A cooperative bank is entitled to claim an exemption under s 80P(2)(a)(i) in respect of the income derived out of investments made from the voluntary reserves of such society, as held by APHC in CIT v Andhra Pradesh State Co-op Bank Ltd — In favour of: The assessee; ITA Nos 86 of 2003 and 711, 715, 718 of 2006, 241 and 243 of 2007, 50, 107, 149, 162, 163 and 289 of 2008, 315, 392, 410 and 413 of 2010 and 24 of 2011.
Appeal — 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 s 260A of the Act is barred.
Interpretation of taxing provisions — The provisions for deduction or tax relief should be interpreted liberally in favour of the assessee.
CIT v Andhra Pradesh State Co-op Bank Ltd.
High Court of Andhra Pradesh
ITA Nos. 86 of 2003 and 711, 715, 718 of 2006, 241 and 243 of 2007, 50, 107, 149, 162, 163 and
289 of 2008, 315, 392, 410 and 413 of 2010 and 24 of 2011
V.V.S. Rao and Ramesh Ranganathan, JJ
Decided on: 7 June 2011
Counsel appeared:
S.R. Ashok, A.V. Krishna Koundinya and V.R. Badri for the Appellant
C. Kodanda Ram, K. Vasant Kumar, S. Ravi, N. Siva Reddy, K. Krishna Masthan, Y. Ratnakar, A.V.
Raghu Ram, C.P. Ramaswami and Anjali Agarwal for the Respondent
Judgment
V.V.S. Rao, J
1. 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).
2. 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.
3. 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.
4. 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 [2001] 251 ITR 194/118 Taxman 321.
5. The Senior Counsel for the Income-tax, Mr. S.R. Ashok, would rely on Karnataka State
Cooperative Apex Bank's case (supra), Mehsana District Central Cooperative Bank Ltd v. ITO [2001]
251 ITR 522/119 Taxman 785 (SC) and CIT v. Nainital District Cooperative Bank [2009] 318 ITR 62
(Uttarakhand) 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 CIT v. Karnataka State Cooperative Apex Bank 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 assessees, 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 Seth Pushalal Mansinghka (P.) Ltd. v. CIT AIR
1967 SC 1626. In support of their contention on the core issue the Counsel relied on Karnataka State
Cooperative Apex Bank's case (supra), Mehsana District Central Co-operative Bank's Ltd.'s case
(supra) CIT v. Sri Ram Sahakari Bank Ltd. [2004] 266 ITR 632/138 Taxman 45 (Kar.), CIT v. H.P.
State Cooperative Bank Ltd. [2010] 323 ITR 1 (HP), CIT v. Muzaffar Nagar Kshetriya Gramin Bank
Ltd. [2010] 323 ITR 202 (All.) and CIT v. Nawanshahar Central Cooperative Bank Ltd. [2007] 289
ITR 6/107 Taxman 48 (SC). Maintainability of appeal
6. 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 1-10-1998. 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 insofar 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 Seth Pushalal Mansinghka (P.)
Ltd.'s case (supra). 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 pricis 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 insofar 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
7. 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, sub-sections (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 cooperative 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 longterm
credit for agricultural and rural development activities.
[clauses (b) to (f) of sub-section 3 omitted as not relevant]
8. 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 [1978] 113
ITR 84 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.
9. 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 insofar 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.
10. 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 assessees, 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 assessees, 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.
11. 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. Insofar 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.
12. 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 per cent 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 per cent 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 per cent 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 per cent 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 assessees 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 insofar as deduction allowed by section 80P(2)(a)(i) of the Act.
13. 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 per cent 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 per cent 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 per cent 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. Insofar 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.
14. 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 District Cooperative Marketing Society Ltd.
[1989] 176 ITR 117/43 Taxman 328 (SC), Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman
480 (SC) and CIT v. N.C. Budharaja and Co., [1993] 204 ITR 412/70 Taxman 312 (SC). 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.
15. In Bihar State Co-operative Bank Ltd v. CIT [1960] 39 ITR 114 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."
16. In CIT v. Bombay State Cooperative Bank Ltd. [1968] 70 ITR 86, 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 Bank Ltd.'s case (supra) 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.
17. Karnataka State Cooperative Apex Bank's case (supra) was concerned with the exemption of
interest income from mandatory investment made out of the reserve fund. As there was a conflict
between the Madhya Pradesh Cooperative Bank Ltd v. Addl. CIT [1996] 218 ITR 438/84 Taxman 640
(SC) and CIT v. Bangalore District Cooperative Central Bank Ltd. [1998] 233 ITR 282/99 Taxman
404 a three Judge Bench of the Supreme Court considered the matter and agreed with Bangalore
Distt. Cooperative Central Bank Ltd.'s case (supra). In Madhya Pradesh Cooperative Bank Ltd.'s case
(supra), 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 District
Cooperative Central Bank Ltd.'s case (supra) 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 Income-tax 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 Income-tax Act.
18. In Mehsana District Central Co-operative Bank Ltd.'s case (supra) 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.
19. In CIT v. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392/174 Taxman 87 the Supreme
Court considered the conditionalities for availing exemption under section 80P(2)(a)(i) of the Incometax Act. The relevant observations are as follows:
"Under section 80P(1), where the gross total income of a cooperative 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 cooperative
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]
20. In CIT v. Ramanathapuram District Co-operative Central Bank Ltd. [2002] 255 ITR 423/123
Taxman 222 (SC), following the Karnataka State Cooperative Apex Bank's case (supra), 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.
21. Nawanshahar Central Cooperative Bank Ltd.'s case (supra), 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 Income-tax 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. [2003] 263 ITR 320/138 Taxman 196 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 Central Cooperative Bank Ltd.'s case (supra), 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."
22. In H.P. State Cooperative Bank Ltd.'s case (supra) 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."
23. The Allahabad High Court also took a similar view in Muzaffar Nagar Kshetriya Gramin Bank
Ltd.'s case (supra) 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.
24. The Senior Counsel for the revenue brought to our notice the decision of Uttarakhand High Court
in Nainital District Cooperative Bank's case (supra) 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 Ltd. v. ITO [2010] 188 Taxman
282 (SC) 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 viewof the learned Tribunal.
25. In the result, for the above reasons, these appeals fail and are, accordingly, dismissed, without anyorder as to costs.
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