TaxTMI 
TaxTMI 
2002 (11) TMI 244
X X X X Extracts X X X X
X X X X Extracts X X X X
....annot be applied in the case of the appellant 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 ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the judgment of the Hon'ble Supreme Court in case of M.P. Co-operative 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cer at page 2 of the assessment order as under: (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 lakh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....p; ------- Less: CRR requirement (on average of last day of 53 weeks) 2230.25 -------  ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 respe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bsp; ----------- 3,06,18,303 ----------- The net total income of the assessee was according....
X X X X Extracts X X X X
X X X X Extracts X X X X
....p; ----------- 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... --------------- 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 sec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bsp; 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 &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(2)(a)(i), is not legally correct. The Hon'ble Supreme Court in the case of M.P. Co-operative Bank Ltd. has held that the 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 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nbsp; Rs. 1,46,584 (5) Kisan Vikas Patra (accrued int.) Rs. 8,10,000 ------------ Rs.14,12,363 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Baroda Central Co-op. Bank Ltd: 7. The Assessing Officer vide his original assessment order dated 11-11-1997, relying upon the judgment of the Hon'ble Supreme Court in the case of M.P. Co-operative Bank Ltd. 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 --------- &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing the denial of deduction under section 80P in respect of entire sum of Rs. 14,96,434. That is why the assessee has raised the grounds in relation to the entire amount of Rs. 14,96,434. 8. Shri S.N. Soparkar, learned Advocate 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 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... whether such voluntary reserves were utilised in the course of its ordinary banking business. The learned counsel contended that in view of the aforesaid judgment of the Hon'ble Supreme Court holding that the income by way of hiring 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 compani....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Hon'ble Apex Court further held that as per instructions issued by the MP Government, no part of statutory reserve fund can be utilised as working capital nor can any part of the reserve fund deposited be withdrawn except with the permission 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 los....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e of Bangalore District Co-operative Bank Ltd was approved. It was also pointed out that the judgment of the Hon'ble Gujarat High Court in the case of Gujarat State Co-operative Bank Ltd has also been overruled by the Hon'ble Supreme Court in 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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t, whether the income derived by the assessee from the investment of its voluntary reserves has been utilised by it in the course 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 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 wo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....business. In other words 'that is an act done in what is truly the carrying on or carrying out of a business'. It may be added that another mode of conducting the business of a bank Ls to place its funds in deposit with other banks and that also is to meet demands which 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 no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the case of Punjab Co-operative Bank Ltd. v. CIT [1940] 8 ITR 635. The learned counsel drew our attention to the findings given by the Hon'ble Privy Council in the aforesaid case which reads as under: "In the ordinary case of a bank, the business consists in its essence of 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 mor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....anking business, were business income of the assessee, and the assessee was entitled to deduction under section 80P(2)(a)(i) of the Act in respect thereof. 8.14 The learned counsel then invited our attention to the judgment of the Hon'ble Bombay High Court in the case of CIT v. Ratnagiri 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o the issue as to whether interest income earned out of the utilisation of the voluntary reserves, the following broad propositions are set out: (i) Creation and utilisation of voluntary reserves. (ii) Investment of the voluntary reserve funds is a banking activity and income earned thereon 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rder or otherwise." Section 6 of the BR Act, 1949 (as applicable to Co-operative Societies) enumerates various forms of business in which a co-operative bank may engage. The section provides that the business of banking includes and a Co-operative bank may engage in any one or more of the businesses of providing 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 busines....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rt reaffirmed its decision of Cambay Electric Supply in the case of Vellore Electric Corporation v. CIT [227 ITR 557 (SC)]. In this case the issue before the Supreme Court was whether the assessee was entitled to relief under section 80-I not only in respect of business income but also in respect of income derived from 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) of the Act. (iii) Reserve are Working Capital/Stock-in-trade-- The expression "reserve" has not been defined in the Act and, therefore, we have to resort to its ordinary natural meaning as given in the dictionary. According to the dictionaries (both Oxford and Webster) the applicable primary meaning of the word "reserve" 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ise also exempt under section 80P(2)(a). The learned CIT(A) has not given any finding in relation to such alternative contention. The learned counsel also submitted that so far as excess collection of interest tax is concerned, it is a part of income of banking business carried on by the assessee. The learned counsel placed reliance on 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 miscellan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s represented by him. Submissions made by Shri M.G. Patel, the learned CA in relation to grounds of appeal raised in the case of Unnati Co-operative Bank Ltd. [ITA No. 522/Ahd/ 1998]. 10. Shri Patel drew our attention to an application dated 2-1-2001 submitted by the said Society for raising certain additional grounds of appeal. However, at the time of hearing, 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 submi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the expenditure of the bank such as interest on deposits, staff salary and bonus, rent, taxes, postage, telephone, stationery, audit fees, etc. incurred in respect of its ordinary banking business as shown on the debit side of the P&LA/cs. Thus the entire income of the bank has been utilised towards expenditure incurred for carrying on its banking business. The income 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....22.93 3. Sardar Sarovar Bond-Deposit 12,50,000 2,57,226.60 4. Kisan Vikas Patra 60,00,000 13,23,340.00 ----------- ------------ Total 1,72,50,000 25,41,289.53 &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nbsp; 13.50 10,00,000.00 67,500.00 67,500.00 3. IFCI Bonds 13.50 1,00,00,000.00 6,75,000.00  ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nbsp; ------------ ----------- 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. I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ply to, or in relation to co-operative societies as they apply to or in relation to, banking companies with the modification as stated in section 56. The provisions of section 17 have been made inapplicable in the case of co-operative bank by virtue of section 56. The learned counsel contended that the object behind providing requirement of maintaining CLR/SLR is to protect the interest of depositors. 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. securit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... safe securities. The statutory reserve of 25 per cent of profits as required to be made under section 67 of the Gujarat Co-op. Societies Act is only for the purpose of ensuring that the dividend may not be declared out of profits without transferring at least 25 per cent to such statutory reserve fund. These provisions have been introduced to safeguard the interest of depositors. The amount so transferred to 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 207/A/99 1997-98 Assessee 1-1-2001 I/A/2001 Shri Mukesh Patel adopted and supported the arguments made by Shri Soparkar, Shri Kaji, Shri M.G. Patel and Shri Ashwin C. Shah. 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 re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s to the members of the society. The provisions of section 80P have obviously been enacted with a view to encouraging and promoting growth of the co-operative sector in the economic life of the country and in pursuance of the declared policy of the Government. This section should therefore be liberally construed to effectuate the aforesaid legislative object. 21. The expression "banking activity" has not been defined in the IT Act. We will therefore 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 b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security; (h) undertaking and executing trusts; (i) undertaking the administration of estate as executor, trustee or otherwise; (j) establishing and supporting or aiding in the establishment and support of association, institution, funds, trusts and conveniences, calculated to benefit employees or ex-employees of the company 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,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ive Bank; (iii) in the case of a State of Central Co-operative Bank, also any deposit of money with it representing the reserve fund or any part thereof maintained with it by any other co-operative society within its area of operation, and in the case of a Central Co-operative Bank, also an advance taken by it from the State Co-operative Bank of the State concerned; (iv) in the case of a primary Co-operative Bank, also any advance taken by it from the State Co-operative Bank of the State concerned or the 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... are reproduced below:-- [In section 24,-- (i) in sub-section (1), the words, "After the expiry of two years from the commencement of this Act" shall be omitted; (ii) for sub-sections (2) and (2A), the following sub-sections shall be substituted, namely: (2) In computing the amount for the purposes of sub-section (1)- (a) any balances maintained in India by a Co-operative Bank in Current account with the Reserve Bank or by way of net balance in Current account and in the case of a scheduled State Co-operative Bank, also the balance 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)....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of a Co operative Bank shall not be deemed to be unencumbered approved securities, (b) in case a Co-operative Bank has taken an advance against any balance maintained with the State Co-operative Bank of the State concerned or with the Central Co-operative Bank of the 'district concerned, such balance to the extent to which it has been drawn against or availed of shall not be deemed to be cash maintained in India; (c) for the purpose of clause (a) the market price of an approved security shall be the price as on the date of the issue of the notification or as on any 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.--W....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eties Act, 1961 reads as under: 71. Investments of funds.--(1) A society may invest, or deposit its fund. (a) in a Central Bank, or the State Co-operative Bank (b) in the State Bank of India (c) in the Postal Savings Bank (d) in any of the securities specified in section 20 of the Indian Trusts Act, 1882 (e) in shares, or security bonds, or debentures. issued by any other society with limited liability; or (f) in any co-operative bank or in any banking company approved for this purpose by the Registrar, and on such conditions as the Registrar may from time to time impose, and (g) in any 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 co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....banking business" in the wider sense. The Hon'ble Gujarat High Court further held that interest earned by Co-operative Banks on deposits of non-statutory or voluntary reserves would not qualify for exemption under section 80P(2)(a)(i). It was also held that locker rent would also not qualify for deduction under the said provision as section 6 of the BR Act, 1949 regards such an activity to be an activity "in addition" to the business of banking. 27. However, the Hon'ble Supreme Court in a later judgment in the case of Bangalore District Co-operative Central Bank Ltd. as already stated hereinbefore has taken a view 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 Distri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....earned CIT(A) refusing to grant deduction under section 80P(2)(a)(i) in respect of such incomes are therefore contrary to the judgments of the Hon'ble Supreme Court in the case of Karnataka State Co-operative Apex Bank Ltd. and Mehsana Disfrict Central Co-operative Bank Ltd. The impugned orders passed by the learned CIT(A) of denying such deduction under section 80P(2)(a)(i) in respect of such income are therefore liable to be quashed. 29. The only point which remains to be considered further is that whether the income derived by the assessee Co-operative Banks from the investments of their voluntary reserves other than 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 Alkal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....deduction under the main provisions of section 80P(2)(a)(i) of the Act. It may also be relevant here to mention that the amounts have been transferred by debiting the P&LA/cs with a corresponding credit to various Reserve Funds. The accumulated credit balances in various Reserve Funds including statutory reserves created under section 67 has been shown as liability in the balance sheet from year to year. The appellant societies have made investments in such Government Securities, Government Bonds and Fixed Deposits with banks and other co-operative societies which have been shown as investments in the asset side of the balance sheets. 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 b....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... bank including Co-operative Bank to maintain its investments in cash or other approved securities of amount which shall not be less than 25% of the total of its demand and time liabilities in India The limit of 3% and 25% prescribed in sections 18 and 24 of the BR Act are the minimum mandatory amount required to be kept deposited in the approved securities and other approved modes of investments. The investments made by these Co-operative Banks in various Government Securities and other approved investments have been partly treated as attributable to meet the requirements of investing such minimum banking reserves as per sections 18 and 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee's business of banking and the profits arising therefrom were ssessable to income-tax. 36. The Hon'ble Supreme Court in the case of Bihar State Co-operative Bank Ltd. was dealing with the question relating to assessability of interest income from short term deposits made with Imperial Bank of India. The assessee claimed that such interest was exempt from income-tax under notification of Central Board of Revenue. The Assessing Officer assessed such interest income as income under section 12 of the Income-tax Act, 1922. The Appellate Tribunal held that the interest was rightly treated as income from other sources as it did not form part 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....entitled to grant of deduction under section 80P of the Act in respect of such interest income. 38. The Hon'ble Supreme Court in the case of Bangalore District Co-operative Central Bank Ltd. has held that the interest income derived by the Co-operative Societies engaged in the banking business on Government securities and dividend from Industrial Finance Corporation was attributable to the banking business carried on by the assessee. The assessee was held to be entitled to special deduction under section 80P of the Act. 39. The Hon'ble Supreme Court in the case of Ramanathapura District Co-operative Central Bank Ltd. held that interest on securities, 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tune of Rs. 253.88 lakhs out of Rs. 1259.65 lakhs. The deduction under section 80P has been denied in respect of following items of interest income: Rs. (i) Proportionate Interest Income on Kayami Thapan 2,53,88,000 (ii) Interest on Government Securities 12,11,250 (iii) Interest on other Trustee Securities 35,40,458 ----------- &nbs....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... State Bank of India 33997222.96] State Bank of San. 9852.20] Notified Banks 68010655.94] &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nbsp; 54224743.10] Current Deposits 8612256.47] Agri. Credit Stab Fund 36954800.19] Saving Bank Deposits -] Building Fund 7956033.95] Fixed Deposits 1570327251.00] ] (Kayami Thapan) ] Dividend Eqlialisation &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....; Short Notice 717000000.00 Fund ] ------------ Staff Provident Fund 1861432.56] Investment In Central & ] State Govt. Securities &....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 43213440,00 Propaganda 1797598.50] Charity 3368510.62] Investment out Bldg. Depreciation -] of the principal Staff Benefit &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sp; ] Industries Dev. Fund 1193674.00] Long Term Loans 48871701.96 Staff Prov. Fund (Bank) 4101275.00] which secured at Capital Red Fund 4000000.00] Depositor's Benefit Fund -] Staff Salary Areas 8000000.00] Consortium finance 81900000.00 Bank Memorial Fund &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....; 224361605.77 Safe Deposits Vault 4710651.29 Chq. Saving Deposit 381943835.34 Current Deposits 272830299.38 OtherAssets 56612328.30 Money at call & Non-Capitalise Short Notice ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....entral/Co-op Bank Nabard Automatic Ref. 3254500.00 Non-Farm SIDCBI Credit 2626989.00 Project Landing 1385100.00 IRDP Loan 1179000.00 Bills for Collection 21006621.41 Interest Outstanding 15340986.15 Branch Adjustment 7185584.91 Overdue Interest 64467632.10 &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to be not eligible for grant of deduction under section 80P(2)(a)(i) by the Assessing Officer and the learned CIT(A). The investments in Government Securities, Fixed Deposits and other Trustee Securities are permissible modes of investments as per provisions contained in the BR Act and/or section 71 of the Gujarat Co-operative Societies Act, 1961. Substantial part of interest income derived on Fixed Deposits (Kayami Thapan) attributable to the extent of meeting requirements of SLR/CRR has been held to be exempt under section 80P(2)(a)(i) by the Assessing Officer himself. The investments of the surplus amounts beyond the amounts required to be invested to meet the requirements of SLR/CRR has been made in those very Fixed Deposits (Kayami Thapan). The nature of investments 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....provisions have made it mandatory for the banks to investment minimum amount of 3 per cent and 25 per cent its demand liabilities in approved Government Securities. These provisions only prescribe mandatory minimum amount of investments in approved securities to meet the requirements of SLR/CRR but it does not prohibit the investments of larger amount in such safe and secure Government securities and other approved modes of investments. Maintaining larger proportion of their demand liabilities by way of investments in such approved Government Securities and other approved investments enhance the prestige and goodwill of the bank and thereby the Banks enjoy greater confidence of large number of depositors. 48. The nature and facts relating to the interest income derived by other 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 sec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urities/other approved investments which are permissible under the provisions of the BR Act and/or section 71 of the Gujarat Co-operative Societies Act, 1961 or authorised by Circulars/notifications issued by RBI or other Competent Authority from time to time are all such investments which are part of normal transactions carried out by such Co-operative Banks. Such investments have been made by these Co-operative Banks in consonance with the sound banking practice adopted by almost all Co-operative Banks to last several years. The said investments fulfil all the tests of being treated as part of the normal trading activities of banking business, as laid down by the various judgments referred to hereinbefore. 51. On a careful consideration of the entire relevant facts and in view of 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 c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ut significant difference between the meaning and scope of these two expressions used in various provisions of the Act. (a) Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC). The Hon'ble Supreme Court has held as under at pages 93 and 94: "As regards the aspect emerging from the expression "attributable to" occurring in the phrase "profits and gains attributable to the business of" the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the Legislature has deliberately used the expression "attributable to" and not the expression "derived from". It can not be disputed that the expression "attributable to" is certainly wider in import than the expression "derived from". 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 me....