TMI Blog1997 (12) TMI 134X X X X Extracts X X X X X X X X Extracts X X X X ..... larified by the assessee that these fixed deposits were kept from the surplus reserves after meeting all the obligations of maintaining SLR plus CRR as per RBI guidelines and on minimum involvement fixed by NABARD. On the basis of the above clarification from the assessee, the A.O. issued a detailed show-cause notice on 11-3-1994 to the assessee bank which is reproduced on page 5 of the assessment order. In this show-cause notice, the A.O., inter alia, pointed out that as per the Madhya Pradesh High Court decision in the case of M.P. State Co-operative Bank Ltd v. Addl. CIT [1979] 119 ITR 327 the co-operative banks would not be entitled to exemption under section 80P(2) of the Act in respect of certain income earned by them, because the entire income of such co-operative banks would not constitute income from banking operations. The A.O. particularly mentioned income derived from the deployment of funds segregated or identified as reserves, being not liable to be qualified as stock-in-trade or circulating capital of the company, in particular, building fund, dividend equalisation fund, investment reserve, depreciation reserve and other training deposits funds as reflected in the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions in Addl. CIT v. Ahmedabad District Co-operative Bank Ltd. [1975] 101 ITR 733 and CIT v. Gujarat Mineral Development Corpn. [1981] 132 ITR 377. 5. ITO v. Karnataka State Co.-operative Apex Bank Ltd. [1983] 86 ITD 763 (Bang.). 6. Parsik Janata Sahakari Bank Ltd. v. ITO [1994] 50 ITD 318 (Bom.). 5. Shri R.K. Chowdhury, the learned D.R. submitted that the issue squarely stands covered in favour of the revenue and against the assessee by the decision of the M.P. High Court in the case of M.P. State Co-operative Bank Ltd. which has since been affirmed by the Hon'ble Supreme Court in Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT [1996] 218 ITR 438/84 Taxman 640. He further relied upon a recent decision of the Hon'ble Rajasthan High Court in the case of CIT v. Rajasthan State Co-operative Bank [1997] 223 ITR 55 wherein the Hon'ble Rajasthan High Court has followed the decision of the Hon'ble Supreme Court in the case of Madhya Pradesh Co-operative Bank Ltd. . The learned D.R. then drew our attention to Bye Laws 43 to 45,49 and 56 of the assessee bank dealing with preparation of Profit and Loss Account, appropriation of Profits Reserve Fund other funds and utilisatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as may remain in hand after the payment mentioned in sub-clause (a) shall be applied to such objects of public utility as may be selected by the General Body, and approved by the Registrar. If-within three months of the final closing up of the Bank, the General Body fail to make any selection that it is approved by the Registrar, the latter may use the above-mentioned portion of the Fund in supporting co-operative societies or in encouraging the Organisation and development of the co-operative movement. [Emphasis supplied] 65. Fund not to be divided - (1) No part of the funds or assets of a society other than the dividend equalisation fund, if any, and the net profits thereof, shall be paid by way of rebate or dividend or otherwise distributed, to its members: Provided that in the case of a member, who is also a salaried servant of the society payment on such scale as may be laid down by the bye laws may be made to him for work done as such servant. (2) No honorarium shall be paid out of the funds and assets of a society, other than the net profits and such honorarium shall not exceed the prescribed limit. 66. Appropriation of Profits - (1) A society earning profit, shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties specified in section 20 of the Indian Trust Act, 1882 (11 of 1882), (e) in shares, or security bonds, or debentures, issued by any other society with limited liability, or in any Co-operative bank or in any banking company approved for this purpose by the Registrar, and on such conditions as the Registrar may from time to time impose, (g) in any other mode permitted by the rules, or by general or special order of the State Government. (2) Notwithstanding anything contained in sub-section (1), the Registrar may, with the approval of the State Co-operative Council, order a society or a class of societies to invest any funds in a particular manner, or may impose conditions regarding the mode of investment of such funds. [Emphasis supplied] 115. Disposal of Surplus Asset: Any surplus assets, as shown in the final report of the liquidator of a society which has been wound up, shall not be divided, amongst its members but shall be devoted to any object or objects provided in the bye-laws of the society, it they specify that such a surplus shall be utilised for the particular purpose. Where the society has no such bye-Laws, the surplus shall vest in the-Registrar, who shall h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less such society has been, by general or special order, partially or wholly exempted in this behalf by the Registrar, and (b) pay to the Madhya Pradesh Co-operative Union Ltd. and to such other institutions or unions as may be specified by the Registrar In this behalf, such contribution as may be prescribed; (c) transfer at least twenty per cent to an equity redemption fund by such societies which have Government equity participation. (3) No society shall pay dividend to its members at the rate exceeding twenty five per cent except with the prior approval of the Registrar. (4) A society may, with the sanction of the Registrar, after one-fourth of the net profit in any year has been carried to the reserve fund, contribute not exceeding five per cent of the remaining net profits to any purpose connected with the development of co-operative movement or charitable purpose as defined in section 2 of the Charitable Endowment Act, 1890 (No. 6 of 1890). Sec. 43-A. Appropriation of Profits:-(1) A society earning profit shall calculate the net profit by deducting from the gross profits for the year the following:- 1[(a) all overdue interest accrued on loan accounts.] (b) manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified purposes, shall be made by a society other than a housing society without the approval of the Registrar]. A society accepting deposits shall maintain, as a cover against such deposits, fluid resources to such extent and in such manner as may be specified by the Registrar from time to time. Sec. 72. Disposal of surplus assets of liquidated societies.-After all the liabilities including the paid-up share capital of a wound up society have been met, the surplus assets shall not be divided amongst its members but they shall be applied to any object described in the bye laws of the society and when no object is so described, to any object of public utility determined, by the general meeting of the society and approved by the Registrar or they may, in consultation with them either be assigned by the Registrar in whole or in part to any or all of the following:- (a) an object of public utility or local or civic interest; or (b) the Madhya Pradesh Co-operative Union Ltd., or any other institution or Union; or (c) may be placed on deposit with a Central Co-operative Bank until such time as a new society with similar conditions is registered when with the consent of the Regis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (which includes cooperative Banks) and one of such ancillary businesses mentioned is renting of safe deposit vaults. In this connection he drew our attention to sections 5 6 of the Banking Regulation Act, 1949 reproduced at page 88 of the assessee's paper book. The learned counsel submitted before us a comparative chart of the corresponding sections of the Rajasthan Cooperative Societies Act, Madhya Pradesh Co-operative Societies Act and Gujarat Co-operative Societies Act and submitted that from the said chart it will be found that while sec. 63 of the Rajasthan Act and sec. 71 of the Gujarat Act provide various modes of investment for all the funds of the co-operative societies, the M.P. Act in sec. 44(2) contains a restrictive clause as follows: "Section 44(2): The reserve funds of the society shall be invested or utilised only in such manner and on such terms and conditions as may be laid down by the Registrar in this behalf." He therefore submitted that in view of the above restrictive clause the ratio laid down by the M.P. High Court in the case of Madhya Pradesh State Co-operative Bank Ltd and later affirmed by the Apex Court does not apply to the facts of the present c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veral businesses refer-red to in sub-clause (2) thereof. The business of the assessee society must have a direct or proximate connection with or nexus to the earning in order that the latter may enjoy the exemption Andhra Pradesh Co-operative Central Mortgage Bank Ltd.'s case . In other words, 100 per cent deduction can be availed only where the income is from the activities specified. Activity which is not so specified shall not enjoy the full exemption. Addl. CIT v. UP. Co-operative Cane Union [1978] 114 ITR 70 (All.); CIT v. UP. Co-operative Cane Union Federation Ltd. [1980] 122 ITR 913 (All.); Vidarbha Cooperative Marketing Society Ltd. v. CIT [1985] 156 ITR 422 (Bom.). This view is later reiterated in the case of CIT v. Co-operative Supply Commission Shop Ltd. [1993] 204 ITR 713 (Raj.) and CIT v. Co-operative Supply Commission Shop Ltd. [1996] 220 ITR 352 (Raj.). Further in the matter of granting 100% exemption under section 80P(2)(a) a strict construction of the provision is necessary as has been held by the Hon'ble Gujarat High Court in the case of Surat Vankar Sahakari Sangh Ltd. v. CIT [1971] 79 ITR 722 (Guj.). Various available judgments on the issue i.e. availabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets of the co-operative societies under both the enactments is not available for distribution among the members of the co-operative society as far as the provisions as stood at the relevant point of time. So also sub-section (2) of section 71 of the Gujarat Co-operative Societies Act, 1961 as over riding provisions whereby the Registrar of Co-operative Societies may order a society or a class of societies to invest any fund in a particular manner or may impose condition regarding the mode of investment or such funds. In fact as pointed out by the learned D.R. various notifications have been issued by the Registrar of Co-operative Societies of Gujarat for approving the investment of funds in particular manner and one such notification where the name of the assessee bank prominently appears has been referred to in para 5 at page 9 . 10. As stated above the Hon'ble Supreme Court has since affirmed the judgment of the Hon'ble M.P. High Court in the case of M.P. Co-operative Bank Ltd. . In its decision reported at Madhya Pradesh Co-operative Bank Ltd.'s case the Hon'ble Apex Court has clearly and categorically held as under:- "The object of section 81 of the I.T. Act, 1961 is to en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same did not form part of its stock-in-trade or working circulating capital. Hence, the interest on Govt. Securities placed with the State Bank of India or the Reserve Bank of India could not qualify for exemption under section 81 (now section 80P) of the I.T. Act." [Emphasis supplied] The above decision of the Hon'ble Supreme Court in our considered opinion clearly takes the issue beyond any argument as in reaching the aforesaid decision the Hon'ble Apex Court has clearly analysed what amounted to the normal banking activity and the nature of funds invested in outside Govt. securities and fixed deposits with other banks against funds specifically earmarked as Reserve Fund. The Hon'ble Supreme Court has clearly and categorically held that such investment coming out of reserve fund which could not be easily encashed and which could be utilised only when certain contingencies arose could not be considered to be the circulating capital or stock-in-trade of the bank and the income derived from such investment could not be regarded as essential part of assessee's banking activity inasmuch as the same did not form part of its stock-in-trade or working/circulating capital. Thus, in ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shares or securities or debentures issued by any other cooperative society with limited liability; (d) in any other mode permitted by the rules general or special order of the Government. (e) A co-operative society may deposit its funds for temporary period in such manner as may be prescribed." Examination of the provision of sec. 63, in particular clause (d) of sub-sec. (1) clearly brings out the fact that under Rajasthan Co-operative Societies Act there was no absolute restriction on deployment of reserve funds within the business and bank could have been permitted to invest in any other way by general or special order of the Government. It is noted that what has ultimately weighed with the Hon'ble Rajasthan High Court is that the interest earned on securities/investment by the bank is not a banking business as the said investment is neither of circulating capital or stock-in-trade of the Co-operative bank, as it has no absolute or unfettered right to withdraw the same whenever it likes as the same can be withdrawn only in the proceedings of the winding up of the co-operative society. 12. In the fight of above discussion we reverse the finding of the learned CIT(A) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to be corelated to any of the activities which may fall within the definition of banking and consequently the view taken by the Tribunal in its appellate order, insofar as the income from locker rent is concerned, seems to be correct, namely that this income shall not full under clause (a) of sec. 80P(2) of the Act but shall fall under clause (c) thereof." 17. Shri Kaji, the learned counsel for the assessee submitted that though the earlier decision of the M.P. High Court in Bhopal Co-operative Central Bank Ltd.'s case 169 ITR 573 on this issue was against the assessee the CIT(A) relied on the subsequent decision of the same High Court in Bhopal Co-operative Central Bank Ltd.'s case 172 ITR 423 while rejecting the reference application of the department and holding that the issue regarding bank locker was covered by the earlier decision of the M.P. High Court in CIT v. Dhar Central Co-operative Bank [1984] 149 ITR 438/[1985] 20 Taxman 258. However Shri Kaji was fair enough to admit that there is once again a recent decision of the M.P. High Court reported in CIT v. Jila Sahakari Kendriya Bank Maryadit [1997] 225 ITR 421/90 Taxman 426 holding that rent from bank lockers cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Bank Ltd.'s case 169 ITR 573 has held that the income derived from locker rent could not be co-related to any of the activities which may fall within the definition 'banking' and hence, the same was not entitled to exemption under section 80P(2)(a)(i) of the I.T. Act, 1961. Further the Tribunal, Pune Bench in the decision in the case of Mahalaxmi Co-operative Bank Ltd. v. ITO [1987] 27 TTJ (Pune) 49 has clearly held that the locker hiring activity is only on account of permissible clause of Banking Act and therefore action of the A.O. not considering the income of locker rent for exemption under section 80P was justified. In view of the above legal position, we reverse the finding of the CIT(A) and hold that locker rent amounting to Rs. 1,10,950 is not eligible for deduction under section 80P(2). This ground of the revenue accordingly succeeds. 19. Ground No. 3 raised by the Revenue reads as under: "The ld. CIT(A) has erred in allowing deduction on account of commission of Rs. 5,27,990". During the course of assessment proceedings, the A.O. noted that the assessee in the profit and loss account had shown an amount of Rs. 5,29,990 being commission, exchange and brokerage. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel of the assessee. Accordingly we deem it fit to set aside this issue and restore the issue to the file of the A.O. The assessee will furnish the necessary details before the A.O. to establish the nexus of this income with the business of banking and the A.O. will readjudicate upon the issue after giving an opportunity of being heard to the assessee. This ground is allowed for statistical purposes. 22. Now we take up the cross objections filed by the Assessee. 22.1 The first objection raised by the assessee reads as under:- "The ld. CIT(A) erred in not deciding alternative claim of the respondent for allowance of proportionate expenses for earning the interest income, in case the interest income was held taxable by higher appellate authority." 23. In the revenue's appeal we have given the necessary directions to the A.O. to consider the assessee's alternative contention for allowance of proportionate expenses for earning the interest income. The issue has been restored to the file of the A.O. This objection is accordingly allowed for statistical purposes. 24. The second objection raised by the assessee reads as under:- "The ld. CIT(A) erred in remanding the issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Ahd.)] of 74 relating to the A.Y. 1972-73 and placed at page 100 of the paper book. The learned counsel also relied upon the decision of the Allahabad High Court in CIT v. Sahakari Bhumi Vikas Bank Ltd. [1994] 123 Taxation 386. 27. Shri R.K. Chowdhury, the learned D.R. strongly supported the order of the CIT(A). 28. We have considered the rival submissions. We do not find any infirmity in the finding of the CIT(A) in setting aside the issue and restoring it to the file of the A.O. It is noted that the Tribunal's decision relied upon by the learned counsel was not cited before the A.O. or even before the learned CIT(A). The assessee pressed its claim for deduction under section 80P(2)(d) whereunder exemption is available for dividend and interest income from other co-operative societies and admittedly such income was not earned from other co-operative societies. Hence the A.O. rejected assessee's claim as no other alternative claim was pressed before the A.O. The learned CIT(A), in our opinion, has rightly set aside the issue as the assessee has come up with an altogether new claim.-In any case no substantive grievance is caused by this direction of the CIT(A) to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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