TaxTMI 
TaxTMI 
2005 (7) TMI 33
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..... K.H. Kaji, learned advocate, has been permitted to intervene and address the court. The assessment year in Tax Appeal No. 208 of 2003 is 1995-96 and the relevant accounting period is the financial year 1994-95. The assessee, a cooperative society, filed return of income declaring total income at Rs. nil. The Assessing Officer called upon the assessee to furnish particulars of investments relating to circulating capital and particulars of investments relating to fixed capital. The assessee furnished such particulars pointing out that it had earned interest (both accrued and received) to the tune of Rs. 25,41,289.53 from investments in (i) IDBI Bonds, (ii) SBI Bonds, (iii) Sardar Sarovar Narmada Bonds, and (iv) Kisan Vikas Patra. It was contended that the bank is duly registered under the Gujarat Co-operative Societies Act, 1961 (the GCS Act), and is governed by the GCS Act, Rules and Regulations framed thereunder; the assessee-bank is regularly assessed since many years and income from interest on investments made by the assessee out of the reserve funds is being regularly treated as income from banking business; such income has continuously been held to be eligible for deduction....
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.... statutory reserves mentioned above; and the third one in respect of deduction of locker rent. That the first and third questions have been answered in favour of the assessee and on these two counts, the decision of this court has been reversed by the apex court; in so far as the second issue relatable to interest from voluntary reserves is concerned, the apex court having restored the issue to the Commissioner (Appeals), a presumption would arise that the apex court has not reversed the decision of this High Court. Therefore, it was urged that the interest income per se was not entitled to deduction under section 80P(2)(a)(i) of the Act, as not being attributable to the "business of banking". That only in the event of the assessee producing evidence to show that the said interest income has been realized in the course of ordinary business of banking, the benefit would be allowable. Elaborating on the submission, it was contended that the assessee cannot take recourse to the provisions of section 5(b) read with section 6(1)(a) of the Banking Regulation Act, 1949 ("the BR Act"), because the apex court was aware of the said provisions and despite that the Supreme Court has issued cer....
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....f "banking" as per section 5(b) of the BR Act can give rise to income which can be claimed to be deductible under section 80P(2)(a)(i) of the Act and not the other activities enumerated in section 6(1)(a) of the BR Act. On behalf of the assessee it was submitted that the width and scope of income governed under section 80P(2)(a)(i) of the Act is such which would take within its fold all income arising from investments in securities considering the definition of "banking" under section 5(b) of the Act and section 6(1)(a) of the BR Act. That investment in securities is part of ordinary banking business; it is normally a mode of carrying on banking business to invest monies in such a manner that they are readily available and that is just as much part of conducting the bank's business as receiving deposits or lending monies; investments in securities which are easily realizable would be part of the stock-in-trade or circulating capital and, therefore, eligible for deduction under section 80P(2)(a)(i) of the Act. It was submitted that the decision of this court in the case of Gujarat State Co-operative Bank Ltd. [2001] 250 ITR 229 cannot continue to hold the field because the directi....
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....rves has been taxed under the head "Business" and not under the head "Income from other sources". Therefore, once income is from a business and the assessee is admittedly not carrying on any other business except business of banking, income is deductible under section 80P of the Act. It is an accepted position that the income earned by all co-operative banks was held to be eligible for deduction under section 80P(2)(a)(i) of the Act since a number of years but when the apex court rendered its decision in the case of Madhya Pradesh Co-operative Bank Ltd. [1996] 218 ITR 438 the Revenue undertook an exercise to distinguish between fixed capital and circulating capital. It is in the backdrop of this position that the controversy arose, but the said issue is now no longer res integra and in a subsequent decision, the apex court has categorically overruled the aforesaid decision in the case of Madhya Pradesh Co-operative Bank Ltd. [1996] 218 ITR 438. However, in the meantime, this court in the case of Gujarat State Co-operative Bank Ltd. [2001] 250 ITR 229 held that a co-operative bank would have three types of reserves : (i) Banking reserves, (ii) Statutory reserves, (iii) Voluntary r....
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....se of its ordinary banking business. Though the assessee placed before the assessing authority its books of account and balance-sheets, the fact aforestated was not considered at any stage, for one or other reason on which it is not necessary for us to dilate. We think that it is in the interests of justice that the assessee should have the opportunity to lead evidence before the Commissioner (Appeals) to establish as a fact what is stated above. So far as the second question is concerned, therefore, the matter stands restored to the Commissioner (Appeals) for being decided afresh. He shall also decide any consequential issue that may arise." It is in the aforesaid backdrop that this court is required to determine as to whether income arising from utilization of voluntary reserves is, or is not, deductible under section 80P(2)(a)(i) of the Act. According to the Revenue, the finding recorded by this court in relation to the second question has not been reversed by the apex court and hence would be binding both on the assessees and the Revenue as well as this court. There can be no doubt that if the finding recorded in the judgment of this court stands it would bind both the assesse....
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....he second issue survives. Even if it is not categorically overruled, the said finding is neither approved nor does it survive. In fact, even if it is not stated, it stands set aside when the direction is issued to the Commissioner (Appeals) to decide afresh the said issue as well as any consequential issue. The next question that arises for consideration is whether the Tribunal has "overruled" (as contended by Mr. Naik) the decision/direction of the apex court. The Tribunal cannot overrule the decision of either the High Court or the Supreme Court. The Tribunal may, through erroneous process of reasoning state that a decision of the apex court is not applicable, or the Tribunal may ignore a decision but that does not amount to overruling a decision. However, in the present case whether that is the situation or not, may be examined. But before that it is necessary to briefly recapitulate as to what constitutes a binding precedent. The principles governing article 141 of the Constitution of India may be briefly recapitulated. In cases of (i) Krishena Kumar v. Union of India [1990] 4 SCC 207: "19. The doctrine of precedent, that is being bound by a previous decision, is limited to....
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....recedent and not to disturb settled point. When court has once laid down a principle of law as applicable to certain state of facts, it will adhere to that principle, and apply it to all future cases where facts are substantially the same. A deliberate and solemn decision of court made after argument on question of law fairly arising in the case, and necessary to its determination, is an authority, or binding precedent in the same court, or in other courts of equal or lower rank in subsequent cases where the very point is again in controversy unless there are occasions when departure is rendered necessary to indicate plain, obvious principles of law and remedy continued injustice. It should be invariably applied and should not ordinarily be departed from where decision is of long standing and rights have been acquired under it, unless considerations of public policy demand it." (ii) Arnit Das v. State of Bihar [2000] 5 SCC 488: "20. A decision not expressed, not accompanied by reasons and not proceeding on a conscious consideration of an issue cannot be deemed to be a law declared to have a binding effect as is contemplated by article 141. That which has escaped in the judgment i....
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....r the decision pronounced, but even though an obiter may not have a binding effect as a precedent, but it cannot be denied that it is of considerable weight. The law which will be binding under article 141 would, therefore, extend to all observations of points raised and decided by the court in a given case. So far as constitutional matters are concerned, it is a practice of the court not to make any pronouncement on points not directly raised for its decision. The decision in a judgment of the Supreme Court cannot be assailed on the ground that certain aspects were not considered or the relevant provisions were not brought to the notice of the court (see Ballabhadas Mathurdas Lakhani v. Municipal Committee [1970] 2 SCC 267; AIR 1970 SC 1002 and AIR 1973 SC 794. When the Supreme Court decides a principle, it would be the duty of the High Court or a subordinate court to follow the decision of the Supreme Court. A judgment of the High Court which refuses to follow the decision and directions of the Supreme Court or seeks to revive a decision of the High Court which had been set aside by the Supreme Court is a nullity, (see Narinder Singh v. Surjit Singh [1984] 2 SCC 402 and Kausalya ....
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....gation into the facts, it cannot be assumed whether a similar direction must or ought to be made as a measure of social justice. Precedents sub silentio and without argument are of no moment. Mere casual expressions carry no weight at all, nor every passing expression of a judge, however eminent, can be treated as an ex cathedra statement having the weight of authority." Therefore, it becomes necessary to ascertain as to what is the decision of the apex court. In other words, what is the distinction between the decision on the case before the court and what is the ratio decidendi. Can it be stated that the apex court has laid down a principle which acts as a precedent and is binding upon the authority. In the words of the apex court, the task of finding out the principle is fraught with difficulty. However, one thing is certain, whatever is stated, it is for the High Court to decide the issue on the merits according to its own interpretation of the judgment of the apex court. It is not open to the High Court to direct the parties to approach the apex court and seek a clarification of the order of the apex court. But, it is equally well-settled that a decision not expressed, not ac....
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.... to what is the nature of the income which is to be included in the gross total income is laid down vide section 80AB of the Act. The said section provides that where any deduction is required to be made or allowed under any section included in Chapter VI-A under the heading "C-Deductions in respect of certain incomes" in respect of any income of the nature specified in any of the sections falling under the heading "C", then for the purposes of the inclusion in the gross total income, notwithstanding anything contained in any of the said sections, the amount of income of that nature as computed in accordance with provisions of the Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is amenable to deduction and which is included in the gross total income. On a conjoint reading of sections 80B(5) and 80AB of the Act it is apparent that for seeking deduction in respect of incomes falling in any of the sections specified under heading "C" of Chapter VI-A such income has to be computed in accordance with the provisions of the Act and then included in gross total income; and gross total income means the total income, ....
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....r laid down in the Act. Thus, all income received by or accruing to an assessee during any previous year is to be charged to tax after computation in the manner prescribed by the Act. Therefore, in the case of an assessee, like the present assessee, all interest income, actually received or accrued, has to be computed in the manner provided in the Act so as to form the total income which is subjected to charge under section 4 of the Act. That once again gives an indication that all such income has to be computed as provided on a conjoint reading of sections 28 and 29 of the Act and only thereafter the net figure is required to be taken up for consideration for the purpose of ascertaining deducibility or otherwise under section 80P of the Act which falls under the heading "C" of Chapter VI-A of the Act. In the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 the Supreme Court reiterates the fundamental principles thus: "... Under the Income-tax Act, 1961, the total income of the company is chargeable to tax under section 4. The total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of....
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....hool Singh 'will be entitled to choice in respect of plots forming the subject-matter of the sale deed.' The said words are not capable of being construed as authorising Phool Singh to surrender the transferred land even if he is in a position to comply with the requirement of surrender of surplus land without touching the transferred land. To repeat, the order of this court cannot and should not be construed in a manner inconsistent with the provisions of the Act. This court could not have contemplated passing an order contrary to the provisions of the Act or to authorise the respondent Phool Singh to surrender surplus land contrary to the provisions of the Act. We are, therefore, of the opinion that the said order of this court is not capable of nor can it be construed as overriding or superseding the provisions of the Act. The choice referred to in the order of this court is the choice referred to in section 12A(d) and not independent of it." The legal position thus is that an order of the apex court cannot be understood as laying down a proposition contrary to law. The order of the apex court cannot and should not be construed in a manner so as to be inconsistent with the prov....
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....d out for the purpose of claiming deduction under section 80P(2)(a)(i) of the Act. Hence, to reiterate, the direction can only mean ascertainment of utilisation of net income of earlier years, which forms part of the funds which are invested, and given the nomenclature of voluntary reserves. Section 80P of the Act in so far as is relevant for the present reads as under: "80P. Deduction in respect of income of co-operative societies.-(1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely:- (a) in the case of a co-operative society engaged in - (i) carrying on the business of banking or providing credit facilities to its members, or ... the whole of the amount of profits and gains of business attributable to any one or more of such activities:" Sub-section (1) of section 80P stipulates that in the case of an assessee who is a co-operative socie....
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....ies to its members. On a plain reading, it becomes apparent that the two activities are distinct and separate activities. The first activity, viz., carrying on the business of banking connotes a larger activity than the activity of providing credit facilities to its members. The latter is restricted qua the members of the society while the former is wide enough to take within its sweep as its potential customers both members and non-members. The interpretation canvassed by the Revenue that the latter phrase has a restrictive effect on the former expression "business of banking" ignores the word "or" which occurs between the two phrases. There is no warrant for reading the word "or" as "and". Once the Legislature has used the term "or", the logical consequence that flows from the contextual setting is that it provides for an alternative, a different distinct activity. In the case of Kerala State Co-operative Marketing Federation Ltd. v. CIT [1998] 231 ITR 814 the apex court was called upon to resolve a controversy in the context of section 80P(2)(a)(iii) of the Act but after reproducing the entire section at page 819 it was observed as under: "We may notice that the provision is i....
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....ay of interest therefrom was attributable to profits and gains of the business of the assessee for the purposes of section 80-I of the Act. The apex court observed as under: "In Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, this court has said: 'In our view, since the expression of wider import, namely, "attributable to", has been used, the Legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity'. This would mean that it is not necessary that the income should have been earned from the actual conduct of the business of generation and distribution of electricity. What is required is that the activity from which the income is earned must have a direct and proximate connection with the priority industry of generation and distribution of electricity." In the light of the above decision when the investments are made in securities, which are a permissible mode of investment, either under the BR Act or the GCS Act read with the Indian Trusts Act, income arising therefrom would be attributable to the business of banking and the assessee would be eligible for deduction in terms....
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....t deals with reserve fund and under sub-section (2) it is provided that at least one-fourth of the net profits of the society each year, shall be carried to the reserve fund; and such reserve fund may be used in the business of the society or may, subject to the provisions of section 71, be invested as per directions, general or special, issued by the State Government. But from this, it does not flow that the reserve fund has necessarily to be restricted to only one-fourth of the net profits each year. Similarly by virtue of sub-section (3) of section 67 of the GCS Act it is permissible for a society to carry to the reserve fund an amount less than one-fourth of the net profits but not less than one-tenth of the net profits: however, from this it is not possible to read that a larger amount cannot be credited to the reserve fund. The prescription under sub-sections (2) and (3) is of the minimum amount. There is no upper limit laid down and none can be read in the provision. Section 71 lays down the mode of investment or deposit of funds. From this provision it is not possible to infer that a cooperative society carrying on the business of banking cannot invest in a security which i....
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....ets in specified securities and most importantly, file necessary returns at periodical intervals as stipulated by the BR Act. Similarly, the accounts of the society, including the balance-sheet, are required to be prepared in the manner specified and are subject to inspection, audit and regulation by the Reserve Bank of India. These provisions indicate an entity carrying on business of banking is not absolutely or wholly free; is amenable to supervision/regulation. In other words, its investments are subject to scrutiny; and any impermissible investment will not be permitted to continue, if made, by the regulator, i.e., the Reserve Bank of India. Section 6(1) of the BR Act specifies the forms of business in which a banking company may engage. Section 6 finds its place in Part II under the heading "Business of Banking Companies". Sub-section (1) of section 6 of the BR Act specifies that a banking company may engage in any one or more of the forms of business specified in clauses (a) to (o). Sub-section (1) of section 6 opens with the use of the phrase "in addition to the business of banking" and on the basis of the said phrase the Revenue contends that this would not amount to busi....
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.... by a court, much less the Revenue. In the case of CIT v. U.P. Co-operative Federation Ltd. [1989] 176 ITR 435, the apex court was called upon to resolve a controversy under the Indian Income-tax Act, 1922, whereunder by section 14(3) of the 1922 Act similar provision was made to extend certain advantages to co-operative societies. In the case before the apex court, the assessee-co-operative society earned interest on certain security deposits placed with agent and a question arose as to whether the same would amount to "investment". The apex court held that there could be no dispute that the money provided by the assessee was by way of investment. In fact, if this money had not been made available the business as stipulated under the scheme could not have been carried out and perhaps there would have been no business. After observing thus, the apex court took note of the term "investment" as follows: "'Investment' has not been defined in the Act. P. Ramanatha Aiyar's Law Lexicon (Reprint Edition 1987) states: 'The term "invest" is used in a sense broad enough to cover the loaning of the money but is not restricted to that mode of "investment" or loans made on commercial paper. ....
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.... loans and for the purpose of statutorily prescribed investments. Any deposits in excess of such requirements, if invested, would be tantamount to not carrying on the business of banking. At the cost of repetition, as already noticed hereinbefore, the definition of the term "banking" does not impose any such restriction and it is not possible to read any such restriction. Even otherwise the entire premise is based on a fallacious understanding of the business. It is never possible for a bank to match the sum total of its borrowings in the form of deposits with the amounts lent out and invested. The bank earns profits because of the spread between rate of interest between borrowings made and the loans advanced and investments made. The deposits accepted by the bank carry interest at varying rates depending on the time frame and taking into consideration the required amount towards the interest payable to the depositors coupled with the expenses to be incurred for carrying on business, including fixed overheads like salaries, etc., it would be asking for an impossibility if an entity is required to carry on business as envisaged by the Revenue, viz., to match the total amount of depo....
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.... not convert them into investments pure and simple." The question therefore would arise as to whether any distinction can be drawn between so-called surplus funds/idle funds and statutory investments. It is necessary to bear in mind that a reserve per se does not yield any income. It is the investment of the fund backing a reserve which would yield income. Therefore, whatever be the nomenclature of a particular reserve, the funds of an assessee in totality are conglomerate of the total amount of deposits/investments, profits and other realisations. Money has no colour and the nomenclature used to segregate different funds is only for the sake of administrative convenience. Otherwise it is not possible to state that a particular portion of the fund emanates from the deposits received or from the profits earned in the earlier years. Thus, these funds are utilised, are invested, to earn further profits by way of interest. The only caveat, as can be seen running through the entire case law commencing from the Privy Council decision is that such funds must be invested in easily realizable securities. The twin objective as laid down by this court is not to lose interest by keeping the f....
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....y to be transacted by a banker alone. The customer is an equally vital component of such a business and it is the trust that he has in a particular establishment which ultimately permits the establishment to carry on the business of banking. Thus, all investments, even if one accepts the Revenue's artificial distinction, surplus or not, are essential and conducive to the promotion or advancement of the business of banking. In the case of CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194, the apex court has stated that there is nothing in the phraseology of section 80P(2)(a)(i) of the Act which makes it applicable only to income derived from working or circulating capital. As already noticed hereinbefore the said decision has been followed and applied by the apex court in the case of Mehsana District Central Co-operative Bank Ltd. [2001] 251 ITR 522 in the case of income from utilization of funds forming statutory reserves and income from hiring out of safe deposit vaults. In the case of CIT v. Ramanathapuram District Co-operative Central Bank Ltd. [2002] 255 ITR 423, the apex court following its earlier decisions in the cases of Karnataka State Co-operative Apex Ba....
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....003 are concerned the Tribunal has after referring to the Special Bench decision, analysed the details of investments on which interest income is earned yearwise and applied the decision of the Special Bench. In paragraphs Nos. 6 and 7, the Tribunal has issued direction in relation to the miscellaneous income as well as interest on suspense account and directed the Assessing Officer to verify the facts and held that "income which has no nexus or connection to the banking activity alone be brought to tax and grant exemptions to others". During the course of hearing on behalf of the appellant-Revenue 13 authorities were cited, and on behalf of the respondent-assessees 21 authorities were cited. All the authorities have been taken into consideration even if the same have not been specifically enumerated. August 9, 2005. To summarise: (i) The finding of this court rendered in the case of Gujarat State Cooperative Bank Ltd. [2001] 250 ITR 229 does not survive when in relation to the second question it is stated by the apex court that the matter stands restored to the Commissioner (Appeals) for being decided afresh; (ii) It is well-settled that a decision not expressed, not accompani....
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....tal" under section 2(24) of the GCS Act cannot be restricted to mean money raised by borrowing; (xiii) The scheme under the GCS Act in the case of a society carrying on the business of banking is that, it would be permissible to make investments or deposits in any of the specified modes as provided in section 71 of the GCS Act including any of the modes specified in section 20 of the Indian Trusts Act without there being any upper limit as to the amount that can be invested, once the statutory requirement of reserve fund stipulated in section 67(2) of the GCS Act is satisfied; (xiv) Section 6(1) of the BR Act is an enabling provision and to read the same as restricting the scope of business of banking would be an incorrect reading which does not flow from the plain language employed by the provision; (xv) Section 80P(2)(a)(i) of the Act requires a co-operative society, and not a co-operative bank defined under the GCS Act, to be engaged in carrying on business of banking; hence, it is not possible to restrict the scope of the business to the definition of "banking" under section 5(b) of the BR Act; (xvi) There is a live link, a proximate nexus between clauses (a) to (o) of sect....