PRIME CO OP BANK LTD. vs. INCOME TAX OFFICER

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH)

order

of Respondent No.1(Annexure-B), by which it has been held that Rs.6,96,778/- received by it towards interest from investment of voluntary reserve is taxable income and it is also further prayed to direct Respondent No.1 to pass an order holding that the said income is income from banking business, and therefore, liable for exemption under Section 80P of the Income-Tax Act, 1961. 2. At the outset, it is required to be noted that the petitioner, a Cooperative Bank, filed return of income for A.Y. 1998-99 and claimed exemption under Section 80P(2)(a)(i) of the Act on the amount of interest, i.e. Rs.6,96,778/-, received by it through investment in (1) Karnataka Bank, Rs.1,71,301/-, (2) Sardar Sarovar Nigam Ltd. (Bonds)Rs.90,000/-, (3) Gujarat Small Scale Industrial Corporation, Rs.4,35,477/-. The AO held that interest received against the investment of the petitioner’s voluntary reserve will not come within the purview of Section 80P(2)(a)(i) of the Act and accordingly, the amount of Rs.6,96,788/- was held as taxable.

permits

a Cooperative Society engaged in carrying on the business of banking or providing credit facilities to its members to claim deduction of the whole of the amount of profits and gains of business attributable to such activity viz., business of banking or providing credit facilities to its members. On a plain reading it becomes apparent that the two activities are distinct and separate activities. The first activity viz.,carrying on the business of banking connotes a larger activity than the activity of providing credit facilities to its members. The latter is restricted qua the members of the society while the former is wide enough to take within its sweep as its potential customers, both the members and non members. The interpretation canvassed by the Revenue that the latter phrase has a restrictive effect on the former expression 'business of banking' ignores the word 'or' which occurs between the two phrases. There is no warrant for reading the word 'or' as 'and'. Once legislature has used the term 'or', the logical consequence that flows from contextual setting is that it provides for an alternative,

a different

distinct activity. While examining a case wherein a Cooperative Society claims deduction under Section 80P(2)(a)(i) one has to bear in mind the object with which the provision is introduced viz., to encourage and promote growth of the Cooperative Sector in the economic life of the country and in pursuance of the declared policy of the Government. The Apex Court has also stated that if a question arises as to whether any particular category of income of a Co- operative Society is exempt from tax what has to be seen is whether the income falls within any of the several heads because each would be a separate and distinct head and merely because conditions for deduction under one head are not satisfied that does not necessarily mean that an assessee is not entitled to deduction under another head wherein conditions stand fulfilled. Hence the contention on behalf of the revenue that the first activity namely business of banking has to take colour from the second activity namely providing credit facilities to members does not merit acceptance. Section 80P requires that the profits and gains of business must be attributable to any one or more of the specified activities. On a plain reading of the Gujarat Co- operative Societies Act, 1961, the Scheme which unfolds is that in the case of a Society carrying on business of banking, it would be permissible to make investments or deposits in any of the specified investments as provided in Section 71 of the Gujarat Co-operative Societies Act including in any of the modes specified in Section 20 of the Indian Trusts Act without there being any upper limit as to the amount that can be invested, once the statutory requirement of reserve fund as stipulated in Section 67(2) of the Gujarat Co-operative Societies Act is satisfied. The provisions of the Banking Regulation Act, 1949, indicate that an entity carrying on the business of banking is not absolutely or wholly free; is amenable to supervision /regulation. In other words, its investments are subject to scrutiny; and any impermissible investment will not be permitted to continue, if made, by the regulator i.e. Reserve Bank of India. Bearing in mind that Section 80P(2)(a)(i) of the Act requires a Co-operative Society, and not a Co-operative Bank defined under the Gujarat Co-operative Societies Act, to be engaged in carrying on business of banking it is not possible to restrict the scope of the business to the definition of 'Banking' under section 5(b) of the Banking Regulation Act. Even otherwise, a banking company including a co-operative society, may accept deposits for the purpose of lending or investment. The definition does not stipulate that investment has to be only to the extent provided either by the Gujarat Co- operative Societies Act or the Banking Regulation Act. Hence when investments are made in securities, which are a permissible mode of investment, either under the Banking Regulation Act or the Gujarat Co-operative Societies Act read with the Indian Trusts Act income arising therefrom would be attributable to the business of banking and the assessee would be eligible for deduction in terms of section 80P(2)(a)(i).”