TMI Blog2002 (11) TMI 244X X X X Extracts X X X X X X X X Extracts X X X X ..... llant as the facts of both the cases are not identical and clearly distinguishable. (2) Both the lower authorities has failed to adjudicate upon the alternate contention raised by the appellant of allowing deduction under section 80P(2)(d) of the IT Act as the impugned income is from the investment of the reserve fund and almost the entire reserve fund was invested in other co-operative banks/societies. (3) Alternatively and without prejudice to whatever stated above the learned CIT(A) has erred in not considering the facts 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 Income-tax 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. (4) The orders passed by both the lower authorities are without properly appreciating the facts and both of them have blindly followed the decision of the Hon'ble Supreme Court in the case of M.P. Co-operative Bank Ltd without properly appreciating the distinguishable facts of the appellant's case. Various submissions, explanations and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of M.P. Co-operative Bank Ltd. (5) Your Appellant submits that considering the provisions of the Gujarat State Co-operative Societies Act, 1961, which are substantially different from that of the Madhya Pradesh State Co op. Societies Act, the judgment of the Hon'ble Supreme Court in case of MP Co-operative Bank Ltd. is not applicable to the facts and circumstances of the Appellant Bank. D. The Baroda Peoples Co-operative Bank Ltd. in their appeal being ITA No. 523/Ahd/1998 for assessment year 1995-96 have raised similar grounds as that in ITA No. 522/Ahd/1998 except that the figure of interest income on investments on which deduction under section 80P(2)(a)(i) has been claimed, is Rs. 25,41,289 in this case as against the figure of Rs. 14,12,363 in the case of Unnati Co-operative Bank Ltd. in ITA No. 522/ Ahd/1998. E. The Baroda Central Co-operative Bank Ltd. in their appeal being ITA No. 524/Ahd/ 1998 for assessment year 1995-96 have raised the following grounds: (1) The learned CIT(A)-III, Baroda has erred in law and on the facts of the case by upholding the contention of the learned Assessing Officer that income of the appellant Bank of Rs. 14,96,434 being interest on se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment Securities Rs. 1,10,00,000 (ii) Trustees Securities Rs. 3,06,00,000 (iii) Kayami Thapan Rs. 1,57,03,27,251 3.1 The Assessing Officer observed that the Co-operative Society/Bank is obliged to invest some amount in Government Securities as per CRR/ SLR requirement of RBI. According to section 42 of the RBI Act, every Scheduled Bank is required to maintain an average daily balance not less than 7%. As per section 24 of the BR Act, a Scheduled Bank is required to maintain in India--in cash, gold or specified securities having value of not less than 25% of the total of its demand and time liability in India. The Assessing Officer required the assessee to compute the amount of investment required to be made in Government Securities to meet the requiremerit of CRR/SLR. The assessee aide letter dated 14-3-1997 intimated that such requirement of CRR at the rate of 7% of daily balance comes to Rs. 2,230.25 lakhs and the requirement of SLR comes to Rs. 2,521.02 lakhs at the rate of 28%. The rate of SLR was excessive that required as per section 24 of the BR Act. The Assessing Officer further observed that the CRR requirement of Rs. 21230.25 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ify for deduction under section 80P of the Act as income from non-banking business." 3.2 The Assessing Officer further held that the income of Rs. 4.76 lakhs received in respect of locker rent is also not exempt under section 80P(2)(i) of the Act, as the same is not a banking activity. Likewise, the Assessing Officer also held that the excess collection of interest tax amounting to Rs. 2,385 will also not qualify for deduction under section 80P. The Assessing Officer after elaborate discussion arrived at the following conclusion in para 3 of the assessment order: "3. In view of the aforesaid facts, the income which does not fall under section 80P comes to Rs. 3,06,18,303 calculation of which is given as under: Rs. Interest income from Govt. Security, trustee security etc. 3,01,39,708 Add: Locker Rent 4,76,210 ----------- 3,06,15,918 Add: Excess Collection Int. Tax 2,385 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier the following categories of income will not be exempt under section 80P(2)(a)(i): 1. Interest on Long Term Investment of the bank: a. Interest on Govt. Securities (see para 10.1) Rs. 2,42,78,882 b. Dividend on UTI Units (see para 10.2) Rs. 20,00,000 c. Interest accrued on Indira Vikas Patra (see para 10.3) Rs. 60,99,000 d. Interest received on FD of 1 year or more (see para 10.4) Rs. 4,19,812 e. Income from Safe Deposit Vault (see para 11.1) Rs. 8,08,905 f. Surplus of interest tax (see para 11.2) Rs. 6,11,823 --------------- Rs. 3,42,18,422 --------------- Out of above income, the assessee has claimed that investment in Government Securities were made to meet the CRR and SLR requirements. The assessee has failed to submit the details of interest earned on Government securities which were held in excess of SLR requirements. As discussed earlier in para 10.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled to deduction under section 80P(2)(a)(i), is not legally correct. The Hon'ble Supreme Court in the case of M.P. Co-operative Bank Ltd. has held that the Government securities coming out of the reserve fund which could not be easily encashed and which could be utilised only when certain contingencies arose could not be considered to be circulating capital or stock-in-trade. The income derived from the investment in such securities could not be regarded as essential part of assessee's banking activity. The learned CIT(A) in para 22 of his order further observed that section 67 of the Gujarat State Co-operative Societies Act require every society to provide at least 1/4th of the net profits of the society of each year, which, shall be carried to the reserve fund and such reserve fund may be used in the business of the society or the society shall have the option to make investment subject to the provisions of section 71. Thus, unlike the Madhya Pradesh Law, there is no restriction in Gujarat regarding utilisation of funds carried to the reserve fund. The Gujarat Law permits society to use reserve fund in the business of the society. If the amount transferred to reserve fund is uti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 22-12-1997 in the case of Baroda Central Co-operative Bank Ltd. and the judgmentof the Hon'ble Supreme Court in the aforesaid case has confirmed the action of the Assessing Officer. ITA No. 523/Ahd/1998 for assessment year 1995-96 in the case of Baroda Peoples Co-operative Bank Ltd.: 6. The Assessing Officer relying upon the judgment of the Hon'ble Supreme Court in the case of M.P. Co-operative Bank Ltd refused to grant deduction under section 80P(2)(a)(i) on the following income derived by the appellant-society: (1) IDBI Rs. 7,32,500.00 (2) State Bank of India Bond Rs. 2,28,222.93 (3) Sardar Sarovaf Narmada Nigam Rs. 2,57,226.60 (4) Kisan Vikas Patra (Int. Accrued) Rs.13,23,340.00 --------------- Total Rs.25,41,289.53 --------------- The learned CIT(A) following his order dated 14-5-1997 in the cases of Baroda City Co-operative Bank Ltd. and Baroda Central Co-operative Bank Ltd. and the judgment of the Hon'ble Supreme Court in the aforesaid case has confirmed the acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co-operative Bank Ltd [IT Appeal No. 2562 (Ahd) of 1997]. Shri Soparkar submitted that the provisions of section 80P(2)(a)(i) provide that in case of a co-operative society engaged in carrying on the business of banking or providing credit f acuities to its members, the whole of the amount of profits and gains of business attributable to such activities will be exempt under the said provisions. The appellants are Scheduled Co-operative Banks registered under the provisions of the Gujarat State Co-operative Societies Act, 1961 and are also governed by the Banking Regulation Act, 1949 so far as it relates to co-operative banks. He invited our attention to the definition of "Working Capital" given in section 2(24) of the Gujarat State Co-operative Societies Act, 1961 which defines "Working Capital" means funds at the disposal of a society inclusive of paid-up share capital, funds built out of profits, and money raised by borrowing and by other means. The learned counsel then invited our attention to the definition of "banking" given in section 5(b) and sections 6 of the Banking Regulation Act, 1949 enumerating the forms of business in which a banking company may engage itself in addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other business activities permissible under section 6(1)(a) will similarly form part of ordinary banking business of these co-operative banks. Investment in Government securities, deposits with banks, investment in shares and warrants and debentures are specified activities regarded as part of ordinary business activities of a bank/society in view of the clear language used in section 6(1)(a) of the Banking Regulation Act, 1949. 8.2 The learned counsel also drew our attention to the judgment of the Hon'ble Supreme Court in the case of Vimal Chandra Grower v. Bank of India AIR 2000 SC 2181. In this case also the Hon'ble Supreme Court considered the scope of section 6 of the Banking Regulation Act, 1949. The Bank in the said case had sanctioned overdraft limit of Rs. 5 lakhs to the appellant against pledge of shares of various companies; the value of all the shares being Rs. 10,60,900 at the relevant time. In due course of time the bank received bonus shares numbering 2224. The appellant paid an instalment of Rs. 1,45,600 to the bank against the overdraft limit. In order to clear overdraft accounts the appellant, apart from the shares of other companies, requested the bank to arra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curities relating to the statutory reserve fund can never be considered to be circulating or working capital of the bank or its stock-in-trade to qualify for exemption under section 81 of the Act. Hence it was held that the interest earned thereon cannot qualify for exemption. Our attention was drawn to MP Government Instructions No. CR 25/26, dated 7th October, 1960 reproduced at page 442 of 218 ITR in which it was clearly stated as under: "The reserve fund of the apex bank shall be fully invested outside its business in the Government securities. No part of its reserve fund should be utilised as its working capital." 8.4 It was further mentioned in the said letter that no part of reserve fund shall be drawn without the previous sanction of the Registrar. Such approval can be given when the amount is either required to meet losses, or, when the society is to be wound up. The learned counsel also drew our attention to the observations made by the Hon'ble Supreme Court at page 443 of 218 ITR wherein it was, interalia, observed that "Investments which permit withdrawals at short notice would, therefore, be a part of the requirement of banking business and interest accruing on suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all these cases of co-operative banks by placing reliance on the judgment of the Hon'ble Supreme Court in the case of MP. Co-operative Bank Ltd is not valid in view of the above referred subsequent judgments of the Hon'ble Supreme Court. 8.7 The learned counsel submitted that the Hon'ble Supreme Court in the case of Karnataka State Co-operative Apex Bank while overruling the decision of MP Co-operative Bank Ltd. has held that interest arising from investment made, in compliance with statutory provisions to enable it to carry on banking business, out of reserve fund, by a Co-operative society engaged in banking business, is exempt under section 80P(2)(a)(i) of the Act. The placement of such funds being imperative for the purpose of carrying on banking business. The income therefrom would be income from the 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. 8.8 The learned counsel further contended that the Hon'ble Supreme Court once again re-affirmed the view so taken by it in the case of Karnataka State Co-operative Apex Bank in a subsequent decision in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for us to dilate. We think that it is in the interests of justice that the assessee should have the opportunity to lead evidence before the Commissioner (Appeals) to establish as a fact what is stated above. So far as the second question is concerned, therefore, the matter is stand restored to the Commissioner (Appeals) for being decided afresh. He shall also decide any consequential issue that may arise." 8.9 The learned counsel on the strength of the aforesaid judgment contended that so r as income earned on investments attributable to utilisation of reserve funds being statutory reserves under section 67(2) of Gujarat Co-operative Societies Act, 1961, income on investments in Government securities etc. to meet the requirement of BR Act and the locker rent is concerned, the income falling under these categories would be exempt under section 80P(2)(a)(i) by virtue of the aforesaid judgments of the Supreme Court. As regards the income earned from utilisation of its voluntary reserves other than statutory reserves indicated above, the Hon'ble Supreme Court, inter alia directed the Commissioner of Income-tax to ascertain the fact whether the income derived by the assessee from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the Imperial Bank on long term deposits inasmuch as they were deposited for one year and were renewed from time to time also for a year, but as is shown by the accounts these deposits fell due at short intervals and would have been available to the appellant had any need arisen. Stress was laid on the use of the word "surplus" both by the Tribunal as well as by the High Court and it was also contended before us that in the bye-laws under the heading "Business of the bank" it was provided that the bank could "invest surplus funds when not required for the business of the bank in one or more ways specified in section 19 of the Bihar Act [clause 4(III)(i) of the bye-laws]. Whether funds invested as provided in section 19 of the Bihar Act would be surplus or not does not arise for decision in this case, but it has not been shown that the money which were in deposit with other banks were "surplus within that by law so as to take it out of banking business. As we have pointed out above, it is a normal mode of carrying on banking business to invest moneys in a manner that they are readily available and that is just as much a part of the mode of conducting a bank's business as receivin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds at somewhat higher rates of interest. But the banker has always to keep enough cash or easily realisable securities to meet any probable demand, by the depositors. No doubt there will generally be loans to persons of undoubted solvency which can quickly be called in, but it may be very undesirable to use this second line of defence. If as in the present case, some of the securities of the Batik are realised in order to meet withdrawals by depositors, it seems to Their Lordships to be quite clear that this is a normal step in carrying on the banking business, or, in other words, that it is an act done in "what is truly the carrying on" of the banking business. This, it appears to Their Lordships, is the more appropriate and satisfactory ground for dealing with the question arising in the present case. It accords exactly with one of the findings in the statement of the Commissioner agreeing with the views both of the ITO who first dealt with the case and of the Assistant Commissioner. He observed "that the purchase and sale of shares and securities are so much linked with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble High Court that the interest accrued on the investment made in IVPs was an income arising out of banking business eligible for exemption under section 80P(2)(a)(i) of the Act. It was observed that the investments made in IVPs no doubt have an effect of withdrawing funds from the banking business. Mere withdrawal of funds is not sufficient. It must be proved that the withdrawal of funds has resulted in permanent deprivation of funds for banking activity. It ought to have been examined as to whether such investments have an effect of temporary withdrawal of the funds or the investments made in IVP can be brought back to the banking business. It was further observed that the interest income on IVP was attributable assessee's business income and such investments were made from the funds generated from the banking business. It had a direct and proximate connection with or nexus to the earning from banking business. Such income had been derived by way of interest on securities of the Central Government, which were easily capable of being converted into liquid funds so as to make it available to the assessee bank in their banking business. It would be noteworthy to point out tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from" and therefore business activities that has direct and proximate nexus with the business of banking is eligible for deduction under section 80P(2)(a)(i) of the Act. (iii) Reserves are working capital/stock-in-trade. Now, these propositions are discussed in detail hereinbelow: (i) Creation and utilisation of voluntary reserves--Like any prudent businessman, even the co-operative bank also set aside part of its profits under various heads in order to use it in difficult times and/or in case of various contingencies. These reserves are set aside out of the profits and shown in the balance sheet under various heads. These reserves in turn are utilised for making various investments to generate income out of them. These incomes in turn are utilised for the purpose of business of banking as in the State of Gujarat under the Gujarat Co-op. Societies Act, 1961 there is no embargo upon the Co-operative Banks against investing its reserves funds and/or interest income earned out of the said investments of the reserves in its own business of banking. In the case of banking business the raw material for the bank is money while the finished good is also money and money has got no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buying and selling and dealing in stocks, funds, shares, debentures, bonds, securities and investments of all kinds etc. The list is so exhaustive that barring trading in goods and real estate, virtually all other activities within the meaning of word "banking" is covered. Here the important question for consideration is whether the definition of banking, includes investment of funds or it is restricted only to accepting deposits and lending money. If banking includes investment of funds also then income from investment is part of and attributable to the banking activity, and therefore eligible for deduction under section 80P. Hon'ble the Supreme Court in the case of Bihar State Co-op. Bank Ltd v. CIT (39 ITR 114), observed that it is normal mode of carrying of banking business to invest moneys in such a manner that they are readily available and that is just as much part of conducting bank's business as receiving deposits or lending moneys. Further the appellant relies on the following decisions wherein investment is considered as integral part of banking activity: Berhampura Co-op. Central Bank v. Addl CIT 93 ITR 168 (Ori.), Malabar Co-op. Central Bank Ltd. v. CIT 101 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ratio laid down by the Supreme Court is there has to be a direct and proximate connection between the activity from which income is earned and the activity for which deduction is granted. Once this link is established, the said income can be attributable to the main activity of the assessee. In case of co-operative banks also creation of reserves is as per the guidelines of RBI or the State Co-operative Acts or as per its bye-laws. Applying the ratio laid down by the Supreme Court, income from investment of the said reserves has a direct and proximate connection with the main activity of banking and therefore the whole of the interest income is eligible for deduction under section 80P of the Act. Further reliance is placed on the decision of the Hon'ble Supreme Court in the case of Ashok Leyland (224 ITR 122) wherein it was held that importing of spare parts and its sales in the domestic market has a direct and proximate nexus with the main activity of manufacturing trucks carried on by the assessee and therefore attributable to the industrial activities and thus the profit earned from the sale of said spare parts is eligible for deduction. Further Hon'ble the Bombay High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view; to keep in store for future or special use: to keep in reserve". However, for our purpose, the meaning of the word reserve as defined in the accountancy field is important and as per the same "reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business" [Ref. 75 ITR 53 (SC)]. Reserves are setting aside of the profit for future need and therefore part of the capital employed or Proprietor's fund or can be equated with the capital. Hon'ble the Supreme Court while explaining the scope of the expression "reserve", has held that as per the accounting principles, funds created out of reserves form part of Working Capital. Reliance is placed on the following decisions: Metal Box Co. of India Ltd. v. Their Workmen 73 ITR 53 (SC), Vazir Sultan Tobacco Co. Ltd. v. CIT 132 ITR 559 (SC). Once it is accepted that reserves are part of the working and/or calculating capital, any income from the investment of the same has to be considered as income from banking business and deduction under section 80P(2)(a)(i) of the Act has to be granted on the same. Even in the case of MP Co-op. the Hon'ble Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 49 ITR 438 (MP) (b) Madhya Pradesh Raiya Sahakari Bank v. CIT [1988] 174 ITR 150 (MP) (c) CIT v. Dhar Central Co-operative Bank Ltd. [1990] 183 ITR 174 (MP) (d) CIT v. Jila Sahakari Kendriya Bank Maryadit [1997] 225 ITR 421(MP) (e) CIT v. UP Co-operative Cane Union Federation Ltd. [19801 122 ITR 913 (All.) (f) Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd. v. CIT [1975] 100 ITR 472 (AP) (g) Rajasthan Raiya Sahakari Bhoomi Vikas Bank Ltd. ITO [1986] 19 ITD 674 (JP) (h) Ahmednagar District Central Co-operative Bank Ltd. v. ITO [1990] 33 ITD 683 (Pune). 8.18 All these cases dealt with the question relating to grant of deduction under section 80P in relation to income from interest on securities, income derived from locker rent and miscellaneous receipts attributable to the banking business, Specific issue relating to eligibility of excess collection of interest tax under section 80P was not discussed in these decisions. However, the Hon'ble High Courts and the Tribunal in these cases have considered the scope of exemption allowable under section 80P(1) read with section 80P(2)(a)(i) and section 5(b) and section 6 of the BR Act, 1949. For an instance, in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ress his application for entertaining those additional grounds. 11. Shri Patel then drew our attention to a chart placed at page 11 of the paper book submitted in this appeal which gives details of income from investments in question. In the said chart it has been pointed out that income of Rs. 3,76,584 has been derived from investments made in IDBI Bonds to meet the requirements of Statutory Liquidity Ratio (SLR) required to be maintained as per section 24 of the BR Act. The balance income aggregating to Rs. 10,98,779 on Non-SLR investments made in SBI Bonds, Sardar Sarovar Nigam Ltd. and KVP quality for deduction under section 80P(2)(a)(i) in view of various judgments cited by Shri S.N. Soparkar, the learned Advocate and also referred to in the written submissions submitted by him. The learned counsel has relied upon the judgments of the Hon'ble Supreme Court in the case of Gujarat State Coop. Bank Ltd.; Karnataka State Co-operative Apex Bank Ltd.; Addl, CIT v. Ahmedabad District Co-operative Bank Ltd. [1975] 101 ITR 733 (Guj.) and Bihar State Co-operative Bank Ltd.'s case to support his contention that the income from investments made with Banks, Central Government Undertaking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the bank from its banking business, is eligible for deduction under section 80P(2)(a)(i). The learned counsel further pointed out that the list of investments given at page 11 of the paper book on the income of which deduction under section 80P(2)(a)(i) has been denied by the Assessing Officer are investments which have been guaranteed by the Central/State Government and all such securities are readily realisable securities. Those securities can be sold in open market at any time at the prevailing market rates. Therefore the assessee's claim for grant of deduction under section 80P(2)(a)(i) is directly covered by the judgment of the Hon'ble Gujarat High Court in the case of Ahmedabad District Co-operative Bank Ltd. Shri Patel also submitted that the Hon'ble Bombay High Court in Ratnagiri District Central Co-operative Bank Ltd.'s case has held that the income from investments in IVPs made by the bank is exempt under section 80P(2)(a)(i). The judgment of the Hon'ble Bombay High Court in Ratnagiri District Central Co-operative Bank Ltd. This judgment has achieved finality as the Hon'ble Supreme Court has dismissed SLP filed by the Department. The learned counsel thus strongly urg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income in question have been given as under: Particulars Rate of Book Value Interest Interest Received Government Securities 1. NABARD Bond 9.75 10,00,000.00 48,750.00 48,750.00 2. NABARD Bond 13.50 10,00,000.00 67,500.00 67,500.00 3. IFCI Bonds 13.50 1,00,00,000.00 6,75,000.00 -------------- ----------- 1,20,00,000.00 9,07,500.00 -------------- ----------- Debentures 1. G.E. Bond 1997 7.50 10,00,000.00 37,500.00 37,500.00 2. G.E. Bond 2007 13.50 5,00,000.00 32,500.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iety. Section 24 requires every banking company to maintain reserve known as Statutory Liquidity Reserve (SLR) of not less than 25% of the total of its demand and time liabilities. Section 17 requires every banking company to create a reserve fund of a sum equivalent to not less than 20% of profits computed in the manner specified in that section. It was also pointed out that section 56 of the BR Act provides that the provisions of this Act as in force from the time being, shall apply to, or in relation to co-operative societies as they apply to or in relation to, banking companies with the modification as stated in section 56. The provisions of section 17 have been made inapplicable in the case of co-operative bank by virtue of section 56. The learned counsel contended that the object behind providing requirement of maintaining CLR/SLR is to protect the interest of depositors. Therefore the entire investments made by the banking societies in conformity with the provisions of section 6 of the BR Act and section 71 of the Gujarat Co.op. Societies Act in Govt. securities, with Scheduled Banks, with Co-op. Societies, in bonds issued by various Govt. Undertakings which are guaranteed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Act is only for the purpose of ensuring that the dividend may not be declared out of profits without transferring at least 25 per cent to such statutory reserve fund. These provisions have been introduced to safeguard the interest of depositors. The amount so transferred to statutory reserve fund as per section 67 of Gujarat Co-op Societies Act does not require that such fund should be invested in any specific securities. On the other hand, the provisions clearly permit the user of such statutory reserve fund in business activities. The learned counsel submitted that there is in fact no distinction between the investment made out of statutory reserve and investment made out of voluntary reserve or other fund available with the co-operative banks. He submitted that after reversal of judgment of the Supreme Court in the case of MP Co-operative Bank Ltd. in the subsequent judgment of larger Bench in the case of Karnataka State Co-operative Apex Bank, the eligibility of these co-operative banks for grant of deduction under section 80P(2)(a)(i) is not in doubt at all as all such investments are easily realisable and such investments have been made to ensure greater security in the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missions made by the learned representatives and have carefully gone through all the judgments cited by all of them. The only issue which requires or consideration in all these appeals relates to the claim for grant of deduction made by these Co-operative banks under section 80P(1) read with section 80P(2)(a)(i) of the Act. It will therefore be imperative to reproduce the relevant extracts of provisions contained in section 80P of the Act: 80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely: (a) in the case of a co-operative society engaged in- (i) carrying on the business of banking or providing credit facilities to its members, or (ii) a cottage industry, or (iii) the marketing of agricultural produce grown by its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agricu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit faults, the collecting and transmitting of money and securities; (b) acting as agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharge and otherwise acting as an attorney on behalf of customers, but excluding the business of a [managing agent or secretary and treasurer] of a company; (c) contracting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to in sub-section (1). 22. Section 18 as modified by section 56 of the BR Act as applicable to Co-operative societies, is reproduced below: "18. Cash reserves.--(1) Every Co-operative Bank, not being a State Co operative Bank for the time being included in the Second Schedule to the Reserve Bank of India Act, 1934 [2 of 1934], [hereinafter referred to as a Scheduled State Co-operative Bank], shall maintain in India by way of cash reserve with itself of balance in a current account with the Reserve Bank or the State Co-operative Bank of the State concerned or by way of net balance in current accounts, or, in case of a primary Co-operative Bank, with the Central Co-operative Bank of the district concerned, or in one or more of the aforesaid ways, a sum equivalent to at least three per cent of the total of its demand and note liabilities in India, as on the last Friday of the second preceding fortnight and shall submit to the Reserve Bank before the fifteenth day of every month a return showing the amount so held on alternative Fridays during a month with particulars of its demand the time liabilities in India on such Friday or of any such Friday is a public holiday under the N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Government in this behalf shall be reduced by the aggregate of the liabilities of all such banks and institutions to the Co-operative Bank; (e) any cash with a Co-operative Bank or any balance held by a Co operative Bank with another bank, shall not, to the extent such cash or such balances represent the balance in, or investment of, agricultural credit Stabilisation Fund of such Co-operative Bank, be deemed to be cash maintained in India. (2) The Reserve Bank may, for the purposes of this section and section 24, specify from time to time, with reference, to any transaction or class of transactions, that such transaction or transactions shall be regarded as liability in India of a Co-operative Bank, and if any question arises as to whether any transaction or class of transactions shall be regarded for the purposes of this section and section 24, as liability in India of a Co-operative Bank, the decision of the Reserve Bank thereon shall be final." 23. The provisions of section 24 as modified by section 56 of the BR Act, is reproduced below: 24. Maintenance of a percentage of assets.--(I) After the expiry of two years from the commencement of this Act, every banking compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 18, shall maintain in India, in cash, or in gold value at a price not exceeding the current market price or in unencumbered approved securities valued at a price determined in accordance with such one or more of, or combination of, the following methods of valuation, namely, valuation with reference to cost price, market price, book value, or face value as may be specified by the Reserve Bank from time to time, an amount which shall not, at the close of business on any day, be less than twenty-five per cent or such other percentage not exceeding forty per cent (is the Reserve Bank may, from time to time, by notification in the Official Gazette, specify, of the total of its demand and time liabilities in India, as on the last Friday of the second preceding fortnight. (b) in computing the amount for the purpose of clause (a) the following shall be deemed to be cash maintained in India, namely: (i) any balance maintained by a scheduled State Co-operative Bank with the Reserve Bank in excess of the balance required to be maintained by it under section 42 of the Reserve Bank of India Act, 1934 (2 of 1934), (ii) any cash or balances maintained in India by a Co-operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilities of such Co-operative Bank or Banks." 25. It may also be imperative to reproduce the relevant provisions of the Gujarat Co-operative Societies Act, 1961. Section 2(24) defines "Working Capital" as under: 2(24). "Working Capital" means funds at the disposal of a society inclusive of paid-up share capital, funds built out of profits and money raised by borrowing and by other means." Section 67 of the Gujarat Co-operative Societies Act, 1961 is reproduced below: 67. Reserve Fund.--(1) Every society which does, or can, derive from its transactions shall maintain a reserve fund. (2) At least one-fourth of the net profits of the society each year, shall be carried to the reserve fund; and such reserve fund may be used in the business of the society or may subject to the provisions of section 71, be invested, as the State Government may by general or special order direct, or may, with the previous sanction of the State Government, be used in part for some public purpose likely to promote the objects of this Act, or for some such purpose of the State, or local interest: Provided that if the Registrar is satisfied that financial condition of the society is such that it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain contingencies arose, could not be considered to be circulating capital or stock-in-trade. The income derived from the investment in Government Securities placed with the State Bank of India or the Reserve Bank of India could not be regarded as an essential part of the assessee's banking activity inasmuch as the same did not form part of its stock-in-trade or working/circulating capital. Hence, interest on such Government Securities could not qualify for exemption under section 81 (now section 80(P) of the Act. The view so taken by the learned CIT(A) in the impugned orders was also supported by the judgment of the Hon'ble Gujarat High Court in the case of Gujarat State Co-operative Bank Ltd. The Hon'ble Gujarat High Court, inter alia, held that in relation to a Co-operative Society carrying on banking business, only income arising on deposits of "banking reserve" viz., cash reserves and amounts to be maintained for liquidity as prescribed by the BR Act, 1949, and reserves required to be maintained under the NABARD Act, 1981, can be treated as income attributable to a banking activity. Short term deposits from surplus funds out of such reserves alone qualify for exemption under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital. Thereafter, the larger Bench of the Hon'ble Supreme Court once again re-affirmed the said view in the case of Mehsana District Central Co-operative Bank Ltd. It is noteworthy to repeat that the judgment of the Hon'ble Gujarat High Court in the case of Gujarat State Co-operative Bank Ltd. was reversed on the point of interest on investment from statutory reserves and also in relation to income derived by the assessee from hiring out of Safe Deposit Vaults. The Hon'ble Supreme Court held that the interest on investments from statutory reserves was eligible for deduction under section 80P(2)(a)(i) and further held that the provision of Safe Deposit Vaults was part of ordinary banking business of a bank as shown by section 6(1)(a) of the BR Act, 1949 and therefore such income was also eligible for deduction under section 80P(2)(a)(i) of the Act. However, in so far as interest on investments from non-statutory reserves was concerned, the matter was restored back to the CIT(A) for providing an opportunity to the assessee to lead evidence on the aspect whether the income derived by the assessee from the investment of its voluntary reserves has been utilised by it in the course o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Whether a particular receipt is of the nature of income and falls within the charge of section 4 of the IT Act is a question of law which has to be decided by the court on the basis of the provisions of the Act and the interpretation of the term "income" given in a large number of decisions of the High Courts, the Privy Council and also this court. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also well-settled that interest income is always of a revenue nature unless it is received by way of damages or compensation." 31. It may therefore be imperative to examine the nature of income in question at the point of its accrual as also the fact whether such income derived by the assessee from the investment of its voluntary reserves has been utilised by it in the course of its ordinary banking business. The claim under section 80P(2)(a)(i) in all these cases relates to income derived from the investments made in Government Securities, Trustee Securities, Kayami Thapan (Fixed Deposits with Banks) [an approved mode of investment for purposes of meeting the requireme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Co-operative banks is to carry on the business of banking. Like other banks, money is its stock-in-trade or circulating capital and its normal business is to deal in money and credit. The very definition of "banking" given in section 5(b) of the BR Act clearly shows that it is a normal mode of carrying on of banking business to invest moneys and that is just as much a part of the mode of conducting banking business as receiving the deposits or lending moneys to its borrowers. Thus the activity of the receiving the deposits from various depositors at small rate of interest and utilising the same for lending or for investment are all integral part of the activities of a banking business. 33. The Hon'ble Supreme Court in the case of Karnataka State Co-operative Apex Bank Ltd. overruling the earlier decision in the case of MP Co-op. Bank Ltd. has held that the interest arising from investment made, in compliance with statutory provisions to enable it to carry on banking business, is exempt under section 80P(2)(a)(i). The placement of such funds being imperative for the purpose of carrying on banking business, the income therefrom would be income from banking business carried on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have seen the reports in Newspaper showing that several Co-operative Banks in the State of Gujarat had faced serious liquidity problems either as a result of some scam or as a result of heavy withdrawals by panicky depositors. The Government is finding it difficult to deal with debacle in the Co-operative Banking Sector in the State in the recent past. One of the worst defects of Indian banking is propensity of the smaller banks to over trade at the expense of liquidity and it has now become imperative to insist on all banks to maintain reasonably larger proportion of their cover in the form of cash or trustee securities as defined in the Indian Trust Act or as approved by the provisions of the BR Act, Co-operative Societies Act, etc. Such investments in Government Securities and other approved modes of investment provide liquidity support to repay their depositors, as and when need arise. 35. The Hon'ble Privy Council in the case of Punjab Co-operative Bank Ltd. has considered the question relating to assessability of profits derived from sale of shares and securities and observed that the bank as on 31-12-1934 owned investments amounting to Rs. 50,88,550 mainly held in Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been available to the appellant had any need arisen. The Hon'ble Supreme Court held that the High Court was in error in treating interest derived from such deposits as not arising from the business of banking. Such income was held to be exempt under the relevant notifications. 37. The Hon'ble Gujarat High Court in the case of Ahmedabad District Co-operative Bank Ltd. has considered the eligibility of deduction under section 81 and section 80P of the IT Act in respect of interest derived by Co-operative Bank from its investments in Government Securities and Municipal Debentures. It was observed by the High Court that it is normally the business of a bank to lay out its idle and surplus funds in such securities and debentures as will be easily realisable for purposes of its main business of banking, namely, of giving credit to its customers. One of the most important factors which would help in distinguishing whether Government securities and debentures or fixed deposits held by a bank are in the nature of investments or are part of stock-in-trade is whether such securities or debentures are easily realisable or not. The laying out by a bank of its surplus and idle funds in easily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in permanent deprivation of funds for banking activity. It ought to have been examined as to whether such investments has an effect of temporary withdrawal of the funds or the investments made in IVP can be brought back to the banking business, as and when needed. This judgment of the Bombay High Court has also achieved finality as SLP preferred by the Department against the said judgment has been dismissed by the Hon'ble Supreme Court. 41. The principles of law emerging from all the above ref erred judgments clearly indicates that the investments of surplus and idle funds made by the Co-operative Banks in easily realisable Government Securities or such other approved modes of investments in consonance with sound banking practice are regarded as investments forming integral part of main activities of banking business. The income from such investments will be eligible for grant of deduction under section 80P(2)(a)(i) of the Act. 42. The facts of all the present cases so far as they relate to claim for grant of deduction under section 80P(2)(a)(i) are almost similar. Let us therefore analyse the facts of one of these five cases in the light of the principles of law emerging fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 53250463.66] State Bank of India 33997222.96] State Bank of San. 9852.20] Notified Banks 68010655.94] State Co-op. Bank 17440668.14] ------------ 172708862.90] ------------ Reserve Fund Balance with other Other Reserves Banks Statutory Reserve 54224743.10] Current Deposits 8612256.47] Agri. Credit Stab Fund 36954800.19] Saving Bank Deposits -] Building Fund 7956033.95] Fixed Deposits 1570327251.00] ] (Kayami Thapan) ] Dividend Eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -] ST Loan cash Agri. Dev. Fund 3433500.38] Credit O/DS 1229441766.00 Reconstruction of Society -] Staff Gratuity Fund 2347842.54] Medium term Loan 69201392.98 Rural Artisans ] Industries Dev. Fund 1193674.00] Long Term Loans 48871701.96 Staff Prov. Fund (Bank) 4101275.00] which secured at Capital Red Fund 4000000.00] Depositor's Benefit Fund -] Staff Salary Areas 8000000.00] Consortium finance 81900000.00 Bank Memorial Fund -] Int. Fluctuation Fund 8500000.00] Interest Receivable 112801546.68 ------------ Total Reserve Funds 358103751.67 ------------ Principal/Subsidiary Bills Receivable 21006621.41 State Partnership Fund for Shares Capital 1521000.00 Premises 10469341.00 Deposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e out of common/mixed funds maintained by the said Society. The definition of working capital given in section 2(24) is relevant for understanding as to what arc the broad sources of making such investments, working capital means funds at the disposal of a society inclusive of paid-up share capital, funds built out of profits and moneys raised by borrowing and by other means. The investments in such Government Securities and other approved investments have been made out of such working capital as defined in section 2(24), as the said definition included within its ambit the share capital, the funds borrowed, funds built out of profits and funds raised by other means. 45. The part amount of interest income on Fixed Deposits with other banks (Kayami Thapan), interest on Central and State Government Securities and other Trustee Securities aggregating to Rs. 3,01,39,708 has been held to be not eligible for grant of deduction under section 80P(2)(a)(i) by the Assessing Officer and the learned CIT(A). 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction under section 80P(2)(a)(i) of the Act by various assessing authorities. That judgment has been overruled by the larger Bench of the Hon'ble Apex Court in the subsequent judgments cited supra. Such investments should therefore be regarded as integral part of banking activities carried on by these Societies as in various earlier years. The investments have continued to be made/retained in such approved securities on the basis of sound banking practice prevailing in various Co-operative Banks like the present assessees for past several years. 47. We have also pointed out hereinbefore that the requirements of minimum SLR/CRR specified in sections 18 and 24 only recognise the sound banking practice prevailing in the banking trade for last several years. The banks have to keep adequate reserves of cash and liquid assets to meet its demand liabilities. That is why these provisions have made it mandatory for the banks to investment minimum amount of 3 per cent and 25 per cent its demand liabilities in approved Government Securities. These provisions only prescribe mandatory minimum amount of investments in approved securities to meet the requirements of SLR/CRR but it does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The destination of such income has always been the same Mixed/common fund constituting the working capital. Such interest income on investments in Government securities etc. made out of working capital (including voluntary reserves) has been credited in profit and loss account and have been utilised for meeting various Banking expenses debited in the P L A/cs and surplus has merged with the working capital available for carrying on the Banking business of lending and/or of making such investments. Such inseparable mixed common funds, which constitutes the source and origin of such investments is also the destination of such income and proceeds of its realisation on encashment. All such activities are integral part of normal banking activities of banking business carried on by these societies. 50. The nature of investments made in all these cases in approved Government Securities/other approved investments which are permissible under the provisions of the BR Act and/or section 71 of the Gujarat Co-operative Societies Act, 1961 or authorised by Circulars/notifications issued by RBI or other Competent Authority from time to time are all such investments which are part of normal tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocker Rent is also allowable in view of the direct judgment of the Hon'ble Supreme Court as already discussed and decided hereinbefore. 54. The claim for deduction under section 80P(2)(a)(i) in respect of all such income in question, viz., interest income from investments in Government securities/approved modes of investments of surplus funds/idle money lying out of working capital, excess amount of interest tax collected and locker rent, etc. can be examined from one more angle. It is pertinent to note that under section 80P(2)(a)(i) income "attributable to" "banking business is exempt. The expression income attributable to" has been distinguished from the expression "income derived from" used in various other provisions of the Act, by the Hon'ble Apex Court and other Courts in various cases. Let us examine the ratio of some of those judgments explaining the subtle but significant difference between the meaning and scope of these two expressions used in various provisions of the Act. (a) Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC). The Hon'ble Supreme Court has held as under at pages 93 and 94: "As regards the aspect emerging from the expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness which, have a proximate connection with the main business or is an incidental activity closely related to the main activity. In this context, we may refer to the decision of the Madras High Court in the case of Madurai District Central Co-operative Bank Ltd. [1984] 148 ITR 196 (Mad.) wherein it was held that the maintenance of liquid assets in the form of securities is a must for carrying on the banking activity of the assessee and therefore, the income from such securities should be taken to the income from banking business. Their Lordships of the Madras High Court distinguished the decision of Madhya Pradesh High Court in the case of MP State Co-operative Bank Ltd. v. Addl CIT [1979] 119 ITR 327 by stating that that was a case under section 81(1)(a) which did not use the expression "attributable to" as it is used in section 80P(2)(a)(i) of the Act. 56. One of the grounds in some of these appeals taken on behalf of the assessees was that an alternative prayer was made before the CIT(A) for grant of deduction under section 80P(2)(a) which provides exemption in respect of income by way of interest or dividend derived by Co-operative Society from its investments with any ot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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