TMI Blog1996 (4) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... een obtained by the assessee and that income arising therefrom was income from non-banking assets not liable for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961 ? " The assessee is a co-operative bank and was formed as a co-operative society under the Rajasthan Co-operative Societies Act for carrying on the business of the activity of borrowing and lending money and it had invested money in Government securities both in Central as well as State. According to the Department, the investment of the reserve and the other funds would have to be governed by the provisions contained in section 63 of the Rajasthan Co-operative Societies Act. The total investment which was made by the assessee was to the tune of Rs. 4.83 crores. According to the Department, this investment was considered to have been made in contravention of the provisions of section 63 of the Rajasthan Co-operative Societies Act without permission of the Registrar, Co-operative societies, and, therefore, it was considered that the income earned on such investments cannot be said to be related to the banking business and, therefore, cannot be exempt under section 80P(2)(a)(i) of the Income-tax Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. It was found by the assessing authority that necessary permission as contemplated under section 63 of the Rajasthan Co-operative Societies Act has not been obtained and on that basis the income was held taxable and not exempt under section 80P(2)(a)(i). The Tribunal found that the term "banking business" has not been defined under the Act and the term has to be given its meaning as given by the Banking Regulation Act, 1949, and by the Reserve Bank of India Act, 1934. Under section 3 of the Banking Regulation Act specific provision is made regarding the said Act applying to the co-operative societies formed for the purpose of carrying on the business of banking. The objects of the bank as contained in clause 3 of its bye-laws are as under : (a) To promote the economic interest of the members of the bank in accordance with the co-operative principles ; (b) to receive money on current savings, fixed deposits or other accounts and to raise or borrow from time to time such sums of money as may be required for the purpose of the bank ; (c) to grant loans to co-operative institutions registered or deemed to be registered under the Act and other members enrolled as per the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 species; the buying and selling of foreign exchange including foreign bank notes ; the acquiring, holding, issuing on commission, underwriting and dealing in stocks . . . bonds, obligations, securities and investments of all kinds, etc. . . . Clause (d) : the effecting, insuring, guaranteeing, underwriting participating in managing and carrying out any issue, public or private, of State, municipal or other loans or of shares, stock, debentures or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue. " " Approved securities " have been defined in section 5(a) to mean securities in which a trustee may invest money under clause (a), (b), (c) or (d) of section 20 of the Indian Trusts Act, 1882. Clause 3(h) of the bye-laws provide for investment of its funds in the securities specified in clauses (a), (b), (c) and (d) of the Indian Trusts Act, 1882. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king or providing credit facilities to its members. The provisions of section 80P(2)(a)(i), therefore, are similar to them. In respect of the provisions of section 81(i)(a) it was observed by this court that the income by way of interest earned on Government securities held by a co-operative banking institution is exempt from income-tax under section 81(i)(a) of the Act of 1961, if the said securities are held by the bank as its stock-in-trade and section 81(v) of the Act is not applicable. The principle which has been laid down in the above case are stated to be fully applicable to this reference. The case of the assessee before the assessing authority was that under clause 4 of the bye-laws of the bank, the reserve fund will belong to the bank and is to be invested in any of the securities specified in section 20 of the Indian Trusts Act, 1882, or in any manner directed by the Registrar. Section 63 of the Co-operative Societies Act, 1965, also prescribes the manner under which the societies could invest the funds. Rule 54(4) contemplates that the reserve fund of the society could be utilised with the sanction of the Registrar to meet unforeseen losses, specific claims of credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Registrar as required under the Co-operative Societies Act and Rules made thereunder would not result in a situation that income which is otherwise attributable to the banking business would not be considered as attributable to banking business. In the appeal before the Income-tax Appellate Tribunal, the Revenue contended that since the action has been taken by the assessee contrary to the provisions of the Co-operative Societies Act itself, therefore, it would be outside the ambit of the banking business carried on by the assessee. The Tribunal has taken into consideration the provision of section 5A of the Banking Regulation Act, 1949, and section 24 which are as under : " Section 5A. Act to override bye-laws, etc. (1) The provisions of this part shall have effect notwithstanding anything to the contrary contained in the bye-laws of a co-operative society, or in any agreement executed by it, or in any resolution passed by it in general meeting, or by its board of directors or other body entrusted with the management of its affairs, whether, the same be registered, executed or passed, as the case may be, before or after the commencement of the Banking Laws (Application to Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 securities relating to reserve fund can be considered the bank's stock-in-trade or circulating capital. It is clearly understood in banking parlance that circulating capital is that which is put into circulation or turned over to earn profits. Government securities coming out of the reserve fund which cannot be easily encashed and which can be utilised only when the contingencies mentioned therein arise cannot be considered to be circulating capital or stock-in-trade. It is more or less in the nature of a fixed asset of the society, be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Registrar previously obtained in writing. (4) The reserve fund of a society shall be available, with the sanction of the Registrar, for being utilised for any of the following purposes, subject to the conditions that the amount drawn shall be reimbursed as directed by the Registrar unless the Registrar dispenses with such reimbursement in special : (i) to meet unforeseen losse's incurred by the society ; (ii) to meet such claims of the creditors of the society as cannot otherwise be met ; and (iii) to provide for other financial needs in times of special scarcity. 56. Disposal of reserved fund on winding up of a co-operative society. --- (1) On the winding up of a co-operative society, the reserve fund together with the other funds constituted by the society in accordance with its bye-laws, shall be applied by the liquidator to the discharge of such liabilities of the society as may remain undischarged out of the assets of the society in the order : (a) the debts of the society ; (b) the paid-up share capital ; and (c) for dividend upon paid-up share capital at rates not exceeding six per cent. for any period or periods for which dividend has not been paid ; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ially 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. " The decision relied by learned counsel for the assessee cannot be considered to be good law in view of the judgment of the apex court referred to above and the provisions of the Rajasthan Co-operative Societies Act and Rules, referred to above, from which it is evident that the interest earned on securities investments by the bank is not a banking business as the said investment is neither of circulating capital or stock-in-trade of the co-operative bank as it has n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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