." The aforesaid reasoning relatable to statutory reserves has categorically been overruled by the apex court and the first question is answered in favour of the assessee. Therefore, the Revenue cannot successfully contend that the finding in relation to the second issue survives. Even if it is not categorically overruled, the said finding is neither approved nor does it survive. In fact, even if it is not stated, it stands set aside when the direction is issued to the Commissioner (Appeals) to decide afresh the said issue as well as any consequential issue. The next question that arises for consideration is whether the Tribunal has "overruled" (as contended by Mr. Naik) the decision/direction of the apex court. The Tribunal cannot overrule the decision of either the High Court or the Supreme Court. The Tribunal may, through erroneous process of reasoning state that a decision of the apex court is not applicable, or the Tribunal may ignore a decision but that does not amount to overruling a decision. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m as if they gave the ratio decidendi of the case. If more reasons than one are given by a Tribunal for its judgment, all are taken as forming the ratio decidendi.'... 33. Stare decisis et non quieta movere. To adhere to precedent and not to unsettle things which are settled. But it applies to litigated facts and necessarily decided questions. Apart from article 14 of the Constitution of India, the policy of courts is to stand by precedent and not to disturb settled point. When court has once laid down a principle of law as applicable to certain state of facts, it will adhere to that principle, and apply it to all future cases where facts are substantially the same. A deliberate and solemn decision of court made after argument on question of law fairly arising in the case, and necessary to its determination, is an authority, or binding precedent in the same court, or in other courts of equal or lower rank in subsequent cases where the very point is again in controversy unless there are occasions when departure is rendered necessary to indicate plain, obvious principles of law and remedy continued injustice. It should be invariably applied and should not ordinarily be departed fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a decision. A judgment of the court has to be read in the context of questions which arose for consideration in the case in which the judgment was delivered. An 'obiter dictum' as distinguished from a ratio decidendi is an observation by the court on a legal question suggested in a case before it but not arising in such manner as to require a decision. Such an obiter may not have a binding precedent as the observation was unnecessary for the decision pronounced, but even though an obiter may not have a binding effect as a precedent, but it cannot be denied that it is of considerable weight. The law which will be binding under article 141 would, therefore, extend to all observations of points raised and decided by the court in a given case. So far as constitutional matters are concerned, it is a practice of the court not to make any pronouncement on points not directly raised for its decision. The decision in a judgment of the Supreme Court cannot be assailed on the ground that certain aspects were not considered or the relevant provisions were not brought to the notice of the court (see Ballabhadas Mathurdas Lakhani v. Municipal Committee [1970] 2 SCC 267; AIR 1970 SC 1002 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich it is rendered. The scope and authority of a precedent should never be expanded unnecessarily beyond the needs of a given situation. The only thing binding as an authority upon a subsequent judge is the principle upon which the case was decided. Statements which are not part of the ratio deci-dendi are distinguished as obiter dicta and are not authoritative. The task of finding the principle is fraught with difficulty as without an investigation into the facts, it cannot be assumed whether a similar direction must or ought to be made as a measure of social justice. Precedents sub silentio and without argument are of no moment. Mere casual expressions carry no weight at all, nor every passing expression of a judge, however eminent, can be treated as an ex cathedra statement having the weight of authority." Therefore, it becomes necessary to ascertain as to what is the decision of the apex court. In other words, what is the distinction between the decision on the case before the court and what is the ratio decidendi. Can it be stated that the apex court has laid down a principle which acts as a precedent and is binding upon the authority. In the words of the apex court, the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with and subject to the provisions of this Chapter, viz., Chapter VI-A. Under sub-section (2) of section 80A a ceiling has been placed, viz., the aggregate amount of the deductions under the Chapter shall not exceed the gross total income of an assessee. Under section 80B(5) "gross total income" has been defined to mean the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A. As to what is the nature of the income which is to be included in the gross total income is laid down vide section 80AB of the Act. The said section provides that where any deduction is required to be made or allowed under any section included in Chapter VI-A under the heading "C-Deductions in respect of certain incomes" in respect of any income of the nature specified in any of the sections falling under the heading "C", then for the purposes of the inclusion in the gross total income, notwithstanding anything contained in any of the said sections, the amount of income of that nature as computed in accordance with provisions of the Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of section 4 read with section 5 and section 2(45) of the Act. The charge of income-tax is fastened under section 4 of the Act in respect of the total income of the previous year. Such total income includes all income from whatever source derived which is either received or accrues to an assessee during any previous year. Section 2(45) of the Act defines "total income" to mean the total amount of income referred to in section 5, computed in the manner laid down in the Act. Thus, all income received by or accruing to an assessee during any previous year is to be charged to tax after computation in the manner prescribed by the Act. Therefore, in the case of an assessee, like the present assessee, all interest income, actually received or accrued, has to be computed in the manner provided in the Act so as to form the total income which is subjected to charge under section 4 of the Act. That once again gives an indication that all such income has to be computed as provided on a conjoint reading of sections 28 and 29 of the Act and only thereafter the net figure is required to be taken up for consideration for the purpose of ascertaining deducibility or otherwise under section 80P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay 7, 1981, entitles the respondent Phool Singh to surrender such land as he chooses. We are of the opinion that they were not right in construing this court's order in the above manner. Firstly, the appellant herein was not heard (he says that he was not even a party to the said SLP) before passing such order. Secondly, the said order cannot be understood as laying down a proposition contrary to law. All that it says is that the petitioner therein, i.e., respondent Phool Singh 'will be entitled to choice in respect of plots forming the subject-matter of the sale deed.' The said words are not capable of being construed as authorising Phool Singh to surrender the transferred land even if he is in a position to comply with the requirement of surrender of surplus land without touching the transferred land. To repeat, the order of this court cannot and should not be construed in a manner inconsistent with the provisions of the Act. This court could not have contemplated passing an order contrary to the provisions of the Act or to authorise the respondent Phool Singh to surrender surplus land contrary to the provisions of the Act. We are, therefore, of the opinion that the said order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestments would be eligible for deduction under section 80P(2)(a)(i) of the Act. One cannot say that the direction to ascertain utilisation is for the purpose of determination of accrual of income or for determining its eligibility to deduction considering the scheme of the Act which is set out hereinbefore. The expenses, which a bank is required to incur in the course of its ordinary banking business, have already gone into consideration before the net figure is worked out for the purpose of claiming deduction under section 80P(2)(a)(i) of the Act. Hence, to reiterate, the direction can only mean ascertainment of utilisation of net income of earlier years, which forms part of the funds which are invested, and given the nomenclature of voluntary reserves. Section 80P of the Act in so far as is relevant for the present reads as under: "80P. Deduction in respect of income of co-operative societies.-(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 sub-section (2), in computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of Chapter VI-A is in terms of the provisions of the Act with special reference to section 80B(5) read with section 80AB of the Act and is the net figure. Section 80P(2)(a)(i) of the Act permits a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members to claim deduction of the whole of the amount of profits and gains of business attributable to such activity, viz., business of banking or providing credit facilities to its members. On a plain reading, it becomes apparent that the two activities are distinct and separate activities. The first activity, viz., carrying on the business of banking connotes a larger activity than the activity of providing credit facilities to its members. The latter is restricted qua the members of the society while the former is wide enough to take within its sweep as its potential customers both members and non-members. The interpretation canvassed by the Revenue that the latter phrase has a restrictive effect on the former expression "business of banking" ignores the word "or" which occurs between the two phrases. There is no warrant for reading the word "or" as "and". Once the Legislatu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributable to any one or more of the specified activities. The phrase "attributable to" has come up for consideration in various cases before the apex court. In the case of Vellore Electric Corporation Ltd. v. CIT [1997] 227 ITR 557 the assessee before the apex court was an electricity supply undertaking. A dispute arose as to whether investment of sums appropriated to the contingencies reserve, in securities authorised under the Indian Trusts Act, 1882, and income derived by way of interest therefrom was attributable to profits and gains of the business of the assessee for the purposes of section 80-I of the Act. The apex court observed as under: "In Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, this court has said: 'In our view, since the expression of wider import, namely, "attributable to", has been used, the Legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity'. This would mean that it is not necessary that the income should have been earned from the actual conduct of the business of generation and distribution of electricity. What is required is that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital are inclusive in nature, viz., apart from paid-up share capital, funds built out of profits and money raised by borrowing, there could be monies raised by other means also which would constitute working capital of a co-operative society. Chapter VI of the GCS Act deals with property and funds of societies. Section 65 stipulates the prohibitions as to distribution of the funds or the assets of the society. Section 66 pertains to appropriation of profits. Section 67 of the GCS Act deals with reserve fund and under sub-section (2) it is provided that at least one-fourth of the net profits of the society each year, shall be carried to the reserve fund; and such reserve fund may be used in the business of the society or may, subject to the provisions of section 71, be invested as per directions, general or special, issued by the State Government. But from this, it does not flow that the reserve fund has necessarily to be restricted to only one-fourth of the net profits each year. Similarly by virtue of sub-section (3) of section 67 of the GCS Act it is permissible for a society to carry to the reserve fund an amount less than one-fourth of the net profits but not less than one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the basis of difference in rates of interest on the borrowings made and advances given. Or a third situation, which clearly a prudent banker would engage himself in, would be where deposits are accepted, and certain portion thereof is invested and the balance advanced. Under the provisions of the BR Act every banking company, including a co-operative society carrying on the business of banking, is required to obtain a licence from the Reserve Bank, maintain a certain percentage of its assets in specified securities and most importantly, file necessary returns at periodical intervals as stipulated by the BR Act. Similarly, the accounts of the society, including the balance-sheet, are required to be prepared in the manner specified and are subject to inspection, audit and regulation by the Reserve Bank of India. These provisions indicate an entity carrying on business of banking is not absolutely or wholly free; is amenable to supervision/regulation. In other words, its investments are subject to scrutiny; and any impermissible investment will not be permitted to continue, if made, by the regulator, i.e., the Reserve Bank of India. Section 6(1) of the BR Act specifies the forms o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 80P(2)(a)(i) of the Act. Even otherwise, as already noted hereinbefore, a banking company including a co-operative society, may accept deposits for the purpose of lending or investment. The definition does not stipulate that investment has to be only to the extent provided either by the GCS Act or the BR Act. To read it to be so would mean reading in a restriction which is not available in the provision on a plain reading. What the Legislature has not provided cannot be read in by a court, much less the Revenue. In the case of CIT v. U.P. Co-operative Federation Ltd. [1989] 176 ITR 435, the apex court was called upon to resolve a controversy under the Indian Income-tax Act, 1922, whereunder by section 14(3) of the 1922 Act similar provision was made to extend certain advantages to co-operative societies. In the case before the apex court, the assessee-co-operative society earned interest on certain security deposits placed with agent and a question arose as to whether the same would amount to "investment". The apex court held that there could be no dispute that the money provided by the assessee was by way of investment. In fact, if this money had not been made ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as permitted under section 5(b) read with section 6(1) of the BR Act. Hence, to treat the investments made by an assessee as being investments not in the course of business is not warranted by the provisions of the BR Act. One cannot presume that an assessee would voluntarily engage in activities which are prohibited specifically by the BR Act. During the course of hearing a contention was raised on behalf of the Revenue that an assessee-bank must accept deposits, only for the purpose of advancing loans and for the purpose of statutorily prescribed investments. Any deposits in excess of such requirements, if invested, would be tantamount to not carrying on the business of banking. At the cost of repetition, as already noticed hereinbefore, the definition of the term "banking" does not impose any such restriction and it is not possible to read any such restriction. Even otherwise the entire premise is based on a fallacious understanding of the business. It is never possible for a bank to match the sum total of its borrowings in the form of deposits with the amounts lent out and invested. The bank earns profits because of the spread between rate of interest between borrowings mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of its business profits." In the case of Addl. CIT v. Ahmedabad District Co-operative Bank Ltd. [1975] 101 ITR 733, this court stated: "The laying out by a bank of its surplus and idle funds in easily realisable securities or debentures or deposits may be with twin objectives, viz., to encash them readily in case of need and not to lose interest by keeping them idle. Merely because they are the securities or debentures payable at a certain specified period or that there was no variation in them would not convert them into investments pure and simple." The question therefore would arise as to whether any distinction can be drawn between so-called surplus funds/idle funds and statutory investments. It is necessary to bear in mind that a reserve per se does not yield any income. It is the investment of the fund backing a reserve which would yield income. Therefore, whatever be the nomenclature of a particular reserve, the funds of an assessee in totality are conglomerate of the total amount of deposits/investments, profits and other realisations. Money has no colour and the nomenclature used to segregate different funds is only for the sake of administrative convenience. Other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In other words a balance-sheet which reflects sound financial health of a bank would get preference over an establishment whose balance-sheet reflects weak finances. It is for this purpose that a prudent banker is required to invest in various modes, including in securities of different kinds to carry on the business of banking. It is in this context that the concept of easily realizable securities, investments wherefrom moneys are readily available, comes into the sphere of banking. The business is not only to be transacted by a banker alone. The customer is an equally vital component of such a business and it is the trust that he has in a particular establishment which ultimately permits the establishment to carry on the business of banking. Thus, all investments, even if one accepts the Revenue's artificial distinction, surplus or not, are essential and conducive to the promotion or advancement of the business of banking. In the case of CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194, the apex court has stated that there is nothing in the phraseology of section 80P(2)(a)(i) of the Act which makes it applicable only to income derived from working or circulati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments is also the destination of such income and proceeds of its realisation on encashment. All such activities are integral part of normal banking activities of banking business carried on by these societies." The aforesaid findings would cover Tax Appeal No. 208 of 2003 and Tax Appeal No. 178 of 2003, because the Tribunal has found "the facts of all the present cases so far as they relate to claim for grant of deduction under section 80P(2)(a)(i) are almost similar". In so far as Appeals Nos. 371 to 375 of 2003 are concerned the Tribunal has after referring to the Special Bench decision, analysed the details of investments on which interest income is earned yearwise and applied the decision of the Special Bench. In paragraphs Nos. 6 and 7, the Tribunal has issued direction in relation to the miscellaneous income as well as interest on suspense account and directed the Assessing Officer to verify the facts and held that "income which has no nexus or connection to the banking activity alone be brought to tax and grant exemptions to others". During the course of hearing on behalf of the appellant-Revenue 13 authorities were cited, and on behalf of the respondent-assessees 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viding credit facilities to its members; (x) The provision of section 80P has been introduced on the statute book to encourage and promote growth of the co-operative sector in the economic life of the country; (xi) When investments are made in securities, in permissible mode of investments, under the BR Act or the GCS Act read with the Indian Trusts Act income arising therefrom would be attributable to the business of banking, and eligible for deduction under section 80P(2)(a)(i) of the Act; (xii) Definition of "working capital" under section 2(24) of the GCS Act cannot be restricted to mean money raised by borrowing; (xiii) The scheme under the GCS Act in the case of a society carrying on the business of banking is that, it would be permissible to make investments or deposits in any of the specified modes as provided in section 71 of the GCS Act including any of the modes specified in section 20 of the Indian Trusts Act without there being any upper limit as to the amount that can be invested, once the statutory requirement of reserve fund stipulated in section 67(2) of the GCS Act is satisfied; (xiv) Section 6(1) of the BR Act is an enabling provision and to read the sa ..... 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