TMI Blog2000 (9) TMI 210X X X X Extracts X X X X X X X X Extracts X X X X ..... that the interest constituted income from banking business. Moreover, it is the case of the assessee that the interest earned on the aforesaid fixed deposit was never brought to tax in the past; the disallowance was made for the first time in 1989-90 in an order passed under section 154 of the Act followed by disallowance made in the subsequent years. In the regular assessment proceedings, in respect of assessment year 1989-90, the Assessing Officer observed that in the course of audit, an objection was raised as to the treatment of the interest amounting to Rs. 14,49,278 received from fixed deposit with CESC Ltd. on the ground that such deposit was not readily available as and when required by the depositors and hence interest cannot be considered as an income from banking business. In response to notice under section 154, assessee filed a written submission. After considering the same, the Assessing Officer observed that the assessee failed to establish that interest on fixed deposit with CESC Ltd. should be treated as income from banking business. 4. Aggrieved by the order under section 154 of the Act for the assessment year 1989-90, it was contended before the CIT(A) that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause 30 of Bye-law of the society deals with investment of funds which states that fund of the society not used in the business may be invested or deposited in the manner prescribed thereunder. Since the assessee itself admitted that it has invested its surplus funds by way of fixed deposit for three years, and since the records show that there has never been any occasion for withdrawal of fixed deposit prematurely, it indicates that the moneys invested with CESC Ltd. is not at all required for the business of the society, apart from the fact that the investment so made is not easily realisable as the premature repayment is at the absolute discretion of the company as per terms and conditions as discussed earlier and hence it is not part of circulating capital. The terms of repayment, as given in page 2 of assessment order for the assessment year 1990-91, is extracted hereunder for the sake of convenience : "Deposit will be repaid only on maturity but the company reserves the right to allow repayment before maturity at its absolute discretion in which event the rate of interest payable on such deposit shall be in accordance with the provisions of Companies (Acceptance of Deposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed his finding that the investment made with CESC Ltd. where all the members of the assessee-society were, employees, was not easily realisable as the premature repayment is only At the absolute discretion of the CESC Ltd., assessee as per the terms and conditions of the Investment Agreement and further observed that the amount invested with CESC Ltd. cannot be made readily available as and when required by the depositors and thus it could not be treated as part of circulating capital of the assessee-society. Relying upon the following decisions, Ld. CIT(A) has come to the conclusion that the investment with CESC Ltd. was not made in the normal course of business of banking and thus the interest income earned thereon will not be covered by the provisions of section 80P(2)(a)(i) of the Act. The addition was, therefore, confirmed : (a) M.P. State Co-operative Bank Ltd. v. Addl. CIT [1979] 119 ITR 327 (MP) (b) Madhya Pradesh Rajya Sahakari Bank v. CIT [1988] 174 ITR 150 (MP) 8. Further aggrieved, assessee is in appeal before us. Ld. counsel for the assessee submits that the issue as to whether the interest income is liable to be treated as income from banking business or not, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [1993] 204 ITR 713/76 Taxman 588 (Raj.) 12. We have carefully considered the rival submissions and also perused the record. The issue centres round the question as to whether the impugned amount invested by the is part of the circulating capital/trading asset or not. The ld. counsel for the assessee relied upon two decisions of the Hon'ble Supreme Court which are, in our opinion, distinguishable on facts. In the case of Cocanada Radhaswami Bank Ltd. the Hon'ble Supreme Court had not independently decided the question as to whether the securities were trading assets of the assessee. In the said case, the Tribunal and the High Court found that they were assessee's trading assets and the Hon'ble Supreme Court based its decision on the facts as found by the Tribunal. Similarly, in the case of United Commercial Bank Ltd., the Hon'ble Supreme Court observed at page 93 of the report that securities are accepted by the department as part of the trading assets of that assessee and proceeded to consider the question posed before them on the admitted fact that the securities are part of its trading assets. However, in the case before us, the revenue challenges the claim of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isputedly, the members of the society are employees of CESC Ltd. and the aforesaid deposits made with the CESC Ltd. were renewed from time to time. The deposits made during the years under consideration were for a fixed term of three years. The case of the ld. counsel for the assessee is that funds invested with CESC Ltd. can be withdrawn as and when it requires if only the assessee is prepared to accept lesser rate of interest. However, the submission of the ld. counsel of the assessee is not substantiated by placing any material before us. On the contrary, the Assessing Officer as well as the first appellate authority examined the terms of the deposit wherein it was categorically mentioned that only CESC Ltd. has the right to allow repayment before maturity at its absolute discretion, which implies that the assessee-society has no say in the matter. Thus, it cannot be said that the surplus funds were invested in the short-term deposits so as to encash the same at any time to meet with a spurt in withdrawals by depositors and consequently the amount of deposit cannot be considered as part of circulating capital of the assessee, inasmuch as, the same went out of circulation for a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such investment should be assessed under the head 'Other sources'. 19. Assessee challenged the issue before the CIT(A). Relying upon the decision of the Hon'ble Madhya Pradesh High Court in the case of Madhya Pradesh Rajya Sahakari Bank, ld. CIT(A) observed that interest on security earmarked against Reserve and Provident Fund do not constitute income from banking business. He, therefore, confirmed the action of the Assessing Officer. 20. Further aggrieved, assessee is in appeal before us. Ld.. counsel for the assessee submitted that there is difference between recognised gratuity fund and unrecognised gratuity fund. In other words, his submission is that the funds invested were free funds and since the fund is not recognised, the assessee can withdraw the fund as and when it requires. Both the ld. counsel as well as the ld. departmental representative reiterated the submissions made before us in respect of the issue considered by us above. 21. We have carefully considered the rival submissions. In our opinion, the issue is squarely covered against the assessee and in favour of the revenue vide decision of the Hon'ble M.P. High Court in the case in Madhya Pradesh Rajya Sahaka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... short notice so as to meet the emergency such as spurt in withdrawals by depositors, etc. It is not the case of the revenue that the investment made in UTI cannot be withdrawn at short notice. It is also not the case of the revenue that such deposits are made out of the reserve fund. In such an event of the matter, we are of the opinion that lea the interest payment on such investment qualifies for deduction under section 80p of the Act. By respectfully following the observations made by the Hon'ble Supreme Court in the case of Madhya Pradesh Co-operative Bank Ltd. we uphold the order of, the first appellate authority. 27. In the result, the appeals filed by the revenue are dismissed. 28. Per Sri K.K. Gupta, A.M. : I beg to disagree with my learned brother in the assessee's appeals in ITA Nos. 1168 1169/Cal/94, 746/cal/95 and 816/Cal/96 for the assessment years 1989-90, to 1992-93 respect of ITA Nos. 994/Cal/94, 417/Cal/95 162/Cal/96 (appeals filed by the Revenue) for the assessment years, 1990-91 to 1992-93 have been dealt with by my learned brother in his order in paragraphs 24, 25 26, I agree with the decision reached by my learned brother that it is not case, of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it can be submitted as follows : 30. First, the Assessing Officer has relied on the fact that this earning of interest is not income from trading activity of the Society. He held that the investment is not a trading asset as claimed by the assessee. Secondly, he has observed that the funds offered for investment in the fixed deposit were surplus and, therefore, were not the circulating capital involved in the banking activity calling for deduction under section 80P(2). The third contention of the Assessing Officer is regarding the liquidity of fixed deposits which are term deposits and were with CESC for a period of three years and hence, were not easily realisable due to dependence on absolute discretion of the company for their premature repayment. 31. The department has learned heavily on the Apex Court decision in the case of M.P. Co-operative Bank Ltd. The Hon'ble Supreme Court in that case was on the scope of section 81 as it stood at that time now as section 80P. There the reserve funds of the bank were invested in Government securities under instructions of the State Government who also had contributed. The State Government instructed the bank that the reserved funds co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ambit of trading activity or profit or gain of the banking business of the Society? In my view trading activity is best left to the trader who according to the best of his acumen and business prudency, transacts business to earn profit for paying taxes thereon holding the investment as a trading activity. In fact, on perusal of the balance sheet, of the Society holding of investments shows healthy picture of the Society inasmuch as the current ratio of 1 : 2 and the acid test ratio or quicker liquid asset ratio shows as healthy ratio of 1 : 1. For a bank the circulating capital can be worked out on the basis of a healthy current ratio. The long-term asset and the long term liabilities should also have a healthy ratio of 1 : 1 which in the instant case is borne by the fact that in, the totality of the balance sheet the Society depicts a very healthy picture of providing banking facilities to its members and totally indulge in the banking business. Moreover the investments are from ploughing back the business of banking profits over a number of years. 34. This brings us to the second objection/observation by the Assessing Officer regarding the surplus funds invested for earning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned and outgoings on Funds held by the Society. All these cannot be isolated as they are deeply inter-connected. May be, the members who have taken part in retirement benefit are the members who have obtained loans from the Society. The primary objective of the Society is to be fulfilled in toto by providing services of banking for the members, by the members and of the members. In fact, in my opinion, if at all the Assessing Officer would have sought, to disallow interest on account of non-banking activity, he should have considered the activity of providing Holiday House facility to the Society's members which may be incidental to the main object of the Society but nonetheless is a different activity than banking/trading activity governed by section 80P(2)(a)(i). On perusal of the Balance Sheet, 'a profit or loss could be easily ascertained on this activity and isolated for disallowance, if any. The funds are being created for the benefit of the members, loans are being granted to the members, interest is earned on the loans to the members and interest is paid on the deposit to the members. These funds are circulating and as per the healthy current ratio and healthy quick ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit from the banking business. In the instant case the Society in the total paid up capital and reserve fund amounting to Rs. 11.02 crores hardly has the liability on account of such banking activity at Rs. 0.90 crores. As against this, loans have been granted to members amounting to Rs. 7.8 crores which gives the surplus of Rs. 3.22 crores remaining from the banking activity on which interest out-going and interest in-coming has been accounted for and accepted as part of the trading business activity of the Society with the circulating funds. 37. Therefore, isolating fixed deposit with CESC for non-banking activity and assigning reason thereof in view of the citations as reported in Madhya Pradesh Co-operative Bank Ltd.'s case MP. State Cooperative Bank Ltd.'s case, Rajasthan Stale Co-operative Bank's case and Co-operative Supply Commission Shop Ltd.'s case which are totally distinguishable on the mere fact that the amounts were not available due to directions otherwise or due to contingencies not provided for. 38. The Society had been established for providing credit facilities and over the years had been claiming deduction under the provisions of section 80P. In fact, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he other side of the coin would have shown the depth of the assessee-Society which has been confronted to prove the banking activity, the realisability of the deposit and to prove the nexus between the circulating capital and the capital together with reserves created after running handsome profit over a period of so many earlier years. 40. In my opinion, therefore, the contention of the assessee in all these appeals for the four years is correct and is to be allowed. Regarding departmental appeals, as stated earlier, I agree with my learned brother in dismissing the department's appeals but in reaching that decision neither do I hold the fact that it is not the Revenue's case that such deposits were made out of the reserve fund or were not easily realisable but the fact that they were part of the investments invested from the circulating capital of the banking business judiciously, prudently and with a sharp business acumen. ORDER UNDER SECTION 255(4) OF THE I.T. ACT, 1961 In view of difference of opinion, the following common point is framed by the Bench which requires to be adjudicated by a Third Member : "Whether the interest received by the assessee on the Fixed Depo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of the Assessing Officer for all the years under consideration. 3. The assessee came up in further appeals against the aforesaid order of the CIT(A) upholding the disallowance of claims of the assessee, before the ITAT, In the order, brother Judicial Member discussed the departmental contentions in detail. He ultimately agreed with the findings of the lower authorities by pin-pointing the facts of the case and taking into consideration certain decisions of different Courts. The reasons, on which he decided the issue against the assessee, may summerised as below : (1) The earning of income on fixed deposits with CESC cannot be considered as income from regular trading activity of the assessee-society, "investments" not being a trading asset, as claimed by the assessee; (2) The funds offered for investments with CESC by way of fixed deposits were the surplus funds of the assessee and did not constitute its circulating capital or stock-in-trade in the business activity. In this connection a reference has been made to clause 30 of Bye-laws of the assessee-society dealing with investment of funds, which states that the funds of the society not used in the business may be invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the claim of the assessee and hence rectification under section 154 would actually lie to correct the earlier order of the Assessing Officer which was against the decision of the Supreme Court. In that view, he has upheld the orders of the lower authorities for that year also. 4. On the other hand, brother Accountant Member has also made elaborate discussions in support of his conclusion that the investments held by the assessee-society, in whatever manner, were very much part of the business funds of the assessee-society and were also circulating in nature. He has further discussed in this connection that from a perusal of the balance-sheet of the assessee-society it can be seen that holding of investments by it shows healthy picture by way of maintaining a proper ratio between the liquidity funds of the assessee and that invested in a more or less long-term manner. He has also discussed in this connection that the Assessing Officer himself has allowed the benefit of deduction under section 80P on interest and other income derived from various other investments. He thus argues that hence it would not be a proper to say that only the interest income derived from fixed deposits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stood at almost a static figure ranging Rs. 9 lakhs to 10 lakhs only. The percentage of this figure to the availability of funds is found to have declined gradually from 70.29 per cent in the assessment year 1989-90 to 57.31 per cent in the assessment year 1992-93. It is thus amply, clear that the assessee was beset with the problem of existence of huge surplus fund arising out of membership fees, deposits from members and reserves and surplus of the business over the years, on account of, most probably, lack of demand from the side of the members for credit availability. In the interest of normal activities of the assessee-society, it is necessary for the assessee to make best utilisation of this surplus funds by putting the same in various investments. It cannot be said that the income arising out of such investments does not form part of the regular income of the assessee-society. Even, the Assessing Officer himself has accepted the claim of the assessee in this regard in respect of major portion of the investments including even the investments in Units of UTI, excepting with regard to the investments by way of fixed deposits with CESC. There is absolutely no reason to make a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s". "Business of banking" would have a larger sphere to revolve around and all other activities which may not be directly covered by the definition of 'Banking' as mentioned above; but at the same time, which are intimately connected with such activities and are also instrumental to carrying on such activities, would also come under the wider expression "business of banking". Thus, in modern days, even maintaining safe deposit lockers by banks for use of its customers, should also be considered to be a part of the banking business. Making profit by investments of surplus funds of the bank is intimately connected with its regular business operations and hence the income arising out of such investments is also required to be considered as a part of income from banking business. A query was put to the representatives of both the sides as to whether under the Banking Regulations Act and connected Rules and Guidelines issued by the Reserve Bank of India, the banks are permitted to make investments of their surplus funds and especially in the form of fixed deposits with companies. The representatives from both the sides admitted that there is no bar to keeping money of banks in fixed dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso been placed on the subsequent judgment of the Supreme Court in the same case approving the aforesaid judgment of the M.P. High Court. In that particular case, that assessee was also a co-operative bank engaged in almost similar activities as that of our present assessee. The reserved fund of that assessee was invested in Government securities under instructions of the State Government. There were instructions from the State Government to the effect that the reserve fund could not be utilised as working capital of the bank. It was held that the interests on the Government securities which were towards the reserve fund were not entitled to special deduction under section 81(1)(a) [now section 80-P]. It can easily be seen that in that particular case, the investments in Government securities were earmarked towards the reserve funds which was not to be utilised for the normal purpose of the business of the assessee and, on the other hand, was to be used in case of special contingencies like winding up of the bank, etc., That is why, both the M.P. High Court as well as the Supreme Court held that the interest on such Government securities could not be considered to form part of regu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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