BANSABATI CO-OPERATIVE BANK LTD., ,HOOGHLY vs. PRINCIPAL CIT - 8, KOLKATA , KOLKATA

At the outset it is noted that there was a delay of 293 days in filing this appeal and the assessee has filed condonation petition. An affidavit has been filed by the chairman of assessee bank wherein it has been stated that due to negligence on the part of Accountant of bank Shri Shyamal Chattopadhyay, who kept the file in a drawer had later forgotten about the file and later when they realized about the omission, there was a delay in filing this appeal before this Tribunal. It is noted that there was no mala fide intention on the part of assessee not to file the appeal on time before this Tribunal. Since we find that there was no reason for the assessee not to file

By preferring Ground nos. 1 and 2, the assessee bank has assailed the action of Ld PCIT to have invoked the revisional jurisdiction u/s 263 of the Act without satisfying the condition precedent as prescribed in the Statute. According to assessee, on a perusal of the impugned order it could reveal that the twin condition required for invoking revisional jurisdiction is absent. According to assessee, the only issue that has been found fault by the PCIT is that before passing the assessment orders, the Assessing Officer did not make adequate enquiry in respect of interest earned amounting to Rs. 4,55,000/- from Bond of NABARD which according to Ld PCIT cannot be claimed as deduction u/s 80P of the Act. So he issued show cause notice (SCN) to the assessee conveying his intention to interfere in the assessment order invoking his revisional jurisdiction under section 263 of the Act. Pursuant to the SCN of Ld PCIT, the assessee replied explaining how the action of AO was correct after enquiry. However the Ld PCIT was not satisfied and after taking note of the judgment of Hon’ble Supreme Court in the case of Totgar’s Co-operative Sales Society Ltd. Vs. ITO (2012) 349 ITR 689 (SC), he was of the opinion that the Assessing Officer failed to make relevant enquiry while examining the documents relating to the claim of deduction claim of the assessee u/s 80P of the Act on account of interest earned amounting to Rs. 4,55,000/- from the Bond of NABARD. Thereafter he set aside the assessment order dated 25.03.2015 and directed the framing of fresh assessment on this issue.

Aggrieved by the aforesaid action of the PCIT, the assessee is before us.

We have heard both the parties and perused the records. At the outset it was pointed out by the Ld. A.R Shri Soumitra Chowdhury that the Ld PCIT erred in relying on the decision of Hon’ble Supreme Court in the case of Totgar’s Co-

Sub-section (1) of section 80P stipulates that in the case of an assessee who is a co-operative society, the sums specified in sub-section (2) shall be deducted while computing the total income of the assessee, provided the gross total income includes any income referred to in sub-section (2). Sub-section (2) specifies the sums which are deductible by way of specifying activities in clauses (a) to (f). In clause (a) again, the activities which are of the prescribed nature, ld. Counsel for the assessee reiterated the submissions made before the authorities below specified vide sub-clause (i) to (vii). In the event of a co-operative society carrying on any one or more such activities the whole of the amount of profits and gains of business attributable to any one or more activities shall be deducted. Thus, the provision itself gives an inherent indication that for the purpose of constituting the sum deductible while computing the total income of the assessee, the sum has to be the amount of profits and gains of business. It is necessary to take note of the fact that in sub-section (2) of section 80P of the Act the word “income” is not used but the word used is “sum” which is the “ whole of the amount of profits and gains of business”. Therefore, under sub-section (1) the gross total income has to include income from any of the specified activities and for the purpose of deduction the sums specified in sub-section (2) shall be deducted in computing the total income of an assessee, namely, a co-operative society. Before analysing sub-clause (i) of clause (a) of sub-section (2) of section 80P of the Act it is necessary to take note that under sub-section (3) of section 80P the deduction available under sub-section (1) of Section 80P shall be allowed after reducing from the qualifying income, the income, if any, as referred to in the sections specified therein, viz. section 80HH, etc. This is one more indication available in the scheme of the Act to denote that what is deductible under the provisions of chapter VI-A is in terms of the provisions of the Act with special reference to section 80B(5) read with Section 80AB of the Act and is the net figure.

Section 80P(2)(a)(i) of the Act permits a co-operative 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 members and non-members. The interpretation canvassed by the Revenue that the latter phrase has a restrictive effect on the former expression “business of banking” ignores the word “or” which occurs between the two phrases. There is no warrant for reading the word “or” as “and”. Once the Legislature has used the term “or”, the logical consequence that flows from the contextual setting is that it provides for an alternative, a different distinct activity. …………………………………………… …………………………………….. 53. In the light of the above decision when the investments are made in securities, which are a permissible mode of investment, either under the BR Act or the GCS Act read with the Indian Trusts Act, income arising therefrom would be

The dispute therefore is as to what constitutes “business of banking”; because the whole of the amount of profits and gains of business attributable to business of banking is deductible while computing the total income of an assessee, where an assessee is a co-operative society. Therefore, a twofold inquiry is contemplated : firstly, what is the meaning to be assigned to the phrase business of banking; and secondly, what would be the profits and gains attributable to business of banking. …………………………… …………………………….

…………………………. Therefore, on the one hand, an entity carrying on the business of banking is required to accept deposits which are repayable on demand or permitting withdrawal in any of the specified modes, and on the other hand, the funds generated by acceptance of deposits are available for the purpose of lending or investment. In a given case, a bank may accept deposits and merely invest them, and earn profits from the difference between the rates of interest paid on the deposits and earned on the investments. Or, the bank may accept deposits and lend the funds, and again earn profits on the basis of difference in rate of interest on the borrowings made and advances given. Or a third situation, which clearly a prudent banker would engage himself in, would be where deposits are accepted, and certain portion thereof is invested and the balance advanced. Under the provisions of the BR Act every banking company, including a co-operative society carrying on the business of banking, is required to obtain a licence from the Reserve Bank, maintain a certain percentage of its assets in specified securities and most importantly, file necessary returns at periodical intervals as stipulated by the BR Act. Similarly, the accounts of the society, including the balance-sheet, are required to be prepared in the manner specified and are subject to inspection, audit and regulation by the Reserve Bank of India. These provisions indicate an entity carrying on business of banking is not absolutely or wholly free; is amenable to supervision / regulation. In other words, its investments are subjection to scrutiny; and any impermissible investment will not be permitted to continue, if made, by the regulator, i.e. the Reserve Bank of India.

In the case of Punjab Co-operative Bank Ltd. vs. CIT [1940] 8 ITR 635 the Privy Council stated (headnote): “In the ordinary case of a bank the business consists in its essence of dealing with money and credit. The banker has always to keep enough cash or easily realisable securities to meet any probable demand by depositors, and if some of the securities are realised in order to meet withdrawals by depositors, this is clearly a normal step in carrying on the banking business, in other words, it is an act done in what is truly the carrying on of the banking business.”

This view was reiterated with emphasis by the apex court in the case of Bihar State Co-operative Bank Ltd. vs. CIT (1960) 39 ITR 114 wherein it was observed (page 122): “…………………it is a normal mode of carrying on banking business to invest moneys in a manner that they are readily available and that is just as much a part of the mode of conducting a bank's business as receiving deposits or lending moneys or discounting hundies or issuing demand drafts.

However, the business of banking is primarily a business in trust, a business of putting trust in a banker. How does a bank ensure that the customer places trust. It has to offer not only good returns but also safety and liquidity. In other words, the depositor must be ensured that the depositor will get good returns on its deposit, the deposits would be safe and deposits would be available for withdrawal as and when required, subject to the terms of the contract between the parties. It is in this context that the requirement of investment being in easily realisable securities or money being readily available for meeting the demand made by the depositor is taken as the touchstone of the business of banking.

The depositor is not aware of the definition of the term “banking” as provided under the BR Act nor is he concerned with the same. His only concern is to place his funds with a “bank”, which in common parlance is defined as a financial establishment which uses money deposited by the customer for investment, pays it out when required, makes loans at interest, exchanges currency, etc. When the term “bank” is used as a verb in its transitive form it would take within its sweep deposit of money or valuables

Thereafter the Hon’ble Gujrat High Court after summarizing the order had held that : “(i)…………………….. (ii)…………………………. (iii) …………………………… (iv) As per the scheme of the Income Tax Act, the net income relatable to a particular head or item has to go in as a component of the gross total income before any deduction under Chapter-VI A is allowed; (v) In the case of an assessee carrying on the business of banking income under Section 28 is computed in accordance with provisions of Section 29 of the Income Tax Act and the net figure is taken as a component of the total income or gross total income for the purpose of deduction under Chapter VI-A; (vi) In the case of an assessee, like the present assessee, all interest income, actually received or accrued, has to be computed in the manner provided in the Act so as to form the total income which is subjected to charge under Section 4 of the Act; (vii) The order of the Apex Court cannot and should not be construed in a manner so as to be inconsistent with the provisions of the statute as the apex court could not have contemplated passing an order contrary to the provisions of the Act; (viii) Thus the direction by the Supreme Court can only mean ascertainment of utilization of net income of earlier years, which forms part of the funds which are invested, and given the nomenclature of voluntary reserves; (ix) Under Section 80P(2)(a)(i) of the Act the two activities viz., business of banking or providing credit facilities to its members, are distinct and separate activities; the former connotes a larger activity than the activity of providing credit facilities to its members;

In the light of the ratio laid by the Hon’ble High Court in CIT vs. Baroda Peoples Co-operative Bank (supra) we find merit in the submission of the ld. A.R that the Ld PCIT has erred in relying on the decision of Hon’ble Supreme Court in Totgar’s Co-operative Sales Society Ltd. (supra) since it was in respect of society providing credit facilities to its members and not an assessee which is a bank. Therefore we find that the Ld PCIT erred in relying on the decision of Hon’ble Supreme Court in Totgar’s Co-operative Sales Society Ltd. (supra) and his decision that the assessment order is erroneous and prejudicial to the interest of justice cannot be accepted. In the light of judicial precedence laid down by the Hon’ble Apex Court

In the result, appeal of the assessee is allowed.