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TMI Blog2005 (8) TMI 287X X X X Extracts X X X X X X X X Extracts X X X X ..... "As on As on As on 4-4-1997 25-9-1997 27-3-1998 (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 complian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also observed that those investments were held by the assessee from 2-9-1985 till their maturity. These in vestments cannot be treated to have been held with a view to call back at short notice so as to be available for utilization in proper banking activity. It was, therefore, proposed to treat interest income earned from such investment as income not attributable to the banking activity within the meaning of section 80P(2)(a)(i). The assessee-society objected to above disallowance by submitting as under "In this regard your attention is invited to the wording of the section 80P(2) 'the whole of the amount of profits and gains of business attributable to anyone or more of such activities' out of which one activity under (a)(i) is carrying on the business of banking or providing credit facility to its members. The word 'Attributable to' is distinguished from 'Derived from' in the case of Cambay Electricity Supply Industrial Company Ltd, v. CIT, 113 ITR 84 by the Hon'ble Supreme Court. It is pertinent to note that the Legislature has deliberately 'derived from', The word 'attributable to' is wider in import than the expression 'derived from'. Thus as the interest earned on invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). The said sub-rules provide for premature encashment in all circumstances. So it is clear that premature encashment is authorized under the rules. In view of this the co-operative bank can hold these KVPs as part of the banking business and the decision given in the CIT v. Bangalore DCC Bank will apply. Further, out of the total investment, Rs. 60 lakhs worth of KVPs are due for final encashment within a year. The bank can also avail loan at any time on KVPs. INTEREST ACCRUED ON INVESTMENT IN INDIRA VIKAS PATRAS The IVPs are bearer securities and are easily transferable at any point of time. The IVPs are like bearer cheques and are fast liquidatable securities. They can be transferred immediately at any time and without much formalities. Thus, the investment do form part of circulating capital. INTEREST ACCRUED ON INVESTMENT IN GOVERNMENT OF KARNATAKA SECURITIES, IDBI BONDS, RBI BONDS, KRISHNA BHAGYA JALANIGAM BONDS, UTI SCHEME, MEDINOVA DIAGNOSTIC ETC. All the above securities (Shares and Bonds) are the investment for the purpose of maintaining SLR and CRR. The bank has to maintain SLR and CRR for the purpose of running banking activities as per the RBI guidelines. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s assessable as income from other sources. (a) Collis Line (P.) Ltd. v. ITO [1982] 135 ITR 390 (Ker.) (b) Bokaro Steel Ltd. v. CIT [1988] 170 ITR 545 (Pat.) (c) Murli Investments Co. v. CIT [1987] 167 ITR 368 (Raj.) (d) CIT v. Rajasthan Land Development Corpn. [1995] 211 ITR 597 (Raj.) 6. The learned Assessing Officer further held that decision of Supreme Court in the case of CIT v. Bangalore Distt. Co-operative Central Bank Ltd [1998] 233 ITR 282 is not applicable in the instant case as in that case the factual finding of the Tribunal that interest income was attributable to the business of the assessee was not challenged. 7. The learned Assessing Officer further observed that interest income from investment in co-operative societies are exempt under section 80P(2)(d). In case these were exempt under section 80P(2)(a)(i), then there was no need for separate exemption of such income under section 80P(2)(d). It was, therefore, concluded that interest income from investments other than investments in co-operative societies is not exempt under section 80P(2)(a)(i). 8. The learned CIT(A) has also passed a detailed speaking order. It will be relevant to reproduce the following pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trial Co. Ltd. The Assessing Officer should have appreciated the interpretation of Apex Court that the expression 'attributable to' is of 'wider significance and import' than the expression 'derived from' which is narrower in concept. In para 7 of the assessment order, the learned Assessing Officer has made passing reference to the expression 'attributable to' but has not elaborated his reasons as to why and how the word 'attributable to' does not come to the rescue of the assessee. The Assessing Officer ought to have, for clarity sake, further analyzed the facts of the case to buttress his opinion that the wider import of 'attributable to does not help the assessee in claiming the deduction under section 80P(2)(a)(i) of the Act insofar as the interest earned on investments made is concerned. I am also in agreement with the view expressed by the learned counsel of the assessee that all the reserve funds created by the assessee in accordance with the provisions of the Co-operative Society Act cannot automatically be termed as 'surplus funds' since the 'reserves' are created automatically be termed as 'surplus funds' since the 'reserves' are created by transfer of part of profit eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r circulating capital. None of such fetters were placed on the investments made by the appellant bank. The learned Assessing Officer has not established, rather not even indicated such restrictive shackles placed by the Karnataka Government or any other lawful authority on the appellate bank. The Assessing Officer does not appear to have grasped intricacies of the judgment of the Hon'ble Apex Court laid down in the case of Madhya Pradesh Co-op. Bank Ltd. The Assessing Officer has, in para 8 of his order, held rather erroneously that deduction under section 80P(2)(a)(i) is allowable only when the funds available to the society can be utilized for its banking activity proper and not for earning income from investments extraneous to the proper banking activity. The Assessing Officer, as a matter of fact, erred in treating investments made so as if for extraneous purpose because such investments are to be made in view of regulation of RBI or other statutory guidelines and since such funds are not diverted permanently so that normal banking operations are deprived of their usability after conversion, the learned Assessing Officer has erred in treating the interest earned on such investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of banking business and therefore is entitled to exemption under section 80P(2)(a)(i) of the Act. The learned counsel has emphasized that the judgment delivered by the Bombay High Court is of direct relevance to it as the majority of investments of assessee are in IVPs and KVPs. In view of the decision available directly on the point involved, I have no qualms in concurring with the learned counsel of the assessee." 9. Before us, the learned DR submitted that investments have been made out of surplus funds and not out of circulating capital. Such investments cannot be treated as part of banking activity. As per section 80P(2)(a)(i), income arising from banking activity is exempt. Hence it was contended that learned Assessing Officer by his elaborate order has rightly denied exemption under section 80P(2)(a)(i) on the interest income from certain investments. The learned DR supported the order of Assessing Officer and stated that learned CIT(A) has erred in not appreciating the facts in proper perspective. 10. We have heard the learned DR and have gone through the order of the authorities below. Before making discussion on the issue, it will be relevant to reproduce the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition to the cash reserve which it is required to maintain under section 18, shall maintain in India, in cash, or in gold valued 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 as 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 proceeding fortnight. Section 17(1) Every banking company incorporated in India shall create a reserve fund and shall, out of the balance of profit of each year, as disclosed in the profit and loss account prepared under section 29 and before assessment year dividend is declared, transfer to the reserve fund a sum equivalent to not less than twenty per cent of such pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; Farmers Benefit fund 1,92,206.00 12. Capital Reserve fund 4,57,435.00 13. Co-op. Welfare fund 3,50,000.00 14. Provision for Gap fund 73,33,000.00 15. PACs Development fund 8,30,000.00 16. Development of Bank fund 10,00,000.00 17. Computerisation of Bank 69,76,500.00 18. NPA Reserve Fund 36,00,000.00 --------------- Total &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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., [1974] I Tax L.R. 463 at pp. 465-66 (Ker.) Characteristics of a reserve which appear from the observation of the Supreme Court in the cases of, Metal Box Co. of India v. Their Workmen [AIR 1969 SC 612, 73 ITR 53 and CIT, Bombay City v. Century Spinning and Manufacturing Co. Ltd., [1953] 24 ITR 499 : AIR 1953, SC 501] which has been considered in detail in the case of Duncan Brothers & Co. [1976] 1 Cal. Tax Cases 288 are as follows: (a) Reserve are appropriation of profits which are retained to form part of the capital employed in the business. (b)A reserve is not designed to meet any liability contingency, commitment or diminution in the value of assets known to exist at the date of the balance sheet. (c) A reserve is something set apart for future use or enjoyment, - Commissioner of Income-tax & Super Profits tax v. M/s. Eyre Smelting Pvt. Ltd. [1978] Tax L.R. 567 at pg. 571. The term 'reserve' means something specially kept apart for future use or for a specific occasion. Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 relevant to quote the following lines from pg. 68 of the judgment:- "On the other hand, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balance sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest". 17. It is not the case of the revenue that reserve credited is voluntary and without any guidelines of the Reserve Bank of India or the Karnataka Government. Hence, it is not correct to hold that amounts reflected by reserve represent the surplus. Acquiring the security or debenture is mentioned in section 6(1)(a) of the Banking Regulation Act. The learned jurisdictional High Court in the case of CIT v. Grain Merchants Co-operative Bank Ltd. [2004] 267 ITR 742 (Kar.) observed at pg. 747 as under:- "But as noticed by us earlier, section 6 of the Regulation A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194 held that interest arising from investment made out of reserve fund is income from bank business and is exempt under section 80P. The learned Supreme Court in the case of Mehsana Distt. Central Cooperative Bank Ltd v. ITO [2001] 251 ITR 522 held that income derived from the investment of its voluntary reserves will be exempt in case such reserves are utilized in the course of its ordinary banking business. 20. The learned Bombay High Court in the case of CIT v. Ratnagiri Distt. Central Co-operative Bank Ltd [2002] 254 ITR 697 held that interest receivable on Indira Vikas Patra is entitled to special deduction, as such securities were capable of conversion into liquid funds. Similarly, Rajasthan High Court in the case of CIT v. Rajasthan State Co-operative Bank [1996] 88 Taxman 98, held that income from investment of reserves and other funds in various securities can be said to be from bank business and exempt under section 80P(2)(a)(i). 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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