Income Tax Appellate Tribunal - Ahmedabad
Surat District Co-Operative Bank Ltd. ... vs Income Tax Officer And Ors. on 20 November, 2002
Equivalent citations: [2003]262ITR1(AHD), (2003)78TTJ(AHD)1
ORDER
B.M. Kothari, A.M.
1. The Hon'ble President, ITAT, has constituted this Special Bench to dispose of these cases of co-operative banks involving the point relating to grant of deduction, under Section 80P of the IT Act, 1961.
A. Surat District co-op. Bank Ltd., Surat, in their appeal being ITA No. 3675/AM/1997 for asst. yr. 1994-95 have raised the following grounds :
(1) The learned CIT(A)-II, Surat, has erred in law and on facts in confirming the disallowance of deduction under Section 80P of the IT Act made by the ITO, Surat, relying on the decision of the Supreme Court in the case of M.P. Co-operative Bank Ltd v. Addl. CIT (1996) 218 ITR 438 (SC). As a matter of fact the decision of the Hon'ble Supreme Court cannot be applied in the case of the appellant as the facts of both the cases are not identical and clearly distinguishable.
(2) Both the lower authorities have failed to adjudicate upon the alternate contention raised by the appellant of allowing deduction under Section 80P(2)(d) of the IT Act as the impugned income is from the investment of the reserve fund and almost the entire reserve fund was invested in other co-operative banks/societies.
(3) Alternatively and without prejudice to whatever is stated above the learned CIT(A) has erred in not considering the fact that the free statutory reserve is only Rs. 5,42,24,743 and not Rs. 35,81,03,752. If at all any disallowance of deduction under Section 80P(2)(a)(i) of the IT Act has to be made then only figure of free-reserve i.e., Rs. 5,42,24,743 can be taken into account and not that of the whole reserve i.e., Rs. 35,81,03,752.
(4) The orders passed by both the lower authorities are without properly appreciating the facts and both of them have blindly followed the decision of the Hon'ble Supreme Court in the case of M.P. Co-op. Bank Ltd. (supra) without properly appreciating the distinguishable facts of the appellant's case. Various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned orders have been grossly ignored.
B. The Kalupur Commercial Co-op. Bank Ltd. in their appeal being ITA No. 2562/Ahd/97 for asst. yr. 1993-94 have raised the following grounds :
(1) The learned CIT(A) has erred in law and on facts in not granting exemption under Section 80P(2)(a)(i) on locker rent and interest-tax collected, treating it as income which does not form part of banking business.
(2) Assuming, while denying that deduction under Section 80P was not available in respect of locker rent income, the learned CIT(A) has erred in not appreciating that as a matter of fact, considering the expenses incurred by the appellant, there was no income or negligible income from locker rent and, therefore, the whole receipt could not be brought to tax.
C. Unnati Co-op. Bank Ltd. in their appeal being ITA No. 522/Ahd/1998 for asst. yr. 1995-96 have raised the following grounds :
(1) The learned CIT(A)-III, Baroda has erred in law and on the facts by relying on his own appellate orders in appeal No. CAB/III-24/97-98 and No. CAB/III-368/97-98 in case of Baroda Central Co-op. Bank Ltd. through the same are not applicable to the facts of the case of the appellant.
(2) The learned CIT(A)-III, Baroda has erred in law and on the facts of the case by upholding the contention of the learned AO that income of the appellant-bank of Rs. 14,12,363 being interest on investments cannot be considered as income of the appellant from its banking business.
(3) Your appellant submits that in view of the definition of the banking business as contained in the Banking Regulation Act, 1949, which defines that "banking means the accepting, for the purpose of lending or investments, of deposits of money from public", the income of the appellant-bank from its investments is its income from the banking business and hence eligible for deduction under Section 80P(2)(a)(i) of the IT act, 1961.
(4) The learned CIT(A)-III, Baroda has further erred in law and on the facts of the case by holding that deduction under Section 80P(2)(a)(i) of the IT Act, 1961, is not allowable in respect of income of interest on investments amounting to Rs. 14,12,363 in view of the judgment of the Hon'ble Supreme Court in case of M.P. Co-op. Bank Ltd. v. Addl. CIT (1996) 134 (SC) 92 : (1996) 218 ITR 438 (SC).
(5) Your appellant submits that considering the provisions of the Gujarat State Co-operative Societies Act, 1961, which are substantially different from that of the Madhya Pradesh State Co-op. Societies Act, the judgment of the Hon'ble Supreme Court in case of MP Co-op. Bank Ltd. is not applicable to the facts and circumstances of the appellant-bank.
D. The Baroda Peoples Co-op. Bank Ltd. in their appeal being ITA No. 523/Ahd/l998 for asst. yr. 1995-96 have raised similar grounds as that in ITA No. 522/Ahd/1998 except that the figure of interest income on investments on which deduction under Section 80P(2)(a)(i) has been claimed, is Rs. 25,41,289 in this case as against the figure of Rs. 14,12,363 in the case of Unnati Co-op. Bank Ltd. in ITA No. 522/Ahd/1998.
E. The Baroda Central Co-op. Bank Ltd. in their appeal being ITA No. 524/Ahd/1998 for asst. yr. 1995-96 have raised the following grounds :
(1) The learned CIT(A)-III, Baroda has erred in law and on the facts of the case by upholding the contention of the learned AO that income of the appellant-bank of Rs. 14,96,434 being interest on securities cannot be considered as income of the appellant from its banking business.
(2) Your appellant submits that in view of the definition of the banking business as contained in the Banking Regulation Act, 1949, which defines that "banking means the accepting, for the purpose of lending or investments, of deposits of money from 'public", the income of the appellant-bank from its investments is its income from the banking business and hence eligible for deduction under Section 80P(2)(a)(i) of the IT Act, 1961.
(3) The learned CIT(A)-III, Baroda, has further erred in law and on the facts of the case by holding that deduction under Section 80P(2)(a)(i) of the IT Act, 1961, is not allowable in respect of income of interest on securities amounting to Rs. 14,96,434 in view of the judgment of the Hon'ble Supreme Court in case of M.P. Co-op. Bank Ltd. v. Addl. CIT (1996) 218 ITR 438 (SC).
(4) Your appellant submits that considering the provisions of the Gujarat State Co-operative Societies Act, 1961, which are substantially different from that of the M.P. State Co-operative Societies Act, the judgment of the Hon'ble Supreme Court in case of M.P. Co-op. Bank Ltd. is not applicable to the facts and circumstances of the appellant-bank.
2. All the appellant-societies are co-operative societies registered under the provisions of The Gujarat State Co-operative Societies Act, 1961, and are engaged in the business of banking. These societies are, therefore, also governed by the Bank Regulation Act, 1949 (in short "the BR Act"). It may be relevant here to briefly state the facts relating to each of these five cases.
ITA No. 3675/Ahd/97 for asst. yr. 1994-95 in the case of The Surat District Coop. Bank Ltd.; Surat:3. The appellant submitted return of income declaring NIL income on the ground that its entire income of Rs. 1,66,59,383 is allowable as deduction under Section 80P(2)(1) of the IT Act, 1961. The AO observed that the balance-sheet of the appellant as on 31st March, 1994, shows reserve fund of Rs. 35,81,03,752. The said reserve fund has been invested in various Government securities, trusteeship and Kayami Thapan (Permanent deposits) in the form of fixed deposits with various banks for more than one year. The said deposits have been summarised by the AO at p. 2 of the assessment order as under :
Rs.
(i) Government securities 1,10,00.000
(ii) Trustees securities 3,06,00.000
(iii) Kayami Thapan 1,57,03,27,251 3.1. The AO observed that the co-operative society/bank is obliged to invest some amount in Government securities as per CRR/SLR requirement of RBI. According to Section 24 of the RBI Act, every scheduled bank is required to maintain an average daily balance not less than 7 per cent. As per Section 24 of the BR Act, a schedule bank is required to maintain in India in cash, gold or specified securities having value of not less than 25 per cent of the total of its demand and time liability in India. The AO required the assessee to compute the amount of investment required to be made in Government securities to meet the requirement of CRR/SLR. The assessee vide letter dt. 14th March, 1997, intimated that such requirement of CRR at the rate of 7 per cent of daily balance comes to Rs. 2230.25 lakhs and the requirement of SLR comes to Rs. 8,921.02 lakhs at the rate of 28 per cent. The rate of SLR was excessive than required as per Section 24 of the BR Act. The AO further observed that the CRR requirement of Rs. 2,230.25 lakhs is fully met by balance in current account maintained in various' banks. Further, the requirement of SLR is also met by balance in current account and fixed deposit account with various banks. The AO gave the following chart at p. 3 of the assessment order :
(Rs. in lakhs) Balance with various banks (Ind. cash) 1,727.08 Add : Current a/c with other bank 86.12 Add : Mutual Arrangement Scheme Deposit 7.00 1,820.20 Less : CRR requirement (on average of last day of 53 weeks) 2,230.25 410.05 Less : SLR requirement (on average of last day of 53 weeks) 8,921.02 9,331.07 Add : Investment in Kayami Thapan 15,703.27 Excess investment in Kayami Thapan 6,372.20 Thereafter, the AO observed as under:
"From the above chart, it is clear that the bank is having Rs. 63.72 lakhs invested in various fixed deposits which is excess than that requirement of CRR and SLR. Therefore, the investment of Kayami Thapan includes the investment of reserve funds also.
Interest earned on Kayami Thapan is of Rs. 1,259.65 lakhs on total investment of Rs. 1,57,03,272 out of which Rs. 253.88 lakhs (31.65 x 1,259.65 + 15,703.27) is to be treated as interest earned from investment of reserve fund in Kayami Thapan. Further, the assessee earned an interest of Rs. 12,11,250 from Government security and Rs. 35,40,458 from other trustees securities. All these interest earned is from investment of reserve funds. Therefore, the same does not -qualify for deduction under Section 80P of the Act as income from non-banking business."
3.2. The AO further held that the income of Rs. 4.76 lakhs received in respect of lacker rent is also not exempt under Section 80P(2)(a)(i) of the Act, as the same is not a banking activity. Likewise, the AO also held that the excess collection of interest-tax amounting to Rs. 2,385 will also not qualify for deduction under Section 80P. The AO after elaborate discussion arrived at the following conclusion in para 3 of the assessment order.
3. In view of the aforesaid facts, the income which does not fall under Section 80P comes to Rs. 3,06,18,303 calculation of which is given as under :
Interest income from Government security, trustee security, etc. 3,01,39,708 Add : Locker Rent 4,76,210 3,06,15,918 Add : Excess collection Int. Tax 2,385 3,06,18,303"
The net total income of the assessee was accordingly computed under :
by the AO as Net Profit as per P&L a/c 1,66,59,383 Less : Income other than income from banking business 3,06,18,303 1,39,58,920 Add : Income earned by the assessee-society from the activities other than banking 3,06,18,303 Total income 1,66,59,383 R/o under s. 288A of the Act 1,66,59,380 3.3. The learned CIT(A) relying upon the judgment of the Hon'ble Supreme Court in the case of M.P. Co-operative Bank Ltd. v. Addl. CIT (1996) 218 ITR 438 (SC) upheld the action of the AO in respect of denial of deduction under Section 80P(2)(a)(i) of the Act in relation to interest on investment amounting to Rs. 3,01,39,708 and in respect of excess collection of interest-tax of Rs. 2,385. The learned CIT(A), however, held that the income of Rs. 4.76 lakhs by way of locker rent would qualify for deduction under Section 80P(2)(a)(i) of the Act.ITA No. 2562/Ahd/1997 for asst. yr. 1993-94 in the case of the Kalupur Commercial Co-op. Bank Ltd. :
4. The appellant-society submitted their return of income showing NIL income on the ground that the entire business income of the co-operative bank is eligible for grant of deduction under Section 80P of the Act. The AO has elaborately discussed the assessee's claim for grant of deduction under Section 80P(2)(a)(i) of the Act. The AO relying upon the judgment of the Hon'ble Supreme Court in the case of M.P. Co-op. Bank Ltd. v. Addl. CIT (supra) computed the deduction allowable and disallowable under Section 80P of the Act at pp. 37 and 38 of the assessment order as under :
"(c) Computation of Deduction under Section 80P As discussed earlier the following categories of income will not be exempt under Section 80P(2)(a)(i) :
1. Interest on long term investment of the bank :
Rs.
(a) Interest on Government securities (See para 10.1) 2,42.78,882
(b) Dividend on UTI units (See para 10.2) 20,00,000
(c) Interest accrued on Indira Vikas Patra (See. Para 10.3) 60,99,000
(d) Interest received on FD of 1 year or more (see para 10.4) 4,19,812
(e) Income from safe deposit vault (see para- 11.1) 8,08,905
(f) Surplus of interest-tax (see para 11.2) 6,11,823 3,42,18,422 Out of above income, the assessee has claimed that investment in Government securities were made to meet the CRR and SLR requirements. The assessee has failed to submit the details of interest earned on Government securities which were held in excess of SLR requirements. As discussed earlier in para 10.1 out of total securities, 50.3 per cent are in excess of SLR requirements. Applying same ratio over the whole year the interest accrued on Government securities held for SLR purpose comes to 49.7 per cent of 2,42,78,882 i.e. 1,20,66,604, thus the income earned from various categories of income which are not exempt under Section 80P(2)(a)(i) comes to Rs. 2,21,51,818. The assessee was requested to furnish the details of expenses incurred to earn above income. However, the assessee has failed to submit the same. Keeping in view the facts that most of the expenses of wages and salaries and other overheads are incurred to earn income from banking activities i.e., advancing loan to the public, deduction of 10 per cent is given on the gross receipts to arrive at the figure of net profit.
Rs.
Income 2,21,51,818 Less: 10 per cent deduction for expenses 22,15,182 1,99,36,636 Subject to the above the computation of income of the assessee is as below :
Gross Total income (as per para
13) 15,29,00,534.50 Less : Deduction 80P(2)(a)(i) not allowed Rent 288 Non-banking income (See para 14) 1,99,36,636 1,99,36,924 13,29,63,610.50 80P(2)(c) 20,000.00 13,29,83,610.00 Total Income 1,99,16,924.00"
4.2. The learned CIT(A) has held that the word "banking" has been given wide definition and it includes accepting deposits or moneys from the public for the purpose of lending or investment. The view taken by the AO that the income earned by the society by utilisation of the different kinds of funds will not be entitled to deduction under Section 80P(2)(a)(i), is not legally correct. The Hon'ble Supreme Court in the case of M.P. Co-op. Bank Ltd. (supra) has held that the Government securities coming out of the reserve fund which could not be easily' encashed and which could be utilised only when certain contingencies arose could not be considered to be circulating capital or stock-in-trade. The income derived from the investment in such securities could not be regarded as essential part of assessee's banking activity. The learned CIT(A) in para 22 of his order further observed that Section 67 of the Gujarat State Co-op. Societies Act require every society to provide at least 1/4th of the net profits of the society of each year, which shall be carried to the reserve fund and such reserve fund may be used in the business of the society or the society shall have the option to make investment subject to the provisions of Section 71. Thus, unlike the Madhya Pradesh law, there is no restriction in Gujarat regarding utilisation of funds carried to the reserve fund. The Gujarat law permits society to use reserve fund in the business of the society. In the amount transferred to reserve fund is utilised for its business, the income therefrom would be entitled to deduction under Section 80P. Likewise if the society makes investment in Central Bank, State Co-operative Bank, State Bank of India, Postal Savings Bank in securities and shares as per provisions of Section 71, the benefit under Section80P in relation to interest income on such investment cannot be denied, as the investments in such Government securities are to be taken as part of normal banking activities of the society in accordance with the provisions contained in the BR Act. The learned CIT(A) thus directed the AO to allow deduction under Section 80P(2)(a)(i) in respect of interest on such investment in Government securities and banks, etc. The CIT(A), however, confirmed the action of the AO only in respect of income by way of locker rent of Rs. 8,08,905 and surplus of interest-tax collected Rs. 6,11,823.
4.3. The assesses has challenged only these two items of additions confirmed by the CIT(A) in the present appeal. An application dt. 7th Aug., 2002, was given by the learned Senior Departmental Representative informing that the Department has also filed an appeal on 1st Aug., 1997, for asst. yr. 1993-94 and requested that the said appeal may also be fixed along with the assessee's appeal. However, the Revenue's appeal is not one of the cases for which this Special Bench was constituted by the Hon'ble President, ITAT. The Revenue's appeal will, therefore, have to be heard by a Regular Bench.
ITA No. 522/Ahd/1998 for asst yr. 1995-96 in the case of Unnati Co-op. Bank Ltd5. The AO relying upon the judgment of the Hon'ble Supreme Court in the case of M.P. Co-op. Bank Ltd. v. Addl. CIT (supra) refused to grant deduction under Section 80P(2)(a)(i) on the following income derived by the appellant-society :
Rs.
(1) State Bank of India 60,636 (2) Sardar Sarovar Narmada Nigam Ltd.
2,28,143 (3) IDBI 2,30,000 (4) IDBI 1,46,584 (5) Kisan Vikas Patra (accrued int.) 8,10,000 14,12,363 (Correct total comes to Rs. 14,75,363) 5.1. The learned CIT(A) following his order dt. 22nd Dec., 1997, in the case of Baroda Central Co-op. Bank Ltd. and the judgment of the Hon'ble Supreme Court in the aforesaid case has confirmed the action of the AO.
ITA No. 523/Ahd/1998 for asst. yr. 1995-96 in the case of The Baroda Peoples Co-op. Bank Ltd. :6. The AO relying upon the judgment of the Hon'ble Supreme Court in the case of M.P. Co-op. Bank Ltd. v. Add. CIT (supra) refused to grant deduction under Section 80P(2)(a)(i) on the following income derived by the appellant-society :
Rs.
(1) IDBI 7,32,500.00 (2) State Bank of India Bond 2,28,222.93 (3) Sardar Sarovar Narmada Nigam 2,57,226.60 (4) Kisan Vikas Patra (Int. accrued) 13,23,340.00 Total 25,41,289.53
6. The learned CIT(A) following his order dt. 14th May, 1997, in the cases of Baroda City Co-op Bank Ltd. and Baroda Central Co-op. Bank Ltd. and the judgment of the Hon'ble Supreme Court in the aforesaid case has confirmed the action of the AO.ITA No. 524/Ahd/1998 for asst yr. 1995-96 in the case of the Baroda Central Coop. Bank Ltd.:
7. The AO vide his original assessment order dt. 11th Nov., 1997, relying upon the judgment of the Hon'ble Supreme Court in the case of M.P, Co-op. Bank Ltd. v. Addl. CIT (supra) refused to grant deduction under Section 80P(2)(a)(i) in respect of the following income :
Rs.
(a) Government securities 9,07,500
(b) Debenture 1,40,000
(c) Commercial shares 65,924
(d) Other co-operatives 3,83,006 14,96,434
7.1. However, the AO vide order under Section 154, dt. 1st Dec., 1997 (copy placed at p. 17 of the paper book), allowed deduction under Section 80P(2)(d) in respect of dividend income aggregating to Rs. 4,48,935 (correct figure should be Rs. 4,48,930) consisting of Rs. 65,924 + Rs. 3,83,006 and recomputed the income of the society as under:
Rs.
Income as per assessment order dt.
11th Nov. 1997 16,18,664 Less : Income from dividend exempted under s. 80P(2)(d) as discussed in para 2 above 4,48,935 Revised Total income 11,69,729 7.2. The assessee in the grounds of appeal has challenged the disallowance of Rs. 14,96,434 but after considering the order passed by the AO under Section 154, the dispute in the present appeal will survive only in relation to income on Government securities Rs. 9,07,500 and income on debentures of GE Bond Rs. 1,40,000. It appears that the order under Section 154 passed by the AO on 1st Dec., 1997, was not brought to the notice of the CIT(A) who passed the impugned order on 22nd Dec, 1997. The CIT(A) has dismissed the assessee's appeal confirming the denial of deduction under Section 80P in respect of entire sum of Rs. 14,96,434. That is why the assessee has raised the grounds in relation to the entire amount of Rs. 14,96,434.
8. Shri S.N. Soparkar, learned advocate appeared on behalf of The Surat District Co-op. Bank Ltd. (ITA No. 3675/Ahd/97) and The Kalupur Commercial Co-op. Bank Ltd. (ITA No. 2562/Ahd/97). Shri Soparkar submitted that the provisions of Section 80P(2)(a)(i) provide that in case of a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members, the whole of the amount of profits and gains of business attributable to such activities will be exempt under the said provisions. The appellants are scheduled co-operative banks registered under the provisions of the Gujarat State Co-operative Societies Act, 1961 and are also governed by the Banking Regulation Act, 1949, so far as it relates to co-operative banks. He invited our attention to the definition of 'Working capital" given in Section 2(24) of the Gujarat State Co-operative Societies Act, 1961, which defines "Working capital" means funds at the disposal of the society inclusive of paid-up share capital, funds built out of profits, and money raised by borrowing and by other means. The learned counsel then invited our attention to the definition of "banking" given in Section 5(b) and Section 6 of the Banking Regulation Act, 1949, enumerating the forms of business in which a banking company may engage itself in addition to the business of banking.
8.1. The learned counsel drew our attention to the judgment of the Hon'ble Gujarat High Court in the case of Gujarat State Co-op. Bank Ltd. v. CIT (2001) 250 ITR 229 (Guj) in which it was, inter alia, held that running a safe deposit vault cannot be said to be a part of banking activity in the wider sense; nor. can it be said to be an activity attributable to banking activity properly so called. That is considered, by Section 6 of the Banking Regulation Act, 1949, to be in addition to the business of banking. Locker rent was held to be not eligible for exemption under Section 80P(2)(a)(i) by the Hon'ble Gujarat High Court, But this judgment of the Gujarat High Court was overruled by the Hon'ble Supreme Court. The Hon'ble Supreme Court in the case of Mehsana District Central Co-op. Bank Ltd. and Gujarat State Co-op. Bank Ltd. v. ITO (2001) 251 ITR 522 (SC) has held that provision of safe deposit vaults was part of the ordinary banking business of a bank as shown by Section 6(1)(a) of the Banking Regulation Act, 1949, and, therefore, income derived by the assessee from the hiring out of safe deposit vaults was income from the business of banking and deductible under Section 80P(2)(a)(i). The judgment of the Hon'ble Gujarat High Court in the case of Gujarat State Co-op. Bank Ltd. v. CIT (supra) was reversed on the point of eligibility of co-operative bank in respect of income derived from utilisation of its funds out of statutory reserve under Section 67(2) of the Gujarat State Co-op. Societies Act, 1961. It was held by the Hon'ble Supreme Court that the assessee was entitled to deduction under Section 80P(2)(a)(i) in respect of interest earned from funds utilised from the statutory reserve and also in respect of income from hiring of safe deposit vaults/lockers. As regards income derived by co-operative bank from the investment of its voluntary reserve other than statutory reserves, it was observed by the Hon'ble Supreme Court that deduction under Section 80P(2)(a)(i) in respect of such income would depend upon the fact as to whether such voluntary reserves were utilised in the course of its ordinary banking business. The learned counsel contended that in view of the aforesaid judgment of the Hon'ble Supreme Court holding that the income by way of hiring from lockers/safe deposit vaults is a part of ordinary banking business of a bank as shown by Section 6(1)(a), various other business activities permissible under Section 6(1)(a) will similarly form part of ordinary banking business of these co-operative banks. Investment in Government securities, deposits with banks, investment in shares and warrants and debentures are specified activities regarded as part of ordinary business activities of a bank/society in view of the clear language used in Section 6(1)(a) of the Banking Regulation Act, 1949.
8.2. The learned counsel also drew our attention to the judgment of the Hon'ble Supreme Court in the case of Vimal Chandra Grover v. Bank of India 2000 (087) AIR 2181 (SC). In this case also the Hon'ble Supreme Court considered the scope of Section 6 of the Banking Regulation Act, 1949. The Bank in the said case had sanctioned overdraft limit of Rs. 5 lakhs to the appellant against pledge of shares of various, companies; the value of all the shares being Rs. 10,60,900 at the relevant time. In due course of time the bank received bonus shares numbering 2,224. The appellant paid an instalment of Rs. 1,45,600 to the bank against the overdraft limit. In order to clear overdraft accounts the appellant, apart from the shares of other companies, requested the bank to arrange the sale of 500 shares of that company which was agreed to by the bank. The appellant suffered loss because of delay in not disposing of his shares as agreed to by the bank. On these facts, the Hon'ble Supreme Court held that the request for sale of a part of the shares pledged for acquiring the overdraft facilities and which was agreed to by the bank, is certainly part of the service connected with the grant or overdraft facilities. The appellant as a consumer was hiring the service of the bank for consideration by way of payment of interest for the overdraft facilities received by pledging the shares of different companies. Such observations were made by the Hon'ble Supreme Court after quoting the provisions of Sections 6(1)(a) to 6(1)(o) and also Section 6(2), The activity of rendering such services of selling of shares on behalf of the customers is also activity of the business of banking which is covered within the meaning of Section 6(1)(a) and other sub-clauses of Section 6 of the Banking Regulation Act, 1949.
8.3. The learned counsel submitted that the AO has denied deduction under Section 80P by placing reliance on the judgment of the Hon'ble Supreme Court in the case of M.P. Co-op. Bank Ltd. v. Addl. CIT (supra) and the decision of Tribunal Ahmedabad Bench in the case of Gujarat State Co-op. Bank Ltd. According to the AO, the said decision of the Hon'ble Supreme Court puts restriction in the case of co-operative banks in claiming deduction under Section 80P on "any income other than the income derived by co-operative banks by carrying on the business of banking. Interest earned on securities forming part of stock-in-trade will come under the category of income from banking and will be exempt under Section 80P. It was pointed out that the Hon'ble Supreme Court in the case of M.P. Co-op. Bank Ltd. (supra) held that income from investment of statutory reserve is not banking activity and as such the income is not eligible for deduction under Section 81 (now Section 80P) of the Act. The Hon'ble apex Court further held that as per instructions issued by the M.P. Government, no part of statutory reserve fund can be utilised as working capital nor can any part of the reserve fund deposited be withdrawn except with the permission of the Registrar to meet losses or at the time of winding up and not otherwise. Under these circumstances the securities relating to the statutory reserve fund can never be considered to be circulating or working capital of the bank or its stock-in-trade to qualify for exemption under Section 81 of the Act. Hence, it was held that the interest earned thereon cannot qualify for exemption. Our attention as drawn to M.P. Government Instructions No. CR 75/26, dt. 7th Oct., 1960, at p. 442 of 218. ITR in which it was clearly stated as under:
"The reserve fund of the apex bank shall be fully invested outside its business in the Government securities: No part of its reserve fund should be utilised as its working capital."
8.4. It was further mentioned in the said letter that no part of reserve fund shall be drawn without the previous sanction of the Registrar. Such approval can be given when the amount is either required to meet losses, or, when the society is to be wound up. The learned counsel also drew our attention to the observations made by the Hon'ble Supreme Court at p. 443 of 218 ITR wherein it was, inter alia, observed that "Investments which permit withdrawals at short notice would, therefore, be a part of the requirement of banking business and interest accruing on such investments would be outside the tax net". Again on p. 445 of the said Report, the Hon'ble Supreme Court observed that the funds which have gone out of circulation in banking business for an indefinite period cannot qualify for grant of deduction under Section 80P(2)(a)(i). The test even according to the said judgment of the Hon'ble Supreme Court in the case of M.P. Co-op. Bank Ltd. (supra) is the test of easily realizable securities. If a security is easily reliazable at the time of need without there being any restriction as to its withdrawal under the provisions of Co-operative Societies Act or under any other Act or under Executive instructions of the society RBI, interest income on investments made in Government securities, banks and other such investments will be a part of ordinary banking activity and will qualify for deduction under Section 80P(2)(a)(i) of the Act.
8.5. The learned counsel submitted that the Hon'ble Supreme Court in the case of CIT v. Bangalore Dist. Co-op. Central Bank Ltd. (1998) 233 ITR 282 (SC) has distinguished the case of M.P. Co-op. Bank Ltd. (supra). The Hon'ble apex Court has taken a view that income from investment of any reserve is an integral part of banking activity and was attributable to the business of banking carried on by the assessee. The assessee was held to be eligible for deduction under Section 80P of the Act. The Hon'ble Supreme Court observed that the decision in the case of M.P. Co-op. Bank Ltd. (supra) was rendered on the facts of that case and it is not applicable to the facts of the present case in view of the findings of the Tribunal that the interest income in question is attributable to the business of the assessee.
8.6. The learned counsel also drew our attention to the judgment of the larger Bench comprising of three Hon'ble Judges of the Supreme Court in the case of CIT v. Karnataka State Co-op. Apex Bank (2001) 251 ITR 194 (SC) in which the decision in the case of M.P. Co-op. Bank Ltd. (supra) was overruled and the judgment of the apex Court in the case of CIT v. Bangalore District Co-op. Bank Ltd. (supra) was approved. It was also pointed out that the judgment of the Hon'ble Gujarat High Court in the case of Gujarat State Co-op. Bank Ltd. v. CIT (supra) has also been overruled by the Hon'ble Supreme Court in Mehsana District Central Co-op. Bank Ltd. v. ITO and Gujarat State Co-op. Bank Ltd. v. CIT (supra). Therefore, the denial of deduction made by the AO in all these cases of co-operative banks by placing reliance on the judgment of the Hon'ble Supreme Court in the case of M.P. Coop. Bank Ltd. (supra) is not valid in view of the above referred subsequent judgments of the Hon'ble Supreme Court.
8.7. The learned counsel submitted that the Hon'ble Supreme Court in the case of CIT v. Karnataka State Co-op. Apex Bank (supra) while overruling the decision of M.P. Co-op. Bank Ltd. (supra) has held that interest arising from investment made, in compliance with statutory provisions to enable it to carry on banking business, out of reserve fund, by a co-operative society engaged in banking business, is exempt under Section 80P(2)(a)(i) of the Act. The placement of such funds being imperative for the purpose of carrying on banking business the income therefrom would be income from the assessee's business. There is nothing in the phraseology of Section 80P(2)(a)(i) which makes it applicable only to income derived from working or circulating capital.
8.8. The learned counsel further contended that the Hon'ble Supreme Court once again reaffirmed the view so taken by it in the case of Karnataka State Coop. Apex Bank (supra) in a subsequent decision in the case of Mehsana District Central Co-op. Bank Ltd. and Gujarat State Co-op. Bank Ltd. (supra). The relevant extracts from the said judgment are reproduced below :
"We are concerned in these appeals with the asst. yrs. 1988-89 to 1994-95. The High Court refrained the questions that arise in these appeals thus (p. 249).
(1) Whether the Tribunal was right in law in disallowing the claim of the assessee-bank for deduction under Section 80P(2)(a)(i) in respect of income earned from utilisation of its reserve funds being statutory reserves under Section 67(2) of the Gujarat Co-operative Societies Act, 1961 ?
(2) Whether the assessee-bank is entitled to claim deduction under Section 80P(2)(a)(i) in respect of income earned from utilisation of its voluntary reserves other than the statutory reserves mentioned above ?
(3) Whether the Tribunal was right in law in holding that the locker rent is not deductible under Section 80P(2)(a)(i) ?
In so far as the first question is concerned, it is covered against the Revenue by the judgment delivered by this Court on 22nd Aug., 2001, in CIT v. Karnataka State Co-op. Apex Bank (2001) 251 ITR 194 (SC) (Civil Appeals No. 4646-4648 of 2000). The first question, therefore, is answered in the negative and in favour of the assessee.
Insofar as the third question is concerned, it is clear that the provision of safe deposit vaults is part of the ordinary banking business of a bank; this is shown by Section 6(1)(a) of the Banking Regulation Act, 1949. Therefore, the income derived by the assessee form the hiring out of safe deposit vaults is income from the business of banking and, therefore, deductible under Section 80P(2)(a)(i) of the IT Act, 1961. Accordingly, the third question is answered in the negative and in favour of the assessee.
Now, as to the second question, we have heard learned counsel and been referred to various decisions, including the decision of this Court in Bihar State Co-op. Bank Ltd. v. CIT (1960) 39 ITR 114 (And). To be able to answer the question, it is necessary to ascertain, as a fact, whether the income derived by the assessee from the investment of its voluntary reserves has been utilised by it in the course of its ordinary banking business. Though the assessee placed before the assessing authority its books of account and balance sheets, the fact aforestated was not considered at any stage, for one or other reason on which it is not necessary for us to dilate. We think that it is in the interests of justice that the assessee should have the opportunity to lead evidence before the CIT(A) to establish as a fact what is stated above. So far as the second question is concerned, therefore, the matter is stand restored to the CIT(A) for being decided afresh. He shall also decide any consequential issue that may arise."
8.9. The learned counsel on the strength of the aforesaid judgment contended that so far as income earned on investments attributable to utilisation of reserve funds being statutory reserves under Section 67(2) of Gujarat Co-op. Societies Act, 1961, income on investments in Government securities, etc. to meet the requirement of BR Act and the locker rent is concerned, the income falling under these categories would be exempt under Section 80P(2)(a)(i) by virtue of the aforesaid judgment of the Supreme Court. As regards the income earned from utilisation of its voluntary reserves other than statutory reserves indicated above, the Hon'ble Supreme Court, inter alia, directed the CIT to ascertain the fact whether the income derived by the assessee from the investment of its voluntary reserves has been utilised by it in the ordinary course of its banking business. The eligibility for grant of deduction under Section 80P(2)(a)(i) in respect of such income earned from utilisation of its voluntary reserves will thus depend on the manner of its utilisation. If such income has been utilised by the society in the course of its ordinary banking business, it would be entitled to grant of deduction under Section 80P(2)(a)(i). The Hon'ble Supreme Court also cited with approval their decision in the case of Bihar State Co-op. Bank Ltd. v. CIT (1960) 39 ITR 114 (SC).
8.10. The learned counsel thereafter submitted that it may be appropriate to make useful reference to the decision of the Hon'ble Supreme Court in the case of Bihar State Co-op. Bank Ltd. v. CIT (supra). The aforesaid case has held as under :
"In the instant case the co-operative society (the appellant) is a bank. One of its objects is to carry on the general business of banking. Like other banks money is its stock-in-trade or circulating capital and its normal business is to deal in money and credit. It cannot be said that the business of such a bank consists only in receiving deposits and lending money to its members or such other societies as are mentioned in the objects and that when it lays out its moneys so that they may be readily available to meet the demand of its depositors if and when they arise, it is not a legitimate mode of carrying on of its banking business. The Privy Council in Punjab Co-op. Bank Ltd. v. CIT (1940) 8 ITR 635 (PC), where the profits arose from the sale of Government securities, pointed out at p. 645 that in the ordinary case the business of a bank essentially consists of dealing with money and credit. Depositors put their money in the bank at a small rate of interest and in order to meet their demands if and when they arise the bank has always to keep sufficient cash or easily realisable securities. That is a normal step in the carrying on of the banking business. In other words 'that is an act done in what is truly the carrying on or carrying out of a business'. It may be added that another mode of conducting the business of a bank is to place its funds in deposit with other banks and that also is to meet demands which may be made on it. It was, however, argued that in the instant case the moneys had been deposited with the Imperial Bank on long-term deposits inasmuch as they were deposited for one year and were renewed from time to time also for a year; but as is shown by the accounts these deposits fell due at short intervals and would have been available to the appellant had any need arisen.
Stress was laid on the use of the word 'surplus' both by the Tribunal as well as by the High Court and it was also contended before us that in the bye-laws under the heading 'business of the bank' it was provided that the bank could 'invest surplus funds when not required for the business of the bank in one or more ways specified in Section 19 of the Bihar Act [Clause 4 III(i) of the bye-laws]. Whether funds invested as provided in Section 19 of the Bihar Act would be surplus or not does not arise for decision in this case, but it has not been shown that the moneys which were in deposit with other banks were "surplus" within that bye-law so as to take it out of banking business. 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 pan of the stock-in-trade of the bank, or that the interest arising therefrom did not form part of its business profits. Under the bye-laws one of the objects of the appellant-bank is to carry on the general business of banking and, therefore, subject to the Co-operative Societies Act, it has to carry on its business in the manner that ordinary banks do. It may be added that the various heads under Section 6 of the IT Act and the provisions of that Act applicable to these various heads are mutually exclusive. Section 2 is a residuary section and does not come into operation until the preceding heads are excluded. CIT v. Basant Rai Takhat Singh (1933) 1 ITR 197 (Bom).
In our opinion, the High Court was in error in treating interest derived from deposits as not arising from the business of the bank and, therefore not falling within the income exempted under the Notification. The appeal must, therefore, be allowed and the judgment and order of the High Court set aside. The appellant will have its costs in this Court and in the Court below.
[Emphasis, italicised in print, supplied] 8.11. The Hon'ble Supreme Court in the aforesaid case of Bihar State Co-op. Bank Ltd. had 'inter alia, referred to the earlier decision of the Hon'ble Privy Council in the case of Punjab Co-op. Bank v. CIT (1940) 8 ITR 635 (PC). The learned counsel drew our attention to the findings given by the Hon'ble Privy Council in the aforesaid case which reads as under:
"In the ordinary case of a bank, the business consists in its essence of dealing with money and credit. Numerous deposits place their money with the bank often receiving a small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds at somewhat higher rates of interest. But the banker has always to keep enough cash or easily realisable securities to meet any probable demand by the depositors. No doubt there will generally be loans to persons of undoubted solvency which can quickly be called in, but it may be very undesirable to use this second line of defence. If as in the present case some of the securities of the bank are realised in order to meet withdrawals by depositors, it seems to their Lordships to be quite clear that this is a normal step in carrying on the banking business, or, in other words, that it is an act done in 'what is truly the carrying on' of the banking business. This, it appears to their Lordships, is the more appropriate and satisfactory ground for dealing with the question arising in the present case. It accords exactly with one of the findings in the statement of the CIT agreeing with the views both of the ITO who first dealt with the case and of the Asstt. CIT. He observed 'that the purchase and sale of shares and securities are so much linked with the deposits and withdrawals of clients that with the existing articles of association the purchase and sale of shares and securities are as much part of the assessee's business as receiving deposits from clients and paying them off are, and, therefore, the profits which arise from the former transactions are as much business profits as the profits arising from the latter transactions are."
[Emphasis, italicised in print, supplied] 8.12. The learned counsel submitted that the investments made by a banking society by way of fixed deposits with other co-operative societies, apex bank, investments in IVPs and KVPs and other Government, securities are such securities which are easily realisable securities. The fixed deposits with other banks for a longer period can also be encashed before the date of maturity by accepting reduced rate of interest. In order to determine whether it was an investment made in the ordinary course of banking activity, the test is whether such investment is "easily realisable" so that in the event of liquidity crisis, the realisation from such securities in investment can be quickly made to meet the probable demand by the depositors. In the present case, the claim for deduction under Section 80P(2)(a)(i) relates to investments made in Government securities or with banks and co operative societies which are easily realisable and such investments have been made in the ordinary course of business of banking carried on by these co-operative societies. All the present assessees are, therefore, clearly entitled to grant of such deduction in respect of their entire income derived from such investments made in the ordinary course of their banking business.
8.13. The learned counsel then invited our attention to the judgment of the Hon'ble Supreme Court in the case of CIT v. Ramanathapuram Dist Co-op. Central Bank Ltd. (2002) 255 ITR 423 (SC). In this case, the Hon'ble Supreme Court has held that the interest on securities, subsidies from the Government and dividend received by the assessee, a co-operative society carrying on banking business, were business income of the assessee, and the assessee was entitled to deduction under Section 80P(2)(a)(i) of the Act in respect thereof.
8.14. The learned counsel then invited our attention to the judgment of the Hon'ble Bombay High Court in the case of CIT v. Ratnagiri Dist. Central Co-op. Bank Ltd. (2002) 120 Taxman 77 (Bom). It was held by the Hon'ble High Court that the interest accrued on the investment made in IVPs was an income arising out of banking business eligible for exemption under Section 80P(2)(a)(i) of the Act. It was observed that the investments made in IVPs no doubt have an effect of withdrawing funds from the banking business. Mere withdrawal of funds is not sufficient. It must be proved that the withdrawal of funds has resulted in permanent deprivation of funds for banking activity. It ought to have been examined as to whether such investments has an effect of temporary with drawal of the funds or investments made in IVP can be brought back to the banking business. It was further observed that the interest income on IVP was attributable to assessee's business income and such investments were made from the funds generated from the banking business. It had a direct and proximate connection with or nexus to the earning from banking business. Such income had been derived by way of interest on securities of the Central Government, which were easily capable of being converted into liquid funds so as to make it available to the assessee-bank in their banking business. It would be noteworthy to point out that such a view was taken inter alia after referring to the decision of the Hon'ble Gujarat High Court in the case of Gujarat State Co-op. Bank Ltd. v. CIT (supra) and the Hon'ble Bombay High Court at that time did not have benefit of knowing the fact that the said judgment of Hon'ble Gujarat High Court has been reversed by the Hon'ble Supreme Court in the case of Mehsana District Central Co-operative Bank Ltd. v. ITO (supra).
8.15. This judgment delivered by the Hon'ble Bombay High Court has achieved finality as SLP filed by the Department against the said judgment has been dismissed by the Hon'ble Supreme Court as reported in 256 ITR (St) 48.
8.16. The learned counsel submitted that the object of Section 80P is to encourage co-operative movement in the country by providing tax exemption to those cooperatives engaged in activities as mentioned in the said section. One such activity is the carrying on of the business of banking or providing credit facilities to its members by a co-operative society. Section 80P provides that the entire income earned by a co-operative society from the business of banking or providing credit facilities to its members is exempt from tax under Section 80P(2)(a)(i). But if that society also engages itself in any other activities and earns profit therefrom, the income so derived becomes liable to tax if it exceeds the ceiling amount specified in Section 80p. Therefore, the main issue which remains to be considered after considering the judgment of the Hon'ble Supreme Court in the case of Mehsana District Central Co-op. Bank Ltd. and Gujarat State Co.op. Bank Ltd. (supra), is that whether interest income earned by these co-operative banks out of utilisation of voluntary reserves can be regarded as income attributable to the business of banking carried on by these co-operative banks. The learned counsel submitted written submissions containing the gist of oral arguments made by him. It may be worthwhile to reproduce the written submissions made in para. 10 in relation to interest income earned out of utilisation of voluntary reserves :
"10. Now, coming to the issue as to whether interest income earned out of the utilisation of the voluntary reserves, the following broad propositions are set out:
(i) Creation and utilisation of voluntary reserves.
(ii) Investment of the voluntary reserve funds is a banking activity and income earned thereon is attributable to the business of banking. 'Attributable to' is wider than 'derived from' and, therefore, business activities that has direct and proximate nexus with the business of banking is eligible for deduction under Section80P(2)(a)(i) of the Act.
(iii) Reserves are working capital/stock-in-trade.
Now, these propositions are discussed in detail hereinbelow :
(i) Creation and utilisation of voluntary reserves :
Like any prudent businessman, even the co-operative bank also set aside part of its profits under various heads in order to use it in difficult times and/or in case of various contingencies. These reserves are set aside out of the profits and shown in the balance-sheet under various heads. These reserves in turn are utilised for making various investments to generate income out of them. These incomes in turn are utilised for the purpose of business of banking as in the State of Gujarat under the Gujarat Co-op. Societies Act, 1961, there is no embargo upon the co-operative banks against investing its reserves funds and/or interest income earned out of the said investments of the reserves in its own business of banking. In the case of banking business the raw material for the bank is money while the finished goods is also money and money has got no earmarking and/or distinct identification and, therefore, any activity relating to investing, advancing and dealing into money to earn more money is a banking business. It may further be clarified that though the reserves are shown under various heads, the investments of the same have no earmarking and, therefore, it is not possible to point out as to which reserve is invested where. As a matter of fact, all the funds of the bank including share capital, reserves and unappropriated profits constitute a single fund or a pool of money on one hand which on the other hand is represented by various investments made by the bank. As already discussed above, investment is banking activity and, therefore, any income earned out of investment activity is income from banking business and therefore eligible for deduction under Section 80P(2)(a)(i) of the Act.
(ii) Investment of reserves is a banking activity:
In order to determine whether banking includes investment, it is necessary to see what does it mean by banking. The words "banking" or "business of banking" are not defined in the IT Act, 1961, and, therefore, for all purposes these are to be imported from another statute of the Government of India viz. Banking Regulation Act, 1949 (As applicable to co-operative bank is governed by the Reserve Bank of India under Banking Regulation Act, 1949 (As applicable to co-operative Societies).
Section 3 of the BR Act, 1949 provides that the said Act shall apply to the cooperative banks in the manner and to the extent specified in Part V. Under Part V, Section 56 of the Act makes various provisions of Banking Regulation Act applicable to co-operative banks. Accordingly the definition of the word "banking" is derived from Section 5(b) which reads as under:
'Banking means 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.' Section 6 of the BR Act, 1949 (as applicable to co-operative societies) enumerates various forms of business in which a co-operative bank may engage. The section provides that the business of banking includes and a co-operative bank may engage in any one or more of the businesses of providing safe deposit vaults, the collecting and transmitting of money and issuing L/Cs, buying and selling and dealing in stocks, funds, shares, debentures, bonds, securities and investments of all kinds, etc. The list is so exhaustive that barring trading in goods and real estate, virtually all other activities within the meaning of word "banking" is covered.
Here the important question for consideration is whether the definition of banking includes investment of funds or it is restricted only to accepting deposits and lending money. If banking includes investment of funds also then income from investment is part of and attributable to the banking activity and, therefore, eligible for deduction under Section 80P, [See the leading decision on the issue, Hon'ble Privy Council in the case of Punjab Co-op. Bank v. CIT (1950) 8 ITR 635 (Pa-Honourable the Supreme Court in the case of Bihar State Co-op. Bank Ltd. v. CIT (1960) 39 ITR 114 (SC), observed that it is normal mode of carrying on banking business to invest moneys in such a manner that they are readily available and that is just as much part of conducting bank's business as receiving deposits or lending moneys. Further the appellant relies on the following decisions wherein investment is considered as integral part of banking activity :
(i) Berhampur Co-op. Central Bank v. Addl. CIT (1974) 93 ITR 168 (Ori);
(ii) Malbar Co-op. Central Bank Ltd. v. CIT (1975) 101 ITR 87 (Ker);
(iii) CIT v. Co-op. Cane Development Union Ltd. (1979) 118 ITR 770 (All); and
(iv) CIT v. Orissa State Co-op. Housing Corporation Ltd. (1976) 104 ITR 157 (Ori).
The decision of the Hon'ble Gujarat High Court in the case of Addl. CIT v. Ahmedabad Distt. Co-op. Bank Ltd. (1975) 101 ITR 735 (Guj) directly and squarely covers the issue inasmuch as it was held therein that investment in the securities which are easily realisable are part of the stock-in-trade and, therefore, eligible for deduction under Section 80P(2)(a)(i) of the Act.
It is, therefore, submitted that the income from the investment of the other voluntary reserves is attributable to the banking business and, therefore, eligible for deduction under Section 80P(2)(a)(i) of the Act. It is not even the case of the Revenue that the interest income earned from the utilisation of reserves is not business income as the same is taxed under the head "Business Income" and not under the head "Income from other sources". Once it is accepted that the income is a business income, and admittedly the appellant is carrying no other business than the business of banking, the same is eligible for deduction under Section 80P(2)(a)(i) of the Act. However, a question may arise as to whether the said interest income can be said to be attributable to the banking business or not. It may be noted that under Section 80P of the Act "income attributable to" banking activity is exempt from income-tax. This phrase may be 'distinguished from the phrase "income derived from" as appearing in Section 80-IA of the Act. The Hon'ble Supreme Court of India in the case of Cambay Electric Supply Industries Ltd. v. CIT (1978) 113 ITR 84 (SC) has held that the term "attributable to" is much wider in its scope compared to the term "derived from". Therefore, even if there may be no direct connection between the activity and the income so long as the income can be attributable to the activity, the same would be regarded as the exempt income. In a recent decision Hon'ble Supreme Court reaffirmed its decision of Cambay Electric Supply (supra) in the case of Vellore Electric Corporation v. CIT (1997) 227 ITR 557 (SC). In this case the issue before the Supreme Court was whether the assessee was entitled to relief under Section 80-I not only in respect of business income but also in respect of income derived from investments in securities made in pursuant to Electricity (Supply) Act, 1948.
Here the ratio laid down by the Supreme Court is there has to be a direct and proximate connection between the activity from which income is earned and the activity for which deduction is granted. Once this link is established, the said income can be attributable to the main activity of the assessee. In case of co-operative banks also creation of reserves is as per the guidelines of RBI or the State Co-operative Acts or as per its buy-laws. Applying the ratio laid down by the Supreme Court, income from investment of the said reserves has a direct and proximate connection with the main activity of banking and, therefore, the whole of the interest income is eligible for deduction under Section 80P of the Act. Further reliance is placed on the decision of the Hon'ble Supreme Court in the case of Ashok Leyland v. CIT (1997; 224 ITR 122 (SC) wherein it was held that importing of spare parts and its sales in the domestic market has a direct and proximate nexus with the main activity of manufacturing, trucks carried on by the assessee and, therefore, attributable to the industrial activities and thus the profit earned from the sale of said spare parts is eligible for deduction. Further Hon'ble the Bombay High Court in the case of CIT v. United Carbon India Ltd. (1991) 190 ITR 622 (Bom) held that interest income from investment of surplus fund is attributable to the business of industrial undertaking and, therefore, eligible for deduction under Section 80-I of the Act.
Further, it may be noted that Hon'ble the Supreme Court in the case of the Mehsana Co-op. (supra) held that income from locker rent is attributable to the banking business and, therefore, eligible for deduction under Section 80P(2)(a)(i) of the Act. Even though the activity of providing safe deposit vault or locker facility is not covered within the definition of banking as given in Section 5(b) of the BR Act, Hon'ble Supreme Court took the view as stated above and given the relief. Section 6 of the BR Act, 1949, enumerates that a co-operative bank may engage in any one or more of the businesses of providing safe deposit, vaults, the collecting and transmitting of money and issuing L/Cs, buying and selling and dealing in stock, funds, shares, debentures, bonds, securities, and investments of all kinds etc. Thus, this section enables a co-operative bank to carry out business stated above which otherwise cannot be carried on by the co-operative bank. In spite of the fact that providing of locker facility is not covered in the definition of banking and it can be carried on by the cooperative banks only because of an enabling section, Hon'ble the Supreme Court took the view that income from such activity is attributable to the banking business and eligible for deduction under Section 80P(2)(a)(i) of the Act. It is, therefore, respectfully submitted that if the ratio laid down by Hon'ble Supreme Court is taken to its logical conclusion, investment which is included in the very definition of the banking and income earned out of such investments are always to be considered as part and parcel of the business of banking and income earned therefrom is attributable to the banking business and eligible for deduction under Section 80P(2)(a)(i) of the Act.
(iii) Reserves are working capital/stock-in-trade The expression "reserve" has not been defined in the Act and, therefore, we have to resort to its ordinary natural meaning as given in the dictionary. According to the dictionaries (both Oxford and Webster) the applicable primary meaning of the word "reserve" is: "to keep for future use or enjoyment; to set apart for some purpose or end in view; to keep in store for future or special use; to keep in reserve". However, for our purpose, the meaning of the word reserve as defined in the accountancy field is important and as per the same "reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business" [Ref. (75 ITR 53 (SC)].
Reserves are setting aside of the profit for further need and, therefore, part of the capital employed or proprietor's fund or can be equated with the capital. Hon'ble the Supreme Court while explaining the scope of the expression "reserve", has held that as per the accounting principles, funds created out of the reserves from part of working capital. Reliance is placed on the following decisions :
(i) Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53 (SC); and
(ii) Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559 (SC).
Once it is accepted that reserves are part of the working and/or circulating capital, any income from the investment of the same has to be considered as income from banking business and deduction under Section 80(2)(a)(i) of the Act has to be granted on the same. Even in the case of M.P. Co-op, (supra) the Hon'ble Court observed that :
'Counsel for the Revenue did not join issue on the proposition that if circulating capital or stock-in-trade of a co-operative bank is invested in securities, interest earned thereon would be income from banking business and would, therefore, qualify for exemption.' Further, in cases of co-operative banks governed by the Gujarat Co-operative Societies Act, 1961, the position is even further clear. In the said Act, Section 2(24) defines working capital as "working capital means funds at the disposal of a society inclusive of paid up share capital, funds built out of profits and money raised by borrowing and by other means". Meaning thereby the statute governing the co-operative banks itself recognizes that the reserves are part of working capital than all the above stated consequences would automatically follows and the settled legal position that would emerge would be that income from investment of the reserves which is part of the working/circulating capital is income from banking business and, therefore, eligible for deduction under Section 80P(2)(a)(i) of the Act."
8.17. Shri Soparkar, then drew our attention to the facts of the two cases represented by him. As regards Surat Dist Co-op. Bank Ltd. [ITA No. 3675/Ahd/97], he submitted that the learned CIT(A) has not rendered any decision in relation to the alternative contention raised by the assessee for allowing deduction under Section 80P(2)(d) as the impugned income is from the investments of the reserve funds and almost the entire reserve fund was invested in other co-operative banks/societies. To illustrate this point, he drew our attention to the facts stated before the CIT(A) which are recorded on p. 4 of his order. It was pointed out that the total amount of deposits with Gujarat State Co-op. Bank in Kayami Thapan (fixed deposits) is Rs. 157 crores and hence the entire amount is otherwise also exempt under Section 80P(2)(d). The learned CIT(A) has not given any finding in relation to such alternative contention. The learned counsel also submitted that so far as excess collection of interest-tax is concerned, it is a part of income of banking business carried on by the assessee. The learned counsel placed reliance on the following judgments :
(a) CIT v. Dhar Central Co-op. Bank (1984) 149 ITR 438 (MP);
(b) M.P. Rajya Sahakari Bank v. CIT (1988) 174 ITR 150 (MP);
(c) CIT v. Dhar Central Co-op. Bank Ltd. (1990) 183 ITR 173 (MP);
(d) CIT v. Jila Sahakari Kendriya Bank Maryadit (1997) 225 ITR 421 (MP);
(e) CIT v. U.P. Co-op. Cane Union Federation Ltd. (1980) 122 ITR 913 (All);
(f) A.P. Co-op. Central Land Mortgage Bank Ltd. v. CIT (1975) 100 ITR 472 (AP);
(g) Rajasthan Rajya Sahakari Bhoomi Vikas Bank Ltd. v. ITO (1986) 19 ITD 674 (Jp); and
(h) Ahmednagar Dist. Central Co-op. Bank Ltd. v. ITO (1990) 33 ITD 683 (Pune).
8.18. All these cases dealt with the question relating to grant of deduction under Section 80P in relation to income from interest on securities, income derived from locker rent and miscellaneous receipts attributable to the banking business. Specific issue relating to eligibility of excess collection of interest-tax under Section 80P was not discussed in these decisions. However, the Hon'ble High Courts and the Tribunal in these cases have considered the scope of exemption allowable under Section 80P(1) r/w Section 80P(2)(a)(i) and Section 5(b) and Section 6 of the BR Act, 1949. For an instance, in the case of Ahmednagar Dist. Central Co-op. Bank Ltd. v. ITO (supra) the Tribunal Pune Bench has held that the income by way of commission received by the said co-operative bank was attributable to business of banking carried on by the assessee. It was observed by the Tribunal that Section 6(1) of the BR Act, 1949 enumerates various activities which a banking company can carry on. The activities which had resulted in the income by way of commission in the present case would fall under the said provisions. Merely because that section says that those forms of business can be carried on "in addition to the business of banking" would not mean that the said form of business was other than the business of banking. Besides, what one has to see is whether the income is "attributable" to business of banking. In other words, what one has to see is whether the income is incidental to business activity of any company which carries on business of banking. The expression "attributable" is wider than the expression "derived from" and it covers income from activities incidental to main activities.
8.19. As regards the facts relating to the Kalupur Commercial Co-op. Bank Ltd (ITA No. 2562/Ahd/97), the learned counsel contended that he has succeeded before the learned CIT(A), in relation to the main point viz. the claim for grant of deduction under Section 80P(2)(a)(i) in respect of interest income on Government securities, debentures etc. The only point in this appeal relates to claim for exemption under Section 80P(2)(a)(i) on locker rent and excess interest-tax collected by the assessee, for which detailed arguments have already been made.
9. Shri M.G. Patel, the learned C.A. appeared on behalf of the remaining three cases. Shri Patel relied upon the elaborate arguments made by Shri S.N. Soparkar, the learned advocate. In addition to those arguments, he made the following submissions in relation to the grounds of appeal raised in the three cases represented by him.
Submissions made by Shri M.G. Patel, the learned CA in relation to grounds of appeal raised in the case of Unnati Co-op. Bank Ltd. (ITA No. 522/Ahd/1998).
10. Shri Patel drew our attention to an application dt. 2nd Jan., 2001 submitted by the said society for raising certain additional grounds of appeal. However, at the time of hearing, the learned counsel contended that he would not like to press his application for entertaining those additional grounds.
11. Shri Patel then drew our attention to a chart placed at p. 11 of the paper book submitted in this appeal which gives details of income from investments in question. In the said chart it has been pointed out that income of Rs. 3,76,584 has been derived from investments made in IDBI Bonds to meet the requirements of Statutory Liquidity Ratio (SLR) required to be maintained as per Section 24 of the BR Act. The balance income aggregating to Rs. 10,98,779 on Non-SLR investments made in SBI Bonds, Sardar Sarovar Nigam Ltd. and KVP qualify for deduction under Section 80P(2)(a)(i) in view of various judgments cited by Shri S.N. Soparkar, the learned advocate, and also referred to in the written submissions submitted by him. The learned counsel has relied upon the judgments of the Hon'ble Supreme Court in the cases of Gujarat State Co-op. Bank Ltd. v. CIT (supra), CIT v. Karnataka State Co-op. apex bank Ltd. (supra) Addl. CIT v. Ahmedabad Dist. Co-op. Bank Ltd. (1975) 101 ITR 733 (Guj) and Bihar State Co-op. Bank Ltd. v. CIT (supra) to support his contention that the income from investments made with banks, Central Government undertakings and KVPs are part of income derived from ordinary banking business which is eligible for deduction under Section 80P(2)(a)(i). The learned counsel also contended that the Hon'ble Supreme Court in the case of Mehsana Dist. Central Co-op. Bank Ltd. v. ITO and Gujarat State Co-op. Bank Ltd. v. CIT (supra) has held that for purpose of verifying claim of deduction under Section 80P(2)(a)(i) in respect of income earned from utilisation of voluntary reserves, it is necessary to ascertain, as a fact, whether the income derived by the assessee from the investment of its voluntary reserves has been utilised by it in the course of its ordinary banking business. The learned counsel contended that there is no direct nexus between any reserve fund and the investments to establish that any reserve fund has been utilised for making any specific investment. Therefore, none of the investments made by the appellant-society in Government securities or banks represent investments made out of any specific reserves much less out of any of the voluntary reserves. All the investments have been made by the society out of consolidated funds comprising of share capital as well as deposits from the customers and other income and funds received in the course of normal banking business. However, assuming without admitting, even if the entire income from investments made from deployment of voluntary reserves, it is required to be ascertained as per the judgment of the Hon'ble Supreme Court in the case of Mehsana District Central Co-op. Bank Ltd. and Gujarat State Co-op. Bank Ltd. (supra) as to whether such income has been utilised for banking business. A perusal of the P&L a/cs of the appellant-bank shows that the income from all these investments made by bank have been credited to its P&L a/cs along with the income by way of interest on loans and advances made by bank to various customers as well as other income like bank charges, commission etc. The entire income of the bank has been shown on the credit side of the P&L a/cs which has been utilised for meeting the expenditure of the bank such as interest on deposits, staff salary and bonus, rent, taxes, postage, telephone, stationery, audit fees, etc. incurred in respect of its' ordinary banking business, as shown on the debit side of the P&L a/cs. Thus, the entire income of the bank has been utilised towards expenditure incurred for carrying on its banking business. The income from all such investments, which form part of entire income of the bank from its banking business, is eligible for deduction under Section 80P(2)(a)(i). The learned counsel further pointed out that the list of investment given at p. 11 of the paper book on the income of which deduction under Section 80P(2)(a)(i) has been denied by the AO are investments which have been guaranteed by the Central/State Government and all such securities are readily realisable securities. Those securities can be sold in open market at any time at the prevailing market rates. Therefore, the assessee's claim for grant of deduction under Section 80P(2)(a)(i) is directly covered by the judgment of the Hon'ble Gujarat High Court in the case of Addl. CIT v. Ahmedabad Dist. Co-op. Bank Ltd. (supra). Shri Patel also submitted that the Hon'ble Bombay High Court in CIT v. Ratnagiri Distt. Central Co-op. Bank Ltd. (supra) has held that the income from investments in IVPs made by the bank is exempt under Section 80P(2)(a)(i). The judgment of the Hon'ble Bombay High Court is reported in (2002) 120 Taxman 77 (Bom). This judgment has achieved finality as the Hon'ble Supreme Court has dismissed SLP filed by the Department as reported in 256 ITR (St) 48. The learned counsel thus strongly urged that the assessee's claim for grant of deduction under Section 80P(2)(a)(i) should be accepted in respect of entire income, as claimed by them.
Submissions made by Shri M.G. Patel, the learned CA in relation to grounds of appeal raised in the case of The Baroda Peoples Co-op. Bank Ltd.( ITA No. 523/Ahd/1998).
12. An application dt. 3rd Jan., 2001, for entertaining certain additional grounds was submitted. This application was not pressed by the learned counsel at the time of hearing. Here, the application for entertaining additional grounds is rejected, as not pressed.
13. The learned counsel reiterated similar arguments as were made in the case of Unnati Co-op. Bank Ltd. in ITA No. 522/Ahd/98. The written submissions have also been submitted which are more or less similar as that have been submitted in the aforesaid case. The learned counsel also drew our attention to a chart placed at p. 9 of the paper book containing the details of investments and interest income in question, which is the subject-matter of assessee's claim for deduction under Section 80P(2)(a)(i). The details so furnished at p. 9 of the paper book are reproduced below:
Sl.
No. Particulars Book value Interest received Rs.
Rs.
1.
IDBI Bond 75,00,000 7,32,500.00
2. SBI Bond 25,00,000 2,28,222.93
3. Sardai Sarover Bond-Deposit 12,50,000 2,57,226.60
4. Kisan Vikas Patra 60,00,000 13,23,340.00 Total 1,72,50,000 25,41,289.53 The learned counsel, submitted that the facts are similar as that in ITA No. 522/Ahd/1998 and he would rely on the same arguments as were submitted earlier.
Submissions made by Shri M.G. Patel, the learned CA, in relation to grounds of appeal raised in the case of The Baroda Central v. Co-op. Bank Ltd. (ITA No. 524/Ahd/1998).
14. In this case the learned counsel for the assessee did not press the application submitted for entertaining additional grounds. He invited out attention to a chart placed at p. 23 of the paper book in which details of relevant investments and interest income in question have been given as under:
Particulars Rate of interest Book value Interest received Rs.
Rs, Government securities
1. Nabard Bond 9.75 10,00,000 48,750 48,750
2. Nabard Bond 13.50 10,00,000 67,500 67,500
3. IFCI Bonds 13.50 1,00,00,000 6,75,000 1,20,00,000 9,07,500 Debentures
1. G.E. Bond 1997 7.50 10,00,000 37,500 37,500
2. G.E. Bond 2007 13.50 5,00,000 32,500 32,500 15,00,000 1,40,000 Note : Above investments are held by the appellant-bank as investments towards maintenance of statutory liquidity ratio under Section 24 of the BR Act, 1949.
It was contended that the aforesaid investments have been made towards maintenance of SLR under Section 24 of the BR Act, 1949, and, therefore, its eligibility for grant of deduction under Section 80P(2)(a)(i) is clearly supported by the judgment of the Hon'ble Supreme Court in the case of CIT v. Karnataka State Co-op. Bank Ltd. (supra). The learned counsel relied on the similar arguments that were made in ITA Nos. 522 and 523/Ahd/98.
15. Shri K.H. Kaji, the learned senior advocate appeared as an intervene! on behalf of Gujarat State Co-op. Bank Ltd. v. Asstt. CIT in ITA Nos. 2736 to 2742/Ahd/2000 and 51 to 57/Ahd/2000 and 1393/Ahd/2000. Shri Kaji, the learned advocate contended that the activity of accepting deposits of money from public for the purpose of lending or investment are covered within the meaning of expression "banking" used in Section 5(b) of BR Act. He submitted that the investment is a part of banking business. The activity of accepting deposits and the activity of giving loan or making investment are part of one single compartment. Section 67 of the Gujarat Co-op. Societies Act, 1961, is applicable to all co-operative societies and not only to a banking co-operative society. The word "business" of the society cannot be considered de hors of banking business. When a co-operative bank invests or lends, it is carrying on the activities of a banking business covered within the ambit of Section 5(b) of the BR Act r/w Sections 67 and 71 of the Gujarat Co-operative Societies Act, 1961. The learned counsel also drew our attention to the various provisions of the said Acts. He submitted that Section 18 of the B.R. Act requires maintenance of minimum amount as cash reserve or deposits with the apex Bank viz. RBI and other approved securities upto the specified extent. This is known as cash liquidity reserve (CLR) required to be maintained by every banking company/society. Section 24 requires every banking company to maintain reserve known as Statutory Liquidity Reserve (SLR) of not less than 25 per cent of the total of its demand and time liabilities. Section 17 requires every banking company to create a reserve fund of a sum equivalent to not less than 20 per cent of profits computed in the manner specified in that section. It was also pointed out that Section 56 of the BR Act provides that the provisions of this Act as in force for the time being, shall apply to, or in relation to cooperative societies as they apply to or in relation to, banking companies with the modification as stated in Section 56. The provisions of Section 17 have been made inapplicable in the case of co-operative bank by virtue of Section 56. The learned counsel contended that object behind providing requirement of maintaining CLR/SLR is to protect the interest of depositors. Therefore, the entire investments made by the banking societies in conformity with the provisions of Section 6 of the BR Act and Section 71 of the Gujarat Societies Act in Government securities, with schedule banks, with Co-op. societies, in bonds issued by various Government undertakings which are guaranteed by Central/State Government, should be treated as an investment made in ordinary course of banking business. The learned counsel pointed out that the Hon'ble Supreme Court by referring to Section 6(1)(a) of the B.R. Act has held that the locker rent constitutes income attributable to banking business carried on by cooperative banks. This clearly supports that all activities referred to in Section 6(1)(a) of the BR Act including the activity of making investments in such Government securities amount to a banking activity carried out in the ordinary course of banking business. He also relied upon the elaborate arguments made by Shri S.N. Soparkar, the learned advocate.
16. Shri Ashwin C. Shah, the learned CA, also appeared as an intervener in relation to the following appeals :
Name of bank Asst.
yr.
Date of filing appeal The Sabarkantha District Central Co-op. Bank Ltd.
1987-88 to 1994-95 and 1996-97 29-5-2001 The Modasa Nagrik Sahakari 'Bank Ltd.
1997-98 1-6-2001 Shri Ashwin C. Shah, the learned counsel, relied upon the elaborate arguments made by S/Shri S.N. Soparkar, K.H. Kaji and M.G. Patel. He submitted that the provisions of the BR Act provide for mandatory investments by way of cash liquidity reserve (Section 18) and statutory liquidity reserve upto 20 per cent or 25 per cent as prescribed under Section 24 of the said Act. He gave an illustration that suppose a banking society receives deposits of Rs. 100 lacs from public, out of which CLR/SLR are required to the extent of Rs. 30 lacs. The balance Rs. 70 lacs are available with the bank for lending to creditworthy borrowers. Assuming that the bank can find such solvent borrower at a given point of time only to the extent of Rs. 60 lacs, the balance of Rs. 10 lacs will have to be invested in securities which are safe, capable of easily realisable and providing better rate of interest. Investment of such amount to the tune of Rs. 10 lacs cannot be said to be surplus money invested in Government securities by way of non-business investment. Such investment of idle money lying with the bank at the relevant point of time has to be utilised for making investment in safe securities. The statutory reserve of 25 per cent of profits as required to be made under Section 67 of the Gujarat Co-op. Societies Act is only for the purpose of ensuring that the dividend may not be declared out of profits without transferring at least 25 per cent to, such statutory reserve fund. These provisions have been introduced to safeguard the interest of depositors. The amount so transferred to statutory reserve fund as per Section 67 of Gujarat Co-op. Societies Act does not require that such fund should be invested in any specific securities. On the other hand, the provisions clearly permit the user of such statutory reserve fund in business activities. The learned counsel submitted that there is in. fact no distinction between the investment made out of statutory reserve and investment made out of voluntary reserve or other fund available with the cooperative banks. He submitted that after reversal of judgment of the Supreme Court in the case of M.P. Co-op. Bank Ltd. (supra) in the subsequent judgment of larger Bench in the case of CIT v. Karnataka State Co-op. Bank Ltd. (supra), the eligibility of these co-operative banks for grant of deduction under Section 80P(2)(a)(i) is not in doubt at all as all such investments are easily realisable and such investments have been made to ensure greater security in the interest of large number of depositors. He urged that the deduction under Section 80P(2)(a)(i) as desired by the assessee should be allowed.
17. Shri Mukesh Patel, the learned advocate also appeared as an intervener on behalf of the Manekchowk Co-op. Bank Ltd. in relation to the following appeals:
Asst.
yr.
Appeal filed by Date of filing IT Appeal No. 1988-89 Department 7-1-1999 122/A/99 1989-90 Department 28-2-1997 723/A/97 1990-91 Assessee 20-4-1999 843/A/99 1991-92 Assesses 20-4-1999 844/A/99 1994-95 Assessee 22-2-1999 323/A/99 1994-95 Department 18-3-1999 503/A/99 1995-96 Assessee 22-2-1999 324/A/99 1995-96 Department 18-3-1999 504/A/99 1996-97 Assessee 21-10-1999 207/A/99 1997-98 Assessee 1-1-2001 1/A/2001 Shri Mukesh Patel adopted and supported the arguments made by Shri Soparkar, Shri Kaji, Shri M.G. Patel and Shri Ashwin C. Shah.
18. Smt. Vibha Desai, the learned senior Departmental Representative represented the Department. She submitted that the controversy relating to grant of deduction under Section 80P(2)(a)(i) has been set at rest by the Hon'ble apex Court in the case of Mehsana District Central Co-op. Bank Ltd. and Gujarat State Co-op. Bank Ltd. (supra). The present cases relate to assessments which were made much prior to the date when the Hon'ble apex Court delivered the aforesaid judgment. The necessary facts and details of interest income will have to be examined afresh in the light of the aforesaid judgment of the Supreme Court. The AO will have to ascertain as to how much income has been derived by these co-operative banks from investments made out of statutory reserve funds and investments made out of voluntary reserves. She, therefore, urged that the orders passed by the CIT(A)/AO should be set aside and the matter should be restored back either to the CIT(A) or to the AO so that necessary facts and details can be ascertained in the light of the aforesaid judgment of the Hon'ble Supreme Court and matter may be decided in accordance with the principles of law laid down by the Hon'ble Supreme Court.
19. We have considered the submissions made by the learned representatives and have carefully gone through all the judgments cited by all of them. The only issue which requires our consideration in all these appeals relates to the claim for grant of deduction made by these co-operative banks under Section 80P(1) r/w Section 80P(2)(a)(i) of the Act. It will, therefore, be imperative to reproduce the relevant extracts of provisions contained in Section 80P of the Act :
"80P. (1) Where, in the case of an assessee being a co-operative 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 suras 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 co-operative 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 of 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 members, 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;"
20. Section 80P(2)(a)(i) thus grants deduction in respect of whole of the profits and gains attributable to business of banking of providing credit facilities to the members of the society. The provisions of Section 80P have obviously been enacted with a view to encouraging, and promoting growth of the co-operative sector in the economic life of the country and in pursuance of the declared policy of the Government. This section should, therefore, be liberally construed to effectuate the aforesaid legislative object.
21. The expression "banking activity" has not been defined in the IT Act. We will, therefore, have to make a useful reference to the relevant provisions contained in the Banking Regulation Act, 1949, which have been made applicable to co-operative societies under Part V (Section 56) of the BR Act, 1949. Section 5(b) of the BR Act, 1949, is reproduced below :
"Section 5. Interpretation. In this Act, unless there is anything repugnant in the subject or context,
(a).......
(b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, or otherwise;"
Section 6 of the BR Act is reproduced below :
"Section 6. Forms of business in banking companies may engage. --(1) In addition to the business of banking, banking company may engage in any one or more of the following, forms of business, namely :
(a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundis, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scripts and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling, of foreign exchange including foreign bank notes; the acquiring holding, issuing on commission, underwriting and dealing in stock, funds, shares debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds, of bonds, scrips or valuables on deposit vaults; and collecting and transmitting of money and securities;
(b) acting as agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharge and otherwise acting as an attorney on behalf of customers, but excluding the business of a managing agent or secretary and treasurer of a company;
(c) contracting for public and private loans and negotiating and issuing the same :
(d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, of State, Municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue;
(e) carrying on and transacting every kind of guarantee and indemnity business;
(f) managing, selling and realizing any property which may come into the possession of the company in satisfaction or part-satisfaction of any of its claims;
(g) acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security;
(h) undertaking and executing trusts;
(i) undertaking the administration of estates as executor, trustee or otherwise;
(j) establishing and supporting or aiding in the establishment and support of association, institution, funds, trusts and conveniences calculated to benefit employees on ex-employees of the company or the dependents or connections of such persons; granting pensions and allowances and making payments towards insurance, subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any public, general or useful object;
(k) the acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company;
(l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company ;
(m) acquiring and undertaking the whole or any part of the business of any person or company, when such business is of nature enumerated or described in this sub-section;
(n) doing all such other things as are incidental or conductive to the promotion or advancement of the business of the company ;
(o) any other forms of business which the Central Government may by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage.
(2) No banking, company shall engage in any form of business other than those referred to in Sub-section (1)."
22. Section 18 as modified by Section 56 of the BR Act as applicable to co-operative societies, is reproduced below :
18. Cash reserves.--(1) Every co-operative bank, not being a State co-operative bank for the time being included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), (hereinafter referred to as a Scheduled State Cooperative bank), shall maintain in India by way of cash reserve with itself of balance in a current account with the Reserve Bank or the State Co-operative Bank of the State concerned or by way of net balance in current accounts, or, in case of a primary co-operative bank, with the Central Co-operative Bank of the district concerned, or in one or more of the aforesaid ways, a sum equivalent to at least three per cent of the total of its demand and time liabilities in India, as on the last Friday of the second preceding fortnight and shall submit to the Reserve Bank before the fifteenth day of every month a return showing the amount so held on alternative Fridays during a month with particulars of its demand the time liabilities in India on such Friday or of any such Friday is a public holiday under the Negotiable Instruments Act, 1881 (25 of 1881) at the close of business on the preceding working day.
Explanation : In this section and in Section 24 : (a) "liabilities in India" shall not include :
(i) the paid-up capital or the reserve or any credit balance in the P&L a/c of the co-operative bank;
(ii) any advance taken from a State Government, the Reserve Bank, the Development Bank, the Exim Bank, the Reconstruction Bank, the National Housing Bank, the National Bank, the Small Industries Bank or from the National Co-operative Development Corporation established under Section 3 of the National Co-operative Development Corporation Act, 1962 (26 of 1962), by the co-operative bank;
(iii) in the case of a State or Central Co-operative Bank, also any deposit of money with it representing the reserve fund or any part thereof maintained with it by any other co-operative society within its area of operation, and in the case of a Central Co-operative Bank, also an advance taken by it from the State Co-operative Bank of the State concerned;
(iv) in the case of a primary co-operative bank, also any advance taken by it from the State Co-operative Bank of the State concerned or the Central Cooperative Bank of the district concerned;
(v) in the case of any co-operative bank, which has granted an advance against any balance maintained with it, such balance to the extent of the amount outstanding in respect of such advance, and
(vi) in the case of any co-operative bank, the amount of any advance or other credit arrangement drawn and availed of against approved securities:
(b) fortnight shall mean the period from Saturday to the second following Friday, both days inclusive;
(c) net balance in current accounts shall in relation to a co-operative bank, mean the excess, if any, of the aggregate of the credit balances in current account maintained by that co-operative bank with the State Bank of India or a subsidiary bank or a corresponding new bank, over the aggregate of the credit balances in current accounts held by the said banks with such co-operative bank;
(d) for the purpose of computation of liabilities, the aggregate of the liabilities of co-operative bank "to the State Bank of India, a subsidiary bank, a corresponding new bank, a Regional rural bank, a banking company, or any other financial institution notified by the Central Government in this behalf shall be reduced by the aggregate of the liabilities of all such banks and institutions to the co-operative bank;
(e) any cash with a co-operative bank or any balance held by the co-operative bank with another bank, shall not, to the extent such cash or such balances represent the balance in, or investment of, agricultural credit stabilisation fund of such co-operative bank, be deemed to be cash maintained in India.
(2) The Reserve Bank may, for the purposes of this section and Section 24, specify from time to time, with reference to any transaction or class of transactions, that such transaction or transactions shall be regarded as liability in India of a co-operative bank, and if any question arises as to whether any transaction or class of transactions shall be regarded for the purposes of this section and Section 24, as liability in India of a co-operative bank, the decision of the Reserve Bank thereon shall be final."
23. The provisions of Section 24 as modified by Section 56 of the BR Act, is reproduced below :
24. Maintenance of a percentage of assets.--(1) After the expiry of two years from the commencement of this Act, every banking company shall maintain in India in cash, gold or unencumbered approved securities, value at a price not exceeding the current market price, an amount which shall not at the close of business on any day be less than 20 per cent of the total of its demand and time liabilities in India.
Explanation. For the purpose of this section, 'unencumbered approved securities' of banking company shall include its approved securities lodged with another institution for an advance or any other credit arrangement to the extent to which such securities have not been drawn against or availed of."
24. Section 24(2) and Section 24(2A) as modified by Section 56 as applicable to co-operative Societies, are reproduced below ;
"In Section 24,
(i) in Sub-section (1), the words, 'After the expiry of two years from the commencement of this Act' shall be omitted;
(ii) for Sub-section (2) and (2A), the following sub-sections shall be substituted, namely :
(2) In computing the amount for the purposes of Sub-section (1)
(a) any balances maintained in India by a co-operative bank in current account with the Reserve Bank or by way of net balance in current account and in the case of a scheduled State Co-operative Bank, also the balance required under Section 42 of the Reserve Bank of India Act, 1934 (2 of 1934), to be so maintained,
(b) any balances maintained by a Central Co-operative Bank with the State Cooperative Bank of the State concerned; and
(c) any balances maintained by a primary co-operative bank with Central Cooperative Bank of the district concerned or with the State Co-operative Bank of the State concerned, shall be deemed to be cash maintained in India.
(2A)(a) Notwithstanding anything contained in Sub-section (1) and Sub-section (2), after the expiry of two years from the commencement of the Banking Laws (Application to Co-operative Societies) Act, 1965 (23 of 1965), or of such further period not exceeding one year as the Reserve Bank, having regard to the interests of the co-operative bank concerned, may think fit in any particular case to allow :
(i) a scheduled State Co-operative Bank, in addition to the average daily balance which it is or may be, required to maintain under Section 42 of the Reserve Bank of India Act, 1934 (2 of 1934), and
(ii) every other co-operative bank, in addition to the cash reserve which it is required to maintain under Section 18, shall maintain in India, in cash, or in gold valued at a price not exceeding the current market price or in unencumbered approved securities valued at a price determined in accordance with such one or more of, or combination of, the following methods of valuation, namely, valuation with reference to cost price, market price, book value, or face value as may be specified by the Reserve Bank from time to time, an amount which shall not at the close of business on any day, be less then twenty-five per cent or such other percentage not exceeding forty per cent. as the Reserve Bank may, from time to time, by notification in the Official Gazette, specify, of the total of its demand and time liabilities in India, as on the last Friday of the second preceding fortnight.
(b) in computing the amount for the purpose of Clause (a) the following shall be deemed to be cash maintained in India, namely :
(i) any balance maintained by a scheduled State Co-operative Bank with the Reserve Bank in excess of the balance required to be maintained by it under Section 42 of the Reserve Bank of India Act, 1934 (2 of 1934),
(ii) any cash or balances maintained in India by a co-operative bank, other than a scheduled State Co-operative Bank with itself or with the State Co-operative Bank of the State concerned, or in current accounts with the Reserve Bank or by way of net balance in current accounts and in the case of a primary cooperative bank, also any balance maintained with the Central Co-operative Bank of the district concerned, in excess of the aggregate of the cash or balances required to be maintained under Section 18.
(iii) any net balance in current accounts. Explanation.--For the purposes of this sub-section,
(a) approved securities, or a portion thereof, representing investment of moneys of Agricultural Credit Stabilisation Fund of a co-operative bank shall not be deemed to be unencumbered approved securities,
(b) in case a co-operative bank has taken an, advance against any balance maintained with the State Co-operative Bank of the State concerned or with the Central Co-operative Bank of the district concerned, such balance to the extent to which it has been drawn against or availed of shall not be deemed to be cash maintained in India;
(c) for the purpose of Clause (a) the market price of an approved security shall be the price as on the date of the issue of the notification or as on any earlier or later date, as may be notified from time to time by the Reserve Bank in respect of any class or classes of securities;"
(iii) in Sub-section (3), for the proviso, the following proviso shall be substituted, namely :
"Provided that every co-operative bank, other than a primary co-operative bank, shall also furnish within the said period, a copy of the said return to the National Bank."
(iv) in Sub-section (6), in Clause (a) for the words "fourteen days", the word "thirty days" shall be substituted;"
After Section 24, the following section shall be inserted, namely :
"24A Power to exempt.--Without prejudice to the provisions of Section 53, the Reserve Bank may, by notification in the Official Gazette, declare that, for such period and subject to such conditions as may be specified in such notification the whole or any part of the provisions of Section 18 or Section 24, as may be specified therein, shall not apply to any co-operative bank or class of co-operative banks, with reference to all or any of the offices of such co-operative bank or banks, or with reference of the whole or any part of the assets and liabilities of such cooperative bank or banks."
25. It may also be imperative to reproduce the relevant provisions of the Gujarat Co-operative Societies Act, 1961. Section 2(24) defines "Working capital" as under:
"2(24). "Working capital" means funds at the disposal of a society inclusive of paid-up share capital, funds built out of profits and money raised by borrowing and by other means."
Section 67 of the Gujarat Co-operative Societies Act, 1961, is reproduced below ;
"67. Reserve fund --(1) Every Society which does, or can derive from its transactions shall maintain a reserve fund.
(2) At least one-fourth of the net profits of the society each year, shall be carried to the reserve fund; and such reserve fund may be used in the business of the society or may subject to the provisions of Section 71, be invested, as the State Government may by general or special order direct, or may, with the previous sanction of the State Government, be, used in part for some public purpose likely to promote the objects of this Act, or for some such purpose of the State, or local interest : -
Provided that if the Registrar is satisfied that financial condition of the society is such that it is unable to carry to its reserve fund an amount upto the aforesaid limit of one-fourth of its net profits, he may by order in writing for such period as he may specify in the order, fix for the society limit lower than the aforesaid limit but not lower than one-fourth of its net profits.
(3) Where the reserve fund of a society exceeds its authorised share capital, then, notwithstanding anything contained in Sub-section (1), the society may, with the previous permission of the Registrar carry to its reserve fund each year an amount which may be less than one-fourth but not less than one-tenth of its net profits."
Section 71 of Gujarat Co-operative Societies Act, 1961, reads as under :
"71. Investments of funds.--(1) A society may invest, or deposit its fund :
(a) in a Central Bank, or the State Co-operative Bank;
(b) in the State Bank of India;
(c) in the Postal Savings Bank;
(d) in any of the securities specified in Section 20 of the Indian Trusts Act, 1882;
(e) in shares, or security bonds, or debentures, issued by any other society with limited liability; or
(f) in any co-operative bank or in any banking company approved for this purpose by the Registrar, and on such conditions as the Registrar may from time to time impose, and
(g) in any other mode permitted by the rules, or by general or special order of the State Government.
(2) Notwithstanding anything contained in Sub-section (1), the Registrar may, with the approval of the State Co-operative Council, order a society or a class of societies to invest any funds in a particular manner, or may impose conditions regarding the mode of investment of such funds."
26. A perusal of the assessment orders passed in all these cases indicates that the AO has refused to grant deduction under Section 80P(2)(a)(i) in respect of disputed income under consideration in view of the judgment of the Hon'ble Supreme Court in the case of M.P. Co-operative Bank v. Addl. CIT (supra). The learned CIT(A) also confirmed the denial of deduction under Section 80P(2)(a)(i) in relation to the various types of income which are subject-matter of present appeals mainly by placing reliance on the aforesaid judgment of the Hon'ble apex Court. The Hon'ble Supreme Court in the said judgment has held that Government securities coming out of the reserve fund which could not be easily encashed and which could be utilised only when certain contingencies arose, could not be considered to be circulating capital or stock-in-trade. The income derived from the investment in Government securities placed with the State Bank of India or the Reserve Bank of India could not be regarded as an essential part of the assessee's banking activity inasmuch as the same did not form part of its stock-in-trade or working/circulating capital. Hence, interest on such Government securities could not qualify for exemption under Section 81(now Section 80P) of the Act. The view so taken by the learned CIT(A) in the impugned orders was also supported by the judgment of the Hon'ble Gujarat High Court in the case of Gujarat State Co-operative Bank Ltd. v. CIT (supra). The Hon'ble Gujarat High Court, inter alia, held that in relation to a co-operative society carrying on banking business, only income arising on deposits of "banking reserve" viz., cash reserves and amounts to be maintained for liquidity as prescribed by the BR Act, 1949, and reserves required to be maintained under the NABARD Act, 1981, can be treated as income attributable to a banking activity. Short-term deposits from surplus funds out of such reserves alone qualify for exemption under Section 80P(2)(a)(i) of the Act. It was further held that when a co-operative bank utilises a part of its net profits, e.g. which has to be carried to its reserve fund under Section 67 of the Gujarat Co-operative Societies Act, 1961, and which would otherwise be lying idle, to invest with specified institutions or in approved securities enumerated in Section 71 of the said Act, such activity is not a part of its banking business for the purposes of Section 80P(2)(a)(i). Parking of such surplus funds, in excess of "banking reserves", cannot be considered to be a "banking activity" or attributable to banking activity, though it may be part of "banking business" in the wider sense. The Hon'ble Gujarat High Court further held that interest earned by co-operative banks on deposits of non-statutory or voluntary reserves would not qualify for exemption under Section 80P(2)(a)(i). It was also held that locker rent would also not qualify for deduction under the said provision as Section 6 of the BR Act, 1949, regards such an activity to be an activity "in addition" to the business of banking.
27. However, the Hon'ble Supreme Court in a later judgment in the case of CIT v. Bangalore District Co-operative Central Bank Ltd. (supra) as already stated hereinbefore has taken a view that the income from the investment of any reserves is an integral part of banking activity and, therefore such income is very much attributable to the activity of banking and such income is eligible for deduction under Section 80P(2)(a)(i). The earlier decision in the case of M.P. Cooperative Bank Ltd. v. CIT (supra) was distinguished. Thereafter, the Constitutional Bench of the Hon'ble Supreme Court in the case of CIT v. Karnataka State Co-operative Apex Court (supra) has overruled the decision in the case of M.P. Co-operative Bank Ltd. (supra) and approved the judgment in the case of CIT is Bangalore District Co-operative Central Bank Ltd. (supra). The Hon'ble Supreme Court in this judgment has held that the interest income from the investment made, in compliance with statutory provisions to enable it to carry on banking business, out of reserve fund by a co-operative society engaged in banking business, is exempt under Section 80P(2)(a)(i) of the Act. The Hon'ble Supreme Court further observed that there is nothing in the phraseology of Section 80P(2)(a)(i) which makes it applicable only to income derived from working or circulating capital. Thereafter, the larger Bench of the Hon'ble Supreme Court once again reaffirmed the said view in the case of Mehsana District Central Co-operative Bank Ltd. v. ITO and Gujarat State Co-operative Bank Ltd. v. CIT (supra). It is note-worthy to repeat that the judgment of the Hon'ble Gujarat High Court in the case of Gujarat State Co-operative Bank Ltd. v. CIT (supra) was reversed on the point of interest on investment from statutory reserves and also in relation to income derived by the assessee from hiring out of safe deposit vaults. The Hon'ble Supreme Court held that the interest on investments from statutory reserves was eligible for deduction under Section 80P(2)(a)(i) and further held that the provision of safe deposit vaults was part of ordinary banking business of a bank as shown by Section 6(1)(a) of the BR Act, 1949, and, therefore, such income was also eligible for deduction under Section 80P(2)(a)(i) of the Act., However, insofar as interest on investments from non-statutory reserves was concerned, the matter was restored back to the CIT(A) for providing an opportunity to the assessee to lead evidence on the aspect whether the income derived by the assessee from the investment of its voluntary reserves has been utilised by it in the course of its ordinary banking business.
28. In view of the aforesaid judgments of the larger Bench of the Hon'ble apex Court, it is well settled that the interest on investments made by co-operative banks in Government securities attributable to utilisation of its funds from statutory reserves under Section 67(2) of Gujarat Co-operative Societies Act, 1961, the. interest income from investment made by way of mandatory minimum banking reserves as required by the relevant provisions of the BR Act and income from hiring of safe deposit vaults are eligible for grant of deduction under Section 80P(2)(a)(i) of the Act. The impugned orders passed by the learned CIT(A) refusing to grant deduction under Section 80P(2)(a)(i) in respect of such incomes are, therefore, contrary to the judgments of the Hon'ble Supreme Court in the case of CIT v. Karnataka State Co-operative Apex Bank Ltd. (supra) and Mehsana District Central Co-operative Bank Ltd. v. ITO (supra). The impugned orders passed by the learned CIT(A) of denying such deduction under Section 80P(2)(a)(i) in respect of such income are, therefore, liable to be quashed.
29. The only point which remains to be considered further is that whether the income derived by the assessee co-operative banks from the investments of their voluntary reserves other than statutory reserves is exempt under Section 80P(2)(a)(i) of the Act. The Hon'ble Supreme Court in the case of Mehsana District Central Co-operative Bank Ltd. (supra) has given a specific direction while restoring back the issue to the CIT(A) that it is necessary to ascertain, as a fact, whether the income derived by the assessee from the investment of its voluntary reserves has been utilised by it in the course of its ordinary banking business.
30. It may also be pertinent to mention here that the Constitutional Bench of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC) has observed at p. 182 as under:
"It is well settled that tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of revenue nature. If so, the amount will have to be taxed. Pondicherry Railway Co. Ltd. v. CIT (1931) 1 Comp Cas 314 : AIR 1931 PC 165."
Again, at p. 186, the Hon'ble Supreme Court has observed as under :
"Whether a particular receipt is of the nature of income and falls within the charge of Section 4 of the IT Act is a question of law which has to be decided by the Court on the basis of the provisions of the Act and the interpretation of the term "income" given in a large number of decisions of the High Courts, the Privy Council and also this Court. It is well-settled that income attracts tax as soon as it accrues. The application or destination of the income has nothing to do with its accrual or taxability. It is also well-settled that interest income is always, of a revenue nature unless it is received by way of damages or compensation'."
31. It may, therefore, be imperative to examine the nature of income in question at the point of its accrual as also the fact whether such income derived by the assessee from the investment of its voluntary reserves has been utilised by it in the course of its ordinary banking business. The claim under Section 80P(2)(a)(i) in all these cases relates to income derived from the investments made in Government securities, Trustee securities, Kayami Thapan (fixed deposits with banks) (an approved mode of investment for purposes of meeting the requirements of CLR/SLR as per the BR Act, the interest from trustee securities, dividend on UTI units, interest on Indira Vikas Patras (IVPs), interest received on fixed deposits with other banks and investments in other approved Government securities/Bonds.
Apart from this, deduction under Section 80P(2)(a)(i) has been claimed on income from safe deposit vaults and surplus interest-tax collected by these co-operative banks. If interest on such investments in Government securities and other approved investments are treated as an integral part of activities of banking business, the income so derived therefrom, would be eligible for grant of deduction under the main provisions of Section 80P(2)(a)(i) of the Act. It may also be relevant here to mention that the amounts have been transferred by debiting the P&L a/cs with a corresponding credit to various reserve funds. The accumulated credit balances in various reserve funds including statutory reserves created under Section 67 has been shown as liability in the balance sheet from year to year. The appellant-societies have made investments in such Government securities, Government Bonds and fixed deposits with banks and other co-operative societies which have been shown as investments in the asset side of the balance sheets. The various investment so made by these cooperative banks are not earmarked towards any specific reserve fund. There is no provision in the Gujarat Co-operative Societies Act, 1961, requiring the cooperative banks to invest the amounts transferred to statutory reserve fund in any specific securities. In facts, Section 67(2) specifically permits user of such amounts transferred to reserve fund in the business of the society or the same may be invested/deposited in the securities and banks specified in Section 71 of the said Act. Therefore, it cannot be said as to which reserve has been invested where. As a matter of fact, all funds of the bank including their capital, reserves and unappropriated profits constitute a single or mixed fund out of which various loans, and advances have been given to borrowers and investments in various Government securities and deposits with other banks, etc. have been made.
32. Section 5(b) of the BR Act, 1949, defines "banking" which means accepting deposits of money from public repayable on demand or otherwise for purposes of lending or investment. The main object of the co-operative banks is to carry on the business of banking. Like other banks, money is its stock-in-trade or circulating capital and its normal business is to deal in money and credit. The very definition of "banking" given in Section 5(b) of the BR Act clearly shows that it is a normal mode of carrying on of banking business to invest moneys and that is just as much a part of the mode of conducting banking business as receiving the deposits or lending moneys to its borrowers. Thus, the activity of receiving the deposits from various depositors at small rate of interest and utilising the same for lending or for investment are all integral part of the activities of a banking business.
33. The Hon'ble Supreme Court in the case of CIT v. Karnataka State Cooperative Apex Bank Ltd. (supra) overruling the earlier decision in the case of M.P. Co-op. Bank Ltd. (supra) has held that the interest arising from investment made, in compliance with statutory provisions to enable it to carry on banking business, is exempt under Section 80P(2)(a)(i). The placement of such funds being imperative for the purpose of carrying on banking business, the income therefrom would be income from banking business carried on by the assessee.
34. The provisions of Sections 18 and 24 of the BR Act, 1949, have been enacted to prescribe by law what has already been recognised as sound banking practice, namely, that a bank should maintain a minimum reserve of cash and liquid assets to meet its demand liabilities. Section 18 of the said Act provides that a sum equivalent, to at least 3 per cent of its demand and time liabilities in India shall be maintained by way of cash reserve with itself or by way of balance in a current account with RBI and other approved Government securities which are treated equivalent to cash reserves. Section 24 requires every bank including cooperative bank to maintain its investments in cash or other approved securities of amount which shall not be less than 25 per cent of the total of its demand and time liabilities in India. The limit of 3 per cent and 25 per cent prescribed in Sections 18 and 24 of the BR Act are the minimum mandatory amount required to be kept deposited in the approved securities and other approved modes of investments. The investments made by these co-operative banks in various Government securities and other approved investments have been partly treated as attributable to meet the requirements of investing such minimum banking reserves as per Sections 18 and 24 of the BR Act, by the AO himself. The AO has denied deduction under Section 80P(2)(a)(i) on interest income derived on those Government securities/approved deposits made in excess of the amounts required to be invested by way of CLR/SLR required as per Sections 18 and 24 of the Act. It was also contended on behalf of the assessees that such interest income prior to the judgment of the Hon'ble Supreme Court in the case of M.P. Co-operative Bank Ltd. (supra), was held to be eligible for grant of deduction under Section 80P(2)(a)(i) in the case of some of these very assessees in earlier years. The investments by these co-operative banks in such Government securities have been made in consonance with the spirit and intention with which Sections 18 and 24, etc. of BR Act were enacted and in confirmity with practice prevailing for last several years in the case of various co-operative banks. The business necessity of investing larger amount in such Government securities is more apt and necessary to meet liquidity crisis often faced by these co-operative banks. In the recent past, we have seen the reports in newspaper showing that several co-operative banks in the State of Gujarat have faced serious liquidity problems either as a result of some scam or as a result of heavy withdrawals by panicky depositors. The Government is finding it difficult to deal with debacle in the cooperative banking sector in the State in the recent past. One of the worst defects of Indian banking is propensity of the smaller banks to overtrade at the expense of liquidity and it has now become imperative to insist on all banks to maintain reasonably larger proportion of their cover in the form of cash or trustee securities as defined in the Indian Trust Act or as approved by the provisions of the BR Act, Co-operative Societies Act, etc. Such investments in Government securities and other approved modes of investment provide liquidity support to repay their depositors, as and when need arises.
35. The Hon'ble Privy Counsil in the case of Punjab Co-operative Bank Ltd. v. CIT (supra) has considered the question relating to assessability of profits derived from sale of shares and securities and observed that the bank as on 31st Dec., 1934, owned investments amounting to Rs. 50,88,550 mainly held in Indian Government securities, which being readily saleable, could if necessary be promptly realised in order to pay claims. During the year 1935 some 10 lacs of these Government securities and some shares were sold, and the profit of Rs. 1,42,588 was derived therefrom. The bank contended that the said profit does not form part of the profits of its banking business and, therefore, such profit made by the bank on sale of shares and securities was not taxable. The Hon'ble Privy Council held that the purchase and sale of shares and securities by the bank were so much linked with the deposits and withdrawals of clients that they were part of assessee's business of banking and the profits arising therefrom were assessable to income-tax.
36. The Hon'ble Supreme Court in the case of Bihar State Co-operative Bank Ltd. v. CIT (supra) was dealing with the question relating to assessability of interest income from short-term deposits made with Imperial Bank of India. The assessee claimed that such interest was exempt from income-tax under notification of Central Board of Revenue. The AO assessed such interest income as income under Section 12 of the IT Act, 1922. The Tribunal held that the interest was rightly treated as income from other sources as it did not from part of appellant's business profits and was, therefore, not exempt from income-tax. The Hon'ble Patna High Court held that only income derived from the business of the co-operative societies as such fell within the exemption and such exemption was not available in regard to income derived from investments of fluid assets with third parties. The Hon'ble Supreme Court held that the assessee co-operative bank is carrying on general business of banking. The business of such banking consists not only of receiving the deposits and lending money to its members or such other societies as are mentioned in the objects but it also includes the activity of making of such investments of its moneys so that they may be readily available to meet the demand of its depositors if and when they arise. It was argued before the Supreme Court that the moneys had been deposited with the. Imperial Bank of India on long-term deposits inasmuch, as they were deposited for one year and were renewed from time to time also for a year. The Hon'ble Supreme Court observed that these deposits fell due on short intervals and would have been available to the appellant had any need arisen. The Hon'ble Supreme Court held that the High Court was in error in treating interest derived from such deposits as not arising from the business of banking. Such income was held to be exempt under the relevant notifications.
37. The Hon'ble Gujarat High Court in the case of Addl. CIT v. Ahmedabad District Co-operative Bank Ltd. (supra) has considered the eligibility of deduction under Section 81 and Section 80P of the IT Act in respect of interest derived by co-operative bank from its investments in Government securities and Municipal debentures. It was observed by the High Court that it is normally the business of a bank to lay out its idle and surplus funds in such securities and debentures as will be easily realisable for purposes of its main business of banking, namely, of giving credit to its customers. One of the most important factors which would help in distinguishing whether Government securities and debentures or fixed deposits held by a bank are in the nature of investments or are part of stock-in-trade is whether such securities or debentures are easily realisable or not. The laying out by a bank of its surplus and idle funds in easily realisable securities or debentures or deposits may be with twin objectives, viz, to encash them readily in case of need and not to lose interest by keeping them idle. Merely because they are securities or debentures payable at a certain specified period or that there was not variation in them would not convert them into investments pure and simple. It was also observed that the Hon'ble Supreme Court in the case of Bihar State Co-operative Bank Ltd. (supra) has held that even fixed term deposits, which can be encashed as and when need arises, will be part of stock-in-trade. The Hon'ble Gujarat High Court held that the assesses is entitled to grant of deduction under Section 80P of the Act in respect of such interest income.
38. The Hon'ble Supreme Court in the case of Bangalore District Co-operative Central Bank Ltd. (supra) has held that the interest income derived by the cooperative society engaged in the banking business on Government securities and dividend from Industrial Finance Corporation was attributable to the banking business carried on by the assessee. The assessee was held to be entitled to special deduction, under Section 80P of the Act.
39. The Hon'ble Supreme Court in the case of CIT v. Ramanathapuram Dist. Co-operative Central Bank Ltd. (supra) held that interest on securities, subsidies from the Government, dividend received by the assessee, a co-operative society carrying on banking business, were business income of the assessee and the assessee was entitled to deduction under Section 80P(2)(a)(i) of the Act.
40. Likewise the Hon'ble Bombay High Court in the case of CIT v. Ratnagiri District Central Co-operative Bank Ltd. (supra) has held that the interest received by the assessee-co-operative society engaged in the banking business, from Indira Vikas Patras (KVPs) was entitled to exemption under Section 80P(2)(a)(i) and further observed that the said income had been derived from interest on securities of Central Government which were easily capable of being converted into liquid funds so as to make them available to assessee banks for their banking business and hence it was entitled to exemption under Section 80P(2)(a)(i) of the Act. The Hon'ble High Court observed that the investments in IVPs, no doubt, have an effect of withdrawing funds from the banking business. Mere withdrawal of funds is not sufficient. It must be proved that the withdrawal of funds has resulted in permanent deprivation of funds for banking activity. It ought to have been examined as to whether such investments has an effect of temporary withdrawal of the funds or the investments made in IVP can be brought back to the banking business, as and when needed. This judgment of the Bombay High Court, has also achieved finality as SLP preferred by the Department against the said judgment has been dismissed by the Hon'ble Supreme Court as reported in 256 ITR (St) 48.
41. The principles of law emerging from all the above referred judgments clearly indicates that the investments of surplus and idle funds made by the cooperative banks in easily realisable Government securities or such other approved modes of investments in consonance with sound banking practice are regarded as investments forming integral part of main activities of banking business. The income from such investments will be eligible for grant of deduction under Section 80P(2)(a)(i) of the Act.
42. The facts of all the present cases so far as they relate to claim for grant of deduction under Section 80P(2)(a)(i) are almost similar. Let us, therefore, analyse the facts of one of these five cases in the light of the principles of law emerging from various judgments referred to hereinbefore. In the case of Surat District Co-operative Bank Ltd., Surat, the bank had made inter alia, investments in fixed deposits with other banks (Kayami Thapan) to the tune of Rs. 1,57,03,27,251 (Rs. 15,703,27 lacs). The AO has computed the excess investments in Kayami Thapan made in excess of the requirements of SLR/CRR at Rs. 6,372.20 lacs (details given in para-3.1 of this order). The total interest earned on Kayami Thapan is Rs. 1,259,65 lacs. The AO has calculated proportionate interest on investments made in Kayami Thapan out of reserve funds to the tune of Rs. 2,53,88 lacs out of Rs. 1,259,65 lacs. The deduction under Section 80P has been denied in respect of following items of interest income:
Rs.
(i) Proprotionate interest income on Kayami Thapan 2,53,88,000
(ii) Interest on Government securities 12,11,250
(iii) Interest on other trustee securities 35,40,458
------------
Total 3,01,39,708 ------------
43. The investments in the aforesaid securities have been made in approved modes of investments which are permitted under the provisions of the BR Act and/or Section 71 of the Gujarat Co-operative Societies Act, 1961. Such investments are not earmarked against any of the reserve funds. The total reserve funds and other reserves as per balance sheet of the said society as on 31st March, 1994 is Rs. 35,81,03,751 which includes statutory reserves of only Rs. 5,42,24,743. It would be worthwhile to reproduce the abridged balance sheet of Surat District Co-operative Bank Ltd. as on 31st March, 1994, in order to appreciate the sources wherefrom investments in such Government securities, fixed deposits and other investments have been made :
Abridged balance sheets is on 31st March, 1994 Capital and Liabilities Property and Assets Capital 2,50,55,000.00 Cash and Bank Bal.
Cash in hand 5,32,50,463.66 State Bank of India 3,39,97,222.96 State Bank of Sau.
9,852.20 Notified Banks 6,80,10,655.94 State Co-op. Bank 1,74,40,668.14 17,27,08,862.90 Reserve Fund & Other Reserves Balance with other banks Statutory Reserve 5,42,24,743.10 Current Deposits 86.12,256.47 Agrl. Credit Stab Fund 3,69,54,800.19 Saving Bank Deposits Building Fund 7,95,60,333.95 Fixed Deposits Dividend Equalisation (Kayarni Thapan) 1,57,03.27,251.00 Fund 26,15,462.39 Mutual airangement Scheme Deposit 7,00.000.00 1,57,96,39,507.47 Spl. Bad Debt reserve 1,12,323.00 Money At Call Short Notice 71,70,00,000.47 Bad & Doubtful reserve 10,17,01,813.99 Investment Depreciation Fund 20,38,960.24 Staff Piovident Fund 18,61,432.56 Investment In Central & State Govt. securities (a book value) 1,10,00,000.00 State Trading Fund 3,00,000.00 Other trustee securities 3,06,35,000.00 Society Relief Fund 40,10,000.00 Share of co-op Institutions other than in item below 15,19,950.00 Centenary Fund 95,00,000.00 Other Invest.
58,490.00 Depredation Fund 39,29,361.88 4,32,13,440'.00 Propaganda 17,97,598.50 Investment out of the principal subsidiary state partnership fund shares of Pri. Agr. Credit Societies 15,21,000.00 Charity 33,68,510.62 Advances ST. Loans cash credit O/Ds & 1,22,94,41,766.00 Bldg. Depreciation Medium-term Loan 6,92,01,392.98 Staff Benefit 52,23,779.55 Long- Term Loans which secured at 4,88,71,701.96 Staff Bonus 1,81,64,578.68 Consurtium finance 8,19,00,000.00 Loan Bonus Interest receivable 11,28,01,546.68 IT & ST reserve 8,93,761.10 Inv. Fluctuation Fund Development Fund 2,70,000.00 Dev. Fund for small farmer Farm Labours, Dev. Fund Agri. Dev. Fund Reconstruction of society 34,33,500.38 Staff Gratuity Fund Rural Artisans 23,47,842.54 Industries Dev-Fund 11,93,674.00 Staff Prov. Fund (Bank) 41,01,275.00 Capital Reserved Fund Depositor's Benefit Fund 40,00,000.00 Staff Salary arrears 80,00,000.00 Bank Memorial Fund Int.
Fluctuation Fund 85,00,000.00 Total Reserve Funds 35,61,03,751.67 Principal/Subsidiary State Partnership Fund for shares capital 15,21,000.00 Deposits & Other Accounts.
Fixed Deposits 2,23,16,47,092.18 Saving Bank Deposits 22,43,61,605.77 Chq. Saving Deposit 38,19,43.835,34 Current Deposits 27,28,30,299.38 Money at Call & Short Notice 78,52,027.15 Recurring Deposits 10162276.21 Janta Recurring 29,06,28,658.41 Pension Recg. Deposits 1,66,492.20 Societies Fixed 'Deposits 16,17,66,926.67 Platinum Jubilee Cert 18,200.00 Borrowings;
From the RBI of India/SBI/State/Central/ Co-op. Bank Nabard Automatic Ref.
32,54,500.00 Non-Farm SIDCBI Credit 26,26,989.00 Project Landing 13,85,100.00 Bills receivable 2,10,06,621.41 IRDP Loan 11,79.000.00 Premise 1,04.69,341.00 Bills for collection 2,10,06,621.41 Furniture & Fixtures 8,90,439.26 Interest, Outstanding 1,53,40,986.15 Deadstock 53,46,955.58 Branch Adjustment 71,85,584.91 Safe deposit vault 47,10,651.29 Overdue Interest 6,44,67,632:10 Other Assets 5,66,12,328.30 Reserve :
Non-capitalise Interest 1,53,40,986.15 Interest payable 73,28,733.19 Other Liabilities 6,41,84,846.74 Profit & Loss 1,66,59,382.72 4,17,06,76,541.20 Total 4,17,06,76,541.20
44. The aforesaid abridged balance sheet clearly reveals that the investments made under the head "Cash and Bank Balance", balance with other banks including fixed deposits (Kayami Thapan) of Rs. 1,57,03,27,251 and investments in Central and State Government securities as well as in other trustee securities, cannot be said to have been made out of any specific reserve funds. Each investments have been made out of common/mixed funds maintained by the said society. The definition of working capital given in Section 2(24) is relevant for understanding as to what are the broad sources of making such investments. Working capital means funds at the disposal of a society inclusive of paid-up share capital, funds built out of profits and moneys raised by borrowing and by other means. The investments in such Government securities and other approved investments have been made out of such working capital as defined in Section 2(24), as the, said definition included within its ambit the share capital, the funds borrowed, funds built out of profits and funds raised by other means.
45. The part amount of interest income on fixed deposits with other banks (Kayami Thapan), interest on Central and State Government securities and other trustee securities aggregating to Rs. 3,01,39,708 has been held to be not eligible for grant of deduction under Section 80P(2)(a)(i) by the AO and the learned CIT(A). The investments in Government securities, fixed deposits and other trustee securities are permissible modes of investments as per provisions contained in the BR Act and/or Section 71 of the Gujarat Co-operative Societies Act, 1961. Substantial part of interest income derived on fixed deposits (Kayami Thapan) attributable to the extent of meeting requirements of SLR/CRR has been held to be exempt under Section 80P(2)(a)(i) by the AO himself. The investments of the surplus amounts beyond the amounts required to be invested to meet the requirements of SLR/CRR has been made in those very fixed deposits (Kayami Thapan). The nature of investments and nature of income derived therefrom is similar. The fixed deposits (Kayami Thapan) are easily realisable in case of need and in case of liquidity crisis by their premature encashment. The Government securities and other trustee securities are also easily realisable as such securities are freely transferable in open market and the amounts can be realised as and when needed. All these investments fully satisfy the tests of "easily realisable in case of need". Such investments in approved securitus & approved modes of investments are considered to be extremely safe and secured. It protects the interest of large number of depositors. The bank has derived substantial interest income from such investments made in approved securities by investing surplus funds/idle moneys lying at the disposal of the bank. Thus, such investments have not only served the twin objectives as indicated in the judgment of Hon'ble Gujarat High Court in the case of Ahmedabad District Co-operative Bank Ltd. (supra) but have enabled the co-operative banks to achieve multiple advantages, viz.,
(i) Safe and secured investment of surplus funds;
(ii) Easily realisable investments can be encashed at any time of need;
(iii) Such investment has produced substantial interest income;
(iv) Investment of larger amount in excess of minimum mandatory Banking Reserve (CLR & SLR) in such Government securities and approved investments increase confidence of public and depositors; and
(v) It enhances goodwill and prestige of the co-operative banks.
46. The investments in Government securities, fixed deposits, trustees securities which are all approved modes of investments, is a normal practice prevailing in all banking institutions. The uncontroverted facts are that prior to the judgment of the Supreme Court in the case of M.P. Co-operative Bank Ltd. (supra) all such income deprived by various co-operative societies were treated as eligible for grant of deduction under Section 80P(2)(a)(i) of the Act by various assessing authorities. That judgment has been overruled by the larger Bench of the Hon'ble apex Court in the subsequent judgments cited supra. Such investments should therefore, be regarded as integral part of banking activities carried on by these societies as in various earlier years. The investments have continued to be made/retained in such approved securities on the basis of sound banking practice prevailing in various co-operative banks like the present assessees for past several years.
47. We have also pointed out hereinbefore that the requirements of minimum SLR/CRR specified in Sections 18 and 24 only recognise the sound banking practice prevailing in the banking trade for last several years. The banks have to keep adequate reserves of cash and liquid assets to meet its demand liabilities. That is why these provisions have made it mandatory for the banks to invest minimum amount of 3 per cent and 25 per cent of its demand liabilities in approved Government securities. These provisions only prescribe mandatory minimum amount of investment in approved securities to meet the requirements of SLR/CRR but it does not prohibit the investments of larger amount in such safe and secure Government securities and other approved modes of investments. Maintaining larger proportion of their demand liabilities by way of investments in such approved Government securities and other approved investments enhanced the prestige and goodwill of the bank and thereby the banks enjoy greater confidence of large number of depositors.
48. The nature and facts relating to the interest income derived by other societies in the appeals under consideration in respect of which deduction under Section 80P(2)(a)(i) was claimed but has been denied by the AO and confirmed by the CIT(A), are almost similar as that in the case of Surat District Co-operative Bank Ltd. In the case of Kalupur Commercial Co-op. Bank Ltd., the CIT(A) has himself directed the AO to allow deduction under Section 80P(2)(a)(i) in respect of interest on Government securities and other approved modes of investments. The Revenue has preferred an appeal against such deletion. The Revenue's appeal will be heard by a regular Bench as already indicated in para 4.3 of this order. In the case of Unnati Cooperative Bank Ltd., the deduction under Section 80P(2)(a)(i) relates to investments made in Government securities such as KVPs, investments with IDBI, investments with Sardar Sarovar Nigam Ltd. and deposits with State Bank of India. In the case of Baroda Peoples Co-op. Bank Ltd. the claim for grant of deduction under Section 80P(2)(a)(i) relates to investments made in IDBI/SBI Bonds, Sardar Sarovar Nigam Ltd. and KVPs. In the case of Baroda Central Co-op. Bank Ltd. the claim for such deduction relates to income by way of interest on Government securities, debentures, commercial shares and deposits with other co-operative societies.
49. Such investments in Government securities and other approved modes of investments made in excess of requirements of CLR and SLR and statutory reserves, have been made out of mixed funds, which constitute investments, made; out of mixed funds, which constitute investments, made out of surplus funds available out of "working capital" as defined in Gujarat Co-operative Societies Act. Interest income derived on such investments forming integral part of normal activities of banking business qualifies for grant of deduction under Section 80P(2)(a)(i) even since its inception i.e., from the time of accrual of such income. The destination of such income has always been the same mixed/common fund constituting the working capital. Such interest income on investments in Government securities, etc. made out of working capital (including voluntary reserves) has been credited in P&L a/c and have been utilised for meeting various banking expenses debited in the P&L a/cs and surplus has merged with the working capital available for carrying on the banking business of lending and/or of making such investments. Such inseparable mixed/common funds, which constitutes the source and origin of such investments is also the destination of such income and proceeds of its realisation on encashment. All such activities are integral part of normal banking activities of banking business carried on by these societies.
50. The nature of investments made in all these cases in approved Government securities/other approved investments which are permissible under the provisions of the BR Act and/or Section 71 of the Gujarat Co-operative Societies Act, 1961, or authorised by circulars/notifications issued by RBI or other competent authority from time to time are all such investments which are part of normal transactions carried out by such co-operative banks. Such investments have been made by these co-operative banks in consonance with the sound banking practice adopted by almost all co-operative banks for last several years. The said investments fulfil all the tests of being treated as part of normal trading activities of banking business, as laid down by the various judgments referred to hereinbefore.
51. On a careful consideration of the entire relevant facts and in view of the principles of law emerging from the various judgments referred to hereinbefore, we are of the considered opinion that the income from such investments in Government securities, fixed deposits with banks, investments in IVPs/KVPs and other approved modes of investments out of surplus funds available out of working capital including voluntary reserves are integral part of normal banking activities carried on by these co-operative banks and hence all these assessees are entitled to grant of deduction in respect of such income under the main provisions of Section 80P(2)(a)(i) of the Act.
52. In some of these cases, deduction under Section 80P(2)(a)(i) has also been claimed in respect of excess collection of interest-tax made by these cooperative banks. The surplus of interest-tax collected by these co-operative banks is a part of trading receipt. The said amount has been collected by the co-operative banks from their borrowers/customers in the normal course of banking business. A useful reference in this regard may be made to the judgment of the Hon'ble Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. v. CIT (1973) 87 ITR 542 (SC) wherein it was held that the sales tax collected from the buyers but not paid to the State nor refunded to the purchasers, constitute a trading or business receipt in the hands of the assessee. The surplus amount of interest-tax collected by the assessee from its borrowers/customers is of similar nature. The surplus amount of interest-tax so collected and retained with the assessee are integral part of income attributable to banking activities and the same would, therefore, qualify for deduction under Section 80P(2)(a)(i) of the Act. This decision of ours would not be an authority for determining the individual rights of parties or the Government for the recovery of excess tax.
53. The claim for deduction under Section 80P(2)(a)(i) in respect of locker rent is also allowable in View of the direct judgment of the Hon'ble Supreme Court as already discussed and decided hereinbefore.
54. The claim for deduction under Section 80P(2)(a)(i) in respect of all such income in question, viz., interest income from investments in Government securities/approved modes of investments of surplus funds/idle money lying out of working capital, excess amount of interest-tax collected and locker rent, etc. can be examined from one more angle. It is pertinent to note that under Section 80P(2)(a)(i) income "attributable to" banking business is exempt. The expression in come attributable to "has been distinguished from the expression "income derived from" used in various other provisions of the Act, by the Hon'ble apex Court and other Courts in various cases. Let us examine the ratio of some of those judgments explaining the subtle but significant difference between the meaning and scope of these two expressions used in various provisions of the Act.
(a) Cambay Electricity Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC). The Hon'ble Supreme Court has held as under at pp. 93 and 94 :
"As regards the aspect emerging from the expression 'attributable to' occurring in the phrase 'profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature has deliberately used the expression 'attributable to' and not the expression 'derived from'. It cannot be disputed that the expression 'attributable to' is certainly wider in import than the expression 'derived from'. Had the expression 'derived from' been used, it could have with some force been contended that a balancing charge arising from sale of old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed, out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression 'derived from', as, for instance, in Section 80J. In our view, since the expression of wider import, namely, 'attributable to' has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity."
(b) Vellore Electricity Corporation Ltd. v. CIT (1997) 227 ITR 557 (SC). The relevant extracts from the headnote appearing at p. 560 are reproduced below :
"The expression 'attributable to' has been used in Section 80-I of the IT Act, 1961. Profits and gains can be said to be attributable to the priority industry under Section 80-I if there is a direct and proximate connection between the profits and gains and the business of the priority industry."
(c) Ashok Leyland Ltd. v. CIT (1997) 224 ITR 122 (SC): The earlier decision of the Supreme Court in the case of Cambay Electricity Supply Industrial Co. Ltd. (1978) 113 ITR 84 (SC) with regard to the meaning of word "attributable to" has once again been confirmed by the Supreme Court in this case.
55. Various other judgments were also cited by the learned representatives but all those judgments support the same view that the expression "attributable to" has a wider import other than the expression "derived from" used in other provisions of the Act. The words "attributable to" indicate the legislative intention to cover receipts from sources other than the actual conduct of the business which have a proximate connection with the main business or is an incidental activity closely related to main activity. In this context, we may refer to the decision of the Madras High Court in the case of CIT v. Madurai District Central Co-op. Bank Ltd. (1984) 148 ITR 196 (Mad) wherein it was held that the maintenance or liquid assets in the form of securities is a must for carrying on the banking activity of the assessee and, therefore, the income from such securities should be taken to be income from banking business. Their Lordships of the Madras High Court distinguished the decision of Madhya Pradesh High Court in the case of M.P. State Co-operative Bank Ltd. v. Addl. CIT (1979) 119 ITR 327 (MP) by stating that that was a case under Section 81(1)(a) which did not use the expression "attributable to" as it is used in Section 80P(2)(a)(i) of the Act.
56. One of the grounds in some of these appeals taken on behalf of the assessees was that an alternative prayer was made before the CIT(A) for grant of deduction under Section 80P(2)(d) which provides exemption in respect of income by way of interest or dividend derived by co-operative society from its investments with any other co-operative society. It was contended that the learned CIT(A) has not rendered any decision in relation to such alternative prayer made before him. Since we have held that the entire income in dispute in the present appeals in all these cases are eligible for grant of deduction under Section 80P(2)(a)(i), this alternative prayer has become academic. However, in case our order is reversed by the higher Courts, the assessee will be entitled to raise this alternative ground before the CIT(A), if and then, need arises, as such contention already raised before the CIT(A) in such cases were not considered and decided by him.
57. In view of the aforesaid discussions, we are of the considered opinion that the entire income in question viz., interest income on investments in Government securities, fixed deposits, KVPs and IVPs, investments with UTI etc., out of surplus/idle money available from working capital including voluntary reserves, excess collection of interest-tax and locker rent are all income attributable to business of banking and are eligible for grant of deduction under Section 80P(2)(a)(i) of the Act.
58. We have also heard and considered the arguments advanced on behalf of the intervenes. The Hon'ble Supreme Court in the case of Saraswati Industries Syndicate Ltd. v. CIT (1999) 237 ITR 1 (SC) has held that only purpose of granting an intervention application is to entitle the intervenes to address the arguments in support of one or the other side. Having heard the arguments, we have decided the issue in favour of the assessee. The intervenes may take advantage of this order, if facts are found to be similar by respective regular Benches before whom the cases of intervenes will come up for hearing.
59. In the result, the appeals are allowed.