Income Tax Appellate Tribunal - Indore
Income Tax Officer vs Jila Sahakari Kendriya Bank Mydt. Jila ... on 31 August, 1998
Equivalent citations: [1999]69ITD214(INDORE)
ORDER
Satish Chandra, A.M.
1. These appeals by the Revenue and cross-objections by the assessee arise out of the order dt. 18th March, 1994 of the CIT(A), Bhopal, pertaining to the asst. yrs. 1989-90, 1990-91 and 1991-92.
2. In Revenue's appeals, the common grievance is that the CIT(A) erred in deleting the additions of Rs. 1,83,508, Rs. 1,74,408 and Rs. 1,79,750 representing income earned by the assessee from investment of reserve fund in asst. yrs. 1989-90, 1990-91 and 1991-92 respectively. In its cross-objections, the common objection of the assessee is that the CIT(A) erred in not entertaining the additional ground of appeal of the assessee claiming deduction of Rs. 12,58,066, Rs. 10,38,570 and Rs. 17,34,292 as business expenditure in asst. yrs. 1989-90, 1990-91 and 1991-92 respectively.
3. It has been reported by the Registry that the cross-objections filed by the assessee are barred by limitation by 8 days. The Registry had brought this facts to the notice of the assessee, in response to which the assessee submitted vide petition dt. 25th July, 1994 that the assessee had sent the cross-objections by post under postal certificate on 24th June, 1994 and, therefore, the same should have been received well before 4th July, 1994 which was the due date. Due to postal delay, the cross-objections were received by the Registry on 12th July, 1994. It was requested that the delay caused in postal transit from Vidisha to Indore was beyond the control of the assessee and, therefore, the delay may be condoned. The assessee had enclosed photocopy of the postal certificate in support of the contention that the cross-objections had been sent under postal certificate on 21st June, 1994.
4. After hearing the learned representatives of the parties and having regard to the fact that the delay in filing the cross-objections was on account of delay attributable to the postal authorities, we hereby condone the delay and admit the cross-objections.
5. The facts relating to the Revenue's appeals are that the assessee is a co-operative bank. It had filed its returns declaring 'nil' income on 4th August, 1989, 12th November, 1990 and 31st October, 1991 for the asst. yrs. 1989-90, 1990-91 and 1991-92 respectively. These were processed and intimation under s. 143(1)(a) had been issued accepting the 'Nil' income in all the years. Subsequently, notices under s. 148 were issued which were served on 2nd February, 1993. In response thereto, it was stated by the assessee in writing or 9th March, 1993 that the returns submitted earlier may be treated as returns filed in response to notice under s. 148. During the course of reassessment proceedings, it was contended that there was no investment out of reserve fund and, therefore, no income had escaped assessment. It was also contended that as per s. 24(1) of the Banking Regulation Act, 25% of total time and demand liability has to be invested necessarily in securities, otherwise it will amount to an offence under s. 46 of the Banking Regulation Act. It was pointed out that since these investments in securities have been made under the legal provisions, these will constitute stock-in-trade. Details of total time and demand liabilities were filed and reference was made to M. P. High Court decision in CIT v. Bhopal Co-operative Central Bank (1987) 164 ITR 173 (MP). The submissions of the assessee were not acceptable to the AO, who relying on M. P. High Court decision in Madhya Pradesh Rajya Sahakari Bank v. CIT (1988) 174 ITR 150 (MP) held that the interest income earned on securities earmarked against statutory reserve fund is not eligible for exemption under s. 80P. He, accordingly, brought to tax the impugned interest income in all the three years in his consolidated order dt. 3rd September, 1993 under s. 143(3) r/w s. 148. Aggrieved thereby, the assessee appealed.
6. Before the CIT(A), it was contended that the additions were not justified, as the assessee had to deposit certain amounts in accordance with s. 24 of the Banking Regulation Act, 1949. It was also urged that in order to retain the licence and to carry on the business of banking, the assessee had to satisfy the requirements of s. 24 of the Banking Regulation Act, 1949. It was also stated that the amount so deposited in the securities in accordance with s. 24 of the said Act was less than the stipulated amount and, therefore, the investment made by the assessee out of the circulating capital/stock in securities was not from the surplus or reserve fund of the assessee. Reliance was placed on the decision in Bhopal Co-operative Central Bank Ltd. (supra). The submissions of the assessee found favour with the CIT(A), who was of the view that it has been held in Bhopal Co-operative Central Bank Ltd. (supra) that the security deposit made by the co-operative society in compliance with s. 24 of the Banking Regulation Act, 1949, is part of its stock-in-trade and the interest received on such deposits is income arising from business of banking and such income is exempt from tax under s. 80P(2)(a)(i). He further observed that since the deposits made by the assessee Bank in the securities are less than the limits provided under s. 24 of the Banking Regulation Act, 1949, the income from these securities cannot be brought to tax. He accordingly deleted the impugned additions in all the three years. The Revenue is dissatisfied and is before us.
7. Shri Brijesh Gupta, the learned Departmental Representative, submitted that the CIT(A) was not justified in deleting the impugned additions in view of the law enunciated in the following decisions Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT (1966) 218 ITR 438 (SC);
CIT v. Jila Sahakari Kendriya Bank Mydt. (1997) 225 ITR 421 (MP); and CIT v. Rajasthan State Co-operative Bank (1996) 223 ITR 55 (Raj)
8. Before we proceed further, we may notice these decisions. In Madhya Pradesh Co-operative Bank Ltd. (supra), the assessee was an apex body controlling all District Co-operative Banks. Under s. 44 of the Madhya Pradesh Co-operative Society Act, 1960, the assessee was required to invest or deposit its funds to maintain a cover to the extent necessary. Under the M.P. Government instructions No. CR. 25/26 dt. 7th October, 1960, no part of the reserve fund of apex bank can be utilised as working capital nor can any part of the reserve fund deposits be withdrawn except with the permission of the Registrar to meet losses or at the time of winding up and not otherwise. While framing the assessment, the ITO included in the taxable income of the assessee interest earned on securities earmarked against reserves. The assessee claimed that it was entitled to the benefit of s. 81 of the Act. This was negatived by the AO. The assessee's contention did not find favour at the first appellate stage, Tribunal and the High Court. The assessee's appeal to the Supreme Court was also dismissed. Their lordships held that it was clearly understood in banking parlance that circulating capital was that which was to be into circulation or turn over to earn profits. Government securities coming out of reserve fund which could not be easily encashed and which could be utilised only when certain contingencies arose should not be considered to be circulating capital or stock-in-trade. Their lordships further held that the income derived from the investment in Government securities placed with the State Bank of India or 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, the interest on Government securities placed with the State Bank of India or Reserve Bank of India could not qualify for exemption under s. 81 (now s. 80P) or the IT Act. The Hon'ble Supreme Court affirmed the decision of M.P. High Court in MP. State Co-operative Bank Ltd. v. Addl. CIT (1979) 119 ITR 327 (MP).
9. In Jila Sahakari Kendriya Bank Mydt (supra) the assessee was a co-operative society primarily engaged in the banking business. The assessee filed returns claiming exemption under s. 80P of the Act. A question arose whether the income from interest on securities earmarked to reserve fund was entitled to exemption under s. 80P. Following the decision of the Hon'ble Supreme Court in MP. Co-operative Bank Ltd. (supra), the jurisdictional High Court held that income from interest on securities earmarked to reserve fund was not entitled to special deduction under s. 80P.
10. In Rajasthan State Co-operative Bank (supra), a question before Rajasthan High Court arose whether the Tribunal was justified in holding that the incomes of Rs. 35,69,868 from investment of reserve funds is exempt under s. 80P of the Act. Their lordships of Rajasthan High Court noted that the provisions of rr. 55 and 56 of the Rajasthan Co-operative Bank Rules, 1966 can be compared with the Madhya Pradesh Government instructions dt. 7th October, 1960, which was considered by the apex Court in the case of Madhya Pradesh Co-operative Bank (supra) and on the basis of which it was considered that investment of reserve fund and securities is not to meet the probable eventuality to pity all the depositors and was not considered to be a circulating capital or stock-in-trade. Following the apex Court decision in Madhya Pradesh Co-operative Bank Ltd. (supra), their lordships of Rajasthan High Court held that the income from investment of reserve fund was not entitled to special deduction under s. 80P, as the interest earned on securities investments by the bank is not a banking business, as the said investment is neither of circulating capital or stock-in-trade of the co-operative bank as it has no absolute or unfettered right to withdraw the same whenever it likes. It can be withdrawn only in the proceedings of winding up of the co-operative society. In these circumstances, the Court held that the Tribunal was not justified in holding that the income from investment of reserve fund is exempt under s. 80P of the Act.
11. Shri S. K. Jain, the learned advocate for the assessee, submitted that after framing assessment under s. 143(1), no new information came in possession of the AO and the assessments were reopened on mere change of opinion. Since the reopening of assessment is bad in law, the entire reassessment proceedings needs be quashed. He referred to the following decisions in support of the propositions that an assessment already completed cannot be reopened on account of change of opinion :
CIT v. Dinesh Chandra H Shah & Ors. (1971) 82 ITR 367 (SC); CIT v. Simon Carves Ltd. (1976) 105 ITR 212 (SC); Diamond Sugar Ltd. v. ITO (1973) 89 ITR 171 (Cal); Ram Kishan Oil Mills v. CIT (1965) 56 ITR 186 (MP); Kamalchand v. ITO (1981) 128 ITR 290 (MP); and CIT v. Dhar Central Co-operative Bank (1984) 149 ITR 438 (MP).
12. Shri Jain submitted that the above submission was made before the CIT(A), which is obvious from the assessee's written submission dt. 17th March, 1994 before the CIT(A), a copy of which appears at pp. 3-5 of the assessee's compilation.
13. Shri Jain further invited our attention to the observations of the AO on p. 2 of the assessment order regarding the note contained in the returns stating therein that if the claim of the assessee of special deduction under s. 80P(2)(a)(i) is not accepted and it is held that interest income from securities is not exempt under s. 80P, then the expenditure on proportionate basis may be allowed while bringing to tax the income earned on securities. Shri Jain submitted that the said note was appended by way of abundant precautions so that additional tax may not be levied. However, it was an alternate plan with protest. On merits, Shri Jain submitted that the view of the CIT(A) finds support from the latest decision of the Hon'ble Supreme Court in CIT v. Bangalore District Co-operative Central Bank Ltd. (1998) 99 Taxman 404 (SC), wherein their lordships have considered their earlier decision in Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT (wherein the decision of M.P. High Court in Madhya Pradesh State Co-operative Bank Ltd. v. Add]. CIT (supra) was affirmed. Their lordships observed that the decision in Madhya Pradesh Co-operative Bank Ltd. (supra) was rendered on the facts of that case and it is not applicable to the case before them in view of the finding of the Tribunal that the income is attributable to the business of the assessee.
14. In his counter arguments, Shri Brijesh Gupta, the learned Departmental Representative, submitted that while issuing the intimation under s. 143(1)(a), the AO had not applied his mind on the issue of taxability of the interest earned on investment of reserve fund. He submitted that the note appended along with return itself showed that the assessee was not sure that the interest income earned on investment of reserve fund by the assessee would be exempt under s. 80P. On the basis of the said note and the decision of M.P. High Court in Madhya Pradesh State Co-operative Bank Ltd. v. Addl. CIT (supra) and in Madhya Pradesh Rajya Sahakari Bank Ltd. v. CIT (supra) and in Madhya Pradesh Rajya Sahakari Bank v. CIT (supra), wherein their lordships had held that interest on securities earmarked against reserve was not the income of the assessee from business and was, therefore, not exempt, the AO was perfectly justified in reopening the assessments. It is, therefore, not correct to say that the assessments were reopened due to change of opinion. Shri Brijesh Gupta further submitted that the AO has recorded a finding that the interest earned on investment of reserve fund will not qualify for deduction under s. 80P and, therefore, the decision of the apex Court in Bangalore District Co-operative Central Bank Ltd. (supra) is distinguishable on facts.
15. As regards to cross-objections, Shri S. K. Jain, the learned advocate for the assessee, submitted that the additional ground taken before the CIT(A) has not been adjudicated upon. It is submitted that the note appended to the return itself, the assessee had claimed deduction of the business expenditure. The CIT(A), therefore, ought to have recorded his finding on the additional ground taken before him. Shri Brijesh Gupta, the learned Departmental Representative on the other hand, supported the order of the CIT(A) on the point.
16. We have considered the submissions advanced by the learned representatives of the parties. We have also perused the orders of the authorities below as also the decisions cited by the respective parties. Admittedly after the original returns were filed for all these three years, these were processed under s. 143(1)(a). Sec. 143(1)(a) provides for the following action to be taken by the AO
(i) If any tax or interest is found due on the basis of the return, after adjustment of the pre-paid taxes, an intimation shall be sent to the assessee specifying the amount so payable and such intimation shall be deemed to be the notice of demand; and
(ii) If any refund is due, it shall be granted to the assessee. Proviso to cl. (a) of sub-s. (1) of s. 143 stipulates prima facie adjustments to the returned income or loss for the purpose of computing the tax or interest payable or refundable to the assessee.
17. It appears that in the case of the assessee, no prima facie adjustments were made and hence the question of issuing intimation did not arise. It is apparent that at the time of processing the above returns, the AO had not considered the legal position about the taxability of interest on securities held by the assessee co-operative bank as enunciated by the jurisdictional High Court in M.P. State Co-operative Bank Ltd. v. Addl. CIT (supra) and Madhya Pradesh Rajya Sahakari Bank v. CIT (supra). Subsequently, he considered the above legal position. This, in our opinion, would not amount to change of opinion. Change of opinion presupposes that there was, earlier, a formation of an opinion. When, no such opinion was formed by the AO at the time or processing the original returns, it will be difficult to assume that a change in that opinion was being effected. In the case of A. L. A. firm v. CIT (1991) 189 ITR 285 (SC), their lordships of the Supreme Court have held that where the AO did not consider the decision of the jurisdictional High Court though available at the time of assessment, subsequent reopening on consideration of High Court's decision is valid. We therefore, held that the reopening was not without jurisdiction as canvassed by Shri Jain, the learned advocate for the assessee. The notices under s. 148 were issued after completing the formalities envisaged under law and, therefore reassessment proceedings were valid.
18. Now we come to the merits of the case. During reassessment proceedings, the assessee submitted before the AO that in order to carry out the banking business, it is obligatory under s. 24(1) of the Banking Regulations Act to invest in the securities 25% of the total of its time and demand liabilities. If it is not so invested, then, it is an offence under s. 46(4) of the Banking Regulation Act and also for non-maintenance of the said securities, the assessee is liable for winding up the banking business. The deposits in question are in compliance to s. 24 of the Banking Regulation Act and, therefore, the same will not change the nature of holding from stock-in-trade to investment. Statement showing total demand and time liabilities for each of the asst. yrs. 1989-90, 1990-91 and 1991-92 as also the amount of securities against the above liabilities was filed. It was pointed out that in no year, the amount of securities exceed 25% of demand and time liabilities. It may be stated that there is no adverse finding of the AO with regard to the above factual position.
19. Besides, it was the assessee's case that the decision of Madhya Pradesh Rajya Sahakari Bank Ltd. v. CIT (supra) is inapplicable to the facts of the assessee's case, as the amount of securities is below 25% of the demand and time deposits. It was also stated that decision of M.P. High Court in CIT v. Bhopal Co-operative Central Bank (supra) squarely apply to the case of the assessee, which has not been reversed so far. On appeal also, these submissions were reiterated before the CIT(A). It was emphasised that the investments in securities were much below the minimum requirements as per the provisions of the Banking Regulations Act. It was also argued that such investments were neither debited to the reserve fund account nor these were out of the reserve funds. It was in this backdrop that it was contended that these investments could not be held to be not from the circulating capital/stock-in-trade of the assessee and that they were necessary for meeting the statutory compliance of the Banking Regulations Act, failing which, the assessee could not lawfully carry on and reserve the continuance of its banking business.
20. We may observe that the Revenue could not refute the above contentions either before the CIT(A) or before us. In the absence of any material brought on record by the Revenue to controvert the above contentions, it is not permissible to ignore them and draw adverse inference. On the facts available on records, it has, therefore, to be held that the assessee co-operative society, which is carrying on the business of banking, earned interest income on its investment in securities as per the provisions of the Banking Regulations Act in the course of carrying on its banking business. If that be so, the latest decision, of the Hon'ble apex Court in CIT v. Bangalore District Co-operative Central Bank Ltd. (supra) would squarely apply to the facts of the assessee's case, wherein their lordships took notice of the fact that the investment in securities had been made by the assessee in compliance with the statutory provisions of ss. 24 & 56 of the Banking Regulations Act, 1949, and in order to carry on the business of banking the same was necessary and consequently such investments were part of the business activities falling within the scope of s. 80P(2)(a)(i). Their lordships also held that in these circumstances, the decision of the Supreme Court in Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT (supra) was not applicable as the interest income was attributable to the business of the assessee.
21. For the reasons aforesaid, we do not find any merit in the appeals of the Revenue, which we hereby reject.
22. All the three appeals are accordingly dismissed.
23. As regards the cross-objections filed by the assessee, we find that the additional ground taken before the CIT(A) did not involve any legal issue. It necessitated investigation into the facts relating to the claim of expenses. The CIT(A) was, therefore, justified in not entertaining them. However, in view of our decision in the appeals of the Revenue, the cross-objection of the assessee in all the three years has become only, academic. We, therefore, reject them.
24. In the result, the cross-objections are dismissed.