TaxTMI 
TaxTMI 
2011 (11) TMI 180
X X X X Extracts X X X X
X X X X Extracts X X X X
....nder section 80-P(2)(a) in respect of the income of Rs. 10,07,82,579/- being income on investment. 3(a) Whether on facts and circumstances and in law the CIT (A) erred in treating the investments in Govt. securities as long term capital assets and treating the income arising on the sale of these investments as long term capital gain thereby allowing indexation in the commutation of capital gains. 3(b) while deciding so the CIT (A) has failed to appreciate that these investments are depreciable assets in view of the guidelines of the RBI and accordingly assessee has maintained investment fluctuation Reserve Fund/Investment Depreciation Fund. 4. Whether on facts and circumstances and in law the CIT (A) erred in directing the Assessing Officer to exclude the write off of unclaimed dividend of Rs. 1,90,88,857/- from the taxable income though assessee has credited this income in the P&L assessee company". Ground Nos. 5 & 6 are general in nature. 3. The assessee raised the following grounds in its appeal: "Ground I: The CIT (A) erred in denying deduction under section 80(P)(2)(a)(i) in respect of gains realized by sale of securities held in co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt craves leave to add to, alter or amend any or all the above ground of appeal". 4. Briefly stated, assessee was registered under Multi State Cooperative Societies Act 1984 and was subsequently notified by Govt. of Maharashtra as a State Cooperative Bank. The Reserve Bank of India also gave the assessee license under the Banking Regulations Act, 1949. The Maharashtra State Govt.'s notification and the license by the Reserve Bank of India were challenged by the Maharashtra State Cooperative Bank Ltd by a writ petition before the Hon'ble Bombay High Court. The Bombay High Court quashed the notification of the Government and directed the RBI to review its decision granting license to assessee. The assessee challenged this decision before the Hon'ble Supreme Court. The Supreme Court upheld the order of the Bombay High Court. 5. The Assessing Officer found that the RBI cancelled the assessee's license w.e.f. 30.10.2003. In view of the fact that assessee was not permitted to carry on banking business under section 5(b) of Banking Regulation Act (B.R Act) 1949, the Assessing Officer proposed why the claim of deduction under section 80P(2)(a)(i) should not be disallowed. 6. The a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....own by the Bombay High Court. Since the assessee is not a banking company and also not a cooperative bank, the income earned from certain activities do not qualify for deduction under section 80(P)(2)(a)(i). Accordingly he held the following income of the assessee as taxable. S. No Name Amount (Rs.) 1. Income on investments 10,07,82,579 2. Interest on balances with RBI and other bank funds 27,19,052 3. Commission, exchange and brokerage 3,11,942 4. Profit on sale of investments 86,69,70,200 5. Miscellaneous income 1,97,09,871 9. The Assessing Officer however accepted assessee's plea that it is a cooperative society undertaking activity of providing credit facilities to its members. He held that this status of the assessee continued to remain even after its license to transact banking activity was cancelled. Therefore, he accepted that income earned from providing credit facilities to its members qualifies for deduction under section 80P(2)(a)(i). Accordingly, he allowed deduction on an income of Rs. 1,26,03,473/- being interest on advance to its members under section 80P(2)(a)(i). 10. Before the CIT(A), it was contended th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a cooperative society. This status of the as continues to remain even after its license to transact banking activities was cancelled. It is seen that the assessee has granted loans to various cooperative societies from which it was earning income. Therefore, the income earned from providing credit facilities to its members qualifies for deduction under section 80P(2)(a)(i) of the I.T. Act, 1961. As per details filed, the assessee has earned a sum of Rs. 1,26,03,473/- as interest on advances to its members. This is allowed as deduction under section 80P(2)(a)(i) of the I.T. Act. 3.10 Since the appellant is a cooperative society and has advanced loans to its members, it is entitled to deduction under section 80P(2)(a)(i). Cancellation of its banking license and its status as a Cooperative Bank by order of High Court and Supreme Court will not have any effect on the admissibility of deduction under section 80P of the Act. In view of this the AO is directed to allow deduction under section 80P(2)(a)(i) as claimed". 12. Consequent to above findings, the CIT (A) vide Para No. 4.4 allowed deduction in respect of income arising out of investments with RBI holding that the receipts ar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inding up and the incomes earned on the surplus of sale of investment should also be considered as income arising in the course of business of banking. To that extent it was submitted that the CIT(A) has erred in treating the said gains from sale of securities under the head capital gain instead of business income. To buttress his arguments, the learned Counsel referred to the provisions of Section 176(3A) to submit that where any business is discontinued in any year any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax, accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such being received before such discontinuance. It was his submission that the surplus arising on discontinuation of business of banking is also to be treated as business of banking and so to that extent supported the order of the CIT(A) in allowing deduction out of the incomes earned from business of banking under sec. 80P. He also relied on the various orders of the Bombay High Court to support his arguments: (a) In the case of CIT v. Star Andheri Estate [1994] ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Multi State Cooperative Societies Act 1984 to order of winding up of the assessee and appointment of liquidator on 02.12.2005. It was the learned Counsel's submission that the assessee having been permitted to do the banking business cannot be said to be out of banking business just because the license was cancelled and the incomes arising consequent to the cancellation of banking license also are to be considered as income from banking business invoking the provisions of Section 176(3A) and so the assessee is eligible for deduction under section 80P(2)(a) applicable to the banking business. 16. We have considered the submissions and rival contentions, pursued the orders of the Assessing Officer and CIT (A) and various case law relied upon by the parties before us. There is no dispute with reference to the fact that assessee's license was cancelled consequent to the decision of the Hon'ble Supreme Court that the assessee is not eligible to be considered as a 'State Cooperative Bank'. The incomes under consideration are arising in the financial year 2004-05 i.e. from 1.4.2004 to 31.3.2005. During this period the assessee could not engage itself in any banking activity as the li....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ative Bank and it could not do banking business in the State of Maharashtra. Further to the above the learned Assessing Officer also extracted the last Para of the Apex Court order wherein it was held that the assessee cannot be allowed to continue to operate as State Cooperative Bank. In view of the clear findings of the Hon'ble Supreme Court and considering the fact that the license was cancelled by the RBI on 30/10/2003, the Assessing Officer was of the opinion that the assessee cannot be considered as a State Cooperative Bank and so the incomes arising cannot be considered as business of banking. 19. The CIT (A) in our opinion did not consider the issue in its correct perspective while allowing the deduction to the assessee on the incomes arising from the investments made in erstwhile banking business. It is to be noted that the main reason for allowing deduction by him under section 80P(2)(a)(i) is primarily based on the fact that the Assessing Officer himself allowed the deduction to the cooperative society on certain incomes and as extracted above vide Para No. 3.9 of the CIT(A) order the findings of the Assessing Officer in the assessment order is the basis for giving re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ither a cooperative society is engaged in carrying on the business of banking or it is engaged in providing credit facilities to its members, it cannot be considered that a cooperative society is engaged in carrying on business of banking as well as providing credit facilities to members. Therefore, in our opinion, a cooperative society engaged in providing credit facilities to its members cannot be considered as a cooperative society engaged in carrying on in the business of banking. The provisions of BR Act do prohibit doing any other activity other than banking business. Likewise, no person can carry on business of banking without any license. There is no doubt that the assessee admits and Assessing Officer also accepts that the assessee cooperative society is providing credit facilities to its members and an amount of Rs. 1.26 crores was already allowed as deduction. Therefore, the incomes that will not form part of 'providing credit facilities to its members, cannot be allowed as a deduction under section 80P(2)(a)(i). We also notice that section 80P also allows deduction of incomes of one or more activities of cooperative society stated in clause 2(a). However this should be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 vaults; 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 discharges 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 for public and private loans and negotiating and issuing the same; (d) The effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private of State, municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....siness of banking to engage in any one or more of the forms of business listed above. The 'banking company' has been defined under section 5 as under: "5. (c) "Banking Company" means any company which transacts the business of banking in India" Explanation : Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause;........ 5. (d) "Company" means any company as defined in section 3 of the Companies Act, 1956 (1 of 1956); and includes a foreign company within the meaning of section 591 of that Act". 23. Combined reading of above provisions indicate that the 'banking company' means a company defined under section 3 of the Companies Act doing transaction of business of banking in India. However, this benefit was extended to the cooperative bank by virtue of PART V inserted by Act 23 of 1965 w.e.f. 1.3.1966. Section 56 of the Banking Regulation Act modifies the provisions of the Banking Regulation Act as under: "56. Act to apply t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is sub-clause shall not apply to the admission of a cooperative bank as a member by reason of such cooperative bank subscribing to the share capital of such cooperative society out of funds provided by the State Government for the purpose; (ccv) "primary cooperative bank" means a cooperative society other than a primary agricultural credit society- (i) The primary object or principal business of which is the transaction of banking business; (ii) The paid-up share capital and reserves of which are not less than one lakh of rupees; and (iii) The bye-laws of which do not permit admission of any other cooperative society as a member; Provided that this sub-clause shall not apply to the admission of a cooperative bank as a member by reason of such cooperative bank subscribing to the share capital of such cooperative society out of funds provided by the State Government for the purpose; (ccvi) "Primary credit society" means a cooperative society, other than a primary agricultural credit society:- (i) The primary object or principal business of which is the transaction of banking business; (ii) The paid-up share....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o the cancellation of the banking license cannot be considered as incomes from the business of banking on the reason that the assessee is not a state cooperative bank. Such incomes cannot be allowed deduction under 80P(a)(i). 25. Hon'ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd. (supra) had an occasion to analyse various incomes arising to cooperative society. In the above referred case the issue is whether the interest income arising on short term deposit on security which are not required immediately for the purpose of business can be considered as amount of profits and gains of business eligible for deduction under section 80P(2)(a)(i). Considering the issue the Hon'ble Supreme Court held as under: "The words "the whole of the amount of profits and gains of business" in section 80P(2) of the Income Tax Act, 1961, emphasize that the income in respect of which deduction is sought by a cooperative society must constitute the operational income and not the other income which accrues to the society. The interest income arising to a cooperative society carrying on the business of providing credit facilities to its members or marketing of agricultura....
X X X X Extracts X X X X
X X X X Extracts X X X X
....claimed under 80P should be operational income attributable to one of the activity of Society. On the principles established by the Hon'ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd. (supra), it is to be held that the income earned in the case of providing credit facilities to its members is rightly allowed as deduction under section 80P(2)(a)(i) by the Assessing Officer and the CIT (A) was wrong in allowing the deduction on the interest income earned from the investments with the RBI. Since these funds are not utilized in the activity of providing credit facilities to the members, these incomes cannot be allowed as deduction under section 80P(2)(a)(i). It is already considered that the assessee is not in the banking business. Therefore, these incomes cannot be allowed as deduction as income arising out of providing credit facility to its members. 28. Decisions rendered in the context of cooperative bank did not apply to the cooperative society. In the course of arguments, the learned Counsel relied on various judgments given in the context of cooperative bank. Since the assessee is not a cooperative bank, those cases are not applicable to the facts of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Reserve Bank under section 22 which was subsisting on the date of commencement of the Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004 shall be invalid or be deemed ever to have been invalid merely by the reason of such judgment, decree or order; (b) Every license, granted to a multi-State Cooperative society by the Reserve Bank under section 22 which was subsisting on the date of commencement of the Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004 shall be valid and be deemed always to have been validly granted in accordance with law; (c) a multi-State Cooperative society whose application for grant of license for carrying on banking business was pending with the Reserve Bank on the date of commencement of the Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004 shall be eligible to carry on banking business until it is granted a license in pursuance of section 22 or is, by a notice in writing notified by the Reserve Bank that the license cannot be granted to it" 31. The reason for introduction of the above provision was stated as under:- "Amendment Act 24 of 2004-Statement of Objects a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ieties to carry on banking business and make the multi-State cooperative banks eligible for insurance of their deposits under the Deposit Insurance Credit Guarantee Corporation Act, 1961. This will protect the interests of small depositors. 5. Since Parliament was not in session and it had become necessary to take immediate action to provide for the above matters, the Banking Regulation (Amendment) and Miscellaneous Provisions Ordinance, 2004 was promulgated by the President on the 24th September, 2004 inter alia to- (a) provide that the licenses granted to the existing multi-State co-operative banks by the RBI shall be deemed to have been validly granted. (b) enable the RBI to issue in future the licenses to cooperative societies registered under the Multi-State Co-operative Societies Act, 2002 to carry on the banking business; (c) make provisions for supersession of Board of Directors of a multi-State cooperative bank in certain cases; (d) provide that an order sanctioning a scheme of compromise and arrangement or reorganization or reconstruction or winding up or supersession of the Board of winding up of multi-State ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eduction under section 80P(2)(a)(i) to income of Rs. 10,07,82,579/- being the amount contested in ground Nos. 1 and 2 is to be upheld. We reverse the orders of the CIT (A) on this issue and uphold the action of the Assessing Officer in this regard. 34. The next issue for consideration is whether the CIT (A) is right in treating the gain on sale of investments in govt. securities as capital gain. As briefly stated, the assessee earned gains on sale of securities. The assessee had an investment of Rs. 433.55 crores as on 31.03.2004 which has become Nil as on 31.03.2005. All the above investments were sold to meet its liabilities consequent to the cancellation of the banking license. The assessee got a gain of Rs. 81,36,13,690/- on sale of securities held for more than a year and Rs. 5,33,56,510/- in respect of securities held for less than one year. It was the assessee's contention that the total amount of Rs. 86,69,70,200/-should get the deduction under section 80P(2)(a)(i). It has placed reliance on the decision of CIT v. Baroda Peoples Co-operative Bank Ltd. [2006] 280 ITR 282/[2005] 149 Taxman 509 (Guj.) and Electro Urban Co-operative Credit Society Ltd. v. ITO [2001] 76 ITD 4....