THE COMMISSIONER OF INCOME TAX PUNE. vs. THE AHMEDNAGAR MERCHANTS CO-OP BANK LTD AHMEDNAGAR.

These Tax Appeals have been heard together as a common question of law is involved in all these appeals. The issue is, whether the income derived by a cooperative bank from the sale of government securities is banking business and would qualify for a deduction under Section 80P (2)(a)(i) of the Income Tax Act, 1961 ("The Act" for short) while computing its total income.

The assessee in Income Tax Appeal No. 96 of 2008 had filed its returns of income for the assessment year 2004-05, declaring its total income as Nil. The Assessing Officer disallowed the assessee's claim for deductions under Section 80P(2)(a)(i) of the Act, on profit derived from the sale of government securities amounting to ` 58,00,281/=. Being aggrieved by this order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals)-I, Pune (for short “Commissioner (Appeals)”). The appellate authority directed the Assessing Officer to verify whether the investments were made in the securities permissible for investments under the Banking Regulation Act, 1949 or the Maharashtra Cooperative Societies Act, 1960 ("MCS Act") read with the Indian Trusts Act. The Commissioner (Appeals) further held that if these were permissible investments under the aforesaid Acts, the assessee would be entitled to deductions under Section 80P(2)(a)(i) of the Act. That order was passed on 1.8.2007. 03. Being aggrieved by the order dated 1.8.2007 of the Commissioner (Appeals), the Revenue preferred an appeal before the Income Tax Appellate Tribunal, Pune. The Tribunal has dismissed the appeal of the revenue, by relying on various decisions. The Tribunal has upheld the decision of the 4 ta96.08 Commissioner (Appeals) that the income derived from the trading in government securities formed a part of the income derived from the banking business, in view of the provisions of Section 6 of the Banking Regulation Act and, therefore, was a permissible deduction. The Tribunal followed the decisions of its Co-ordinate Benches in the case of Rajkot Nagrik Sahakari Bank Ltd. (2005) 98 TTJ (Rjt) 330 and Pimpalgaon Merchants Cooperative Bank Ltd. in ITA No. 254/PN/05. 04. In Tax Appeal Nos. 103, 104 and 122 of 2008, the facts involved are the same. However, the assessment year varies and the income derived from the sale of the government securities is different in each case.

The main submission of Mr. Sharma, the learned Assistant Solicitor General, was that the income earned by the cooperative banks from the sale of government securities, does not qualify for a deduction under Section 80P(2)(a)(i) of the IT Act. He submits that such income cannot be considered to be obtained from banking business and therefore must be treated as income from other sources. According to him, this issue has been answered by the Supreme Court in the case of M/s The Totgars Karnataka, reported in [2010] 188 TAXMAN 282 (SC) and 5 ta96.08

On the other hand, Mr. Kolte, the learned Advocate appearing for the assessees, has submitted that the investment in and sale of govt. securities is a part of banking business. He draws our attention to Section 6 of the Banking Regulation Act and submits that the sale of govt. securities is one of the activities that a cooperative bank can engage in as a part of its business in banking. The learned Advocate has relied on the judgments of the Supreme Court in the cases of (i) Commissioner of Income Tax vs. Ramnathapuram Dist. Co-op. Central Bank Ltd., (2002) 175 CTR (SC) 297, (ii) Commissioner of Income Tax vs. Nawanshahar Central Co-operative Bank Ltd. (2007) 208 CTR (SC) 438, (iii) Commissioner of Income as provided under Section 56 to suit co-operative banks. Besides this, Section 5A of the principal Act is substituted and it provides that the Banking Regulation Act would have effect in respect of cooperative bank notwithstanding anything contained to the contrary in any a bye-law of a cooperative society, or any agreement executed by it or any resolution passed by the society. Any such provision in a bye-law, or agreement or resolution, which is repugnant to the provisions of the Act, would be void. Section 6 of the principal Act, which describes the forms of business in which the banking company may engage, is modified to the extent that the word "company" is substituted by the word "cooperative society.".

Section 6 of the Banking Regulation Act names the types of businesses in which a banking company, or for that matter, in view of the provisions of Section 56 of the Act, a co- operative bank, may engage. These include; "(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, hoondees, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting an d dealing in stock, funds, shares, debentures, debenture stock bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposits vaults; the collecting and transmitting of money and securities;"

The relevant part of Section 80P of the Income Tax Act for our purpose reads as below; "80P. Deduction in respect of income of co- operative societies. (1) Where, in the case of an assessee being a cooperative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee. (2) The sums referred to in sub-section (1) shall be the following, namely, (a) in case of a co-operative society engaged in- (i) carrying on the business of banking or providing credit facilities to its members, (ii) to (vii) ..................................................................... (b) to (f)........................................................................ the whole of the amount of profits and gains of business attributable to any one or more of such activities. (3)........................................................................................... (4) The provisions of this section shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank. " Explanation.--- For the purposes of this sub-section,- (a) "co-operative bank" and "primary agricultural credit society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) .......................................................................................... .

In M/s The Totgars Cooperative Sale Society Limited (supra), the Supreme Court considered whether an assessee, which provides credit facilities to its members and also markets the agricultural produce of its members, was entitled to deductions on the interest from the income derived from such sources, under Section 80P (2)(a)(i) of the Act. The Court held that interest from such income would fall under the head "income from other sources" and consequently, the assessee-society would not be entitled to deductions under Section 80P (2)(a)(i) of the Act. Kapadia, J. (as he then was) speaking for the Bench, has observed thus; "

At the outset, an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under Section 80P(2)(a)(i) of the Act is not the interest received from the members for providing credit facilities to them. What is sought to be taxed under Section 56 of the Act is the interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes. Assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question, before us, is - whether

An alternative submission was advanced by the assessee(s) stating that, if interest income in question is held to be covered by Section 56 of the Act, even then, the assessee-Society is entitled to the benefit of Section 80P(2)(a)(i) of the Act in respect of such interest income. We find no merit in this submission. Section 80P(2)(a)(i) of the Act cannot be placed at par with Explanation (baa) to Section 80HHC, Section 80HHD(3) and Section 80HHE(5) of the Act. Each of the said sections has to be interpreted in the context of its subject-matter. For example, Section 80HHC of the Act, at the relevant time, dealt with deduction in respect of profits retained for export business. The scope of Section 80HHC is, therefore, different from the scope of Section 80P of the Act, which deals with deduction in respect of income of cooperative Societies. Even Explanation (baa) to Section 80HHC was added to restrict the deduction in respect of profits retained for export business. The words used in Explanation (baa) to Section 80HHC, therefore, cannot be compared with the words used in Section 80P of the Act which grants deduction in respect of "the whole of the amount of profits and gains of business". A number of judgements were cited on behalf of the assessee(s) in support of its contention that the source was irrelevant while construing the provisions of Section 80P of the Act. We find no merit because all the judgements cited were cases relating to Cooperative Banks and assessee-Society is not carrying on Banking business. We are confining this 13 ta96.08 judgement to the facts of the present case. To say that the source of income is not relevant for deciding the applicability of Section 80P of the Act would not be correct because we need to give weightage to the words "the whole of the amount of profits and gains of business" attributable to one of the activities specified in Section 80P(2)(a) of the Act. An important point needs to be mentioned. The words "the whole of the amount of profits and gains of business" emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society. In this particular case, the evidence shows that the assessee- Society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income falls in the category of "Other Income" which has been rightly taxed by the Department under Section 56 of the Act." (emphasis supplied)

It must be noted here that in Totgars case {supra) what was sought to be taxed under Section 56 of the Act, was the interest income derived from the surplus invested in their term deposits and securities which surplus was not required for the purposes of business. The assessee marketed the agricultural produce of its members. The sale proceeds of such produce were retained by the bank at times and this was the income generated

In the case of Mehsana District Central Co- operative Bank Ltd. vs. Income-tax Officer, the same Bench of the Supreme Court followed its decision in Karnataka State Cooperative Apex Bank, and held that the income derived by the assessee-bank from hiring out its safe deposit vaults is a part of the ordinary banking business and, therefore, deductible under Section 80P (2)(a)(i) of the Act.

Again in the case of Commissioner of Income-tax vs. Ramnathapuram District Cooperative Central Bank Limited, the Supreme Court considered whether the interest on securities or subsidies received from the government and dividend business income of the assessee was liable to be deducted under Section 80P (2)(a)(i) of the Act. The Court followed its earlier decisions in Karnataka State Cooperative Apex Bank, and Mehsana District Central Co-operative Bank Ltd. (supra). It was further observed in para 4 thus;

We do not think that it is open to the Revenue to urge, through different counsel, the same thing again and again. We are satisfied that the answer to the question has been correctly given in the decisions aforementioned and in the order under appeal. "

Similarly in the case of Commissioner of Income- tax vs. Nawanshahar Central Co-operative Bank Ltd., the Court considered a case where the assessee-cooperative bank was statutorily required to place a part of its fund in approved securities. The Court held that the income arising from such investments was attributable to the business of the bank, falling under the head "profits and gains of business" and, therefore, deductible under Section 80P (2)(a)(i). The Court followed its earlier decisions which we have referred to earlier.

Thus, the consistent view of the Supreme Court has been that where a cooperative bank invests its funds in government securities or in securities which, it is statutorily required to invest, the income derived from such investment is liable to be deducted under Section 80P (2)(a)(i).

This Court in the case of Commissioner of Income- Bangalore District Central Cooperative Bank and M.P Co- operative Bank Ltd. and held thus; "

Let us turn to the impugned orders, which are subject of the present proceedings so as to apply the above emerging principles to the facts of each case at hand. The investments made in I.V.Ps. no doubt had 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 have resulted in permanent deprivation of funds for banking activity. It ought to have been examined as to whether such investments had an effect of temporary withdrawal of the funds or the investments made in I.V.P. could be brought back to the banking business. In absence of detailed enquiry in the nature of available surplus and investments thereof, it is difficult to go along with the submissions made by the revenue. No enquiry in this behalf was made by any of the authorities below. It was obligatory on the part of the fact finding authorities below to make enquiry and record finding of fact in this behalf. No such attempt was made by either of the authorities below in this regard. We are, therefore, left with no other alternative but to decide these matters on the facts found and available on record.

The facts found and available on record do suggest that the interest income was attributable to the assessees' business income and the investment made in I.V.Ps. or investments made from the fund generated from the banking business. It has a direct and proximate connection with or nexus to the earning from banking business in order to attract provisions of section 80P(2)(a)(i) of the Act. It was expected of the authorities below to go into factual aspect of the matter and to find out as to whether the investments made were from surplus funds or from the funds which were temporarily surplus in the hands of the bank. It was further expected of the authorities below to find out whether the investments made in I.V.Ps. ceased to be circulating capital or that the securities could not be used as working capital or that it did form part of the circulating capital or stock in trade of the bank, so as to reach to the finding that the interest earned therefrom and shown as forming part of the banking activity qualified for exemption.

We, therefore, confine our judgment to the facts of these cases as found by the Tribunal and in some cases by the CIT (A), wherein in the facts and circumstances, it was held that the interest income derived from I.V.Ps. by the assessees was clearly from and out of banking business and, therefore, entitled to exemption under section 80P(2)(a)(i) of the Act and that the said income had been derived from the interest on securities of the Central Government, which were easily capable of being converted into liquid

Later, this court, in the case of Commissioner of Income-tax vs. Solapur Nagari Audyogic Sahakari Bank Limited, considered whether the interest derived by a cooperative bank by investing its surplus fund in Kisan Vikas Patra and/or Indira Vikas Patra, would be income from the banking business and would be eligible for deduction under Section 80P (2) (a)(i) of the Act. The Court held that it was irrelevant whether the investments were made from statutory reserves, or non statutory reserves, as long as the funds in these reserves were generated from the banking business. Accordingly, the court held that where the surplus funds, which were not immediately required for day-to- day banking, were kept in voluntary reserves and Kisan Vikas Patra or Indira Vikas Patra, interest income derived from these investments would become eligible for a deduction under Section 80P (2)(a)(i).

Thus, the law, as enunciated by the Apex Court, as well as the Division Benches of this Court, is that any income derived by a cooperative bank in the course of its banking

The submission of the learned Assistant Solicitor General that the decision in Totgars case (supra) would be applicable in the present case, is unsustainable. The assessee- society in that case, firstly, was not a cooperative bank. It was not taxed as a cooperative society which was carrying on the business of banking. Based on the factual matrix before it, the Court was of the view that the investments made by such a society of its surplus fund, which had arisen because of the retention of the sale proceeds of the agricultural produce of its members, was not income derived from the business, as it was, in fact, the income of its members. Therefore, the decision in Totgars' case (supra) has no application to the present appeals.

Considering the facts in these appeals and the law applicable, in our opinion, the decision of the ITAT is correct. There is no substantial question of law involved in these appeals as the issue raised has already been settled in view of the various judgments of the Supreme Court and this Court to which we have adverted.

The appeals are, therefore, dismissed. (M.T. JOSHI, J.)