TaxTMI 
TaxTMI 
TaxTMI 
2002 (11) TMI 244
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....lant as the facts of both the cases are not identical and clearly distinguishable. (2) Both the lower authorities has failed to adjudicate upon the alternate contention raised by the appellant of allowing deduction under section 80P(2)(d) of the IT Act as the impugned income is from the investment of the reserve fund and almost the entire reserve fund was invested in other co-operative banks/societies. (3) Alternatively and without prejudice to whatever stated above the learned CIT(A) has erred in not considering the facts that the free statutory reserve is only Rs. 5,42,24,743 and not Rs. 35,81,03,752. if at all any disallowance of deduction under section 80P(2)(a)(i) of the Income-tax Act has to be made then only figure of free reserve i.e., Rs. 5,42,24,743 can be taken into account and not that of the whole reserve i.e., Rs. 35,81,03,752. (4) The orders passed by both the lower authorities are without properly appreciating the facts and both of them have blindly followed the decision of the Hon'ble Supreme Court in the case of M.P. Co-operative Bank Ltd without properly appreciating the distinguishable facts of the appellant's case. Various submissions, explanations and infor....
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....perative Bank Ltd. (5) Your Appellant submits that considering the provisions of the Gujarat State Co-operative Societies Act, 1961, which are substantially different from that of the Madhya Pradesh State Co op. Societies Act, the judgment of the Hon'ble Supreme Court in case of MP Co-operative Bank Ltd. is not applicable to the facts and circumstances of the Appellant Bank. D. The Baroda Peoples Co-operative Bank Ltd. in their appeal being ITA No. 523/Ahd/1998 for assessment year 1995-96 have raised similar grounds as that in ITA No. 522/Ahd/1998 except that the figure of interest income on investments on which deduction under section 80P(2)(a)(i) has been claimed, is Rs. 25,41,289 in this case as against the figure of Rs. 14,12,363 in the case of Unnati Co-operative Bank Ltd. in ITA No. 522/ Ahd/1998. E. The Baroda Central Co-operative Bank Ltd. in their appeal being ITA No. 524/Ahd/ 1998 for assessment year 1995-96 have raised the following grounds: (1) The learned CIT(A)-III, Baroda has erred in law and on the facts of the case by upholding the contention of the learned Assessing Officer that income of the appellant Bank of Rs. 14,96,434 being interest on securities cannot ....
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....; (i) Government Securities Rs. 1,10,00,000 (ii) Trustees Securities Rs. 3,06,00,000 (iii) Kayami Thapan Rs. 1,57,03,27,251 3.1 The Assessing Officer observed that the Co-operative Society/Bank is obliged to invest some amount in Government Securities as per CRR/ SLR requirement of RBI. According to section 42 of the RBI Act, every Scheduled Bank is required to maintain an average daily balance not less than 7%. As per section 24 of the BR Act, a Scheduled Bank is required to maintain in India--in cash, gold or specified securities having value of not less than 25% of the total of its demand and time liability in India. The Assessing Officer required the assessee to compute the amount of investment required to be made in Government Securities to meet the requiremerit of CRR/SLR. The assessee aide letter dated 14-3-1997 intimated that such requirement of CRR at the rate of 7% of daily balance comes to Rs. 2,230.25 lakhs and the requirement of SLR comes to Rs. 2,521.02 lakhs at the rate of 28%. The rate ....
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.... ------- Less: CRR requirement (on average of last day of 53 weeks) 2230.25 ------- &nbs....
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....p; ------- Thereafter, the Assessing Officer observed as under: "From the above chart, it is clear that the bank is having Rs. 63.72 lakhs invested in various fixed deposits which is excess than the requirement of CRR and SLR. Therefore, the investment of Kayami Thapan includes the investment of reserve funds also. Interest earned on Kayami Thapan is of Rs. 1259.65 lakhs on total investment of Rs. 1,57,03,272 out of which Rs. 253.88 lakhs (31.65 X 1259.65 + 15703.27) is to be treated as interest earned from investment of reserve fund in Kayami Thapan. Further, the assessee earned an interest of Rs. 12,11,250 from Government security and Rs. 35,40,458 from other trustees securities. All these interest earned is from investment of reserve funds. Therefore the same does not qualify for deduction under section 80P of the Act as income from non-banking business." 3.2 The Assessing Officer further held that the income of Rs. 4.76 lakhs received in respect of locker rent is also not exempt under section 80P(2)(i) of the Act, as the same is not a banking activity....
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....nbsp; ----------- 3,06,18,303 ----------- The net total income of the assessee was accordingly computed by the Assessing Officer as under: &nb....
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....bsp; ----------- Total Income 1,66,59,383 R/o under section 288A of the Act 1,66,59,380" 3.3 The learned CIT(A) relying upon the judgment of the Hon'ble Supreme Court in the case of MP. Co-operative Bank Ltd. upheld the action of the Assessing Officer in respect of denial of deduction under section 80P(2)(a)(i)of the Act in relation to interest on investment amounting to Rs. 3,01,39,708 and in respect of excess collection of interest tax of Rs. 2385. The learned CIT(A), however, held that the income of Rs. 4.76 lakhs by way of locker rent would qualify for deduction under section 80P(2)(i) of the Act. ITA No. 2562/Ahd/1997 for ass....
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....nbsp; Rs. 3,42,18,422 --------------- Out of above income, the assessee has claimed that investment in Government Securities were made to meet the CRR and SLR requirements. The assessee has failed to submit the details of interest earned on Government securities which were held in excess of SLR requirements. As discussed earlier in para 10.1 out of total securities, 50.3% are in excess of SLR requirements. Applying same ratio over the whole year the interest accrued on Government securities held for SLR purpo....
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....; Rs. Gross Total Income (as per para 13) 15,29,00,534.50 Less: Deduction - 80P(2)(a)(i) NotAllowed Rs. - rent 288 - Non-banking income 1,99,36,636 (See para 14) 1,99,36,924 &....
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....ich could not be easily encashed and which could be utilised only when certain contingencies arose could not be considered to be circulating capital or stock-in-trade. The income derived from the investment in such securities could not be regarded as essential part of assessee's banking activity. The learned CIT(A) in para 22 of his order further observed that section 67 of the Gujarat State Co-operative Societies Act require every society to provide at least 1/4th of the net profits of the society of each year, which, shall be carried to the reserve fund and such reserve fund may be used in the business of the society or the society shall have the option to make investment subject to the provisions of section 71. Thus, unlike the Madhya Pradesh Law, there is no restriction in Gujarat regarding utilisation of funds carried to the reserve fund. The Gujarat Law permits society to use reserve fund in the business of the society. If the amount transferred to reserve fund is utilised for its business, the income therefrom would be entitled to deduction under section 80P. Likewise if the society makes investment in Central Bank, State Co-operative Bank, State Bank of India, Postal Saving....
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....6,584 (5) Kisan Vikas Patra (accrued int.) Rs. 8,10,000 ------------ Rs.14,12,363 ------------ [Correct total comes to Rs. 14,75,363] 5.1 The learned CIT(A) following his order dated 22-12-1997 in the case of Baroda ....
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..... refused to grant deduction under section 80P(2)(a)(i) in respect of the following income: Rs. (a) Government Securities 9,07,500 (b) Debenture 1,40,000 (c) Commercial Shares 65,924 (d) Other co-operatives 3,83,006 --------- 14,96,434 7.1 However, the Assessing Officer vide order under section 154, dated 1-12-1997 [copy placed at page 17 of the paper book] allowed deduction under section 80P(2)(d) in respect ....
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....e appeared on behalf of Surat District Co-operative Bank Ltd. [IT Appeals No. 3675 (Ahd.) of 1997) and Kalupur Commercial Co-operative Bank Ltd [IT Appeal No. 2562 (Ahd) of 1997]. Shri Soparkar submitted that the provisions of section 80P(2)(a)(i) provide that in case of a co-operative society engaged in carrying on the business of banking or providing credit f acuities to its members, the whole of the amount of profits and gains of business attributable to such activities will be exempt under the said provisions. The appellants are Scheduled Co-operative Banks registered under the provisions of the Gujarat State Co-operative Societies Act, 1961 and are also governed by the Banking Regulation Act, 1949 so far as it relates to co-operative banks. He invited our attention to the definition of "Working Capital" given in section 2(24) of the Gujarat State Co-operative Societies Act, 1961 which defines "Working Capital" means funds at the disposal of a society inclusive of paid-up share capital, funds built out of profits, and money raised by borrowing and by other means. The learned counsel then invited our attention to the definition of "banking" given in section 5(b) and sections 6 o....
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....ng from lockers safe deposit vaults is a part of ordinary banking business of a bank as shown by section 6(1)(a), various other business activities permissible under section 6(1)(a) will similarly form part of ordinary banking business of these co-operative banks. Investment in Government securities, deposits with banks, investment in shares and warrants and debentures are specified activities regarded as part of ordinary business activities of a bank/society in view of the clear language used in section 6(1)(a) of the Banking Regulation Act, 1949. 8.2 The learned counsel also drew our attention to the judgment of the Hon'ble Supreme Court in the case of Vimal Chandra Grower v. Bank of India AIR 2000 SC 2181. In this case also the Hon'ble Supreme Court considered the scope of section 6 of the Banking Regulation Act, 1949. The Bank in the said case had sanctioned overdraft limit of Rs. 5 lakhs to the appellant against pledge of shares of various companies; the value of all the shares being Rs. 10,60,900 at the relevant time. In due course of time the bank received bonus shares numbering 2224. The appellant paid an instalment of Rs. 1,45,600 to the bank against the overdraft limit. ....
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....ission of the Registrar to meet losses or at the time of winding up and not otherwise. Under these circumstances the securities relating to the statutory reserve fund can never be considered to be circulating or working capital of the bank or its stock-in-trade to qualify for exemption under section 81 of the Act. Hence it was held that the interest earned thereon cannot qualify for exemption. Our attention was drawn to MP Government Instructions No. CR 25/26, dated 7th October, 1960 reproduced at page 442 of 218 ITR in which it was clearly stated as under: "The reserve fund of the apex bank shall be fully invested outside its business in the Government securities. No part of its reserve fund should be utilised as its working capital." 8.4 It was further mentioned in the said letter that no part of reserve fund shall be drawn without the previous sanction of the Registrar. Such approval can be given when the amount is either required to meet losses, or, when the society is to be wound up. The learned counsel also drew our attention to the observations made by the Hon'ble Supreme Court at page 443 of 218 ITR wherein it was, interalia, observed that "Investments which permit withdr....
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....Mehsana District Central Co-operative Bank Ltd. Therefore, the denial of deduction made by the Assessing Officer in all these cases of co-operative banks by placing reliance on the judgment of the Hon'ble Supreme Court in the case of MP. Co-operative Bank Ltd is not valid in view of the above referred subsequent judgments of the Hon'ble Supreme Court. 8.7 The learned counsel submitted that the Hon'ble Supreme Court in the case of Karnataka State Co-operative Apex Bank while overruling the decision of MP Co-operative Bank Ltd. has held that interest arising from investment made, in compliance with statutory provisions to enable it to carry on banking business, out of reserve fund, by a Co-operative society engaged in banking business, is exempt under section 80P(2)(a)(i) of the Act. The placement of such funds being imperative for the purpose of carrying on banking business. The income therefrom would be income from the assessee's business. There is nothing in the phraseology of section 80P(2)(a)(i) which makes it applicable only to income derived from working or circulating capital. 8.8 The learned counsel further contended that the Hon'ble Supreme Court once again re-affirmed th....
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....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 is stand restored to the Commissioner (Appeals) for being decided afresh. He shall also decide any consequential issue that may arise." 8.9 The learned counsel on the strength of the aforesaid judgment contended that so r as income earned on investments attributable to utilisation of reserve funds being statutory reserves under section 67(2) of Gujarat Co-operative Societies Act, 1961, income on investments in Government securities etc. to meet the requirement of BR Act and the locker rent is concerned, the income falling under these categories would be exempt under section 80P(2)(a)(i) by virtue of the aforesaid judgments of the Supreme Court. As regards the income earned from utilisation of its voluntary reserves other than statutory reserves indicated above, the Hon'ble Supreme Court, inter alia directed....
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....h may be made on it. It was however, argued that in the instant case the moneys had been deposited with the Imperial Bank on long term deposits inasmuch as they were deposited for one year and were renewed from time to time also for a year, but as is shown by the accounts these deposits fell due at short intervals and would have been available to the appellant had any need arisen. Stress was laid on the use of the word "surplus" both by the Tribunal as well as by the High Court and it was also contended before us that in the bye-laws under the heading "Business of the bank" it was provided that the bank could "invest surplus funds when not required for the business of the bank in one or more ways specified in section 19 of the Bihar Act [clause 4(III)(i) of the bye-laws]. Whether funds invested as provided in section 19 of the Bihar Act would be surplus or not does not arise for decision in this case, but it has not been shown that the money which were in deposit with other banks were "surplus within that by law so as to take it out of banking business. As we have pointed out above, it is a normal mode of carrying on banking business to invest moneys in a manner that they are read....
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....f dealing with money and credit. Numerous deposits place their money with the bank often receiving a small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds at somewhat higher rates of interest. But the banker has always to keep enough cash or easily realisable securities to meet any probable demand, by the depositors. No doubt there will generally be loans to persons of undoubted solvency which can quickly be called in, but it may be very undesirable to use this second line of defence. If as in the present case, some of the securities of the Batik are realised in order to meet withdrawals by depositors, it seems to Their Lordships to be quite clear that this is a normal step in carrying on the banking business, or, in other words, that it is an act done in "what is truly the carrying on" of the banking business. This, it appears to Their Lordships, is the more appropriate and satisfactory ground for dealing with the question arising in the present case. It accords exactly with one of the findings in the statement of the Commissioner agreeing with the views both of the ITO who first dealt with the case and of the Assistant Commissi....
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....atnagiri District Central CO-operative Bank Ltd. [2002] 120 Taxman 77 (Bom.). It was held by the Hon'ble High Court that the interest accrued on the investment made in IVPs was an income arising out of banking business eligible for exemption under section 80P(2)(a)(i) of the Act. It was observed that the investments made in IVPs no doubt have an effect of withdrawing funds from the banking business. Mere withdrawal of funds is not sufficient. It must be proved that the withdrawal of funds has resulted in permanent deprivation of funds for banking activity. It ought to have been examined as to whether such investments have an effect of temporary withdrawal of the funds or the investments made in IVP can be brought back to the banking business. It was further observed that the interest income on IVP was attributable assessee's business income and such investments were made from the funds generated from the banking business. It had a direct and proximate connection with or nexus to the earning from banking business. Such income had been derived by way of interest on securities of the Central Government, which were easily capable of being converted into liquid funds so as to make it av....
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....reon is attributable to the business of banking. "Attributable to" is wider than "derived from" and therefore business activities that has direct and proximate nexus with the business of banking is eligible for deduction under section 80P(2)(a)(i) of the Act. (iii) Reserves are working capital/stock-in-trade. Now, these propositions are discussed in detail hereinbelow: (i) Creation and utilisation of voluntary reserves--Like any prudent businessman, even the co-operative bank also set aside part of its profits under various heads in order to use it in difficult times and/or in case of various contingencies. These reserves are set aside out of the profits and shown in the balance sheet under various heads. These reserves in turn are utilised for making various investments to generate income out of them. These incomes in turn are utilised for the purpose of business of banking as in the State of Gujarat under the Gujarat Co-op. Societies Act, 1961 there is no embargo upon the Co-operative Banks against investing its reserves funds and/or interest income earned out of the said investments of the reserves in its own business of banking. In the case of banking business the ra....
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....oviding Safe Deposit Vaults, the collecting and transmitting of money and issuing L/Cs, buying and selling and dealing in stocks, funds, shares, debentures, bonds, securities and investments of all kinds etc. The list is so exhaustive that barring trading in goods and real estate, virtually all other activities within the meaning of word "banking" is covered. Here the important question for consideration is whether the definition of banking, includes investment of funds or it is restricted only to accepting deposits and lending money. If banking includes investment of funds also then income from investment is part of and attributable to the banking activity, and therefore eligible for deduction under section 80P. Hon'ble the Supreme Court in the case of Bihar State Co-op. Bank Ltd v. CIT (39 ITR 114), observed that it is normal mode of carrying of banking business to invest moneys in such a manner that they are readily available and that is just as much part of conducting bank's business as receiving deposits or lending moneys. Further the appellant relies on the following decisions wherein investment is considered as integral part of banking activity: Berhampura Co-op.....
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.... investments in securities made in pursuant to Electricity (Supply) Act, 1948. Here the ratio laid down by the Supreme Court is there has to be a direct and proximate connection between the activity from which income is earned and the activity for which deduction is granted. Once this link is established, the said income can be attributable to the main activity of the assessee. In case of co-operative banks also creation of reserves is as per the guidelines of RBI or the State Co-operative Acts or as per its bye-laws. Applying the ratio laid down by the Supreme Court, income from investment of the said reserves has a direct and proximate connection with the main activity of banking and therefore the whole of the interest income is eligible for deduction under section 80P of the Act. Further reliance is placed on the decision of the Hon'ble Supreme Court in the case of Ashok Leyland (224 ITR 122) wherein it was held that importing of spare parts and its sales in the domestic market has a direct and proximate nexus with the main activity of manufacturing trucks carried on by the assessee and therefore attributable to the industrial activities and thus the profit earned from the sale....
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...." is" : "to keep for future use or enjoyment; to set apart for some purpose or end in view; to keep in store for future or special use: to keep in reserve". However, for our purpose, the meaning of the word reserve as defined in the accountancy field is important and as per the same "reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business" [Ref. 75 ITR 53 (SC)]. Reserves are setting aside of the profit for future need and therefore part of the capital employed or Proprietor's fund or can be equated with the capital. Hon'ble the Supreme Court while explaining the scope of the expression "reserve", has held that as per the accounting principles, funds created out of reserves form part of Working Capital. Reliance is placed on the following decisions: Metal Box Co. of India Ltd. v. Their Workmen 73 ITR 53 (SC), Vazir Sultan Tobacco Co. Ltd. v. CIT 132 ITR 559 (SC). Once it is accepted that reserves are part of the working and/or calculating capital, any income from the investment of the same has to be considered as income from banking business and deduction under section 80P(2)(a)(i) of the....
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....the following judgments: (a) CIT v. Dhar Central Co-operative Bank [1984] 149 ITR 438 (MP) (b) Madhya Pradesh Raiya Sahakari Bank v. CIT [1988] 174 ITR 150 (MP) (c) CIT v. Dhar Central Co-operative Bank Ltd. [1990] 183 ITR 174 (MP) (d) CIT v. Jila Sahakari Kendriya Bank Maryadit [1997] 225 ITR 421(MP) (e) CIT v. UP Co-operative Cane Union Federation Ltd. [19801 122 ITR 913 (All.) (f) Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd. v. CIT [1975] 100 ITR 472 (AP) (g) Rajasthan Raiya Sahakari Bhoomi Vikas Bank Ltd. ITO [1986] 19 ITD 674 (JP) (h) Ahmednagar District Central Co-operative Bank Ltd. v. ITO [1990] 33 ITD 683 (Pune). 8.18 All these cases dealt with the question relating to grant of deduction under section 80P in relation to income from interest on securities, income derived from locker rent and miscellaneous receipts attributable to the banking business, Specific issue relating to eligibility of excess collection of interest tax under section 80P was not discussed in these decisions. However, the Hon'ble High Courts and the Tribunal in these cases have considered the scope of exemption allowable under section 80P(1) read with section 80P(2)(a)(i) and s....
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....aring, the learned counsel contended that he would not like to press his application for entertaining those additional grounds. 11. Shri Patel then drew our attention to a chart placed at page 11 of the paper book submitted in this appeal which gives details of income from investments in question. In the said chart it has been pointed out that income of Rs. 3,76,584 has been derived from investments made in IDBI Bonds to meet the requirements of Statutory Liquidity Ratio (SLR) required to be maintained as per section 24 of the BR Act. The balance income aggregating to Rs. 10,98,779 on Non-SLR investments made in SBI Bonds, Sardar Sarovar Nigam Ltd. and KVP quality for deduction under section 80P(2)(a)(i) in view of various judgments cited by Shri S.N. Soparkar, the learned Advocate and also referred to in the written submissions submitted by him. The learned counsel has relied upon the judgments of the Hon'ble Supreme Court in the case of Gujarat State Coop. Bank Ltd.; Karnataka State Co-operative Apex Bank Ltd.; Addl, CIT v. Ahmedabad District Co-operative Bank Ltd. [1975] 101 ITR 733 (Guj.) and Bihar State Co-operative Bank Ltd.'s case to support his contention that the income f....
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....ncome from all such investments which form part of entire income of the bank from its banking business, is eligible for deduction under section 80P(2)(a)(i). The learned counsel further pointed out that the list of investments given at page 11 of the paper book on the income of which deduction under section 80P(2)(a)(i) has been denied by the Assessing Officer are investments which have been guaranteed by the Central/State Government and all such securities are readily realisable securities. Those securities can be sold in open market at any time at the prevailing market rates. Therefore the assessee's claim for grant of deduction under section 80P(2)(a)(i) is directly covered by the judgment of the Hon'ble Gujarat High Court in the case of Ahmedabad District Co-operative Bank Ltd. Shri Patel also submitted that the Hon'ble Bombay High Court in Ratnagiri District Central Co-operative Bank Ltd.'s case has held that the income from investments in IVPs made by the bank is exempt under section 80P(2)(a)(i). The judgment of the Hon'ble Bombay High Court in Ratnagiri District Central Co-operative Bank Ltd. This judgment has achieved finality as the Hon'ble Supreme Court has dismissed SLP....
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....nbsp; 13,23,340.00 ----------- ------------ Total 1,72,50,000 25,41,289.53 ----------- ------------ The learned counsel submitted that the facts are similar as that in ITA No. 522/Ahd/1998 and he would rely....
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....; 67,500.00 3. IFCI Bonds 13.50 1,00,00,000.00 6,75,000.00 -------------- ----------- 1....
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....bsp; 15,00,000.00 1,40,000.00 ------------ ----------- Note: Above investments are held by the appellant bank as investments towards maintenance of statutory liquidity ratio under section 24 of the BR Act, 1949. It was contended that the aforesaid investments have been made towards maintenance of SLR under section 24 of the BR Act, 1949 and therefore its eligibility for grant of deduction under section 80P(2)(a)(i) is clearly supported by the judgment of the Hon'ble Supreme Court in the case of Karnataka State Co-operative Bank Ltd. The learned counsel, relied on the similar arguments that were made in ITA No....
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....Therefore the entire investments made by the banking societies in conformity with the provisions of section 6 of the BR Act and section 71 of the Gujarat Co.op. Societies Act in Govt. securities, with Scheduled Banks, with Co-op. Societies, in bonds issued by various Govt. Undertakings which are guaranteed by Central/State Government, should be treated as an investment made in ordinary course of banking business. The learned counsel pointed out that the Hon'ble Supreme Court by referring to section 6(1)(a) of the BR Act has held that the locker rent constitutes income attributable to banking business carried on by co-operative banks. This clearly supports that all activities referred to in section 6(1)(a) of the BR Act including the activity of making investments in such Govt. securities amount to a banking activity carried out in the ordinary course of banking business. He also relied upon the elaborate arguments made by Shri S.N. Soparkar, the learned Advocate. 16. Shri Ashwin C. Shah, the learned CA also appeared as an intervener in relation to the following appeals: Name of Bank &nbs....
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.... statutory reserve fund as per section 67 of Gujarat Co-op Societies Act does not require that such fund should be invested in any specific securities. On the other hand, the provisions clearly permit the user of such statutory reserve fund in business activities. The learned counsel submitted that there is in fact no distinction between the investment made out of statutory reserve and investment made out of voluntary reserve or other fund available with the co-operative banks. He submitted that after reversal of judgment of the Supreme Court in the case of MP Co-operative Bank Ltd. in the subsequent judgment of larger Bench in the case of Karnataka State Co-operative Apex Bank, the eligibility of these co-operative banks for grant of deduction under section 80P(2)(a)(i) is not in doubt at all as all such investments are easily realisable and such investments have been made to ensure greater security in the interest of larger number of depositors. He urged that the deduction under section 80P(2)(a)(i) as desired by the assessees should be allowed. 17. Shri Mukesh Patel, the learned Advocate also appeared as an intervener on behalf of the Manekchowk Co-op. Bank Ltd. in relation to ....
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....ah. 18. Smt. Vibha Desai, the learned Senior DR represented the Department. She submitted that the controversy relating to grant of deduction under section 80P(2)(a)(i) has been set at rest by the Hon'ble Apex Court in the case of Mehsana District Central Co-operative Bank Ltd. The present cases relate to assessments which were made much prior to the date when the Hon'ble Apex Court delivered the aforesaid judgment. The necessary facts and details of interest income will have to be examined afresh, in the light of the aforesaid judgment of the Supreme Court. The Assessing Officer will have to ascertain as to how much income has been derived by these co-operative banks from investments made out of statutory reserve funds and investments made out of voluntary reserves. She therefore urged that the orders passed by the CIT(A)/Assessing Officer should be set aside and the matter should be restored back either to the CIT(A) or to the Assessing Officer so that necessary facts and details can be ascertained in the light of the aforesaid judgment of the Hon'ble Supreme Court and matter may be decided in accordance with the principles of law laid down by the Hon'ble Supreme Court. 19. We ....
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....have to make a useful reference to the relevant provisions contained in the Banking Regulation Act, 1949 which have been made applicable to co-operative societies under Part V (section 56) of the BR Act, 1949. Section 5(b) of the BR Act, 1949 is reproduced below: Sec. 5 Interpretation.--[In this Act,] unless there is anything repugnant in the subject or context,-- (a) -------------- (b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, or otherwise; Section 6 of the BR Act is reproduced below: Sec. 6 Forms of business in which banking companies may engage.--(1) In addition to the business of banking, banking company may engage in any one 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; the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundies, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scripts and other instrument....
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....y or the dependents or connections of such persons; granting pensions and allowances and making payments towards insurance, subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any public, general or useful object; (k) the acquisition, construction, maintenance and alteration or any building or works necessary or convenient for the purposes of the company; (l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company; (m) acquiring and undertaking the whole or any part of the business of any person or company, when such business is of nature enumerated or described in this sub-section; (n) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; (o) any other forms of business which the Central Government may by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage. (2) No banking company shall engage in any form of business other than those referred to in su....
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.... Central Co-operative Bank of the district concerned; (v) in the case of any Co-operative Bank, which has granted an advance against any balance maintained with it, such balance to the extent of the amount outstanding in respect of such advance, and (vi) in the case of any Co-operative Bank, the amount of any advance or other credit arrangement drawn and availed of against approved securities; (b) fortnight shall mean the period from Saturday to the second following Friday, both days inclusive; (c) net balance in current accounts shall in relation to a Co-operative Bank, mean the excess, if any, of the aggregate of the credit balances in current account maintained by that Co-operative Bank with the State Bank of India or a subsidiary bank or a corresponding new bank, over the aggregate of the credit balances in current accounts held by the said banks with such Co-operative bank; (d) for the purpose of computation of liabilities, the aggregate of the liabilities of a Co-operative Bank to the State Bank of India, a subsidiary bank, a corresponding new bank, a Regional Rural Bank, a banking company, or any other financial institution notified by the Central Government in this beh....
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....lance required under section 42 of the Reserve Bank of India Act, 1934 (2 of 1934) to be so maintained, (b) any balances maintained by a Central Co-operative Bank with the State Co-operative Bank of the State concerned, and (c) any balances maintained by a primary Co-operative Bank with Central Co-operative Bank of the district concerned or with the State Co-operative Bank of the State concerned, shall be deemed to be cash maintained in India (2A)(a) Notwithstanding anything contained in sub-section (1) and sub section (2), after the expiry of two years from the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965), or of such further period not exceeding one year as the Reserve Bank, having regard to the interests of the Co-operative Bank concerned, may think fit in any particular case to allow: (i) a scheduled State Co-operative Bank, in addition to the average daily balance which it is or may be, required to maintain under section 42 of the Reserve Bank of India Act, 1934 (2 of 1934), and (ii) every other Co-operative Bank, in addition to the cash reserve which it is required to maintain under section 18, shall maintain in India,....
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....ny earlier or later date, as may be notified from time to time by the Reserve Bank in respect of any class or classes of securities;" (iii) in sub-section (3), for the proviso, the following proviso shall be substituted, namely: "Provided that every Co-operative Bank, other than a primary Co operative Bank, shall also furnish within the said period, a copy of the said return to the National Bank." (iii) in sub-section (6), in clause (a) for the words "fourteen days", the word "thirty days' shall be substituted;] after section 24, the following section shall be inserted namely: "24-A Power to exempt.--Without prejudice to the provisions of section 53, the Reserve Bank may, by notification in the Official Gazette, declare that, for such period and subject to such conditions as may be specified in such notification the whole or any part of the provisions of section 18 or section 24, as may be specified therein, shall not apply to any Co operative Bank or class of Co-operative Banks, with reference to all or any of the offices of such Co-operative Bank or banks, or with reference of the whole or any part of the assets and liabilities of such Co-operative Bank or Banks." 25. It ma....
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....other mode permitted by the rules, or by general or special order of the State Government. (2) Notwithstanding anything contained in sub-section (1), the Registrar may, with the approval of the State Co-operative Council, order a society or a class of societies to invest in funds in a particular manner, or may impose conditions regarding the mode of investment of such funds. 26. A perusal of the assessment orders passed in all these cases indicates that the Assessing Officer has refused to grant deduction under section 80P(2)(a)(i) in respect of disputed income under consideration in view of the judgment of the Hon'ble Supreme Court in the case of MP Co-operative Bank Ltd. The learned CIT(A) also confirmed the denial of deduction under section 80P(2)(a)(i) in relation to the various types of income which are subject matter of present appeals mainly by placing reliance on the aforesaid judgment of the Hon'ble Apex Court. The Hon'ble Supreme Court in the said judgment has held that Government Securities coming out of the reserve fund which could not be easily encashed and which could be utilised only when certain contingencies arose, could not be considered to be circulating capita....
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.... that the income from the investment of any reserves is an integral part of banking activity and therefore such income is very much attributable to the activity of banking and such income is eligible for deduction under section 80P(2)(a)(i). The earlier decision in the case of MP Co-operative Bank Ltd. was distinguished. Thereafter, the Constitutional Bench of the Hon'ble Supreme Court in the case of Karnataka State Co-operative Apex Bank has overruled the decision in the case of MP Co-operative Bank Ltd., and approved the judgment in the case of CIT v. Bangalore District Co-operative Central Bank Ltd. [1998] 233 ITR 282. The Hon'ble Supreme Court in this judgment has held that the interest income from the investment made, in compliance with statutory provisions to enable it to carry on banking business, out of reserve fund by a co-operative society engaged in banking business, is exempt under section 80P(2)(a)(i) of the Act. The Hon'ble Supreme Court further observed that there is nothing with the phraseology of section 80P(2)(a)(i) which makes it applicable only to income derived from working or circulating capital. Thereafter, the larger Bench of the Hon'ble Supreme Court once a....
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....an statutory reserves is exempt under section 80P(2)(a)(i) of the Act. The Hon'ble Supreme Court in the case of Mehsana District Central Co-operative Bank Ltd. has given a specific direction while restoring back the issue to the CIT(A) that it is necessary to ascertain, as a fact, whether the income derived by the assessee from the investment of voluntary reserves has been utilised by it in the course of its ordinary banking business. 30. It may also be pertinent to mention here that Constitutional Bench of the Hon'ble Supreme Court in the case of Tuticorin Alkali Cheilzicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC) has observed at page 182 as under: "It is well settled that tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of revenue nature. If so, the amount will have to be taxed. Pondicherry Railway Co. Ltd. v. CIT [1931] 1 Comp. Cas. 314; AIR 1931 PC 165." Again, at page 186, the Hon'ble Supreme Court has observed as under: "Whether a particular receipt is of the nature of income and falls within the ch....
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....s. The various investments so made by these co-operative banks are not earmarked towards any specific reserve fund. There is no provision in the Gujarat Co-operative Societies Act, 1961 enquiring the co-operative banks to invest the amounts transferred to statutory reserve fund in any specific securities. In fact, section 67(2) specifically permits user of such amounts transferred to reserve fund in the business of the society or the same may be invested/deposited in the securities and banks specified in section 71 of the said Act. Therefore, it cannot be said as to which reserve has been invested where. As a matter of fact, all funds of the bank including their capital, reserves and unappropriate profits constitute a single or mixed fund out of which various loans and advances have been given to borrowers and investments in various Government securities and deposits with other banks etc. have been made. 32. Section 5(b) of the BR Act, 1949, defines "banking" which means accepting deposits of money from public repayable on demand or otherwise for purposes of lending or investment. The main object of the Co-operative banks is to carry on the business of banking. Like other banks, m....
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....24 of the BR Act, by the Assessing Officer himself. The Assessing Officer has denied deduction under section 80P(2)(a)(i) on interest income derived on those Government securities/approved deposits made in excess of the amounts required to be invested by way of CRR/SLR required as per sections 18 and 24 of the Act. It was also contended on behalf of the assessees that such interest income prior to the judgment of the Hon'ble Supreme Court in the case of MP Co-operative Bank Ltd., was held to be eligible for grant of deduction under section 80P(2)(a)(i) in the case of some of these very assessees in earlier years. The investments by these Co-operative Banks in such Government Securities have been made in consonance with the spirit and intention with which sections 18 and 24 etc. of BR Act were enacted and in conformity with practice prevailing for last several years in the case of various Co-operative Banks. The business necessity of investing larger amount in such Government Securities is more apt and necessary to meet liquidity crisis often faced by these Co-operative Banks. In the recent past, we have seen the reports in Newspaper showing that several Co-operative Banks in the St....
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....art of appellant's business profits and was therefore not exempt from income-tax. The Hon'ble Patna High Court held that only income derived from the business of the Co-operative Societies as such fell within the exemption and such exemption was not available in regard to income derived from investments of fluid assets with third parties. The Hon'ble Supreme Court held that the assessee Co-operative Bank is carrying on general business of banking. The business of such banking consists not only of receiving the deposits and lending money to its members or such other societies as are mentioned in the objects but it all includes the activity of making, of such investments of its moneys so that they may be readily available to meet the demand of its depositors if and when they arise. It was argued before the Supreme Court that the moneys had been deposited with the Imperial Bank of India on long term deposits inasmuch as they were deposited for one year and were renewed from Lime to time also for a year. The Hon'ble Supreme Court observed that these deposits fell due on short intervals and would have been available to the appellant had any need arisen. The Hon'ble Supreme Court held th....
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....urities, subsidies from the Government, dividend received by the assessee, a Co-operative Society carrying on banking business, were business income of the assessee and the assessee was entitled to deduction under section 80P(2)(a)(i) of the Act. 40. Likewise the Hon'ble Bombay High Court in the case of Ratnagiri District Central Co-operative Bank Ltd. has held that the interest received by the assessee Co-operative society engaged in the banking business, from Indira Vikas Patras (IVPS) was entitled to exemption under section 80P(2)(a)(i) and further observed that the said income had been derived from interest on securities of Central Government which were easily capable of being converted into liquid funds so as to make them available to assessee banks for their banking business and hence it was entitled to exemption under section 80P(2)(a)(i) of -the Act. The Hon'ble High Court observed that the investments in IVPS, no doubt, have an effect of withdrawing funds from the banking business. Mere withdrawals of funds is not sufficient. It must be proved that the withdrawal of funds has resulted in permanent deprivation of funds for banking activity. It ought to have been examined a....
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....; ----------- Total 3,01,39,708 ----------- 43. The investments in the aforesaid securities have been made in approved modes of investments which are permitted under the provisions of the BR Act and/or section 71 ....
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....; 9852.20] Notified Banks 68010655.94] State Co-op. Bank 17440668.14] ....
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....sp; ] (Kayami Thapan) ] Dividend Eqlialisation 2615462.39] Mutual arrangement ] Fund ] Scheme Deposit 700000.00]  ....
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....bsp; Investment In Central & ] State Govt. Securities ] (a book value) 11000000.00] ] Other Trustee Securities 30635000.00 ....
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....sp; 3368510.62] Investment out Bldg. Depreciation -] of the principal Staff Benefit 5223779.55] Subsidiary State Staff Bonus 18164578.68] Partnersbip Fund Loan Bonus -] Shares of IT & ST reserve  ....
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.... -] Staff Salary Areas 8000000.00] Consortium finance 81900000.00 Bank Memorial Fund -] Int. Fluctuation Fund 8500000.00] Interest Receivable 112801546.68 ------------ Total Reserve Funds 358103751.67 &nbs....
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....8 OtherAssets 56612328.30 Money at call & Non-Capitalise Short Notice 7852027.15 Interest 15340986.15 ------------- &....
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....bsp; Interest Outstanding 15340986.15 Branch Adjustment 7185584.91 Overdue Interest 64467632.10 Reserve: Interest Payable 7328733.19 Other Liabilities 64184846.74 Profit & Loss 16659382.72 ------------- &....
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....estments and nature of income derived therefrom is similar. The Fixed Deposits (Kayami Thapan) are easily realisable in case of need or in case of liquidity crisis by their premature encashment. The Government Securities and other Trustee Securities are also easily realisable, as such securities are freely transferable in open market and the amounts can be realised as and when needed. All these investments fully satisfv the tests of "easily realisable in case of need". Such investments in approved securities and approved modes of investments are considered to be extremely safe and secured. It protects the interest of large number of depositors. The bank has derived substantial interest income from such investments made in approved securities by investing surplus funds/idle moneys lying at the disposal of the bank. Thus such investments have not only served the twin objective as indicated in the judgment of Hon'ble Gujarat High Court in the case of Ahmedabad District Co-operative Bank Ltd. but have enabled the Co-operative Banks to achieve advantages, viz: (i) Safe and Secure Investment of Surplus funds (ii) Easily Realisable Investments can be encashed at any time of need; and ....
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....her Societies in the appeals under consideration in respect of which deduction under section 80P(2)(a)(i), was claimed but has been denied by the Assessing Officer and confirmed by the CIT(A), are almost similar as that in the case of Surat District Co-operative Bank Ltd. in the case of Kalupur Commercial Co-operative Bank Ltd, the CIT(A) has himself directed the Assessing Officer to allow deduction under section 80P(2)(a)(i) in respect of interest on Government Securities and other approved modes of investments. The Revenue has referred an appeal against such deletion. The Revenue's appeal will be heard by a Regular Bench as already indicated in para 4.3 of this order. In the case of Unnati Co-operative Bank Ltd., the deduction under section 80P(2)(a)(i) relates to investments made in Government Securities such as KVPS, investments with IDBI, investments with Sardar Sarovar Nigam Ltd. and deposits with State Bank of India. In the case of Baroda Peoples Co-operative Ltd. the claim for grant of deduction under section 80P(2)(a)(i) relates to investments made in IDBI/SBI Bonds, Sardar Sarovar Nigam Ltd. and KVPS. In the case of Baroda Central Co-operative Bank Ltd the claim for such ....
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....f the principles of law emerging from the various judgments referred to hereinbefore, we are of the considered opinion that the income from such investments in Government Securities, Fixed Deposits with Banks, investments in IVPs/KVPs and other approved modes of investments out of surplus funds available out of working capital including voluntary reserves are integral part of normal banking activities carried on by these Co-operative Banks and hence all these assessees are entitled to grant of deduction in respect of such income under the main provisions of section 80P(2)(a)(i) of the Act. 52. In some of these cases, deduction under section 80P(2)(a)(i) has also been claimed in respect of excess collection of interest tax made by these Co-operative Banks. The surplus of interest tax collected by these Co-operative Banks is a part of trading receipt. The said amount has been collected by the Co-operative Banks from their borrowers/customers in the normal course of banking business. A useful reference in this regard may be made to the judgment of the Hon'ble Supreme Court in the case of Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542 wherein it was held that the sales tax ....
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....". Had the expression "derived from" been used, it could have with some force been contended that a balancing charge arising from sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the Legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression "derived from", as, for instance, in section 80J. 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." (b) Vellore Electricity Corpn. Ltd. v. CIT [1997] 227 ITR 557 (SC). The relevant extracts from the Head Note appearing at page 560 are reproduced below: "The expression "attributable to" has been used in section 80-I of the IT Act, 1961. Profits and gains can be said to be attributable to the priority industry under section 80-I if there is a direct and proximate connection between the profits and gains and the busi....