TMI Blog2005 (8) TMI 287X X X X Extracts X X X X X X X X Extracts X X X X ..... (Rupees in lakhs) ------------------------------------------------- Total liabilities [Part A (IV)] for The purpose of secs. 18 24 of B R Act. 4487 5089 6280 Assets to be required to maintain [under section 24 [Part C (XI)] 1256 1425 1758 Assets actually maintained for Compliance with section 24 [Part C (XII)] 1994 1510 2259 ------------------------------------------------- As could be seen from the details furnished and Form No. I mentioned above against the amount of assets maintained for compliance with section 24 (as mentioned in Part C (XII) of Form No. I), the following investments out of total investments referred to in Annexures 'A' 'B' were considered for furnishing information in respect of SLR CRR to the Reserve Bank of India. ------------------------------------------ (a) Balance of all types with Apex Bank : 1572 (b) Unencumbered approved securities : 150 (c) Cash on hand : 536 (d) Balance with current bank a/c : 54 As mentioned in Part A (VII) of Form No. I, filed for the month of March, 1998 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anking activities, the interest income is exempt from tax under section 80P(2)(a)(i). Further, this is to state that the facts of the case of Madhya Pradesh State Co-operative Bank v. Addl. Commissioner of Income-tax are not applicable to the co-operative banks in Karnataka as held by the Apex Court in Bangalore District Central Co-operative Bank v. CIT [1998] 233 ITR 282. It has been held in this case that interest on Government Securities and dividends earned by co-operative society engaged in banking business is eligible for deduction under section 80P(2)(a)(i). The Tribunal also had found that such income is attributable to its business. Apart from the above two contentions this is to be noted that all the investments made by us are out of circulating capital. The investments made does not seize the working capital. The investments made are 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 receiving deposits or lending moneys or discounting hundies or issuing demand drafts. That is how the circulating capital is employed and that is the norma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o invest in such form of securities to run its normal banking activities. Therefore, all these investments clearly comes within the purview of banking business and activities. Hence, the claim of interest income for deduction under section 80P(2)(a)(i) is rightly made. Further, this is to be noted that all the above securities are listed on stock exchanges though the duration of these holdings are for longer period. As the securities are listed on the stock exchanges they are easily transferable and liquidatable. Thus these securities do form part of the banking business and are funds out of circulating capital and stock-in-trade. The interest on these securities is eligible for deduction under section 80P(2)(a)(i). In view of all the above facts given and in view of the judgment given by the Hon'ble Apex Court in the above cited case of CIT v. Bangalore DCC Bank Ltd., it is argued that deduction for interest earned on all the Government Securities and investments is rightly claimed under section 80P(2)(a)(i) and it is requested to allow the deduction accordingly." 5. The Assessing Officer after considering the above submissions mentioned that the investments are out of surpl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of learned CIT(A) in order to appreciate the reasons given by him to allow the appeal of the assessee. "I have perused carefully the well drafted order of assessment by the learned Assessing Officer. Indeed, the efforts of the Assessing Officer are laudable and praiseworthy. The learned Assessing Officer has tried his best to apply the decision of the Apex Court reported in 218 ITR 438 to the instant case. I have also gone through the voluminous written representation submitted by the learned counsel for the assessee who has also orally dealt at length the various issues involved during the appellate proceedings. On careful examination of facts and circumstances of the case, the views expressed by the learned Assessing Officer in the asst. order and the submissions made by the learned counsel for the assessee, I am inclined to feel that the points and issues raised by the assessee in its voluminous submissions wins the appeal in its favour especially because of the latest decision of Bench of three Judges of Hon'ble Supreme Court in the case of CIT v. Karnataka Co-op. Apex Bank (251 ITR 194). It ought to be mentioned to the Assessing Officer that the said decision of Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as per the provisions of Governing Act of Co-operative Society. In para 7. of the assessment order, the Assessing Officer has concluded that interest earned from investments is in no way concerned with the assessee's banking activity. However, the learned Assessing Officer ought to have given due weightage to the argument advanced by the assessee that the interest earned on investments is attributable to the banking activities and as such is exempt under section 80P(2)(a)(i) of the Act. This is so because the section 5(b) of Banking Regulation Act, 1949 clearly defines the 'Banking' as under: 'Banking means the accepting, for the purpose of lending or investment, of deposit of money ....' As seen from the above definition, both the lending and investment of funds form part of banking activities only and as such interest earned on these in a general sense are eligible for deduction under section 80P(2)(a)(i), subject of course to interpretations of laws laid down by the Apex Court in its various decisions. It is also seen that in para 8 of the asst. order, the Assessing Officer makes an averment that the fact that some of the investments may be encashed prematurely or tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents as something earned out of non-banking activity. The Assessing Officer in para 8 of the assessment order has also asserted that the assessee's contention that investments made as per Annexure 'A' does not cease to be circulating capital, cannot be accepted. In the case of CIT v. Karnataka State Co-op. Apex Bank (251 ITR 194), the 3 Judge Bench of Apex Court has, categorically observed that it is unable to agree with the view that found favour with the Bench that decided the case of Madhya Pradesh Co-op. Bank Ltd. 218 ITR 438 (SC) that only income derived from circulating or working capital would fall within section 80P(2)(a)(i) of the Act. The Hon'ble 3 Judge Bench Court further laid down that there is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital Ultimately, the Hon'ble Supreme Court Bench of 3 Judges opined clearly that the decision of Supreme Court in the case of Madhya Pradesh Co-op. Bank Ltd. 218ITR 438 does not set down the correct law and that the law is as they have put it earlier. The rationale behind the said decision of Apex Court was that placements of funds in compliance with sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant sections of Banking Regulation Act applicable to Co-operative societies. Section 56 of Banking Regulation Act, 1949 makes the provisions of the Act applicable to Co-operative societies subject to certain modification. Section 6 of Banking Regulation Act is applicable to Co-operative societies with some modifications in sections 6(1)(b), 6(1)(d) and 6(1)(m). For discussion in the instant case sections 6(1)(a) and 6(2) are relevant and these are reproduced as under: "6(1) In addition to the business of banking, a banking cooperative society may engage in anyone or more of the following forms of business, namely- (a) The borrowing, raising or taking up of money, the lending or advancing of money either upon or without security; and drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundies, promissory notes, coupons, drafts bill of lending, railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whether transferable or negotiable or not the granting and issuing of letters of credit, traveller's cheques and circular notes, the buying and selling and dealing in bullion and specie, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of such profit." 11. In AIR 1983 Mad. 15, it was held that section 6 provides for variety of business which a banking company may engage itself in, chit fund transactions indulged in by a banking company partakes character of banking activity. 12. Section 24 of the Banking Regulation Act is a statutory provision to give legal sanction to a sound banking practice that a bank should keep a reserve of cash and liquid assets to meet its demand liabilities. The tendency of smaller banks to overtrade at the expense of liquidity was required to be curbed. Section 24 provides a minimum as well as maximum percentage of keeping assets with reference to demand and liabilities. If such assets exceeds 40 per cent then it can be said such excess is voluntary and without sanction of law. Under such circumstances one can conclude that interest from such investment is not income from banking business. In the instant case, such investments do not exceed the prescribed limit. 13. The Assessing Officer in his order has mentioned the following reserve funds as on 31-3-1997. --------------------------------------------------- Sl. Particulars Amount No. ------------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss so that true picture emerges. Depreciation reserve or reserve for bad and doubtful debts can be taken as example of this nature. Reserve: On the meaning of the expression 'reserve', the Supreme Court observed as follows at page 503 in CIT v. Century Spg. Mfg. Co. Ltd [1953] 24 ITR 499 (SC): "The term 'reserve' is not defined in the Act and we must resort to the ordinary natural meaning as understood in common parlance, the dictionary meaning of the word 'reserve' is: (a) To keep for future use or enjoyment; to store up for some time or occasion; to refrain from using or enjoying at once. (b) To keep back or hold over to a later time or place or for further treatment. (c) To retain or preserve for certain purposes. In Webster's New International Dictionary, 2nd Ed., p. 2188, 'reserve' is defined as follows:- 1. To keep in store for future or special use; to keep in reserve; to retain, to keep, as for oneself. 2. To keep back; to retain or hold over to a future time or place. 3. To preserve - A.P V, Engg. Co. Ltd. v. CIT, West Bengal, [1979] 119 ITR 937 at pp. 943, 954 (Cal.); see also Commissioner of Income-tax, Kerala v. Periakra Malai Tea and Produce Co. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness Profits-tax Act. 'Earned surplus' has, it is true, not been called 'Reserve', but if it is truly a reserve, it must be taken into account in the computation of capital. Where the balance of net profits after allocation to specific reserves and payment of dividend are entered in the account under the caption 'Earned surplus' it is intended thereby to designate a fund which is to be utilized for the purpose of such business of the assessee. Such a fund may be regarded according to the Indian practice as 'General reserves'.- CIT, Calcutta v. Standard Vacuum Oil Co. [1966] 1 S.C.J 401 at pp. 408-10 : A.I.R 1966 S.C. 1393: 16. Thus, the surplus is reflected in the balance sheet on credit side as general reserve or credit balance under the head 'Profit and loss account'. In case the surplus or idle money is invested in the investment earning interest, then such interest cannot be termed as business income. Specific reserves are credited out of the profits to meet the specific liabilities. Such specific reserves are the capital employed in the business as observed by the Supreme Court in the case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53. It will be relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t above, it is a normal mode of carrying on banking 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 receiving deposits or lending moneys or discounting hundies or issuing demand drafts. That is how the circulating capital is employed and that is the normal course of business of a bank. The moneys laid out, in the form of deposits as in the instant case would not cease to be a part of the circulating capital of the assessee nor would they cease to form part of its profits from its banking business. The return flowing from them would form part of its profit from its business. In a commercial sense the directors of the company owe it to the bank to make investments which earn them interest instead of letting moneys lie idle. It cannot be said that the funds of he bank which were not lent to borrowers but were laid out in the form of deposits in another bank to add to the profit instead of lying idle necessarily ceased to be a part of the stock-in-trade of the bank, or that the interest arising therefrom did not form part of its business profits." 19. The learned Supreme Court in the case of C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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