TMI Blog2005 (11) TMI 164X X X X Extracts X X X X X X X X Extracts X X X X ..... tive Bank are not applicable to the Regional Rural Bank. 4. That the authorities below have erred on facts and in law in stating that the investments mentioned in the assessment order are not in accordance with the provisions of Regional Rural Bank Act, 1961. 5. That the authorities below have erred on facts and in law in taxing the income from SLR investments and Non-SLR investments ignoring the various decisions of Hon'ble Supreme Court, High Courts and Income-tax Appellate Tribunal. 6. Your appellant submits that in view of the definition of the banking business as contained in the Banking Business as contained in the Banking Regulation Act, 1949, which defines that 'banking means the accepting, for the purpose of lending or investments, of deposits of money from public', the income of the appellant bank from its investment is its income from the banking business and hence, eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961. 7. That the orders passed by both the lower authorities below are without appreciating the facts, various submissions, explanation and information submitted by the appellant from time to time which ought to have been consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------------------------------------------- However, for the purpose of Income-tax Act, 1961 and Interest tax Act, 1974, the status of Co-operative Society has been assigned under RRB Act, 1976. 3.1 The working area of the assessee Bank has been notified in terms of section 3(1) of the Regional Rural Banks Act, 1976 (hereinafter called as 'RRB Act, 1976'), as the districts of Farrukhabad and Kannauj. In these districts, the bank is working with the network of 82 branches. 3.2 The objects of the bank are brought out in the assessment order by the Assessing Officer from the Director's report, presented by the Chairman of the bank wherein the following objects of the bank under the head "Brief Introduction" were mentioned as under:- "The bank was established mainly with a view to provide basic banking facilities in the remote rural areas and to mobilize savings from rural masses, who were not adequately served by the commercial banks as the branch network of these banks was limited to urban and semi-urban centers only. The bank's objective was to discharge the responsibilities under section 18(2)(a) and (b) of RRB Act, 1976 by extending credit facilities through imple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of the case before him and the judgments of the Supreme Court and the High Courts in conjunction, he was of the opinion that they do not help the assessee. Referring to the judgment of the Hon'ble Madras High Court in the case of CIT v. Lakshmi Vilas Bank Ltd [1997] 228 ITR 697, wherein their Lordships were considering the "Interest-tax Act", he was of the view that their Lordships therein held investments in Government Securities/T-bills to the "Investments" not "working-capital" or "stock-in-trade". 3.6 He was further of the view that on the basis of analysis of the decisions referred to earlier as well as judgments of the Hon'ble Apex Court in the case of Bank of India Finance Ltd. v. Custodian 10 SSC 488, that investment in Government securities are both by practice and in law, "Investments" and not "stock-in-trade". Their classification as "investments" is largely in recognition of their role in and as tools of Governments Monetary and Fiscal policy duly executed through RBI. These SLR and CRR requirements are utilized for intervention in the markets in order to further the Government's imperatives and policy objectives. They are utilized towards contractors/expa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000 (xi) ICICI Bonds Rs. 50,00,000 ----------------- Total Non-SLR investments: Rs. 21,93,00,000 ----------------- It was observed by him that on these investments, the assessee bank has shown the income as under: (1) On SLR Investments Rs.20,39,25,000 (2) On non-SLR Investments Rs. 4,02,30,000 4.1 Observing that the assessee has shown a net profit of Rs. 6,21,91,455.44 and that the entire income had been claimed exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961, which included the interest income earned on Non-SLR investment which amounted to Rs. 4,02,30,000. He was of the view that since this income was earned on the investments which were not in accordance with the scheme of Regional Rural Banks Act, 1976 since under the provisions of RRB Act, 1976, the bank has to conduct banking business in the notified area. The Non-SLR investments on the 'other hand according to him were made outside the notified area even though under the guidelines of Reserve Bank of India and NABARO, yet they were held to be not entitled for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s voluntary reserves has been utilized by it in the course of its ordinary banking business." 4.5 In this background, the Assessing Officer in the present case proceeded to consider the issue regarding the income from non SLR investment (Voluntary reserves) in the context of ordinary banking business done by Regional Rural Bank. 4.6 He was of the view that every ruling of Co-operative bank is not binding on the banking business of Regional Rural Banks because the manner of working differs on account of different enactments, by which they are governed. The business of Cooperative banks, it was observed, is governed by: (a) State Co-operative Banks' Acts; and (b) Banking Regulation Act, 1949. The business of Regional Rural Banks, on the other hand, is governed by; (c) Regional Rural Banks Act, 1976; and (d) Banking Regulation Act, 1949. 4.7 On account of this fact he was of the view that the issue whether making investments by Regional Rural Banks is "ordinary course of banking business" or not, it was necessary to consider the provisions of RRB Act, 1976. 4.8 In this context referring to the objects for which the Regional Rural Banks were established, he referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cludes the income earned from all investments including SLR and Non-SLR. Reference was also made to section 18 of the RRB Act, 1976. 5.1 Reliance was placed on the following decisions: (a) CIT v. Karnataka State Co-op. Apex Bank [2001] 251 ITR 194 (SC) (b) CIT v. Bangalore Distt. Co-op. Bank [1998] 233 ITR 282 (SC). (c) CIT v. Ramanathapuram Distt. Co-op. Central Bank Ltd. [2002] 255 ITR 423 (SC). (d) Surat District Co-operative Bank Ltd. v. ITO [2003] 78 TTJ (Ahd.) (SB) 1. (e) CIT v. Bazpur Co-operative Sugar Factory Ltd. [1988] 172 ITR 321 (SC). (f) Sahney Steel Press Works Ltd. v. CIT [1997] 228 ITR 253 (SC). 5.2 Before the CIT(A) the Assessing Officer also placed written submissions which have been reproduced in para 3.2 onwards from page 3 of the CIT(A)'s order. 5.3 The sum and substance of these submissions which can briefly be culled out is that Co-operative bank and Regional Rural Banks are governed by different statutes as such the decisions in the case of Co-operative Bank will not apply. Another distinction namely the objects for which the Regional Rural Banks were formed namely developing the Rural Economy on Regional basis was also considered to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised by the Assessing Officer that under the RRB Act, it is only the business conducted in the notified area for the purpose of developing the rural economy, which was entitled to deduction under section 80P of the Income-tax Act, 1961 and not any other income. Thus conversely it was submitted the income earned from investment from urban area or metropolitan cities are beyond the purview of RRB Act and deduction thereon is not admissible. 5.7 Reliance was placed upon the following decisions: (1) CIT v. Bangalore Distt. Co-operative Central Bank Ltd. [1998] 233 ITR 282 (SC) (ii) CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194 (SC) (iii) MP Co-operative Bank Ltd. v. Addl. CIT [1996] 218 ITR 438 (SC) (iv) Malprabha Gramin Bank, Dharwad v. Jt. CIT, Hubli ITAT Order. (v) Surat Distt. Co-operative Bank Ltd. v. ITO [2003] 78 TTJ (Ahd.) (SB) 1 (vi) Farrukhabad Gramin Bank v. ITO, Ward-I, Farrukhabad, ITAT, Agra Bench, Agra [IT Appeal No. 54 (Farrukhabad) of 1999-2000, dated 29-2-2000] (Vii) Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC) (viii) Union of India v. Satish Panalal Shah [2001] 249 ITR 221 (SC) (ix) CIT v. A.R.J. Security Printers [2003] 26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blic funds by the Society and this is binding on the society. 'Section 24 of the Banking Regulation Act, 1949 (Maintenance of a percentage of Assets) has full application to co-operative societies engaged in the banking business and as such they have to comply with the provisions of section 24'." 5.11 On the basis of the above, it was submitted that as far as the matter of banking is concerned Reserve Bank of India is supreme and the absence of Circular enjoining the investment of reserves in SLR Securities does not in any way detract the inherent powers which is that certain portion is to be invested in SLR or CRR securities as per RBI norms. 5.12 Vide the written submissions, it was also pointed out before the CIT(A) that the ITAT Bombay Bench distinguished the judgment of Supreme Court in MP Co-operative Bank Ltd.'s case by referring to the fact that the Government securities subscribed under SLR can be traded. It was his submission that this impression is erroneous for it is only such securities subscribed in excess of SLR/CRR requirements that can be traded, and not those that conform to the limits laid down by the SLR/CRR requirements. 5.13 The submission was also mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e objectives drawn in the Regional Rural Bank Act, 1976, the income on which the provisions of Income-tax Act, 1961 shall apply. However, as far as the deduction under section 80P is concerned, it has to be seen in the light of business authorized to be carried out with regard to the aims and objectives of the Regional Rural Banks Act, 1976. He was further of the view that the case laws cited by the ld. Counsel on behalf of the assessee pertains to the case of Cooperative Banks, which are treated as co-operative societies under the provisions of section 80P of the Income-tax Act, whereas the assessee admittedly is a Regional Rural Bank and not a Co-operative bank and hence, the deduction admissible to the income derived from the co-operative bank will be admissible to the appellant bank only to the extent it qualifies for such deduction within the meaning of Board's Circular No. 319, dated 11-1-1982 read with section 22 of the Regional Rural Banks Act, 1976. Moreover even in case of Co-operative Banks, there are a number of judicial pronouncements including those of Hon'ble Apex Court of the Country in which it has clearly been laid out that the entire income of a Co-operative Soci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the break up of profits given by the appellant along with the written submissions furnished during the course of appeal proceedings and further vide a separate application dated 16-3-2004 requesting to direct the Assessing Officer to keep the demand in abeyance till the decision of appeal as under:- ------------------------------------------------------------------ 'Income SLR Non-SLR Banking Total ------------------------------------------------------------------ Interest 20,63,02,000 4,02,30,000 6,90,17,000 31,55,49,000 earned Misc. - - 43,23,000 43,23,000 Income Total Income(A) 20,63,02,000 4,02,30,000 7,33,40,000 31,98,72,000 Expendi- 16,61,91,162 3,24,08,171 5,90,80,667 25,76,80,000 ture (B) Net Profit 4,01,10,838 78,21,829 1,42,59,333 6,21,92,000'" during the year (A-B) ------------------------------------------------------------------ 5.18 Thus, he was of the view that as per the break up of profits given by the assessee himself, the assessee has admittedly earned income from three distinct sources as under:- (1) Interest on SLRs (ii) Interest on non-SLRs (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance placed by the assessee on Surat District Co-operative Bank Ltd.'s case was held to be misplaced as the order was held to be distinguishable since it pertained to the case of a Co-operative Bank and not a Regional Rural Bank. 5.22 Similarly, the judgment in the case of MP Co-operative Bank Ltd v. Addl. CIT [1996] 218 ITR 438, which had been overruled by the Apex Court in the case of CIT v. Karnataka State Cooperative Apex Bank [2001] 251 ITR 194, he was of the view that in the said judgment the Apex Court has laid down as under:- "... There is no doubt, it is not disputed, that the assessee cooperative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee's business, We are unable to take the view that found favour with the Bench that decided the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal had placed reliance upon the judgment of Apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172, wherein, it has been held that it is well-settled that the tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilization. It has to be seen whether at the point of accrual, the amount is of revenue nature. If so, the amount will have to be taxed. In the present case Assessing Officer has considered the income taxable by denying the exemption under section 80P. 5.27 The judgment of Mehsana District Co-operative Bank Ltd. v. ITO [2001] 251 ITR 522 (SC) was also held to be distinguishable since it pertained to a co-operative society engaged in the banking business. In that context interest earned on the funds utilized from the statutory reserves and from the income of hiring of safe deposits, was held to be qualifying for deduction under section 80P(2)(a)(i) as the funds were utilized in accordance with the ordinary banking business. 5.28 The case of CIT v. Ramnathapuram Distt. Co-operative Central Bank Ltd [2002] 255 ITR 423 (SC) was again distin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by either of the authorities below in this regard. Therefore, the Court has to decide these matters on the facts found and available on record. The facts found and available on record do suggest that the interest income was attributable to the assessee's business income and the investment made in IVPs are investments made from the fund generated from the banking business. It has a direct and proximate connection with or nexus to the earning from banking business in order to attract provisions of section 80P(2)(a)(i). In the facts and circumstances, findings recorded in favour of the assessees and against the Revenue are upheld." 5.30 Referring to the said judgment wherein the Court observed that each investment is to be examined, considered and decided on its own merit in order to apply the principles and for this purpose investigation of facts and definite findings are necessary. Accordingly, in this context the CIT(A) was of the view the court observed that in the absence of detailed inquiry in the nature of available surplus and investment thereof by the Revenue in that case, it was difficult to go along with the submissions made by the Revenue, since no inquiry in this regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness from the income therein were attributable to the business specified under section 18B of the RRB Act. 5.33 Accordingly, he was of the view, the assessee is not entitled for deduction under section 80P with reference to the income earned on SLR and Non-SLR which is to the tune of Rs. 4,72,32,667. Thus, the contention of the assessee that it is the income-itself in the business venture as per the provisions of Banking Regulation Act, does not hold good as the issue under consideration according to him is whether or not the income earned from such activities is qualified for deduction under section SOP of the Act. 5.34 He was further of the view that in fact Their Lordships of Bombay High Court itself in para 28 of the said judgment have stated that the judgment was confined only to the facts of these cases in which the judgment was given and the fact remains that in the facts, as placed earlier, Their Lordship of Bombay High Court held that no facts were investigated by any authority and the judgment was as such rendered on the facts available on record. 5.35 On the basis of these facts, he was of the view that:- "Considering the above proposition of law with reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Benches of the Tribunal and one of the orders, i.e., the order of the Hyderabad Bench had been confirmed by the A.P. High Court (copy) of this order, it was submitted is placed at page 90 and order of the Tribunal, which has been confirmed, it was submitted, is placed at pages 84 to 89. As such, on the basis of these circumstances, it was argued that the issue of exemption is fully settled and covered in favour of the assessee and as such it deserves to be allowed. 7.5 The ld. A.R. inviting attention to section 22 of the Regional Rural Bank Act and sections 3 and 18 of the same along with section 24 of the Banking Regulation Act contended that the issue is covered in favour of the assessee. 7.6 The ld. A.R. was required to address the Bench on the aspect of its SLR and Non-SLR investments as to how the amount has been invested by the assessee on which the deduction is sought to be claimed. 7.7 The learned A.R. sought time to ascertain the exact facts. As such, the case was adjourned to the next day. On the next date, the attention was invited to page 264, which was filed on behalf of the assessee in the course of hearing. According to this, it was stated, the total SLR inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n disallowed, it was his submission that since the assessee has earned an income of about 25 crores in the year under consideration and further has claimed exemption of only five to six crores then only that aspect has been brought to tax. It was his submissions that the question of expenses incurred on SLR and Non-SLR do not come into picture at all. As such, it is not correct on behalf of the assessee to submit that the entire income earned by the assessee has been brought to tax. It was his contention that CIT(A) is fully correct on the aspect that how can the assessee on its own allocate proportionate expenditure on SLR or Non-SLR and as such they should not be allowed. 7.12 In this background, the ld. A.R. was required to specifically address the Bench on the aspect as to what is the exact SLR income on which exemption is sought to be claimed and what is the exact non-SLR income, on which deduction is also claimed. Since the relevant facts were not available with the learned A.R. he sought time to verify and place a correct picture before the Bench. Accordingly, the case was adjourned to 12-7-2004. 7.13 On the said date, it was argued on behalf of the assessee that the tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer that no expenditure has been incurred and it was submitted that this finding was confirmed by the CIT(A). With respect to the errors pointed out by the assessee, it was firstly contended that there was no error with respect to the figures given in the assessment order. 7.16 In this background, the assessee was directed to give in writing instead of addressing the Bench orally as to the total SLR and Non-SLR investment and income thereon. The assessee was directed to file copies of the same before the Bench and give one to the learned D.R. The Revenue was also given an opportunity to make necessary verification on this aspect. The objections if any, of the Revenue, were also invited on whether the assessee should be allowed to get the correct figure regarding the SLR and Non-SLR investment substituted at this juncture. Accordingly vide order sheet entry dated 12-7-2004 observing as under, the appeal was adjourned to the next date of hearing: "In the course of hearing, it was pointed out by the learned A.R. Mr. Dayal Saran that the assessee vide letter dated 7-7-2004, filed in the Registry in response to the Written submissions dated 5-7-2004 of the learned D.R. Mr. Wasee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer and how and why they could not be placed before the CIT(A). In the court, it was announced that since certain aspects have to be verified and certain clarification are required, time was given to the Revenue to do the same and it was announced that the case would be fixed for hearing on 26-7-2004. However, while dictating it was considered that looking at the peculiar nature of the issues, which arise for determination, it would be appropriate first of all to direct the learned A.R. to place in writing the errors sought to be pointed out in the assessment order, put in writing as to how and why the said facts were not brought to the notice of Assessing Authority under section 154 or before the CIT(A) when the assessee went in first appeal. The learned A.R. will give this reply in writing on or before 19-7-2004 and also give one copy of the same to the learned D.R. who on the receipt of the said reply of the assessee will give in writing the stand of the Revenue addressing the issue of correctness of assessee's version and anything else which the Revenue would like to address on this aspect on or before 26-7-2004. Thereafter any further replies/rejoinder, which either side ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. --------------------------------------------- A Deposit with Banks 63% 20,39,25,000 B Other income 1% 43,23,000 C Interest on advances (69017) 22% 6,90,17,000 D Interest on Balance with RBI and Other banks (1%) 23,77,000 E Interest on Investments (13%) 4,02,30,000 This is the income, wherein A+D = SLR Income E = Non-SLR Income B+C = Banking Income --------------------------------------------- Further, the assessee submits under a column entitled 'Correct figures' (which same is anything but correct). However, under the 'Correct figures' the assessee arises at a net figure, for the three heads viz. SLR Income, Non-SLR Income and Banking Income by dividing and apportioning the 'Total Expenditure in proportions to the Interest Income' which is legally and factually untenable for the following reasons:- 1. It has not been brought on record that a one-on-one correspondence exist, between interest bearing funds and funds deployed in SLR and Non-SLR securities and more particularly to that portion which is deployed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 3-8-2004 placed following bifurcation: "BEFORE THE HON'BLE INCOME TAX APPELLATE TRIBUNAL, AGRA BENCH, AGRA In the matter of: M/s. Farrukhabad Gramin Bank, Sahyog Bhawan, Chaurasi, Fatehgarh, Farrukhabad v. Asstt. Commissioner of Income-tax, Circle-2(1), Farrukhabad PAN: AAALF0004B ITA No. 190/Agra/04 For the assessment year 2001-02 Sub: Assessment year 2001-02 In compliance with the directions of the order of the Income-tax Appellate Tribunal dated 12-7-2004, the assessee hereby points out the specific errors in the assessment order, dated 26-12-2003, which is under appeal:- 1. That the Non-SLR investment of Rs. 21,93,00,000 has been mentioned at page No. (5) or assessment order. However, the correct Non-SLR investment of the bank is as under:- Non-SLR Investment in Bonds/ Debentures/Units Rs. 21,93,00,000.00 Inter Bank Deposit (Non-SLR) Rs. 146,73,81,522.64 -------------------- Total Rs. 168,66,81,522.64 ---------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee before the Assessing Officer on 3-12-2003, it was his submission that for RRB, the RBI had clarified that cash and "Time Deposits". As such the SLR investment was Rs. 62,64,22,951. However, with respect to the Non-SLR investment amounting to Rs. 21,93,00,000, it was submitted that this figure was not correct. He further stated that the assessee was never required to supply figures of income on SLR and Non-SLR investment. In this background, he stated that the Assessing Officer relying upon the figures furnished by the assessee in the letter, deduced the income from investments from Schedule 13, where the interest earned on TDR, FDRs at Rs. 20,39,25,000 was adopted as income from SLR investments and with respect to non-SLR investments, income of Rs. 4,02,30,000 was adopted. It was further submitted by him that the assessee had made error in classification of FDR/TDRs with other Banks. Accordingly, out of the total TDR deposit of Rs. 2,11,45,44,043 as per Schedule 7, the non-SLR investment should be taken as Rs. 2,74,24,21,002. Accordingly, income from SLR and Non-SLR on bifurcation would be as under:- Income on SLR Investment 48,75,000 Income on Non-SLR investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of its FDR/TDR's with other Banks, which up to a certain limit are termed SLR but beyond that are termed Non-SLR.So, out of a total TDR deposit of 2,11,45,44,043 as per Schedule 7, (a) Money at 'Call and Short-notice' (TDR with Sponsor Bank) = 59,14,23,000 (SLR) (b) TDR's with other Banks = 146,73,82,000 (This is non-SLR) (c) Current accounts-cash = 5,57,39,569 (Non-SLR) although eligible as SLR, but since it exceeds SLR limits, is to be treated as Non-SLR (d) Further, investments in = 3,50,00,000 (SLR) NABARD and IRBI Bonds (e) Other investment as given earlier vide page 115 of paper book = 21,93,00,000 (Non-SLR) Thus SLR Investment is = 59,14,23,000 + 3,50,00,000 (a)+(d) = 62,64,22,450 ------------- and Non-SLR Investment would be = 146,73,82,000 + 5,57,39,569 (b)+(c)+(e) + 21,93,00,000 Total Non-SLR Investment 2,74,24,21,092 --- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been treated as ineligible for deduction under section 80P but the disallowance has been restricted to the extent of deduction claimed under section 80P which is 6,21,45,444. Thus, it is not that the entire income from Banking and Investments have been treated as disallowable, but it is that entire income from SLR and Non-SLR investments have been treated as in-eligible for deduction under section 80P but the disallowance has been restricted to the 'amount claimed as deduction' which corresponds to the Net-Profit viz., 6,21,45,444. 'Further, conclusion-II' However, it must be pointed out, that non-inclusion of other TDR's in other Banks, although Non-SLR investment, but not included in the details filed before the Assessing Officer on 3-12-2003 is a 'material-omission'. To recapitulate, Assessee, under the signature of its Chairman had furnished Total Non-SLR Investments as 1. HPSFCL Bonds Rs. 1,00,00,000.00 2. HBI Bonds Rs. 1,00,00,000.00 3. IDBI Bonds Rs. 2,25,00,000.00 4. SBI Bonds Rs. 1,00,00,000.00 5. TFCI Bonds Rs. 80,00,000.00 6. Units of UTI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... classification of FDR/TDRs and then SLR and Non-SLR classification itself and thus calculations and other issues addressed. 7.24 On the next date of hearing the learned AR. submitted that there is not much difference in working given by the assessee and the working given by the D.R. and this aspect can be looked into. However, coming back to his basic argument, it was his assertion that as far as ground Nos. 1 to 10 are concerned that the issue pertaining to Non-SLR income is fully covered by virtue of the order of Agra Bench of Tribunal and the judgments of Hon'ble Supreme Court and High Court. 7.25 Referring to the order of Agra Bench, it was fairly conceded that the Tribunal has considered only the Non-SLR income since in that year there was no occasion to address SLR income in view of the fact that the Assessing Officer himself had allowed the claim of the assessee. Accordingly, in this background, the fact that SLR investment had not been addressed by the Agra Bench, it is submitted that this aspect is correct. 7.26 In the said circumstances, the ld. A.R. was required to address the Bench specifically on the issue as to how income from SLR investment is claimed exempt a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aper book filed before us. Reliance was also placed upon the judgment of the Karnataka High Court in the case of CIT v. Grain Merchants Co-operative Bank Ltd [2004] 134 Taxman 249 (Kar.), copy of which was also placed before the Bench. Reliance was also placed upon pages 16 to 19 of the paper book which contains another judgment of Karnataka High Court in the case of CIT v. Sri Ram Sahkari Bank Ltd. [2004] 138 Taxman 45. The judgment of Punjab State Warehousing Corpn. v. CIT [2004] 138 Taxman 48 (Punj. Har.) was also relied upon. Reliance was also placed on the Agra Bench of the Tribunal in the case of assessee, which has been considered on the aspect of income from Non-SLR investment. 7.32 The ld. A.R., was specifically required to address the Bench as to how the judgments considered by the CIT(A) for denying the claim of the assessee have been wrongly interpreted. The ld. A.R. submitted that before the Tribunal, he is placing reliance on more or less the same judgments reliance upon which was placed by the assessee before the CIT(A). It was further put to him that before CIT(A) specific objections to the judgments relied upon by the assessee has been raised by the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are not applicable on account of the fact that the cases relied upon are in the context of Co-operative Societies/Banks. It was his contention that the fact that the reliance placed upon the judgment of Supreme Court in the case of MP Co-operative Bank Ltd v. Addl. CIT [1996] 218 ITR 438 has been overruled in the context of non SLR by CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194 has not been properly appreciated and which judgment, it was stated, had been relied upon before the Tribunal also in the case of the assessee. 7.36 It was also submitted by him that the observations of the CIT(A) that this may be the surplus fund, which have been invested is not correct. Referring to page 135 of the balance sheet on the back of page 134, it was submitted that these were not surplus funds of the assessee and these were investments made on the basis of guidelines of RBI. It was further submitted by him that the aspect of circulating capital has been addressed by Ahmedabad Bench at pages 38 to 83 in the paper book. The attention was invited specifically to page 38 wherein it was submitted that the aspect of SLR and Non-SLR has not been addressed. It was submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent securities attributable to utilization of its funds from statutory reserves under section 67(2) of Gujarat Co-operative Society Act, 1961. 8.5 The other aspect, it was submitted which was considered was whether the income derived by the assessee Co-operative Banks from the investments of their voluntary reserves other than statutory reserves is exempt under section 80P which was not relevant. 8.6 Inviting attention to the head notes given at page 1 in Surat District Co-operative Bank Ltd. v. ITO [2003] 78 TTJ (Ahd.) (SB) 1], it was contended that the Special Bench appreciated, for the purpose of deduction under section 80P(2)(a)(i), the specific aspect of investment in respect of non-statutory reserves, which on the facts of that case had been made out of mixed funds. It was submitted that these investments were made out of surplus funds in the year out of the working capital. 8.7 It was emphasized that the entire appreciation of facts was in the context of a Co-operative Bank. It was submitted that therein it was appreciated that the activities of receiving deposits from customers and utilizing the same for lending or for investment in approved modes are all integral par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found that the deployment of reserves is in consonance to the requirement of Co-operative Societies Act. It was argued that these findings are not relevant in the context of Regional Rural Bank and the deployment of reserves in consonance of RRB Act has not been addressed as such has not been examined by any order or judgment and in fact, since it has not been raised in any of these orders or judgments on account of this fact, the courts never had an occasion to deal with the said aspect. 8.13 Specific attention was again invited to the Italicized portion given below the head notes at page 1 of the Special Bench order constituted at Ahmedabad wherein the provisions of section 67(2) of the Gujarat Co-operative Society Act, 1961 read with Banking Regulation Act were interpreted and discussed. Thus, the finding given that the interest earned from the trustee securities, dividend and UTIs etc. are as per the requirement of the enabling Act there, it was argued. 8.14 Again inviting specific attention to page 2 of the said order, it was urged, the Tribunal therein interpreted that in the Gujarat Co-operative Society Act, 1961, there is no provision requiring the co-operative bank to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest of large number of depositors. The Bank has derived substantial interest income from such investments made in approved securities by investing surplus funds/idle moneys lying at the disposal of the bank. Thus, such investments have not only served the twin objectives but has enabled the co-operative banks to achieve multiple advantages." 8.18 It was contended by him that this finding is on the specific facts of the case and with regard to the specific objectives of the relevant Act would have been looked into and only then the Tribunal concluded that the twin objectives of the enabling Act, i.e., Co-operative Society Act were fulfilled. It was his contention that in none of the orders of the Tribunal, this aspect has been considered, i.e., objectives of the Regional Rural Banks and in all the judgments of either the Supreme Court or the High Court this fact has neither been considered nor argued. As such, this material distinction is the reason why the Assessing Officer has rejected the claim of the assessee. It was reiterated that the case of the Revenue is not that the Regional Rural Bank engaged in the activities, for which it was created should be denied exemption under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Banking Regulation Act and section 71 of the Gujarat Co-operative Society Act, 1961 and various circulars, notifications etc. issued by RBI from time to time and in the light of these specific Acts and provisions, the Tribunal therein concluded the issue before them in assessee's favour which has no bearing on the present case. Reverting back again to the order of the Special Bench it was emphasized that the Special Bench observed there that all such investments are part of normal transactions carried out by such Co-operative Banks and the investment as such made by these Co-operative Banks in consonance with sound banking practice adopted by almost all co-operative banks in the last several years fulfils all the tests of being rated as part of normal banking business and as such eligible for deduction. It was emphasized that the reliance had been placed upon the judgment of Supreme Court in the case of Bihar State Co-operative Bank Ltd. v. CIT [1960] 39 ITR 114 which was not relevant in the case of a Regional Rural Bank. 8.22 It was submitted that even if for a moment, the material distinction of this Special Bench order, namely that it has been rendered in the realm of Co- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Regulation Act, 1949 as well as section 57(2) of the Karnataka Co-operative Society Act, 1959 and rule 23(3) of the Karnataka Co-operative Societies Rules, 1960 and in the context of these specific Acts/Rules their Lordships of Supreme Court held "on the fact situation of the case, we do not find any justification to interfere with the conclusions of the High Court. The appeals suffer dismissal. There will be no order as to costs." It was further highlighted by the learned D.R. that even in the said case, the arguments on behalf of the assessee's co-operative Central Bank was that income of the Cooperative Society carrying on business of banking was attributable to the said activities and there was a finding of fact recorded by the Tribunal therein that the interest income is attributable to the business of the assessee, which finding, it was submitted, had not been challenged on the factual basis by the Revenue and no material as such had been placed before their Lordships of Hon'ble Supreme Court to upset the conclusions of the High Court. Accordingly, on account of these specific facts and different provisions of the State Co-operative Societies Acts and Rules, the appeal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctives of RRB Act. Emphasizing this aspect, it was submitted that there is no instance in the history where the Regional Rural Bank has dipped into these reserves. Thus, these activities would not entitle the assessee for exemption. 8.27 The argument advanced was that if the assessee bank can neither have an access to these funds and nor can the assessee bank deploy it towards its aims and objectives, then these funds cannot be said to be so applied towards the development of regional area to which the Regional Rural Banks cater. As such, the judgment of Supreme Court, on which the reliance has been placed i.e., CIT v. Bangalore District Co-operative Bank [1998] 233 ITR 282 and the Special Bench of Ahmedabad Bench of the Tribunal are not entirely in a different context and for this reason are applicable. 8.28 Attention was also invited by the learned D.R. to page 84 of the paper book, which is the order of Hyderabad Bench of the Tribunal rendered in the case of Rayalaseema Grameen Bank. Inviting attention to the same, it was contended that even this order is context specific and as such not relevant to the issue at hand. However, on a perusal of the said order which is placed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. are said to be applicable only to those proportionate interest. It was submitted that the alternative plea was not considered although the Assessing Officer was advised to examine the alternative plea so as to avoid controversy in future. 8.31 Thus referring back the order of the Tribunal in the case of Rayalaseema Grameen Bank, it was his argument that the material distinction between the RRB Act and the State Cooperative Societies Act has not been considered even in the order of the Rayalaseema Grameen Bank since they had no occasion to consider the same as the issue there was only of deployment of funds, as such, the order of the Tribunal is again context specific. Inviting attention to the said order, it was contended that at para 2 of the said order, it can be seen that the proportionate income from investments were challenged since the Assessing Officer was of the view that the reserves were created by transferring the amounts from the profit earned and the same have been invested by the assessee in securities and as such was held to be as income not arising in the course of assessee's business of banking and accordingly disallowed by him under section 80P(2)(a)(i) to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these rules could not be treated as income earned out of banking business: 8.33 It was submitted that the arguments advanced on behalf of the Revenue were as under: "The learned Departmental Representative, Shri C.P. Ramaswami on the other hand strongly supported the orders of the lower authorities, and submitted that the appeal of the assessee is liable to be dismissed." Referring to the said order, it was contended that in the context of tl1ese separate and distinct issue and specific arguments advanced confined to the issue at hand from either side, the Tribunal therein came to the conclusion that in the Banking Regulation Act, there are no restrictions on the assessee bank on the utilization of reserve fund, It was his argument that in the case at hand this finding does not render any help since the dispute in the present proceedings does not pertain to the utilization of reserve fund and as such reliance placed upon the said order by the ld. A.R. is misplaced. In this background, it was submitted that the reliance thereon and the submission that this order of the Tribunal was confirmed by the A.P. High Court does not render any help since the Tribunal in the said order w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbanked under-developed priority sector by ameliorating the poverty conditions of the under-privileged, SC/STs and other weaker sections of the society. That is the paramount objective of the Act. It should not be lost sight of the fact that the total losses suffered by rural branches of commercial banks is undeniably more than the total losses suffered by the RRBs. But the losses of the rural branches of commercial banks are made up by the other branches in semiurban and urban areas and the RRBs unfortunately for them cannot transfer the losses to their sponsor banks. The object and purpose is the economic development of the target groups and the achievements in that field certainly outweigh considerations of viability or losses. When the losses are on the increase even in the rural branches of commercial, banks, the RBBs alone cannot be singled out to bear the cross. I can find no better authority than the Chairman of the NABARD who categorically stated that the 'ghost of profitability' should not haunt us in judging the performance of the RRBs. Establishment of RRBs is a national commitment in the direction of ushering in a welfare State and that is a mandate of the Constitution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese funds are not available. 8.37 It was vehemently contended that this criteria could not be judged from the commercial aspect only and the primary object for which the Regional Rural Bank was created has to be seen and the aspect addressed so as to see whether its aims and objectives are being furthered or not. The fact that the Regional Rural Bank earns higher rate of interest from these investments, it was submitted is not a relevant criteria since these funds are not utilized for the development activities in the notified area which has been addressed by the Assessing Officer at page 7 of his order, where the limits of the area are fixed. Thus, no doubt that as per instruction of RBI Guidelines, investments have to be made and non-SLR investments at different point of time on existing statutory limit arise, but this argument will not hold good at all since in the case of non-SLR there is no necessity for the assessee to invest in the manner invested as in such a situation no penal consequence would be visited upon the assessee. Thus, it was submitted, the fact remains that the banking business was not carried in terms of the aims and objectives of the Regional Rural Banks A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Regional Rural Bank Act, it was reiterated has not been considered by any order or judgment with regard to SLR and non-SLR and the order of the Tribunal is assessee's own cost it was submitted was not a bar since admittedly the facts and circumstances of the two assessment years were entirely different and moreover no arguments pointing out the distinction in the case of Co-operative society and Regional Rural Banks Act was advanced as such the Tribunal never had an occasion to consider it. 9. In reply, the ld. A.R. Shri Dayal Saran appearing on behalf of the assessee submitted that the arguments of the ld. D.R. that Special Bench decision of Ahmedabad Bench of the Tribunal in the case of Surat District Co-operative Bank Ltd is not applicable, are not correct since according to him the principle applied therein is in the context of non-SLR. It was submitted that the D.R. is not correct in his submission since it relates to SLR also. Similarly it was submitted that the decision in the case of Mehsana District Central Co-op. Bank Ltd and Karnataka Co-operative Society again relate to the SLR investment, which has been followed by the Tribunal in assessee's own case, though it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ld. D.R., it is noted that the Department has not objected to the fact that the assessee bank is not a bank engaged in the banking activities the Departments objection is founded on the fact that banking activity on which exemption is being claimed according to the Department is not in pursuance to the aims and objectives of the Regional Rural Banks and only that income has been denied exemption. In reply, it was stated by the learned A.R. that the entire income has been denied exemption and the income has been earned from the banking activity. Maintaining SLR and Non-SLR investments and income thereon should be allowed exemption since it was within the pale of banking as defined under the Banking Regulation Act. Reliance was placed upon the orders and judgments to which our attention was invited in the course of hearing and it was submitted that the first and foremost decision in this line is judgment of Bangalore Distt. Co-op. Bank, which has been consistently followed in all the said judgments." 10. After the closing of the hearing, learned D.R. filed before the Registry a copy of the order of the Kerala High Court in the case of Kerala Small industries Development Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Assessment Order are not correctly mentioned which is a fact admitted by both the parties before us. It is seen that before the Commissioner this aspect was argued only on the principles of law and facts were completely ignored. The case as has been observed earlier has been adjourned a few times so as to give opportunity to either side to bring the correct facts on record. Without commenting further except that after some exchange as to who is responsible for the figures stated in the Assessment Order, the stand of the assessee was that the Assessing Officer had not called for the assessee to give any break-up of income in the category of SLR and non-SLR investment, and the argument on behalf of the Revenue is that the figures as supplied by the assessee have been taken by the Assessing Officer and that the assessee did not point out even before the CIT(A), we would merely like to observe that even if a particular income is claimed to be exempt or the exemption is denied it is necessary to actually state what is the exact amount of the income for which the deduction is being sought and conversely what is the exact amount of income on which deduction is being denied. The foc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment or non-SLR investment or not. It is necessary to have the actual figures verified. Thus in the circumstances it would be appropriate to restore this issue to the file of the Assessing Officer with the direction to verify the income of the assessee as per the relevant provisions in the period under consideration as income from SLR investment and income from Non-SLR investment. The Assessing Officer is directed to give the assessee an opportunity of being heard and pass a speaking order in accordance with law on this aspect. 11.2 Coming to the various arguments advanced before us at length, we have taken into consideration the principles laid down by the different judgments of Courts and the issues decided in the orders of the Tribunal to which our attention was invited and the relevant provisions of law which have a bearing on the issue. After a careful analysis and consideration of these, we have come to the following conclusion. 11.3 We propose at the out set to address the provisions of law which are required to be considered before deciding the present issue and which were referred to before us. Section 80P(2)(a)(i) of the Income-tax Acts grants exemption by virtu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to SLR investment is concerned. The equally vehement and elaborate argument of the learned D.R., on the other hand, on behalf of the Revenue have been that firstly this is an order which is rendered in the context of the provisions of Gujarat Co-operative Societies Act and on an appraisal of the activities of the concerned bank vis-a-vis the Enabling Act there the finding given by the Tribunal is that it is a banking activity has no relevance here as nothing has been advanced so as to show that the provisions of Gujarat Cooperative Societies Act are applicable to the case of a bank created under the Regional Rural Bank Act. Whereas the Revenue right from the beginning has put the assessee to notice that the judgments of Co-operative Banks will not apply to a Regional Rural Bank. It was also his contention that apart from this fact the order is rendered in the context of Non-SLR investment and not in the context of SLR investment. Apart from that various other arguments have been advanced which have been brought out in the earlier part of the order at length. 11.7 In this background, we are of the view that it is imperative first of all to see certain other relevant provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, insuring, guaranteeing, underwriting, participating in managing and carrying out of 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; (e) carrying on and transacting every kind of guarantee and indemnity business; (f) managing, selling and realizing any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims; (g) acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security; (h) undertaking and executing trusts; (i) undertaking the administration of estates as executor, trustee or otherwise; (j) establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons; granting pensions and allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erewith and incidental thereto." 11.13 Section 2(d) of the same defines the term 'notified area' as under:- "'notified area' means the local limits, specified under subsection (1) section 3, within which a Regional Rural Bank shall operate." The notified area under section 3(1) the working area has been notified as the Districts of Farrukhabad and Kannauj. 11.14 Chapter IV of the Regional Rural Banks Act, 1976 in section 18 which is the only section which deals with the business of Regional Rural Bank read as under:- "18. Business, which a Regional Rural Bank may transact.(1) Every Regional Rural Bank shall carryon and transact the business of banking as defined in clause (b) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), and may engage in one or more forms of business specified in sub-section (1) of section 6 of that Act. (2) Without prejudice to the generality of the provisions of sub-section (1), every Regional Rural Bank may, in particular undertake the following types of business namely- (a) the granting of loans and advances, particularly to small and marginal farmers and agricultural labourers, whether individually or in groups, and to co-operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been lead so as to suggest that the income on which deduction is being sought is from the activities of banking business conducted with this target group of socio-economic people within the notified area. The deduction under the Act is given specifically to encourage and promote the upliftment of the target group and not to general banking activity carried out at times may be within the notified area. Thus, the income which is to be considered entitled to deduction is that income which is covered by the definition of banking business as per the Banking Regulation Act and further also by the Regional Rural Banks Act. The fact that the Regional Rural Banks is area specific and activity specific which is narrower than the definition given of banking in the Banking Regulation Act is eminently obvious it and in the case of Regional Rural Bank is aimed at a separate class of socioeconomic spectrum can also be seen from the provisions reproduced above. The argument that this classification is not rationale or violative of any constitutional right is not for this forum to examine. This forum is to apply the legislative intent enunciated in the Act. The fact that the definition of banking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reserve fund and almost the entire reserve fund was invested in other cooperative banks/societies." It is seen that an alternate prayer was also made vide ground No.3 which reads as under:- "Alternatively and without prejudice to whatever is stated above the learned CIT(A) has erred in not considering the fact that the free statutory reserve is only Rs. 5,42,24,743 and not Rs. 35,81,03,752. If at all any disallowance of deduction under section 80P(2)(a)(i) of the IT Act has to be made then only figure of free reserve i.e., Rs. 5,42,24,743 can be taken into account and not that of the whole reserve i.e., Rs. 35,81,03,752." 11.16 Before this Special Bench in the case of Kalupur Commercial Co-operative Bank Ltd, the challenge was posed to not granting of deduction under section 80P(2)(a) on locker rent and interest-tax collected which was held to be not forming the part of banking business. 11.17 Unnati Co-operative Bank Limited also challenged the action of the Tax Authorities in treating the interest on investments as not the assessee's business from banking and denied of deduction to it. Reliance was placed upon the definition of the banking business under the Banking Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co-operative Bank, Postal Savings Bank in securities and shares were found to be as per provisions of section 71 of the Gujarat State Co-operative Societies Act and as such entitled for deduction under section 80P since these investments were made in Government securities in compliance to the provisions of Banking Regulation Act. On account of this fact, the CIT(A) directed the Assessing Officer in the Surat District Co-operative Bank Limited to allow deduction under section 80P(2)(a)(i) in respect of only interest on such investment in Government securities and banks etc. The first appellate authority confirmed the action of the Assessing Officer only in respect of locker rent and surplus of interest tax collected. As such, the assessee had challenged these two items of addition and although an application was moved before the Special Bench that the Departmental appeal regarding the relief given by the CIT(A) is also pending and as such, should be clubbed. However, since, only these cases had been referred to the Special Bench it was ordered that the Revenue's appeal would be heard by a regular Bench separately. These facts emerged from paras 4.2 and 4.3 of the Special Bench Order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that the Assessing Officer denied deduction under section 80P(2)(a)(i) on account of the judgment of the Apex Court in the case of MP Co-operative Bank Ltd. The income which was being considered by the Special Bench was from the investment in Government securities placed by the banks which was held to be not regarded as essential part of the assessee's banking activity inasmuch as the same did not form part of the stock-in-trade or working/ circulating Capital. In the facts of the present case, the Assessing Officer has not denied the claim of the assessee on account of the fact that he was of the view that this income did not form part of its stock-in-trade or working capital but on account of the fact that he was of the view that this income was earned from activities which were not in consonance with the requirements of the Regional Rural Banks Act, 1976. The fact that the assessee complied with the requirements of the Banking Regulation Act were considered to be not enough. 11.22 Thus, apart from this fact that various provisions of different Acts were taken into consideration by the Special Bench before coming to the conclusion in favour of the assessee it is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontext of Gujarat District Co-operative Societies Act is also worth noting. 11.26 Accordingly, after a careful perusal of the said order, it is seen that in the case of the Special Bench, the Tribunal was not called upon to consider the provisions of Regional Rural Bank Act, 1976 and moreover, the Tribunal therein only took into consideration the relevant provisions of the Banking Regulation Act as applicable to the Co-operative Societies Act and also relevant provisions of the Gujarat Co-operative Societies Act, 1961. After this material distinction, various other distinguishable facts and circumstances pertaining to the appeals referred to the Special Bench need not be referred to. However, since the point was laboured by the Revenue, we would state that apart from this, after perusal of the relevant provisions of the Banking Regulation Act as applicable to the Co-operative Societies Act read with the relevant provisions of Gujarat Co-operative Societies Act, the Tribunal therein came to the conclusion that the funds found so invested in consonance with the provisions of these two Acts were also found to be easily realizable which is not a fact in the present case before us as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 12(d)(a) and carryon the activities as laid down in section 18 of the Act. The case of the Revenue has been that the income is not in consonance with the provisions of the Regional Rural Banks Act, 1976 and the arguments of the assessee, on the other hand, is that the issue is well-settled by the judgments taken into consideration by the Special Bench and no arguments have been advanced as we have observed earlier so as to contend that the incomes are in consonance with Regional Rural Banks Act, 1976 and in fact the only reliance is placed upon Orders/ Judgments in which findings are given is the context of the different State Cooperative Societies Act. Apart from that as observed earlier assessee has been at pains to emphasize an admitted fact that the investments are mandatory in nature to the extent of SLR investments. 11.29 As far as this aspect is concerned i.e., the fact that the SLR investments are mandatory in nature, we are of the view that the Revenue has no quarrel with the said submission. The fact that as per the relevant provisions of Banking Regulation Act, 1949 the assessee or any other bank is necessarily required to maintain the fund depending upon its time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be intruding in the dangerous arena of rewriting the law which is entirely the domain of the Legislature. The Legislature in its wisdom has sought to allow deduction to a Regional Rural Bank for transactions as laid down in section 18 and unless and until the assessee can show that the income earned is from these activities even if the income is in consonance with the definition of banking as per the Banking Regulation Act, the deduction under section 80P(2)(a)(i) cannot be allowed. We derive support from the observations of the Apex Court rendered in the case of Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147:- "The court cannot read anything into a statutory provision which is plain and unambiguous. A statute is the edict of the Legislature. The language employed in a statute is the determinative factor of legislative intent. The first and primary rule of construction is that the intention of the legislation must be found in the words used by the Legislature itself. The court only interprets the law and cannot legislate. If a provision of law is misused and subjected to the abuse of the process of law, it is for the Legislature to amend, modify, or repeal it, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance is placed. There is always peril in treating the words of a speech or judgment as though they were words in a legislative enactment. Judicial utterances are made in the setting of the facts of particular cases. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases." Similar caution was emphasized by their Lordships in another judgment of the Apex court namely CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297, where their Lordships observed:- "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision." Since the issue, the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision of law has been cited so as to contend that banking activities of all banks have been exempted by the Legislature from taxation. A consideration of the judgment of the Apex Court in the case of MP Co-operative Banks Ltd. v. Addl. CIT [1996] 218 ITR 438 which has been relied upon by the Assessing Officer and distinguished by the assessee, we would merely like to observe that therein on an interpretation of restrictions placed by the M.P. Government under the M.P. Co-operative Societies Act. The view has been taken by the Apex Court that the funds found so invested were not easily realizable and it is this aspect of fund has not been easily realizable which has been heavily stressed by the Revenue. The fact that it is in the context of M.P. Societies Act was the reason that on a perusal of the Co-operative Societies Act of different States the provisions of which were entirely different, different view was taken. This aspect was taken note of by the Special Bench as we have observed earlier what considering the Gujarat Societies Act provisions which were found to be distinguishable from the M.P. State Co-operative Societies Act and akin to Karnataka State Co-operative Societ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaining to the investments made out of reserve funds, under section 80P(2)(a)(i) of the Act." 11.33 It is further necessary to mention that therein the arguments advanced were pertaining to the earmarking of funds and the availability thereof from reserves etc. 11.34 In this background, the fact that this order has been upheld by the Hon'ble High Court does not help the assessee in any manner since the issue before the Tribunal was entirely different. 11.35 It is seen that all these judgments have been rendered following the judgment of the Apex Court in the case of Bihar State Co-operative Bank Ltd. v. CIT [1960] 39 ITR 114, which has taken into consideration the provisions of the Bihar Act [Clause" 4 III(i) of the by laws] and section 19 of the Bihar Act in the case, of Co-operative Society. Clause one of the aims was to carry on general business of banking. 11.36 Reliance has been placed upon Mehsana District Cooperative Bank Ltd. v. ITO [2001] 251 ITR 522 (SC) which is taken into consideration the provisions of Gujarat Co-operative Societies Act, 1961 read with Banking Regulation Act and the definition of banking given under the Banking Regulation Act which was found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terference is called for in the ground raised by the assessee with respect to the SLR investments claiming deduction under the said provision as such are rejected. Before parting we would like to observe that all the judgments/orders referred to us have been considered even if specific mention thereof has not been given. 11.41 Since the arguments advanced in respect of non-SLR investment on behalf of the assessee and the D.R. are more or less identical, the only difference being that the assessee has canvassed that this aspect had been decided in favour of the assessee by the Tribunal in identical facts and circumstances and the case of the Revenue on the other hand has been at the cost of repetition that the facts and circumstances are diametrically distinguishable and are far from identical since in the year in which the issue has come before the Tribunal, the Assessing Officer had himself allowed the claim of the assessee with respect to SLR investment and disallowed the claim only on account of on SLR investment. The argument of the D.R. has also been that apart from this material distinction in the facts and circumstances of the case and before the Tribunal, no arguments wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, no arguments were advanced or canvassed and as such were not considered by the Tribunal, addressing the aspect of this specific provisions of Regional Rural Banks Act or considering the judgments in the light of the arguments that they were rendered in the context of the specific provisions of different State Co-operative Societies Act. Thus, reference at this juncture may be again made to the action rendered by the Apex Court in numerous judgments where the question examined has to be appreciated in the context of the specific facts and not of the context and deriving strength from that we are of the view that facts and circumstances are entirely distinguishable and the question examined as such was also distinct. Strength is derived from CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297 (SC) and Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 (SC). Similarly, the order of the Special Bench which was in the context of Gujarat Co-operative Societies Act and the Banking Regulation Act as can be seen from paras 43 and 45 of the Special Bench Order it was appreciated in the light of the fact that as far as the income from SLR investments were concerned, they had alrea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided by the sponsor Bank and V.P. Government. The amount received by the assessee bank is to be credited in 'Share Deposit Account' till further orders of Central Government." Letter F.No. 3-10/95-RRB(8), dated 26-6-1995 "This letter contains the final decision of the Government of India, therefore, the same is being reproduced herewith for ready reference:- Ministry of Finance Department of Economic Affairs (Banking Division) 'Jeevan Deep' Parliament Street, New Delhi - 110 001. Dated the 26-6-1995 To The Chairman Farrukhabad Gramin Bank, Farrukhabad (U.P.) Sub: Authorised Capital of Regional Banks Sir, In terms of section 5 of the RRBs Act, 1976 (as amended) the authorized capital of each RRB is Rs. 5 crores: At present the issued capital of RRBs vary from Rs. 50 lakhs to Rs. 1 crore each. As a part of exercise undertaken by Government for restructuring of 49 selected RRBs including your Bank, additional funds in the form of equity is being provided towards cleansing of balance sheet and liquidity support by Central Government, Sponsor Bank and State Government concerned in the ratio of 50 per cent, 35 per cent and 15 per cent respectively. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith respect to these grounds before the CIT(A) were that this amount was a share capital relevant to the assessment year 1996-97, which had been added in the income of the assessee on protective measure. The Assessing Officer on observing that the reserve surplus of the bank as on 31-3-2001 included this amount as addition fund sent by Government of India for cleansing the balance sheet at Rs. 3,72,00,000 and towards liquidity at Rs. 86,76,000, which the assessee has recorded in his books of account as deposits under the head "Share Deposit account". Thus about the letters of the Government which have been reproduced at pages 7 to 9 of the assessment order, the Assessing Officer noted that the restructuring was designed to improve the business of the assessee and as such held to be as Revenue receipts in terms of the judgment of Hon'ble Supreme Court in Sahney Steel Press Works Ltd. v. CIT [1997] 228 ITR 253 and CIT v. Bazpur Co-operative Sugar Factory Ltd. [1998] 172 ITR 321. Considering these submissions, the CIT(A) rejected the claim of the assessee vide para 5 at page 24 observing as under:- "Ground No.8 is again the protective addition of Rs. 4,58,76,000. The appellant arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The attention was also invited to the impugned order at page 24 para 5, wherein at para 5.2, the submissions of the assessee have been rejected. As such, the arguments were that the addition was not warranted. 15. The arguments of the learned D.R. that the addition was rightly made. It was argued that if it was infusion of capital then the requirements of the Companies Act have not been followed. It was conceded that the assessee's claim is not being rejected on this account the claim even in terms of requirements of Regional Rural Banks Act has not been substantiated as the relevant requirements for issued capital etc. are not fulfilled. It was his argument, inviting attention to the relevant provisions of RRB Act, 1976, that where was the prospectus brought out and how is the share allocation or increase in share or capital made without following the requirements of the RRB Act. As such, it was questioned how this issue was justified. The attention was also invited to section 6 of the RRB Act, which deals with the provision of authorized capital. It was further submitted that there is no bank's resolution filed either before the court nor has it been stated that there is such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board meeting relates to the capital for which purpose resolution of board is necessary, which the D.R. has stated, has not been furnished to the department or argued here. The ld. D.R. clarified that he was referring to the provisions of the Regional Rural Banks Act and under which section the assessee is arguing his funds have been received. It was submitted by the ld. A.R. that there was no reason for resolution of the Board since the funds are coming from the Government of India. The arguments of the ld. D.R. that the provisions of the Companies Act have not been followed. It was submitted that the Institution of the bank is as an Regional Rural Bank, to which Companies Act does not apply. It is further submitted that the decision relied upon of the Supreme Court in T.V. Sundaram Iyengar Sons Ltd.'s case is not applicable since there were old balancing treated to be as trading income. It was conceded by the learned A.R. that the submission of the ld. D.R. to the extent that Circular No. 599, which has been relied upon, has been withdrawn vide Circular No. 610. Reliance has also been placed upon CIT v. Ramanathapuram District Cooperative Central Bank Ltd. [2002] 255 ITR 423 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er in withdrawing the interest under section 234A without passing speaking order. The said submission of the assessee was also rejected by the CIT(A) vide para 7.2 after the perusal of the position of the relevant provisions of the Act and relying upon the judgment of Apex Court in the case of CIT v. Anjum M.H Ghaswala [2001] 252 ITR 1. The CIT(A) further observed at page 27 in the context as under:- The charging of interest under sections 234A, 234B and 234C is mandatory. Even before this judgment, it was settled that interest could be charged through a Notice of Demand issued to the assessee. In view of the clear position of law as has been considered by the Hon'ble Apex Court in the above judgment, the charging of interest under sections 234A and 234B is mandatory. In the instant case, the calculation of interest has also been given in ITNS 150, which further strengthens the stand taken by the Assessing Officer on this issue." 19. The submission of the learned A.R. was that the charging of interest is mandatory in nature, as such, is consequential to the finding given in the earlier grounds. It was also submitted that the assessee's income in the last twenty years right up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to address on the aspect of the applicability of the judgment of the jurisdictional High Court and thus the action of the assessee in abusing the trust placed by the Bench in the bona fide exercise of its discretion was strongly deprecated. It was put to the ld. A.R. that had the Bench not exercised its discretion to afford the assessee to address the applicability of the judgment relied upon and to hear the other side, the opportunity to hear the sides would not have arisen and thus in the circumstances the abuse of discretion exercised by raising additional grounds after the conclusion of the hearing and the draft order having been written and signed by one Member was deprecated. In reply, it was submitted by the ld. A.R. Shri Dayal Saran that since the assessee wanted to move additional grounds they had been moved even at this juncture. However, the aspect of the correctness or the appropriateness of moving the additional grounds after the conclusion of the hearing and after the signing of the proposed order by one Member was not addressed. On the said date the hearing was adjourned. 26. On the next date i.e., on 20-4-2005 the appeal came up for hearing. At the outset ld. AR. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecifically required to bring to the notice of the Bench, judgment of any Court in support of the admission of the additional grounds. The learned A.R. in response to this specific and pointed query stated that he was not relying upon any judgment. It was specifically put to him yet again whether he would like to refer to any judgment for the stand taken by the assessee. In response to this it was again stated that no judgment was relied by him for admission of this additional grounds at this stage. However, a prayer was made that the additional grounds deserve to be admitted. 30. Ld. D.R., on the other hand, submitted that he has no objection if the additional ground is admitted subject to certain qualification. It was put to him that he was required to state in clear terms whether he is opposing or not the admission of the additional grounds. It was submitted by him that he has no objection if the additional grounds are admitted. However it was further stated that the reliance placed upon the assessee on the judgment of the jurisdictional High Court is misplaced because the jurisdictional High Court does not say that the income is exempt under section 80P(2)(a)(i). Accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty to address the Bench on the limited aspect of applicability of the judgment in 147 proceedings in the case of the assessee has been attempted to be abused with such callous and utter disregard of judicial proprietary, forum and procedure. 33. Reliance is placed by the Bench upon the judgment of the Apex Court in the case of Jain Exports (P.) Ltd v. Union of India [1993] 4 SCC 51 wherein the Bench comprising of Mr. Justice M.N. Venkatachalaiah, the then Chief Justice of India, Hon'ble Mr. Justice A.M. Ahmedi and Hon'ble Mr. Justice J.S. Verma who both subsequently went on to become the Chief Justices of India laid down the judgment wherein the action of the petitioners was held to be not bona fide. Their Lordships at page 61 in Jain Exports (P.) Ltd's case at para 12 observed as under:- "Before we part we must mention that after counsel for the importers could not secure an adjournment when the matter was taken up for hearing on 23-4-1993, he argued the matter at length. It was only during the course of the hearing that we inquired of him if he could point out from the record whether or not the transaction had yielded any profit. When he could not give a satisfactory reply be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been rejected. A perusal of the judgment in Farrukhabad Gramin Bank v. ITO [2005] 273 ITR 113 (All.) clearly shows that the said judgment is in the context of 147 proceedings taken by the Department. Needless to say that proceedings under 147 operate in the realm of a situation where the Assessing Officer has reason to believe that income has escaped assessment on account of the failure of the assessee to disclose fully and truly the correct facts and a mere change of the opinion of the Assessing Officer on the same facts would result in 147 proceedings to reopen concluded assessments is quashed on the ground that change of opinion on some facts is not called. However, we would like to take support from the judgment of the Apex Court wherein it has been clearly and unambiguously laid down that judgment must be read as a whole and observations in judgments should be considered in the context in which they are made and in the light of the questions that were before the Court. Reliance as such may be placed upon CIT v. Sun Engg. Works (P) Ltd [1992] 198 ITR 297 (SC), Mrs. Lally Jacob v. ITO [1992] 197 ITR 439 (Ker.)(FB). Accordingly the said judgment in 147 proceedings where reopeni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. That the authorities below have erred on facts and in law in not following the order passed by Income-tax Appellate Tribunal, Agra Bench, Agra in assessee's own case for assessment year 1998-99 in which the Tribunal held that income of the bank was exempt under section 80P(2)(a)(i). 3. That the authorities below have erred on facts and in law in holding that the decision of the Hon'ble Supreme Court being in the case of Co-operative Bank are not applicable to the Regional Rural Bank. 4. That the authorities below have erred on facts arid in law in stating that the investments mentioned in the Assessment Order are not in accordance with the provisions of Regional Rural Bank Act, 1961. 5. That the authorities below have erred on facts and in law in taxing the income from SLR investments and Non SLR investments ignoring the various decisions of Hon'ble Supreme Court, High Courts and Income-tax Appellate Tribunal. 6. Your appellant submits that in view of the definition of the banking business as contained in the Banking Business as contained in the Banking Regulation Act, 1949, which defines that "banking means the accepting, for the purpose of lending or investments, of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n record: "Because in the facts and circumstances of the case, the decision of Allahabad High Court in assessee's own case in Writ Civil Miscellaneous Petition No. 132 of 2002 dated 23-11-2004 upholding the 'assessee's stand that the bank from carrying on banking business finally settles the issue that assessee's income is exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961. Because in the facts and circumstances of the addition of Rs. 4,58,76,000 - Capital contribution by Government Central and State and Sponsored bank - received in financial year 1995-96, added on the protective basis by authorities below in the year under appeal with the direct to be considered on substantive basis in financial year 1995-96 cannot be sustained in view of decision of 23-11-2004 of Allahabad High Court in assessee's own case in Writ Civil Miscellaneous Petition No. 132 of 2002." 4. The main ground for the consideration of the Tribunal is whether the assessee/appellant bank, which is an incorporated body under the Regional Rural Banks Act, 1976, is entitled to claim exemption under section 80P(2)(a)(i) of the Income-tax Act, 1961 ('Act' hereinafter for brevity). For the assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. As per section 5(b) of the Banking Regulation Act and section 18(1) of the Regional Rural Banks Act, 1976, the activities involved in the banking system have been permitted to the regional banks and as such, the assessee bank can make investment of its funds and earn the interest. The Hon'ble Apex Court has held in the case of Karnataka Co-operative Apex Bank that the interest income on investment on Government securities, fixed deposit, KVP, investment in UTI, etc., out of surplus/idle money are all income attributable to business of banking and are eligible for grant of deduction under section 80P(2)(a)(i) of the Act. The Agra Bench of the Tribunal in the case of Farrukhabad Gramin Bank has also taken the similar view. In view of the above, we uphold the order of the learned CIT(A) in directing the Assessing Officer to treat the entire income of the assessee bank as exempt under section 80P(2)(a) of the Act." 7. Similar view has been taken by the ITAT, B-Bench, Allahabad in the case of Barabanki Gramin Bank, Barabanki [IT Appeal No. 21 (All.) of 1999] for assessment year 1996-97. 8. The latest decision of the ITAT, Amritsar Bench dated 20-9-2004 in the case of Jammu Rura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "... such investments, being outside the purview of banking deposits and not available at the bank's discretion, the income thereon would not qualify for deduction under section 80P(2)(a)(i)." (2) Income earned from Non-SLR investments is not entitled for exemption available under section 80P(2)(a)(i) of the Act. Hence, while making assessment, the entire net profit shown in the profit and loss account of Rs. 6,21,91,455, which comprised of income from both SLR investments and non-SLR investments including income from business of banking, has been subjected to tax, denying the benefit available under section 80P(2)(a)(i). (3) The following amounts received in assessment year 1996-97 and standard deduction taken in balance sheet as on 31-3-2000 by the Government of India are liable to tax:- (i) For cleansing the Balance Sheet : Rs.3,72,00,000 (ii) For providing liquidity : Rs. 86,76,000 to the bank on protective basis CIT(A)'s decision - Brief Analysis 12. The three decisions enumerated earlier by the Assessing Officer have been confirmed by the CIT(A) on the following grounds:- (a) Regarding Income from SLR Non-SLR investments "(i) ... the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the assessee from various investments in SLRs and Non-SLRs cannot be regarded as an essential part of its activity and the objectives with which the deduction under section 80P of the Act is extended to a RRB. Therefore, the income derived by the appellant assessee from SLRs and Non-SLRs is rightly held as taxable income outside the purview of section 80P of the Act." (ii) Regarding two sums of Rs. 3,72,00,000 and Rs. 86,76,000 received from the Government Considering the nature of receipt and the well-settled legal position relevant for deciding the nature of such receipts, as discussed above, it is evident that the receipts of Rs. 4,58,76,000 were liable to be taxed. The receipts were, however, stated to have been received in the year relevant for assessment year 1996-97. The Assessing Officer has noted that on account of stay order from the Hon'ble Allahabad High Court against the assessment proceedings for assessment year 1996-97, the receipt is added in the income of the appellant only as a protective measure while the substantive assessment would have to be made in assessment year 1996-97 as and when the said order is vacated. Considering these facts and also the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the root of the controversy and is of a preliminary nature, this is taken up first to indicate that this view of the learned CIT(A) is thoroughly misconceived and untenable. 17. The appellant before the Tribunal is an RRB governed by the RRB Act, 1976, having been established under sub-section (1) of section 3 of the said Act. The RBI has issued licence to the FGB and all its branches to carryon banking business. 18. Section 22 of the RRB Act provides that a RRB is to be deemed to be a co-operative society for the purposes of the Income-tax Act, 1961 and reads thus:- "For the purpose of the Income-tax Act, 1961 (43 of 1961) or any other enactment for the time being in force relating to any tax on income, profits or gains, an RRB shall be deemed to be a co-operative society." 19. It is a well-settled rule of interpretation that in construing the scope of a legal fiction, it would be proper and even necessary to assume all those facts on which alone the fiction can operate. As observed by Lord Asquith, in the case of East End Dwellings Co. Ltd. v. Finsbury Borough Council [1951] 2 All ER 587, 599 [1952] AC 109 (HL): "If you are bidden to treat an imaginary state of affairs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Cal.) 25. The Circular does not interfere with the discretion of the CIT(A) and only mentions about the legal position. Hence, the CIT(A) should have accepted the position explained therein and should have decided that the decision, is legal and valid. In any case, the Assessing Officer has not taken a view that Farrukhabad Gramin Bank is not a co-operative society and hence, the CIT(A) has exceeded her power in taking a decision to this effect without giving adequate notice to the appellant. 26. Thus, Farrukhabad Gramin Bank is a co-operative society for the purposes of the Income-tax Act and hence, entitled to the benefit provided by section 80P(2)(a)(i) if the conditions mentioned therein are satisfied. Whether Farrukhabad Gramin Bank is engaged in banking business? 27. The words 'banking or business of banking' are not defined in the Income- tax Act and therefore" for all purposes, these are to be imported from another statute of the Government of India namely of Banking Regulation Act, 1949 ('BR Act' hereinafter for short). Section 3 of BR Act provides that the said Act shall apply to co-operative banks in the manner and to the extent specified in Part-V. Under Part-V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnected with regular business operations and hence the income arising out of such investment is also part of income from banking business. Investment generated out of income being utilized in normal activities of granting loan. Making of such investments was connected with business of banking or providing credit. Money invested out of surplus is clearly a banking business. 31. Further, the CIT(A) has not appreciated that the words used in section 80P(2)(a)(i) the context of giving exemption are 'attributable' to banking business - not derived from such business. Hence, deduction under section 80P(2)(a)(i) is to be allowed to a co-operative society engaged in anyone or more of the activities as specified in clause (a) of sub-section (2) of section 80P to the extent of whole of the amount of profits and gains of business attributable to anyone or more of such activities. The word 'attributable' here has a larger connotation. Its scope is wide and covers the other receipts incidental to such activities. Accordingly, a co-operative society engaged in carrying on the business of banking as specified in sub-clause (i) of head (a), earning income by way of commission and brokerage by de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be available in respect of such investments. (a) The ITAT, Agra Bench, Agra, in assessee's own case in ITA No. 208/AGR for assessment year 1998-99 has held- "After hearing rival contentions and judicial pronouncements cited from both the sides, we noted that the Hon'ble Supreme Court in the case of CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194 held that - 'Interest arising from investment made, in compliance with statutory provisions to enable it to carryon banking business, out of reserve fund by a cooperative society engaged in banking business, is placement of such funds being imperative for the purpose of carrying on banking business, the income therefrom would be income from assessee's business. There is nothing in the phraseology of section 80P(2)(a)(i) which makes it applicable only to income derived from working or circulating capital'." 36. Other Decisions which support Farrukhabad Gramin Bank's case. (a) CIT v. Bangalore Distt. Co-operative Central Bank Ltd. [1998] 233 ITR 282 (SC) dated 24-7-1998. (b) CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194 (SC) Division Bench dated 22-8-2001. (c) Hon'ble ITAT, Ahmedabad, Specia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the bank, would not be an essential part of banking system and in as much as there is no provision for their withdrawal, they are effectively out of the purview of the bank. Accordingly given the above, it is submitted that such 'investments' being outside the pale of banking activity and not available at the bank's discretion, the income thereon would not qualify for deduction under section 80P(2)(a)." 42. The reason given is so unconvincing that no detailed comments on the same are necessary. 43. Unfortunately, without appreciating the legal and factual position and the fact that in the context of judicial discipline, the CIT(A) was bound to follow the jurisdictional Tribunal's decision, the view of the Assessing Officer has been confirmed by the CIT(A). The Bombay High Court in the case of Bank of Baroda v. H.C. Shrivastava [2002] 122 Taxman 330 has held that it is necessary for judicial unity and discipline that all authorities below Tribunal must accept as binding judgment of the Tribunal. Prima facie, both the Assessing Officer and the CIT(A) have flouted this cardinal principle of judicial without mentioning any plausible/reasonable ground for not following the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the same nature as SLR investment with the difference that there is no compulsion under the BR Act to make such investments. These are temporary investments of surplus funds and are easily realizable in case of need. Their nature has been described in the case of Surat District Co-operative Bank Ltd. v. ITO [2003] 78 TTJ (Ahd.)(SB) 1 thus:- "The investments in Government securities, fixed deposits and other trustee securities are permissible modes of investments as per provisions contained in the BR Act and or section 71 of the Gujarat Co-operative Societies Act, 1961. Substantial part of interest income derived on fixed deposits (Kayami Thapan) attributable to the extent of meeting requirements of SLR/CRR has been held to be exempt under section 80P(2)(a)(i) by the Assessing Officer himself. The investments of the surplus amounts beyond the amounts required to be invested to meet the requirements of SLR/CRR has been made in those very fixed deposits (Kayami Thapan). The nature of investments and nature of income derived therefrom is similar. The fixed deposits (Kayami Thapan) are easily realizable in case of need and in case of liquidity crisis by their premature encashment. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Sub: Authorised Capital of Regional Rural Banks. Sir, In terms of section 5 of the RRBs Act, 1976 (as amended) the authorized capital of each RRB is Rs. 5 crores. At present, the issued capital of RRBs vary from Rs. 50 lakhs to Rs. 1 crore each. As a part of exercise undertaken by Government for restructuring of 49 selected RRBs, including your Bank, additional funds in the form of equity is being provided towards cleansing of balance sheet and liquidity support by Central Government, Sponsor Bank and State Government concerned in the ratio of 50 per cent, 35 per cent and 15 per cent respectively. In the case of 27 RRBs, additional amount already released by Central Government and the matching share which is to be provided by the sponsor bank and State Government concerned added to the existing issued capital of Rs. 1 crore has increased the existing limit of authorized capital of Rs. 5 crores. Government has therefore considered this issue in consultation with NABARD and concerned sponsor banks and has decided to enhance with effect from 31-3-1995 the authorized capital in exercise of powers given under proviso to section 5 of the RRBs Act, 1976 of 27 RRBs, including your ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construed. This view is further supported by the following decisions from the Apex Court - CIT v. South Arcot District Co-operative Marketing Society Ltd [1989] 176 ITR 117 (SC) It has been said in this decision that as the provision for exemption was intended to encourage co-operative societies, liberal construction should be given to the language employed in the provision. Broach Distt. Co-operative Cotton Sales, Ginning Pressing Society Ltd. v. CIT [1989] 177 ITR 418 (SC) This decision has been given with reference to section 81(1)(c) and it has been reiterated in this decision that section 81(1) was intended to encourage and promote the growth of co-operative societies and consequently, a liberal construction must be given to the operation of that provision. Hence, to construe the terms 'banking'/'business of banking' in a narrow sense, ignoring the definition of 'banking' given in section 5(b) of the BR Act and excluding income from investments (whether SLR or non-SLR) and Government subsidies/grants would be against the spirit echoed by the highest court of the country in the two decisions mentioned earlier. (B) Interpretation in case of doubt (i) The meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this book, the situations where benefit of doubt is not available to assessees have also been mentioned but the instances given do not apply to the facts and law applicable in Farrukhabad Gramin Bank's case. (iv) A passing reference to the four decisions mentioned by the Assessing Officer is necessary to show how these decisions do not support the proposition expounded by the Assessing Officer. The first two cases relate to the Central Excise. In Liberty Oil Mills (P.) Ltd v. Collector of Central Excise [1995] 1 SCC 451,456, following Novopan India Ltd. v. Collector of Central Excise 1994 (6) Jt. 80, 88, it has been said that in the case of an ambiguity or doubt regarding an exemption provision in a fiscal statute, the ambiguity or doubt will be resolved in favour of the Revenue and not in favour of the assessee. (v) These decisions do not advance the Assessing Officer's view that advantage of ambiguity should be given to the Revenue because as has already been pointed out earlier, there is no ambiguity involved. Further, these decisions have to be considered in the background of the two Supreme Court decisions advocating liberal interpretation in the context of provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieties. There has been a mix up of issues. The Regional Rural Banks Act, 1976 was enacted to provide for the incorporation, regulation and winding up of Regional Rural Banks with a view to developing the rural economy by providing for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs and for matters connected therewith and incidental thereto. (iv) The Regional Rural Banks are authorized to undertake the following types of business: (i) Granting of loans and advances, particularly to small and marginal farmers and agricultural labourers, whether individually or in groups, and to co-operative societies, including agricultural marketing societies, agricultural processing societies, co-operative farming societies, primary agricultural credit societies or farmers' service societies, for agricultural purposes or agricultural operations or for other purposes connected therewith. (ii) Granting of loans and advances, particularly to artisans, small entrepreneurs and persons of small ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banking set out in clause (b) of section 5 of the Banking Regulation Act, acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purpose of the banking company and also selling/improving or leasing or otherwise dealing with all or any part of the property and rights of the company, also should be treated as a banking business. 59. Hence, income received by co-operative bank by letting out premises belonging to it was exempt from payment of tax under section 80P(2)(a)(i). 60. Similarly, income from interest, dividends, Government subsidies, locker rents, etc., have been held to be exempt in the following cases:- 61. In CIT v. Madurai District Co-operative Bank Ltd. [1999] 239 ITR 700 (Mad.), following CIT v. Madurai District Central Cooperative Bank Ltd. [1984] 148 ITR 196 (Mad.), it has been held that interest on securities, subsidy from Government interest from other co-operative institutions and banks, dividend received by the assessee were business income entitled to deduction under section 80P(2)(a)(i). 62. Similar view has been taken in the case of this very bank in the decision in CIT v. Madurai District Central ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es does not require the sanction of the Registrar of the Co-operative Societies under section 63 of the Co-operative Societies Act. 69. In CIT v. Sri Ram Sahakari Bank Ltd. [2004] 266 ITR 632 (Kar.) and ITO v. Karnataka Central Co-operative Bank Ltd. [2004] 266 ITR 635 (Kar.), the assessee, a co-operative bank, claimed deduction under section 80P(2)(a)(i) in respect of interest and dividend income derived out of investments in National Savings Certificate, Indira Vikas Patra, Kisan Vikas Patra, shortterm fixed deposits in banks and shares of Maharashtra State Finance Corpn. of India. The assessee had made said investments out of its surplus funds. It has been held that since the assessee had utilized its surplus or voluntary reserve funds in course of its ordinary banking business, it was entitled to deduction as claimed. 70. There are other decisions too, where similar views, including deduction for Government subsidies, have been held to be deductible, but the foregoing decisions clearly establishes that the view taken against the FGB by the Assessing Officer CIT(A) is not correct. Hence, other decisions are not being mentioned keeping in view the need for brevity in these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approving deduction of income relating to SLR investments under section 80P(2)(a)(i, the Tribunal has also upheld deduction from non-SLR investments. However, this decision has been discarded saying that the provisions of Co-operative Societies Acts of States are wide while the provisions of RRBs Act, 1976, are limited to the regional area only. Further, in the former enactment, the intention of Legislature is to develop the co-operative movement while in the case of RRBs Act, the intention is to develop the rural economy on regional basis, therefore, each and every rule of co-operative society is not applicable on the RRBs. If the investment is made by the RRBs beyond the area, that is the normal commercial banking, which is liable to income-tax like the business of other commercial banks. Obviously, this decision has not been considered helpful in a casual way without appreciating the findings in the background of the facts. Mehsana District Co-operative Bank Ltd. v. ITO [2001] 251 ITR 522 (SC) This decision supports the appellant's case. This decision is on the same lines as the decision in Karnataka State Co-operative Apex Bank's case. It has been said that there is nothin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 13 dismissed as consequential is also not dissented. 1. Whether while writing a dissent, can the dissenting Member refer to in the dissent order unpublished orders or judgments not referred to by either side or made available to the colleague on the Bench as well as the revenue while writing the order in favour of the assessee? 2. Whether merely the act of banking activity entitles the assessee to claim exemption under section 80P(2)(a)(i) or is the banking activity in terms of section 3(1) of the Regional Rural Bank Act, 1976 as per the Notification in the districts of Farrukhabad and Kannauj i.e., the target area is entitled for exemption in the facts of the case? 3. Is the Tribunal while dealing with issues of exemption to be governed merely by law as considered in different context in different legislations or are the specific facts of the case in as much the notification under section 3(1) of RRB Act, 1976 in the facts of the case in each year under consideration is to be considered? 4. Can the issue be stated to be covered by the orders of the Tribunal in the earlier years, where no facts qua the SLR income being exempt are discussed since assessment is made in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the Regional Rural Bank Act, 1976. Under section 22 of the Act, it is deemed to be a co-operative society for the purposes of the Income- tax Act, 1961. It was established in the year 1976 mainly with a view to providing basic banking facilities in the remote rural areas and to mobilize savings from rural masses who were not adequately served by the commercial banks as the branch network of commercial branches was limited to urban or semi-urban areas only. The bank's objective was to discharge the responsibilities under section 18(2)(a) and (b) of the RRB Act, 1976 by extending credit facilities through implementation of various Government sponsored schemes for social and economic upliftment of the weaker sections of the society and to small and marginal farmers, village artisans, landless labourers for the purpose of agriculture and allied activities, trade, commerce etc. The assessee-bank is a scheduled commercial bank and is authorized to do banking business as defined in the Banking Regulation Act. The area of operation of the bank is Farrukhabad and Kannauj districts, where the main occupation of the people is agriculture (potato). The bank provides services to the cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in different context in different legislations or are the specific facts of the case in as much the notification under section 3(1) of RRB Act, 1976 in the facts of the case in each year under consideration is to be considered? 4. Can the issue be stated to be covered by the orders of the Tribunal in the earlier years, where no facts qua the SLR income being exempt are discussed since assessment is made in those years on the basis that SLR income is exempt? Thus, can those orders of the Tribunal be stated to have considered the exemption qua the SLR and non-SLR income wherein admittedly, no arguments or facts even before the Tribunal on the specific target area and target group of the banking activities are addressed? 5. Can the Tribunal, a final fact finding body ignore the facts brought out in the orders of the tax authorities and addressed at length from either side, especially in the background, where on facts, both the Members agree that verification is required since the issue on facts has been restored to the Assessing Officer by the JM on which aspect there is no dissent by the learned AM since that issue has not been touched at all in the dissent order? As such can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim are distinguishable on facts as and they have been rendered under different Acts and many of them have not considered the RRB Act. Further those decisions were not rendered in the context of the interest from SLR or non-SLR investments. (d) The earlier order of the Tribunal for the assessment year 1998-99 passed in the assessee's own case by a co-ordinate Bench was rendered in the context of interest from non SLR investment. For the year under appeal, interest from both SLR and non-SLR investments are in dispute and therefore, the earlier order does not govern the present year." 6. The learned JM has embarked upon the very elaborate discussion of the issue, but so far as I can see, with respect, the gist of the detailed discussion appears to be the above four salient points. 7. The learned AM has adopted the following reasoning in support of his dissent: "(a) Judicial consistency and discipline requires that the earlier order of the co-ordinate Bench of the Tribunal for the assessment year 1998-99 should be followed. (b) There is no difference between the interest on SLR investment and the interest from non-SLR investment in nature and character. Both types of interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned arguments advanced before me by both the sides and after perusing the elaborate orders passed by both the learned Members, that the assessee is entitled to the deduction under section 80P(2)(a)(i) in respect of interest from both SLR and non-SLR investments. The section does not make any distinction between the two types of interest. What has to be seen is whether the income in respect of which deduction is claimed is attributable to the business of banking. There can be no dispute that the assessee, though a rural bank is deemed to be a co-operative society for the purpose of the Income-tax Act, 1961 as provided in section 22 of the RRB Act. Thus the primary condition that the person who claims the deduction shall be a co-operative society is satisfied. When I turn to the question as to what will constitute the business of banking in the case of a regional rural bank such as the assessee, I need to refer to section 18 of the RRB Act. Sub-section (1) says that every regional rural bank shall carryon and transact the business of banking as defined in section 5(b) of the Banking Regulation Act, 1949. The sub-section goes on to say that the regional rural bank may engage in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 18(1) of the RRB Act, is an activity which is closely and inextricably connected to the business of banking. Normally the regional rural bank just as any other commercial bank, is obliged to place a particular percentage, prescribed by the RBI, of its reserves in investments. These are called SLR investments, the abbreviation SLR meaning "Statutory Liquidity Ratio". It is statutory because it is to be invested in accordance with the directions of the RBI. The word "Liquidity" suggests that the investments are to be made in order to ensure that the liquidity position of the bank is sound so that in case of any contingency the bank has no difficulty in meeting its liabilities towards the depositors. The very purpose and object of the SLR investment is to safeguard both the assessee bank as well as the depositor and I am unable to see how the activity of investment can be viewed as not forming part of the banking business. I am also in agreement with the view expressed by the learned AM that there can be no real distinction between the SLR investment and non-SLR investment. Even the non-SLR investments, which are investments made by the assessee bank voluntarily and without any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n their view that the investments, both in SLR and non SLR were made in Metropolitan and Urban areas, which are beyond the notified areas of operation of the assessee bank and therefore for this reason also the deduction cannot be given. It must be remembered that the opportunities for sound investments are available mostly in Metropolitan and Urban areas and they are not easily available in the areas of operation assigned to the assessee bank. But for this reason, it cannot be said that the investments are not part of the business of banking. 12. One more thing which the learned AM has highlighted, which appears to have escaped the attention of the learned JM, is that section 80P(2)(a)(i) uses the words "attributable to" the business of banking. It is now well-settled, especially after the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd v. CIT [1978] 113 ITR 84, that these words are wider in scope and connotation than the words "derived from". The use of the former expression in the section suggests that it is not necessary that the income in respect of which deduction is claimed should be derived from the activity of granting loans to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgment of the Supreme Court in CIT v. Bangalore District Co-operative Bank [1998] 233 ITR 282. In this case the assessee claimed deduction under section 80P(2)(a)(i) of the Income-tax Act on the income by way of interest on. Government securities and dividends on shares of the Industrial Financial Corporation. The ITO held that the investments were made out of reserves and disallowed the claim. On appeal, the AAC found that the reserve fund of the assessee was about Rs. 33 lakhs and the circulating capital was about Rs. 22 lakhs and held that the investment was out of the reserve fund and confirmed the assessment. On appeal, the Tribunal accepted the contention of the assessee that the interest income was attributable to the assessee's business income. The Karnataka High Court having upheld the order of the Tribunal, the matter was carried in appeal to the Supreme Court by the CIT. The Supreme Court held that since the Tribunal has found that the income in question is attributable to the business of banking, the assessee was eligible for the deduction. 16. I may now refer to the judgment of the Supreme Court in Karnataka State Co-operative Apex Bank's case. There it was held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ordinary course of the banking business. To establish that claim, the assessee before me has drawn my attention to the accounts from which I find that all the investments have been shown under one head in the balance sheet without being bifurcated into SLR and non-SLR. Schedule-8 which gives the break-up of investment does not also make any distinction between SLR and non-SLR investments. Paragraph-8 of the Director's report says that the bank has made prudent and profitable investment of its funds, that all the investments have been approved by the Board of Directors and were made under the guidance of the Bank of India which is the sponsor bank, that the guidelines of RBI have been followed, that for the sake of profitability and viability the fund management is handled by the Asset Liability Management Committee at the Head Office as per new investment policy, that the branches are maintaining their current account with the Bank of India/SBI in order to have better cash management/bill collection at branches and they deposit their surplus cash always in sponsor bank branches to earn interest and that the Board of Directors makes quarterly reviews of the investments made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of income from SLR and in respect of income from non-SLR and it would have been in conformity with judicial discipline to follow the said order. The fact that the Special Bench decision was rendered under different enactment and hence inapplicable appears to me a superficial way of distinguishing the same. Whatever be the enactments, since all of them relate to the banking business and since the Special Bench has also considered the issue from the angle of the Banking Regulation Act as well as the provisions relating to the Gujarat Co-operative Societies Act, 1961 which are substantially similar to SLR and non-SLR investments with which the present case is concerned, the decision was fully applicable to the present case which aspect appears to have been overlooked by the learned JM. Not only that, it is the ratio of the decision which ought to have been kept in mind. The Special Bench has examined the nature of the income from investment made in accordance with the statutory investments and those made in excess of the statutory requirements and held that there is in essence no difference between the two. This is precisely the issue in the present case. 18. There are two Circula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, agree with the same and leave it to the parties to thrash out the issue in the assessment proceedings for the assessment year 1996-97. The second question as formulated by me is answered accordingly. 22. Before I part with the case, I must make some observations regarding the manner in which the questions have been framed by the learned JM as reflecting the points of difference. I have already extracted them earlier. The questions are academic in nature and most of them only touch upon the propriety of the steps taken during the decision-making process. Such questions cannot be referred as points of difference under section 255(4). These issues are to be discussed and sorted out between the Members themselves, whether they concur or they are constrained to take different views. The points of difference envisaged by section 255(4) are only with respect to the merits of the decision, not with respect to the conduct of the other Member with reference to the decision-making process. Those are all internal matters with which the section is not concerned nor is it proper to make a grievance out of the same by proposing such questions to the Hon'ble President under section 255(4). ..... X X X X Extracts X X X X X X X X Extracts X X X X
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