Income Tax Appellate Tribunal - Jaipur
Kota Central Co-Operative Bank Ltd. vs Joint Commissioner Of Income Tax on 28 February, 2006
Equivalent citations: (2006)104TTJ(JP)730
ORDER
B.P. Jain, A.M.
1. These appeals arise from the orders of learned CIT(A), Rajasthan-II, Jaipur dt. 29th Sept., 1999, 1st Feb., 2000 and 8th Sept., 2000 for asst. yrs. 1993-94, 1996-97 and 1997-98, respectively.
ITA No. 630/Jp/1999-Asst. yr. 1993-942. The assessee has in all raised seven grounds of appeal. Ground Nos. 1, 4, 5 are dismissed as not pressed by the assessee. As regards ground No. 7 the assessee has raised an additional ground that the AO has grossly erred in discussing and assessing those issues which were not subject-matter of original assessment and thus order passed under Section 143(3) be set aside and assessment made be quashed. The same being a legal ground has been admitted, in view of decision of apex Court in the case of National Thermal Power Co. Ltd. v. CIT . In this regard, the counsel for the assessee had not pressed the ground Nos. 1, 4 and 5 as discussed above, which have been dismissed as not pressed. Therefore, the additional ground raised by the assessee becomes infructuous and, therefore, same is dismissed.
3. Remaining ground Nos. 2, 3 and 6 raised by the assessee are as under:
'Ground No. 2 that under the facts and circumstances of the case, the learned CIT(A) has erred in confirming the addition of interest on Government securities received by the bank as income from other sources Rs. 5,53,125.
Ground No. 3 that under the facts and circumstances of the case, the learned CIT(A) has erred in confirming that a sum, to the tune of Rs. 8,36,748 of interest received by the bank from other banks is liable to tax treating as income from other sources.
Ground No. 6 that the learned CIT(A) has erred in not directing the learned AO to allow deduction under Section 80P as claimed by the assessee.
4. The facts of this case are that the assessment in this case was originally completed vide order dt. 23rd Nov., 1995 against which the assessee filed an appeal and learned CIT(A), Ajmer, set aside the assessment with the direction to re-examine the issues involved afresh. The assessee is a co-operative society and derives income from banking business. The assessee has interest income from Government securities and from banks and other bankers. The observation of the AO vide paras 7 and 8 of his order is as under:
7. The assessee was called upon to state as to why the interest income received from Government securities and interest from other banks and bankers should not be taxed as income from other sources under Section 56 of the Act. In reply, the assessee submitted his explanation vide letter dt. 26th Feb., 1999 and contended that when income from other sources pertaining to dividend and interest has been held to be income from banking business, how can be interest received from funds deposited in Government securities and on deposits with other banks be taxed as income from other sources. It was further stated that without paying interest on deposits taken from market which in turn were deposited with other banks and bankers or in Government securities, no interest income can be earned and, therefore, the deduction for interest payment and incidental expenses in the nature of establishment and other expenses should be allowed before any decision to tax the same as income from other sources is taken. In support of his contention that interest income from bank and Government securities is income from banking business, he relied upon the decision of the Hon'ble Supreme Court in the case of CIT v. Bangalore Distt. Co-operative Central Bank Ltd. . The explanation of the assessee was very carefully examined and considered. In the case of Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT and Madhya Pradesh Rajya Sahakari Bank v. CIT Hon'ble Supreme Court has held that the Government securities coming out of the reserve fund which could not be easily encashed and which could be utilized only when certain contingencies arose could not be considered to be circulating capital or stock-in-trade. The Hon'ble Court accordingly held that income derived from investment in Government securities pledged with SBI or RBI would not be regarded as an essential part of assessee's activity inasmuch as the same did form part of stock-in-trade or/and working/circulating capital and accordingly the interest on Government securities pledged with the SBI or RBI were held be not qualifying for exemption under Section 81 (now Section 80P of the Act). In the case of the assessee, the interest received from Government securities during the period 31st March, 1993 amounted to Rs. 5,53,125 and the reserve fund as per the balance sheet as on 31st March, 1993 amounted to Rs. 2,11,15,335. The investment as on 31st March, 1993 in the Government securities amounted to Rs. 65,00,000. It is, therefore, presumed that the investment in Government securities was made out of the amount lying in the reserve fund. As held by the Hon'ble Supreme Court in the case referred to above, the reserve fund amount does not have part of the stock-in-trade or working/circulating capital. Obviously interest received from Government securities will not qualify for exemption under Section 80P. The interest income of Rs. 5,53,125 is accordingly held to be income from other sources and taxed accordingly under Section 56 of the Act.
So far as interest from other banks and bankers is concerned, the interest received amounted to Rs. 1,44,76,605. As mentioned earlier the assessee has firstly objected to the taxing of this interest, in the alternative he has submitted for allowing deduction for interest payment on deposits taken for deposits with bank for earning interest income and also the expenditure necessary for deriving the said income. It has been stated that the interest payment account for 76.22 per cent and the other expenditure in the nature of establishment expenses, contingent expenses and other expenses account for 27.97 per cent. It was also contended that since the interest payment and expenditure account for 104.19 per cent there was resultantly loss, and, therefore, no income were taxable. The explanation of the assessee has been considered and while the considerable force in the argument of the assessee that for earning interest income, the assessee had to take deposit, from market and on which interest payment had to be done which account for 76.22 per cent. In regard to the establishment and other expenses, the expenditure percentage is 27.97 per cent. As however, the expenditure in relation to earning of interest income from others, i.e., customers, and interest earned from banks cannot be equal inasmuch as while there are lot of legal and other formalities required to be completed before granting loan to the customers, the deposits with banks and bankers are done in pursuance of the guidelines of the RBI and, therefore, the expenditure on establishment and other miscellaneous expenses will certainly be lesser than the expenditure for earning interest income on advances to customers and private parties. Against the expenditure of 27.97 per cent. I hold that expenditure of 18 per cent to be reasonable expenditure for earning interest income from banks, etc. Accordingly expenditure of 94.22 per cent, will be allowed of Rs. 1,36,39,857 against the interest income received from banks at Rs. 1,44,76,605. Deducting the same from receipts of Rs. 1,44,76,605 balance of Rs. 8,36,748 will be taxed as income from other sources.
5. The learned CIT(A) confirmed the action of AO.
6. We have heard the parties and perused the material on record. The issue before us is that whether the interest earned by co-operative society on Government securities and from the banks and other bankers is income from business or income from other sources when the said society is engaged in the business of banking and whether the assessee being a co-operative society a deduction under Section 80P(2)(a)(i) of IT Act is (to be) allowed or not. The counsel for the assessee argued that without paying interest on deposits taken from market which in turn were deposited with banks and other bankers or in Government securities, no interest can be earned and therefore the deduction for interest payment and incidental expenses has to be allowed. Such interest income from bank and Government securities is income from banking business. The AO did not accept the explanation of the assessee. The AO relied upon the decision of Hon'ble apex Court in the case of Madhya Pradesh Co-op. Bank Ltd. v. Asstt. CIT wherein it was held as under:
Held, dismissing the appeal, that it was clearly understood in banking parlance that circulating capital was that which was put into circulation or turned over to earn profits. Government securities coming out of the reserve fund which could not be easily encashed and which could be utilized 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 SBI or the RBI 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, the interest on Government securities placed with the SBI or the RBI, could not qualify for exemption under Section 81 (now Section 80P) of the IT Act.
7. This judgment of Madhya Pradesh Co-operative Bank Ltd. v. Asstt. CTT (supra) was overruled by the larger Bench of Hon'ble apex Court in the case of CIT v. Karnataka State Co-operative Apex Bank (2001) 169 CTR (SC) 486 : (2001) 251 ITR 194 (SC) where after referring the judgment of Madhya Pradesh Cooperative Bank Ltd. (supra) the Hon'ble apex Court at (2001) 169 CTR (SC) 486 : (2001) 251 TTR 194 (SC) (supra), at relevant p. 196 observed as under:
This judgment was cited before the Bench of two learned Judges which decided the case of CIT v. Bangalore District Co-operative Central Bank Ltd. (1998) 148 CTR (SC) 226 : (1998) 233 JTR 282 (SC). It was considered as having been rendered on its own facts and not applicable to the case of Bangalore District Co-operative Bank Ltd. (supra) in view of the finding of the Tribunal that the income in question was attributable to the business of that assessee. The Court referred to the Banking Regulation Act, the Karnataka Co-operative Societies Act and the Karnataka Co-operative Societies Rules, which showed that the investments that had been made by the assessee were in compliance with the statutory provisions and in order to carry on the business of banking. They were necessary and, consequently, they were part of the business activities of the assessee falling within the scope of Section 80P(2)(a)(i).
We do not agree with the finding of the Bench which decided the Bangalore District Co-operative Central Bank Ltd. (supra) that the decision in the case of Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT was rendered on its own facts. The latter decision was clearly a reasoned decision.
The question is whether we agree with the reasoning in Madhya Pradesh Cooperative Bank Ltd. (supra). There is no doubt, and it is not disputed, that the assessee-co-operative bank is required to place a part of its funds with the State Bank or the RBI to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of Section 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee's business. We are unable to take the view that found favour with the Bench that decided the case of Madhya Pradesh Cooperative Bank Ltd. (supra) that only income derived from circulating or working capital would fall within Section 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital.
In the premises, we take the view that the decision of this Court in the case of Madhya Pradesh Co-operative Bank Ltd. (supra) does not set down the correct law and that the law is as we have put it above. The question, accordingly, is answered in the affirmative and in favour of the assessee.
8. The said decision was also approved in the case of CIT v. Ramanathapuram Distt. Co-op. Central Bank Ltd. . The counsel for the assessee further referred to the decision in the case of Mehsana Distt. Central Co-operative Bank Ltd. v. ITO Surat Distt. Co-operative Bank Ltd. and Ors. v. ITO and Ors. (2003) 78 TTJ (Ahd)(SB) 1, Railway Employees Co-operative Bank Ltd. v. ITO 32 TW 107 (Jp) and Rajasthan Rajya Sahakari Bhumi Vikas Bank Ltd. v. ITO 31 TW 212 (Jp) where the decision finds favour to the assessee.
9. In view of the above decisions and facts of the case, we are of the view that the investments made by the assessee in Government securities and with banks and other bankers are essentially a part of banking activity and form part of stock-in-trade and working or circulating capital and, therefore, are the part of business activities falling within scope of Section 80P(2)(a)(i) of the Act. Therefore, in ground Nos. 2, 3 and 6, the answer to the question finds favour to the assessee. Hence ground Nos. 2, 3 and 6 of the assessee are allowed.
10. In the result, the appeal of the assessee is partly allowed. ITA No. 246/Jp/2000-Asst. yr. 1996-97
11. The assessee has raised in all five grounds of appeal. Ground Nos. 1 and 2 are dismissed as not pressed. Ground No. 5 is general in nature and does not require any adjudication.
12. In the remaining ground Nos. 3 and 4 the assessee has objected to inclusion of interest received on Government securities amounting to Rs. 2,67,500 and from banks and other bankers Rs. 11,32,997 as income from other sources and not income from business and which was not allowed deduction under Section 80P(2)(a)(i) of the Act.
13. The facts of the case are similar to the facts in the case of the assessee vide ITA No. 630/Jp/1999 of even date for the asst. yr. 1993-94 where the interest income has been treated as income from business activities of the society and eligible for deduction under Section 80P(2)(a)(i) of the Act. Since the facts in this case are similar to the facts in assessee's own case in ITA No. 630/Jp/1999 (supra), following the decision in that case, we decide the ground Nos. 3 and 4 in favour of the assessee. Thus, ground Nos. 3 and 4 of the assessee are allowed.
14. In the result, appeal of the assessee is partly allowed.
ITA No. 637/Jp/2000-Asst yr. 1997-9815. The assessee has raised in all 6 grounds of appeal. Ground No. 3 is dismissed as not pressed by the assessee and ground No. 5 has been set aside in the first round by the learned CIT(A) and becomes infructuous and hence dismissed.
16. The assessee in ground Nos. 1, 2 and 4 has objected to inclusion of the interest income on Government securities amounting to Rs. 5,35,000 and from banks and bankers amounting to Rs. 11,26,929 and dividend income amounting to Rs. 2,24,987 as income from other sources where a deduction under Section 80P(2)(a)(i) is allowable.
17. The facts of this case are similar to the assessee's own case for the asst. yr. 1993-94 in ITA No. 630/Jp/1999 of even date where the activities of the assessee have been treated as business activities and deduction is allowable under Section 80P(2)(a)(i) of the Act. Following the decision in the assessee's own case for the asst. yr. 1993-94 (supra), we decide ground Nos. 1, 2 and 4 in favour of the assessee. Thus, ground Nos. 1, 2 and 4 of the assessee are allowed.
18. Therefore, the appeal of the assessee is partly allowed.
19. In the result, appeals of the ITA No. 630/Jp/1999, 246/Jp/2000, 637/Jp/2000 for the asst. yrs. 1993-94, 1996-97, 1997-98 are partly allowed.