The Commissioner of Income Tax-II vs. The Andhra Bank Employees Co.Operative Bank Limited

* THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN

INCOME TAX TRIBUNAL APPEAL Nos.86 of 2003 711, 715, 718 of 2006; 241, 243 of 2007; 50, 107, 149, 162, 163, 289 of 2008; 315, 392, 410, 413 of 2010; and 24 of 2011

% 07.6.2011

# Commissioner of Income Tax-III, Hyderabad ... Appellants VERSUS

$ The Andhra Pradesh State Cooperative Bank Limited, Hyderabad ... Respondent

< GIST:

> HEAD NOTE:

! Counsel for Appellants: M/s.S.R.Ashok, A.V.Krishna Koundinya, V.R. Badri

^Counsel for Respondents: M/s.C.Kodanda Ram, K.Vasant Kumar, S.Ravi, N.Siva Reddy, K.Krishna Masthan, Y.Ratnakar, A.V.Raghu Ram, Dr.C.P.Ramaswami, Ms.Anjali Agarwal

? Cases referred 1) (2001) 251 ITR 194 (SC) : (2001) 7 SCC 654 : AIR 2001 SC 3332 2) (2001) 251 ITR 522 (SC) : (2009) 17 SCC 621 3) (2009) 318 ITR 62 (Uttarakhand) 4) AIR 1967 SC 1626 5) (2004) 266 ITR 282 (Bom) 6) (2010) 323 ITR 1 (HP) 7) (2010) 323 ITR 202 (All) 8) (2004) 289 ITR 6 (SC) : (2007) 17 SCC 611 9) (1978) 113 ITR 84 (SC) : (1978) 2 SCC 644 : AIR 1978 SC 1099 10) (1990) 176 ITR 117 (SC) : AIR 1990 SC 1249 11) (1992) 196 ITR 188 (SC) : AIR 1992 SC 1622 : (1992) 3 SCC 78 12) (1993) 204 ITR 412 (SC) : AIR 1993 SC 2529 : (1993) 91 STC 450 (SC) 13) (1960) 39 ITR 114 (SC) : AIR 1960 SC 789 14) (1968) 70 ITR 86 (SC) 15) (1996) 218 ITR 438 (SC) : (1996) 2 SCC 541 16) (1998) 232 ITR 282 (SC) : (1998) 6 SCC 129 : AIR 1999 SC 2955 17) (2008) 306 ITR 392 (SC) : (2008) 9 SCC 337 18) (2002) 255 ITR 423 (SC) : (2009) 17 SCC 620

19) (2003) 63 ITR 63 (P&H) 20) (2010) 3 SCC 223 THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN

INCOME TAX TRIBUNAL APPEAL Nos.86 of 2003 711, 715, 718 of 2006; 241, 243 of 2007; 50, 107, 149, 162, 163, 289 of 2008; 315, 392, 410, 413 of 2010; and 24 of 2011

June 07, 2011 Between: Commissioner of Income Tax-III, Hyderabad … Appellant AND

The Andhra Pradesh State Cooperative Bank Limited, Hyderabad … Respondent

THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN INCOME TAX TRIBUNAL APPEAL Nos.86 of 2003 711, 715, 718 of 2006; 241, 243 of 2007; 50, 107, 149, 162, 163, 289 of 2008; 315, 392, 410, 413 of 2010; and 24 of 2011

COMMON JUDGMENT: (Per Hon’ble Sri Justice V.V.S.Rao) In this group of Income Tax Tribunal Appeals under Section 260A of the Income-tax Act, 1961 (hereafter, the Act) the common question of law raised by the Revenue is whether a cooperative society carrying on the business of banking is entitled to claim exemption under Section 80P(2)(a)(i) of the Act in respect of the income derived out of the investments made from voluntary reserves of such society? At the outset, we may notice the factual background in ITTA No.86 of 2003 filed by the Commissioner of Income Tax-III, Hyderabad against the Andhra Pradesh State Cooperative Bank Limited (the APCOB).

The APCOB is a cooperative society engaged in the business of banking. For the assessment year 1997-98 they filed return declaring Rs.57,652/- as income from the property and Rs.83,60,46,867/- as income from the business of banking. The assessee claimed deduction of business income under Section 80P(2)(a)(i) of the Income-tax Act. The assessing officer, namely, the Deputy Commissioner of Income-tax took up the return for scrutiny and found that the assessee had Rs.61,87,16,546/- as statutory reserve invested in short term and long term deposits. During the assessment year the interest income from the deposits stood at Rs.7,02,69,336/-. This was claimed as deduction being interest from the business of banking. Out of this, an amount of Rs.6,95,66,643/- was disallowed by the assessing officer on the ground that the assessee did not obtain prior approval in respect of investments against statutory reserves as required under Section 46 of the Andhra Pradesh Cooperative Societies Act, 1964 (the Societies Act) and Rule 37(2) of the Andhra Pradesh Cooperative Societies Rules, 1964 (the Societies Rules). The assessing officer came to the conclusion that the investments against reserve funds in all cases of cooperative banks cannot be treated as investments for the purpose of Statutory Liquidity Ratio (SLR), that even if it is in tune with Reserve Bank of India (RBI) guidelines SLR under the Banking Regulation Act, 1949 (the BR Act) and the reserve fund under the Societies Act are different from each other, that even if investment of reserve fund is treated as SLR compliance the assessee has to obtain necessary approval before exercising the choice, and that the factum of utilization of reserve fund for the business should be taken into consideration for the purpose of allowing relief under the Act. Even though the assessee produced the proceedings of the Registrar of Cooperative Societies (the RCS) issued on 30.10.1996 approving utilization of investments against reserves for the purpose of business, the assessing officer

did not give weight to the same on the ground that it does not relate back to actual utilization by the assessee during the previous year. In the appeal against the assessment order dated 27.3.2000, the CIT (Appeals) treated the letter dated 30.10.1996 issued by the RCS as sufficient compliance with Section 46 of the Societies Act read with Rule 37(2) of the Societies Rules. The appellate authority considered the interest accruing from 30.11.1996 as qualified for deduction and came to the conclusion that the restrictions for utilization of reserve fund in banking business would not be applicable if prior sanction of the RCS is obtained by the cooperative society and that such sanction would not, however, be necessary if the investments are made in SLR securities, and that in the absence of any prior sanction the investments made in non- SLR securities would not be eligible for exemption under Section 80P(2)(a)(i) of the Act. He also held that, the income on the investments in securities against reserve fund not utilized for SLR purposes (non-SLR investments not being under any compulsion) under any provisions of the BR Act have to be treated at par with similar investments by any other business activity. They are, therefore, not attributable to banking business and consequently will not qualify for exemption. While holding that the interest income relatable to non-SLR investments accrued during the period from 31.10.1996 to 31.3.1997 will not qualify for exemption, the appeal was partly allowed directing the assessing officer to modify the assessment order accordingly. APCOB’s appeal being ITA No.694/Hyd/2000 under Section 253 of the Act before the ITAT, Hyderabad Bench “A” was heard along with the cross appeals filed by the Revenue. By common order dated 25.9.2001, the appeals filed by the assessees were allowed and the appeals filed by the Revenue were dismissed. The learned Tribunal held that no distinction can be made of income earned from SLR securities and non-SLR securities with the income arising from investments made out of reserve fund under Section

80P(2)(a)(i) of the Act. In coming to this conclusion, the learned Tribunal relied on the decision of the Supreme Court in CIT v Karnataka State Cooperative Bank Ltd[1]. The Senior Counsel for the Income-tax, Mr.S.R.Ashok, would rely on Karnataka State Cooperative Bank, Mehsana Dist. Central Cooperative Bank Ltd v ITO[2] and CIT v Nainital Dist. Cooperative Bank[3] to submit that every cooperative society engaged in the business of banking is regulated by the Societies Act and the Societies Rules, the BR Act and the Reserve Bank of India Act, 1934 (the RBI Act). Every cooperative bank is under an obligation to adhere to SLR norms prescribed by the RBI from time to time. Income from SLR reserve is alone qualified for exemption and the income derived from other investments is not deducible under Section 80P(2)(a)(i) of the Act. He would further contend that the income from the investment of non-statutory reserves voluntarily is outside the purview; not attributable to the banking business and, therefore, the income derived from non-SLR is not entitled for deduction under the said provision. M/s.C.Kodanda Ram, Senior Counsel, Y.Ratnakar, Dr.C.P. Ramaswami and A.V.Raghu Ram appearing for the assesses, would contend that there cannot be any distinction between the interest income earned from the banking business and voluntary reserves and that there is no concept of voluntary or non-statutory reserves in the banking industry. In law, a cooperative bank is required to keep certain amount as reserve and the other money is stock in trade for the cooperative society which can be used for earning more money. A cooperative society is not expected to keep its cash reserve or so-called non-SLR funds idle to the detriment of the business and, therefore, any income earned by investment of any funds of the bank is attributable to banking business. The Senior Counsel also raised a preliminary objection as to maintainability of the appeals. Referring to the question of law

framed in the memorandum of appeals by the Revenue he would urge that when the question of law is neither raised before the Tribunal nor considered, it cannot be permitted to be raised before the High Court. The High Court cannot adjudicate such a question which was not raised before the Tribunal. He relies on the decision of the Supreme Court in S.P.Mansinghka (P) Ltd v CIT[4]. In support of their contention on the core issue the Counsel relied on Karnataka State Cooperative Bank, Mehsana DCCB, CIT v Sri Ram Sahakari Bank Ltd[5], CIT v H.P. State Cooperative Bank Ltd[6], CIT v Muzaffar Nagar Kshetriya Gramin Bank Ltd[7] and CIT v Nawanshahar Central Cooperative Bank Ltd[8].

Maintainability of appeal Before taking up the core issue, we would address the question of maintainability. Section 260A of the Act was inserted by the Finance (No.2) Act, 1998 with effect from 01.10.1998. Sections 256, 257, 260 and 261 were also amended to provide an appeal to the High Court directly against orders of the Tribunal. The appellate power, however, was limited to consideration of a substantial question of law. Section 260A(2)(c) of the Act mandates that proceedings under Section 260A(1) of the Act shall be in the form of memorandum of appeal precisely stating the substantial question of law involved in the case. Prior to amendments introduced by the Finance (No.2) Act, 1998, the Tribunal was the final adjudicatory forum in so far as finding of facts are concerned. If any question of law is raised either by the Revenue or by the assessee, the Tribunal was empowered under Sections 256(1) and (2) of the Act to state the case and refer the question of law arising out of the order of the Tribunal in appeal to the jurisdictional High Court. The answer by the High Court on the question of law would then be the basis for the Tribunal to dispose of the appeal before them during pre-1998 period. A question of law

referred to the High Court under Sections 256(1) and (2) of the Act and a question of law pleaded in the memorandum under Section 260A of the Act is not an academic or general question of law. Such question of law should be one which “arises out of an order of the Tribunal in an appeal or proceeding before them under Section 256 and a substantial question of law which is involved in the case.” If a question of law was not raised before the Tribunal or such question of law does not arise out of the case decided by the Tribunal, an appeal under Section 260A of the Act is barred. To that extent, the Senior Counsel is correct and is well supported by the ratio in S.P.Mansinghka (P) Ltd. The said case arose under Section 55 of the 1922 Act which is the precursor of Section 256(1) of the Act. Ruling on the scope of the said provision, the Division Bench of the Supreme Court observed that, “when a question of law is neither raised before the Tribunal nor considered by it, will not be a question arising out of the order of the Tribunal and the High Court will be acting beyond its jurisdiction in dealing with any such question”. Whether this binding ratio bars these appeals? We are afraid this aspect of the matter does not arise in these cases. We have given the précis of the orders of the CIT (Appeals) as well as the Tribunal impugned in these appeals. Before the CIT (Appeals) the assessee raised the plea that the investment of non-SLR reserves voluntarily also amounts to business of banking and that the income therefrom is attributable to the main activity. Before the Tribunal the assessee filed appeal in so far as the department appeal went against them, and the Revenue also filed appeals. The question was specifically raised and a specific issue was framed by the Tribunal touching upon this aspect. After perusing the orders of the CIT (Appeals) as well as the Tribunal, we are convinced that, the Revenue specifically raised the issue and also tried to distinguish the decision of the Supreme Court relied on by the assessee. We, therefore, reject the submission of the Senior Counsel and hold that

these appeals are maintainable and the question of law raised in these appeals was very much in issue before the CIT (appeals) as well as before the Tribunal. Whether the income from voluntary reserves is exempted Chapter VIA of the Act stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in Sections 80C to 80U. The chapter is divided into four distinct parts, namely, A to D. Part D deals with deductions in respect of certain incomes. Section 80P is a special provision providing for the deduction in respect of income of co-operative societies. As defined in Section 2(19) of the Act, “co-operative society” means “a co-operative society registered under the Co-operative Societies Act, 1912, or under any other law for the time being in force in any State for the registration of co- operative societies”. Insofar as relevant for the purpose, subsections (1) and (2) of Section 80P of the Act read as under. 80-P . DEDUCTION IN RESPECT OF INCOME OF COOPERATIVE 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 the case of a cooperative society engaged in— (i) carrying on the business of banking or providing credit facilities to its members, or (ii) a cottage industry, or (iii) the marketing of agricultural produce grown by its members, or (iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or (v) the processing, without the aid of power, of the agricultural produce of its member, or (vi) the collective disposal of the labour of its members, or (vii) fishing or allied activities, that is to say the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members. The whole of the amount of profits and gains of business attributable to any one or more of such activities: Provided that in the case of a cooperative society falling under sub- clause (vi), or sub-clause (vii), the rules and bye-laws of the society

restrict the voting rights to the following classes of its members, namely:— (1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities; (2) the cooperative credit societies which provide financial assistance to the society; (3) the State Government; (4) The provisions of this section shall not apply in relation to any co- operative bank other than a primary agricultural credit society or a primary co-operative 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) “primary co-operative agricultural and rural development bank” means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities. (clauses (b) to (f) of subsection 3 omitted as not relevant)

The whole of amount of profits and gains of business ‘attributable to’ one or more such activities is eligible for exemption under the above provision. In plain terms, if a cooperative society is engaged in carrying on the business of banking the amount earned from any one or more such activities in relation to the business of banking can be claimed as deduction. The word ‘attributable’ was considered by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd v CIT[9] holding that, “the expression ‘attributable to’ is certainly wider in import than the expression ‘derived from’.” It was also held that by using the expression ‘attributable to’, the legislature intended to cover receipts from sources other than the actual conduct of business. Section 80P of the Act grants deduction in respect of various categories of income of a cooperative society. If any cooperative society carries on the business of banking, the interest income received by a cooperative society on its investment/deposits is attributable to banking business. The provision does not make any distinction in so far as the interest earned by deposit in a bank and interest earned on the compulsive deposit which is made as required under the relevant statute. It is no doubt true that a cooperative society may be required to earmark some portion of its

capital for exclusive deposit in Government prescribed securities or banks. A cooperative society may earn profits by way of interest by parking their funds in high-yielding deposits or may earn income by circulating its capital among its members in the course of their banking business. All the income from banking business which is referable to Section 80P(2)(a)(i) of the Act would qualify for deduction under the Act. ‘The business of banking’ is one of many expressions not defined in the Act. Which are the activities that can be considered attributable to the business of banking? Indisputably the assesses, in these cases being cooperative banks, are subject to the regulations under the RBI Act, the BR Act and the Societies Act. There is also no dispute that all these assesses, in these cases, obtained licences under the BR Act. They are bound to comply with all the orders, rules and regulations issued by the RBI while carrying on banking business. Section 5(b) of the BR Act defines “banking” to mean, “accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise”. As per Section 5(c) of the BR Act “banking company” means “any company which transacts the business of banking in India”. Section 6 of the BR Act lists ‘any one or more’ of the forms of the business as enumerated in Sections 6(1)(a) to (o) of the BR Act in addition to the business of banking. Section 6(1)(a) of the BR Act enumerates every conceivable activity of banking including, “the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities” and under Section 6(1)(n) of the BR Act, the doing of all such other things as are incidental or conducive to the promotion or advancement of the business of the company. Thus reading of Sections 5(b), (c) and Section 6 of the BR Act along with Section 80P(2)(a) of the Act, it becomes clear

that the income received by a cooperative bank from deposits, whether or not they are made in discharge of a statutory obligation or otherwise being income from banking business, would be eligible for exemption under the said provision. Does Section 80P(2)(a) of the Act make a distinction between income received by a cooperative bank from statutory deposits and the income from non-statutory deposit of surplus funds? The answer must be in the negative. The income earned by the cooperative bank either by deposit of the prescribed percentage of its reserves or by deposit of their surplus funds is exempted. The income from either category of the deposits is certainly attributable to the business of banking. Indeed as a prudent business practice, no banking company or no entity engaged in the business of banking would keep its amount idle. By parking the funds, immediately not required for the business in other banks, interest can be earned to the benefit of the cooperative society. Every cooperative society is expected to make profits for the benefit of its members. As long as the deposit of the surplus funds in the other banks for the purpose of earning interest is not unauthorized or not barred by any of the applicable statutes, the income is certainly attributable to the business of banking. There is no concept of voluntary or non-statutory reserves as urged by the Revenue. In so far as the profits and gains from the business of banking by deposit of surplus funds of the bank is concerned, there cannot be any distinction between SLR reserves and non-SLR reserves although the maintenance of cash reserve and SLR are obligatory under below referred provisions of the RBI Act and the BR Act. Section 45 of the Societies Act lays down the method and manner of disposal of the profits earned by the cooperative society. Under Section 45(3)(a) of the Societies Act, a cooperative society shall transfer not less than 25% of net profit to the reserve fund and in case the total amount transferred becomes equal to the

amount of paid up capital, the amount to be transferred can be reduced to a sum not less than 10% of such profits. For doing so the prior permission of the RCS is required. Section 46 of the Societies Act requires every society to act with due care and diligence and invest or deposit its funds which are not immediately required for the business of the society either in postal savings banks, securities specified in Section 20 of the Indian Trusts Act, 1882, in the shares and securities of any other society or with any Nationalised Bank or Scheduled Bank or the concerned District Cooperative Central Bank. As per Rule 37 of the Societies Rules reserve fund is intended to meet unforeseen losses. When the reserve fund of the society exceeds 25% of its working capital, the excess can be utilized in the business of the society with the sanction of the RCS. In other words, a cooperative bank can utilize the reserve fund over and above 25% of the working capital for the purpose of banking business which includes the deposits which yield interest. Further when a society is prohibited by its by-laws from borrowing either from its members or others, the whole of its reserve fund may be utilized in its business. If a cooperative bank derives income by lending money to its members the same being business of banking, is eligible for deduction. Therefore, to say that the income derived from voluntary non-statutory deposits would not be eligible for deduction is illogical and cannot be sustained. As a matter of fact, in all these cases, a finding was recorded that the RCS issued necessary permission to the assesses to use the surplus reserve fund for the banking business. Assuming that there is no such sanction of the RCS for utilization of the reserve fund in the business of the society the same will not make any difference in so far as deduction allowed by Section 80P(2)(a)(i) of the Act. The assessee cooperative banks are scheduled banks as defined under Section 2(e) of the RBI Act read with the Second Schedule thereto. As per Section 42 of the RBI Act, every

schedule bank shall maintain with RBI an average daily balance, the amount of which shall not be less than such percentage of the total demand and time liabilities in India as may be notified by the RBI. In addition to the cash reserve to be maintained by the RBI, every banking company is required to create a reserve fund and, before declaration of dividend, transfer to the reserve fund a sum equivalent not less than 20% of such profit. Further, under Section 18 of the BR Act, every banking company, not being a scheduled bank, shall maintain cash reserve with itself or by way of balance in a current account with the RBI. Such cash reserve shall be equivalent to at least 3% of total of its demand and time liabilities as on the last Friday of the second preceding fortnight. Under Section 24(2-A) of the BR Act in addition to the daily balance required to be maintained under Section 42 of the RBI Act and cash reserve required to be maintained under Section 18 of the BR Act, every banking company shall maintain not less than 25% or such other percentage as prescribed by the RBI, in cash or gold valued at a price not exceeding the current market price or in unencumbered approved securities. This, in banking parlance, is often referred to as SLR. The SLR to be maintained by a cooperative bank is dealt with by Section 24 of the BR Act as modified by Section 56 of the said Act. The SLR, cash reserve or reserve fund required to be maintained by a scheduled bank or a cooperative bank under the provisions of the RBI Act or the BR Act as referred to herein above, are all the activities which are part of business of banking. The non-SLR and non-reserve fund is stock- in-trade for a cooperative bank for the business of banking as defined under Sections 5(b) and (c) read with Section 6 of the BR Act. In so far as the income earned from these deposits is concerned, Section 80P(2)(a)(i) of the Act does not make any difference nor it is possible to read any such limitation having regard to the language of the said provision. Every income “attributable to any or more of business of banking” shall be deducted

from the gross total income. It is well settled that a provision for deduction or tax relief should be interpreted liberally in favour of the assessee. Such a provision should be construed as to fully achieve the object of the legislature and not to defeat it (see CIT v South Arcot Distt. Coop. Marketing Society Ltd[10], Bajaj Tempo Ltd., Bombay v CIT[11] and CIT v N.C.Budha Raja & Co.,[12]). Applying the settled rule of interpretation and liberally interpreting sub-section 2(a)(i) of Section 80P of the Act, the conclusion is inevitable that whatever be the amount of profits and gains of business of a cooperative society attributable to its banking transactions or credit transactions with members is exempt from income tax. If Section 80P(2)(a) of the Act is given restrictive meaning as including the interest earned only on the statutory deposits made by a cooperative society, it would amount to supplying causus omissus and has to be avoided by the Court.

In Bihar State Co-operative Bank Ltd v CIT[13] the Supreme Court considered the scope of the notification issued by the Central Board of Revenue under Section 60 of the Income Tax Act, 1922 (1922 Act) which exempted the profits of any cooperative society from the tax payable under the 1922 Act. The assessing officer granted exemption but, in the reassessment proceedings, the order of the assessing officer was reversed, and the Income Tax Appellate Tribunal (ITAT) referred the matter to the High Court under Section 66(1) of the 1922 Act. The Revenue argued that moneys laid out in deposit in other banks stand apart and, therefore, do not get the benefit of exemption. Repelling the submission, the unanimous Division Bench of the Supreme Court held as follows. 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 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. That is how the circulating capital is employed

and that is the normal course of business of a bank. The moneys laid out in the form of deposits as in the instant case would not cease to be a part of the circulating capital of the appellant nor would they cease to form part of its banking business. The returns flowing from them would form part of its profits from its business. In a commercial sense the directors of the Company owe it to the bank to make investments which earn them interest instead of letting moneys lie idle. It cannot be said that the funds of the bank which were not lent to borrowers but were laid out in the form of deposits in another bank to add to the profit instead of lying idle necessarily ceased to be a part of the stock-in-trade of the bank, or that the interest arising therefrom did not form part of its business profits.

In CIT v Bombay State Cooperative Bank Ltd[14], the Supreme Court held in favour of the respondent therein that the interest received from Government securities held by the society as its stock-in-trade qualified for exemption under the Government of India notification issued under Section 60 of the 1922 Act. Relying on Bihar Sate Cooperative Society Ltd the Supreme Court observed that the business of banking is not restricted to receiving deposits and lending money of its price or other Societies and that the money laid out in the form of deposit did not cease to be part of circulating capital earning and interest from the deposits arose from the business of banking and, therefore, exempt from income-tax under the above mentioned notification. Karnataka State Cooperative Apex Bank was concerned with the exemption of interest income from mandatory investment made out of the reserve fund. As there was a conflict between the M.P. Coop. Bank Ltd v CIT[15] and CIT v Bangalore Distt. Coop. Central Bank Ltd[16], a three Judge Bench of the Supreme Court considered the matter and agreed with Bangalore Coop. Central Bank. In M.P. Coop. Bank, it was held that the interest on Government securities placed with the State Bank or Reserve Bank would not qualify for exemption under Section 80P of the IT Act and that such investment could not be regarded as an essential part of banking activity. On the contrary Bangalore Coop. Central Bank took the view

that the interest income on the investment made in compliance with the statutory provisions in order to carry on the business of banking are part of the business activities falling within the scope of Section 80P(2)(a)(i) of the IT Act. This decision is an authority for the proposition that, even though the investment made in the Government securities in compliance with the statutory provisions does not form part of stock in trade or working capital, still the interest income therefrom would qualify for exemption under Section 80P of the IT Act.

In Mehsana District Central Co-op. Bank the Supreme Court reiterated the test observing that to be able to answer the question whether deduction under Section 80P(2)(a)(i) of the IT Act can be allowed, it is necessary to ascertain whether the income derived by a cooperative society from the investment of its voluntary reserves has been utilized by it in the course of its ordinary business. It was held therein that interest income upon statutory reserves is eligible for deduction. In CIT v Ponni Sugars and Chemicals Limited[17] the Supreme Court considered the conditionalities for availing exemption under Section 80P(2)(a)(i) of the IT Act. The relevant observations are as follows. Under Section 80P(1), where the gross total income of a co- operative society includes any income referred to in Sub-section (2) then the sums specified in Sub-section (2) shall be deducted from the gross total income to arrive at the total income of the assessee-society. In order to earn exemption under Section 80P(2) a co-operative society must prove that it had engaged itself in carrying on any of the several businesses referred to in Sub- section (2). In that connection, it is important to note that under Sub-section (2), in the context of co-operative society, Parliament has stipulated that the society must be engaged in carrying on the business of banking or providing credit facilities to its members. Therefore, in each case, the Tribunal was required to examine the Memorandum of Association, the Articles of Association, the Return of Income filed with the Department, the status of business indicated in such Returns etc. (emphasis supplied)

In CIT v Ramanathapuram Distt. Coop. Central Bank Ltd[18],

following the Karnataka State Coop Apex Bank, another three Judge Bench of the Supreme Court agreed with the view of the High Court of Madras that the interest on securities, subsidies received from the Government and dividend of the cooperative society is entitled to deduction under Section 80P(2)(a)(i) of the IT Act. This case is an authority for the proposition that dividend income also would qualify for exemption. Nawanshahar Central Coop Bank Limited, a cooperative society registered under the Punjab Cooperative Societies Act, 1961, claimed deduction of interest from investment of amount in PSEB Bonds, 2003 First Series (the Bonds). The assessing officer disallowed the claim taking a view that the income from the Bonds could not be treated to be income attributable to the banking business within the meaning of Section 80P(2)(a)(i) of the IT Act. The assessee’s appeal failed but the appellate Tribunal allowed the claim. Before the Punjab and Haryana High Court the question was whether the income from investment in the Bonds is entitled to deduction under the IT Act. Observing that the investment was in accordance with the mandatory provisions of Section 44 of the Punjab Co-operative Societies Act, 1961 the Punjab and Haryana High Court in CIT v Nawanshahar Central Cooperative Bank Ltd.,[19] ruled that, “such income would be automatically entitled to deduction and that it is only in respect of the voluntary reserves that it is necessary to find as to whether the investment had been made in the ordinary course of banking business”. The decision of the Punjab and Haryana High Court was affirmed in Nawanshahar Cooperative Central Bank, wherein the Supreme Court observed as under. This Court has consistently held that investments made by a banking concern are part of the business of banking. The income arising from such investments would, therefore, be attributable to the business of bank falling under the head “Profits and gains of business” and thus deductible under Section 80-P(2)(a)(i) of the Income Tax Act, 1961. This has been so held in Bihar State Coop. Bank Ltd. v. CIT, (1960) 39 ITR 114 (SC) : AIR 1960 SC 789, CIT v. Karnataka State Coop. Apex Bank, (2001) 251 ITR 194 (SC) : (2001) 7 SCC 654 : AIR 2001 SC 3332, and CIT v. Ramanathapuram Distt. Coop. Central Bank Ltd., (2002) 255 ITR 423 (SC): (2009) 17 SCC 620. The principle in these cases would also cover a situation

where a cooperative bank carrying on the business of banking is statutorily required to place a part of its funds in approved securities.

In H.P. State Cooperative Bank Ltd, the assessee earned interest of deposits made out of non-SLR funds. The Tribunal held in favour of the assessee and allowed exemption under Section 80P(2) of the Act. A Division Bench of the Himachal Pradesh High Court held that the interest earned on deposits made out of non- SLR funds is directly attributable to the business of banking and, therefore, exempt from income-tax. The Division Bench made the following observations with which we respectfully agree. Any banking institution, carrying on banking business will not keep its reserves uninvested where they earn no income. The question which arises is whether the income earned on account of interest on deposits made out of the non SLR funds can be said to be attributable to the banking activities of the bank. There can be no dispute with the preposition that the word attributable is much wider in scope than derived. The Legislature has used the words "attributable to" in conjunction with the phrase "any one or more of such activities". ... ... The words used by the legislature are very important. The first word used is attributable, which is much wider in scope than the word derived. The second phrase used is any one or more of such activities. Any banking business providing credit facilities to its members and investing the sums deposited by the members of the society is part of banking business. ... ... We are, therefore, of the considered view that the investment of the funds by the banks including the non reserves were part of the banking activities since no bank would like its reserve funds to remain idle and not earn any interest. This is not only prudent business management but is also a part of the activity of banking. Therefore, the interest earned on such deposits is directly attributable to the business of banking.

The Allahabad High Court also took a similar view in Muzaffar Nagar Kshetriya Gramin Bank Ltd observing that the deposit exceeding SLR was also in relation to banking activity, and hence income accrued out of such deposit is also attributable to the banking business which is deductible under Section 80P(2)(a)(i) of the Act.

The Senior Counsel for the Revenue brought to our notice the decision of Uttarakhand High Court in Nainital Dist. Cooperative Bank wherein it was held that the income received by a cooperative bank from house property is not covered under income from banking business. Our attention has also been invited to Totgars’

Cooperative Sale Society Limited v ITO[20] in support of his contentions. As observed by the Supreme Court therein the said decision was confined to the facts of the said case and their Lordships were not dealing with cases relating to cooperative banks. Both the decisions, therefore, do not assist the learned Senior Counsel. In all these appeals, the learned Tribunal correctly recorded a finding that the income earned by the respondents/ cooperative banks is attributable to the business of banking and, therefore, exempt from income-tax under Section 80P(2)(a)(i) of the Act. We do not find any reason to disagree with the view of the learned Tribunal. In the result, for the above reasons, these appeals fail and are, accordingly, dismissed, without any order as to costs. _______________ (V.V.S.RAO, J)

______________________________ (RAMESH RANGANATHAN, J) June , 2011

NOTE: L.R. Copy be marked. (By order) YS

[1] (2001) 251 ITR 194 (SC) : (2001) 7 SCC 654 : AIR 2001 SC 3332 [2] (2001) 251 ITR 522 (SC) : (2009) 17 SCC 621 [3] (2009) 318 ITR 62 (Uttarakhand) [4] AIR 1967 SC 1626 [5] (2004) 266 ITR 282 (Bom) [6] (2010) 323 ITR 1 (HP) [7] (2010) 323 ITR 202 (All) [8] (2004) 289 ITR 6 (SC) : (2007) 17 SCC 611 [9] (1978) 113 ITR 84 (SC) : (1978) 2 SCC 644 : AIR 1978 SC 1099 [10] (1990) 176 ITR 117 (SC) : AIR 1990 SC 1249 [11] (1992) 196 ITR 188 (SC) : AIR 1992 SC 1622 : (1992) 3 SCC 78 [12] (1993) 204 ITR 412 (SC) : AIR 1993 SC 2529 : (1993) 91 STC 450 (SC) [13] (1960) 39 ITR 114 (SC) : AIR 1960 SC 789 [14] (1968) 70 ITR 86 (SC)

[15] (1996) 218 ITR 438 (SC) : (1996) 2 SCC 541 [16] (1998) 232 ITR 282 (SC) : (1998) 6 SCC 129 : AIR 1999 SC 2955 [17] (2008) 306 ITR 392 (SC) : (2008) 9 SCC 337 [18] (2002) 255 ITR 423 (SC) : (2009) 17 SCC 620 [19] (2003) 63 ITR 63 (P&H) [20] (2010) 3 SCC 223