Income Tax Appellate Tribunal - Agra
Farrukhabad Gramin Bank vs Assistant Commissioner Of Income Tax on 23 February, 2006
Equivalent citations: [2006]103ITD207(AGRA), (2006)105TTJ(AGRA)1
ORDER
Diva Singh, J.M.
1. This is an appeal filed by the assessee against the order dt. 24th April, 2004 of CIT(A), Ghaziabad pertaining to 2001-02 assessment year.
2. The grounds raised in the present appeal read as under:
1. That the authorities below have erred on facts and in law by holding that the deduction under Section 80P(2)(a)(i) of the IT Act, 1961 is not allowable in respect of the income of the bank-assessed as AOP deemed co-operative society.
2. That the authorities below have erred on facts and in law in net following the order passed by Tribunal, Agra Bench, Agra in assessee's own case for asst. yr. 1998-99 in which the Tribunal held that income of the bank was exempt under Section 80P(2)(a)(i).
3. That the authorities below have erred on facts and in law in holding that the decision of the Hon'ble Supreme Court being in the case of co-operative bank are not applicable to the Regional Rural Bank.
4. That the authorities below have erred on facts and in law in stating that the investments mentioned in the assessment order are not in accordance with the provisions of RRB Act, 1976.
5. That the authorities below have erred on facts and in law in taxing the income from SLR investments and non-SLR investments ignoring the various decisions of Hon'ble Supreme Court, High Courts and Tribunal.
6. Your appellant submits that in view of the definition of the banking business as contained in 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 investment is its income from the banking business and hence, eligible for deduction under Section 80P(2)(a)(i) of the IT Act, 1961.
7. That the orders passed by both the lower authorities below are without appreciating the facts, various submissions, explanation and information submitted by the appellant from time to time which ought to have been considered before passing the impugned orders.
8. That the authorities below have erred on facts and in law in not following the instruction of the Government that the entire income of the rural bank is exempt under Section 80P(2)(a)(i) of the IT Act, 1961.
9. That the authorities below have erred on facts and in law in holding that the interest on SLR and non-SLR investments are not income from banking business inasmuch the investment were made in the course of banking business as per provisions of the statutory relevant provisions and guidelines of the RBI.
10. Because in any view of the case the additions made are highly excessive and liable to be deleted.
11. That the authorities below have erred on facts and in law in treating receipt in the previous year relevant to asst. yr. 1996-97 of Rs. 4,58,76,000 as share contribution by the Government of India, U.P. Government and sponsor bank, Bank of India, as income for the asst. yr. 2001-02 on protective basis, the addition made is liable to be deleted.
12. That the authorities below have erred on facts and in law and have ignored that equity capital of Rs. 4,58,76,000 was sanctioned and provided by Central Government, sponsor bank and State Government concerned in the ratio of 50:35:15 as per letters already on file.
13. That the authorities below have erred on facts and in law in imposing interest:
Under Section 234B Rs. 1,74,75,673 Under Section 234D Rs. 70,830 Withdrawing under Section 244A Rs. 62,330
without passing a speaking order. The interest imposed is liable to be deleted.
3. The relevant facts as brought out in the assessment order pertaining to ground Nos. 1 to 10 are that the assessee is an incorporated body under the Regional Rural Banks Act, 1976 sponsored by Bank of India, Farrukhabad, having the following share capital:
SI. No. Share ratio Shareholder No. of shares
subscribed
1. 50% Govt. of India 5000
2. 35% Bank of India 3500
3. 15% Govt. of Uttar Pradesh 1500
However, for the purpose of IT Act, 1961 and Interest tax Act, 1974 the status of co-operative society has been assigned under RRB Act, 1976.
3.1 The working area of the assessee bank has been notified in terms of Section 3(1) of the Regional Rural Banks Act, 1976 (hereinafter called as RRB Act, 1976), as the Districts of Farrukhabad and Kannauj. In these Districts, the bank is working with the network of 82 branches.
3.2 The objects of the bank are brought out in the assessment order by the AO from the directors' report, presented by the chairman of the bank wherein the following objects of the bank under the head "brief introduction" were mentioned as under:
The bank was established mainly with a view to provide basic banking facilities in the remote rural areas and to mobilize savings from rural masses, who were not adequately served by the commercial banks as the branch net work of these banks was limited to urban and semi urban centers only. The bank's objective was to discharge the responsibilities under Section 18(2)(a) and (b) of RRB Act, 1976 by extending credit facilities through implementation of various Government sponsored schemes for social and economic upliftment of the weaker sections of the society and to small and marginal farmers, village artisans, landless labourers for purpose of agriculture and allied activities, trade, commerce, etc. 3.3 In the course of the assessment proceedings the AO took note of the fact that the directors' report also states that the Government of India has decided under their new policy to extend the scope of business activities of RRBs to make them financially sound/viable and self-dependent units w.e.f. 1994-95. Accordingly, the RRBs have been allowed to lend upto 60 per cent of the budgeted amount to the non-target group. Thus, according to the AO, besides the normal banking business fund, the following investments were also made by the assessee bank:
1. SLR Investments:
(i) Deposits with Bank of India Rs. 59,14,22,951
(ii) NABARD & IDBI Bonds Rs. 03,50,00,000
_________________
Rs. 62,64,22,951
_________________
3.4 After taking into consideration the decisions mentioned at pp. 2 and 3 of the assessment order, namely CIT v. Karnataka State Co-operative Apex Bank (2001) 169 CTR (SC) 486 : (2001) 251 ITR 194 (SC), Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT , Bihar State Co-operative Bank v. CIT , CIT v. Ratnagiri District Central Co-operative Bank Ltd. (2002) 174 CTR (Bom) 116 and a decision of Special Bench of Tribunal, Ahmedabad in the case of Surat District Co-operative Bank Ltd. and Ors. v. TTO (2003) 78 TTJ (Ahd)(SB) 1, he was of the view that these case laws would establish that under Section 80P(2)(a)(i) deduction is largely dependent upon facts of the case and more particularly-
1. Investments were out of surplus funds.
2. In approved securities and easily reliable in case of need.
3. Placement of such funds being imperative to the carrying of business of banking.
4. That funds were to be part of circulating capital and could not be permanently deprived of banking business.
5. That the very definition of banking vide 5(b) of the Banking Regulation Act enjoins making of such investments as a normal mode of carrying on the business of banking.
3.5 On a perusal of the facts of the case before him and the judgment of the Supreme Court and the High Courts in conjunction, he was of the opinion that they do not help the assessee. Referring to the judgment of the Hon'ble Madras High Court in the case of CIT v. Lakshmi Vilas Bank Ltd. , wherein their Lordships were considering the "Interest-tax Act", he was of the view that their Lordships therein held investments in Government securities/T-bills to the "investments" not "working-capital" or "stock-in-trade".
3.6 He was further of the view that on the basis of analysis of the decisions referred to earlier as well as judgments of the Hon'ble apex Court in the case of Bank of India Finance Ltd. v. Custodian 10 SSC 488, that investment in Government securities are both by practice and in law, "investments" and not "stock-in-trade". Their classification as "investments" is largely in recognition of their role in and as tools of Government monetary and fiscal policy duly executed through RBI. These SLR and CRR requirements are utilized for intervention in the markets in order to further the Governments imperatives and policy objectives. They are utilized towards contractors/expansion of money supply, towards setting up the interest rate, to pursue inflationary targets and other monetary policy objectives. It is towards these ends that the RBI announces periodic increase/decrease in SLR requirements. Banks have no discretion/control over the said requirements and they have but to comply with them.
3.7 Another reason which according to him significant was that on analysis of Sections 18 and 24 of the Banking Regulation Act that these sections, which prescribe the maintenance of such statutory provisions, do not allow any withdrawals so that "reserve" funds are effectively sterlised as far as the assessee bank is concerned. He was of the view that since the banks have no discretion or control over them and as long as the banks continue operations, such investments would have to be maintained and that these cannot be withdrawn. Accordingly in practice, such investments are effectively outside the control of banks and as such are permanently withdrawn from the banking systems of these RRBs.
3.8 Accordingly, on account of the fact that the banks neither have discretion nor any control over these funds and which are designed to fulfil objectives not of the RRB and thus would not be an essential part of banking activity of RRB inasmuch as there is no provisions for their withdrawals, they are effectively out of the purview of the bank business of RRB.
3.9 Thus on account of this reasoning, he was of the view that such "investments" being outside the pale of banking-activity and not available to the bank, as per its discretion accordingly the income thereon would not qualify for deduction under Section 80P(2)(a).
4. With regard to the non-SLR investments, which were calculated as under:
(i) HPSFCL Bonds Rs. 1,00,00,000
(ii) IDBI Bonds Rs. 1,00,00,000
(iii) IDBI Bonds Rs. 2,25,00,000
(iv) SBI Bonds Rs. 1,00,00,000
(v) TFCI Bonds Rs. 80,00,000
(vi) Units of UTI Rs. 10,98,00,000
(vii) NCDs of Punjab
Wireless Systems Ltd. Rs. 25,00,000
(viii) NCDs of Rapicut
Carbides Ltd. Rs. 25,00,000
(ix) Bank of India Bonds Rs. 1,90,00,000
(x) IFCI Bonds Rs. 2,00,00,000
(xi) ICICI Bonds Rs. 50,00,000
________________
Total non-SLR investments : Rs. 21,93,00,000
________________
It was observed by him that on these investments, the assessee bank has shown the income as under:
(1) On SLR Investments Rs. 20,39,25,000 (2) On non-SLR Investments Rs. 4,02,30,000
4.1 Observing that the assessee has shown a net profit of Rs. 6,21,91,455.44 and that the entire income had been claimed exempt under Section 80P(2)(a)(i) of the IT Act, 1961, which included the interest income earned on non-SLR investment which amounted to Rs. 4,02,30,000, he was of the view that since this income was earned on the investments which were not in accordance with the scheme of RRB Act, 1976 since under the provisions of RRB Act, 1976, the bank has to conduct banking business in the notified area. The non-SLR investments on the other hand according to him were made outside the notified area even though under the guidelines of RBI and NABARD, yet they were held to be not entitled for deduction under Section 80P of the IT Act, 1961 because the business of assessee bank was beyond the purview of RRB Act, 1976. Being of the view that these investments are not in accordance with the objects as specified in the RRB Act, 1976. Therefore, income earned on non-SLR investment was also held not entitled for deduction under Section 80P of the IT Act, 1961.
4.2 In the circumstances, he required the bank to give reasons as to why the income on non-SLR investment should also not be added in the total income vide order sheet notice dt. 24th Nov., 2003.
4.3 From a perusal of the assessment order, it is seen that in response to this notice, the assessee filed written reply dt. 5th Dec, 2003 contending that the income of non-SLR investment is exempt under Section 80P of the IT Act and, for this submission reliance was placed upon the order of Special Bench of Tribunal, Ahmedabad rendered in the case of Surat District Co-operative Bank Ltd. and Ors. v. FTO (supra). Reliance was also placed upon the order of Tribunal, Agra Bench in the case of assessee itself in ITA No. 208/Agra/2000, dt. 31st July, 2003 for asst. yr. 1998-99. It was submitted that the Agra Bench has placed reliance upon the Ahmedabad Bench of the Tribunal.
4.4 The reliance placed upon the above two orders was not accepted by the AO for the reason that he was of the view that the issue of non-SLR investment has been considered by the Gujarat High Court in the case of Gujarat State Cooperative Bank Ltd. v. CIT (2001) 167 CTR (Guj) 34 : (2001) 250 LTR 229 (Guj), wherein their Lordships have held that income on non-SLR investment is chargeable to income-tax. He observed that this issue has travelled to the Hon'ble apex Court, wherein the Supreme Court in Gujarat State Co-operative Bank Ltd. v. CIT (supra) along with the case of Mehsana District: Co-operative Bank Ltd. v. ITO , the Supreme Court has restored the matter to the file of CIT(A) for deciding the issue afresh. On the basis of this fact, it was concluded by the AO that no law has been laid down by Hon'ble Supreme Court. He was further of the view that their Lordships of Hon'ble Supreme Court did not decide the issue because neither the AO nor the appellate authorities had given there any finding regarding the question "whether the income derived by the assessee from the investment of its voluntary reserves has been utilized by it in the course of its ordinary banking business."
4.5 In this background, the AO in the present case proceeded to consider the issue regarding the income from non-SLR investment (voluntary reserves) in the context of ordinary banking business done by RRB.
4.6 He was of the view that every ruling of co-operative bank is not binding on the banking business of RRBs because the manner of working differs on account of different enactments by which they are governed. The business of co-operative banks, it was observed, is governed by;
(a) State Co-operative Banks Acts; and
(b) Banking Regulation Act, 1949.
The business of RRBs, on the other hand, is governed by;
(c) RRB Act, 1976; and
(d) Banking Regulation Act, 1949.
4.7 On account of this fact he was of the view that the issue whether making investments by RRBs is "ordinary course of banking business" or not, it was necessary to consider the provisions of RRB Act, 1976.
4.8 In this context, referring to the objects for which the RRBs were established, he referred to the preamble which read as under:
An Act to provide the incorporation, regulation and winding up of RRBs with a view to developing the rural economy by providing, for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs and for matters connected therewith and incidental thereto.
4.9 He observed that these objects which have been enshrined in Section 18 of the RRB Act, 1976 and Section 3 of the said Act which specified the area of operation of the RRB and which vide notification by the Central Government in the case of assessee bank were District Farrukhabad and District Kannauj.
4.10 Thus, on the basis of the above reasoning and provisions he concluded as under:
Thus for a RRB, only the business conducted in the notified area may be said "ordinary course of banking business".
In view of the above legal position, the placing of working fund (non-SLR) by the assessee at the disposal of other commercial banks and other financial institution is not an ordinary course of banking business. Accordingly, the assessee bank is not entitled for deduction under Section 80P(2)(a) of IT Act, 1961 in respect of income earned from non-SLR investments. Therefore, an income of Rs. 4,02,30,000 is added in the total income of assessee.
4.11 In the circumstances, the income of Rs. 4,02,30,000 was added to the total income of the assessee.
5. Aggrieved by this, in appeal before the first appellate authority, it was submitted on behalf of the assessee that the AO erred on facts and in law in holding that the investment made by the assessee was not in accordance with Banking Regulation Act, 1949 and the RRB Act, 1976. In this context the assessee stated referring to Section 22 of the RRB Act, 1976 that as per this section the status of the assessee bank is deemed to be a co-operative society for the purpose of Section 80P of the IT Act, 1961 as such it was claimed that the assessee is entitled to the deduction claimed. Reference was also made to Section 6 of the Banking Regulation Act, 1949, arguing that the forms of business in which the banking companies may engage includes the income earned from all investments including SLR and non-SLR. Reference was also made to Section 18 of the RRB Act, 1976.
5.1 Reliance was placed on the following decisions:
(a) CIT v. Karnataka State Co-operative Apex Bank (supra);
(b) CIT v. Bangalore Distt. Co-op. Central Bank ;
(c) CIT v. Ramanathupuram Distt. Co-op. Central Bank Ltd. ;
(d) Surat District Co-operative Bank Ltd. and Ors. (supra);
(e) CIT v. Bazpur Co-operative Sugar Factory Ltd. (SC);
(f) Sahney Steel & Press Works Ltd. v. CIT (.
5.2 Before the CIT(A) the AO also placed written submissions which have been reproduced in para 3.2 onwards from p. 3 of the CIT(A)'s order.
5.3 The sum and substance of these submissions which can briefly be called out is that co-operative banks and RRBs are governed by different statutes as such the decisions in the case of co-operative banks will not apply. Another distinction namely the objects for which the RRBs were formed namely developing the rural economy on regional basis was also considered to be a marked distinction whereas the co-operative banks have to develop the cooperative sector of the country, as such this distinction was submitted to be important. On facts, it was further submitted that in the year under consideration the assessee has shown the following sources of income:
(i) Interest income from loans and advances granted by the banks.
(ii) Interest income from investment known as SLR investment,
(iii) Interest income from investment known as non-SLR investment,
(iv) Income or grant from Government sponsored scheme,
(v) Income from other banking activities like locker rent, etc. 5.4 The AO further submitted that the deduction has been denied to the assessee specifically for the reason that the above mentioned income has been earned by the assessee without serving its basic purpose, i.e., it was not earned while developing the rural economy and the investment was made solely to earn more profit.
5.5 With respect to non-SLR investment, it was reiterated by the AO by way of these written submissions that the assessee bank had not operated its bank with a view to develop the rural economy within the notified areas. Referring to the fact that although under the IT Act, income of the assessee is not exempt, and the benefit is only on account of Section 22 of the RRB Act, by which the status of co-operative society has been granted for the purpose of deduction under the IT Act, he submitted that on account of this fact, for activities beyond the notified area contrary to the aims and objects of the Act, the deduction was to be disallowed.
5.6 Reliance by the AO was also placed upon Section 18 of the RRB Act r/w Section 5 and Section 6 for the contention that the assessee bank has to accept the deposits and has to lend or advance money in this area for developing the rural economy. However, apart from the above business, the assessee has invested money in FDRs of other banks, securities and debentures of public sector undertakings. In view of this the advances were made outside the notified limit and mostly in the metropolitan cities. Accordingly, the income arising out of these investments was not in accordance with the spirit of the RRB Act, 1976 and as such, the deduction under Section 80P was denied. By way of written submission, it was emphasised by the AO that under the RRB Act, it is only the business conducted in the notified area for the purpose of developing the rural economy, which was entitled to deduction under Section 80P of the IT Act, 1961 and not any other income. Thus conversely it was submitted the income earned from investment from urban area or metropolitan cities are beyond the purview of RRB Act and deduction thereon is not admissible.
5.7 Reliance was placed upon the following decisions:
(i) CIT v. Bangalore Distt. Co-operative Central Bank Ltd. (supra)
(ii) CIT v. Karnataka State Co-operative Apex Bank (supra)
(iii) Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT (supra)
(iv) Malprabha Gramin Bank, Dharwad v. Jt. CIT, Hubli, Tribunal Order.
(v) Surat Distt. Co-operative Bank Ltd. and Ors. v. ITO and Ors., Tribunal, Special Bench, Ahmedabad (supra).
(vi) Fanukhabad Giamin Bank v. 1T0, Waid-1, Farrukhabad, Tribunal, Agra Bench, Agra.
(vii) Radhasoami Satsang v. CIT
(viii) Union of India v. Satish Panalal Shah
(ix) CIT v. A.R.J. Security Printers .
5.8 With regard to disallowance of deduction under Section 8OP on the income earned from SLRs, the AO by way of the written submission, contended as under:
In respect of the assessee's claim for Section 80P(2)(a)(ii) deduction on "interest from Government securities subscribed under SLR requirements", please find enclosed a newspaper clipping from the Economic Times, in particular, para 1 of column 2, of the said article; 'Financial repression in India used to take many forms. The Government got financial repression revenues, through a high statutory liquidity ratio, forcing banks to buy Government bonds and in effect subsidizing the issue price of Government bonds. Issuing ad hoc treasury bills at 4 per cent interest was another way of borrowing at artificially cheap rates. Bonds sold to the RBI were financed by the RBI simply printing money. This then fuelled inflation, reducing the real value of Government debt and real interest on that debt'.
This is to buttress my argument that SLR securities are meant for Government's fiscal and monetary policy objectives/initiatives and had nothing to do with banking and this term was called "extraction of huge implicit sums from the banking system controls.
5.9 In respect of the above contention, it was stated that the fact duly acknowledged in the public domain, can be cited as evidence to the effect that SLR funds were effectively stymed from the business of banking and vested in the Government.
5.10 It was further stated by him that Tribunal, Mumbai Bench in the case of Maharashtra State Co-operative Bank v. Asstt. CIT (1999) 64 TTJ (Mumbai) 414 had distinguished the judgment of the Hon'ble Supreme Court in Madhya Pradesh State Co-operative Bank Ltd. (supra) by referring to the following-
(a) absence of a "circular" as issued by Registrar MP Government, wherein reserves were to be invested in SLR-securities. However, regardless of whatever the powers of the registrar of co-operative societies, may be, in matters of banking, two judgments may be cited.
(a) Janata Sahakari Bank Ltd. v. State of Maharashtra (1995) 82 Comp Cas 707 (Bom).
Though the control and management of the co-operative society is vested in the Registrar, Co-operative Societies, the RBI has the power and authority to issue circular under Section 35A regarding the use of public funds by the society and this is binding on the society.
Section 24 of the Banking Regulation Act, 1949 (Maintenance of a percentage of assets) has full application to co-operative societies engaged in the banking business and as such they have to comply with the provisions of Section 24.
5.11 On the basis of the above, it was submitted that as far as the matter of banking is concerned RBI is supreme and the absence of circular enjoining the investment of reserves in SLR securities does not in anyway detract the inherent powers which is that certain portion is to be invested in SLR or CRR securities as per RBI norms.
5.12 Vide the written submissions, it was also pointed out before the CIT(A) that the Tribunal Bombay Bench distinguished the judgment of Supreme Court in Madhya Pradesh Co-operative Bank v. Addl. CIT (supra) by referring to the fact that the Government securities subscribed under SLR can be traded. It was his submission that this impression is erroneous for it is only such securities subscribed in excess of SLR/CRR requirements that can be traded, and not those that conform to the limits laid down by the SLR/CRR requirements.
5.13 The submission was also made that CRR is not a sine qua non of the business of banking, for this reliance was placed on the practice in England wherein the Bank of England does not prescribe any CRR (i.e., effective CRR rate is zero) for the banks whose operations it is required to supervise.
5.14 On the basis of the above facts and submissions, it was contended that the basis on which the judgment of Hon'ble Supreme Court in Madhya Pradesh State Co-operative Bank was overruled was:
(a) absence of circular from the Registrar;
(b) trading of SLR securities;
(c) sine qua non nature of CRR/SLR requirements; and
(d) that these SLR/CRR are in integrate part of banking operation. This, it was submitted, stands negatived by the contention raised by him and the law laid down in Laxmi Vilas Bank and the market practice.
5.15 Considering the submissions, the CIT(A) referring to Section 5(b) and Section 6(1)(a) of the Banking Regulation Act, 1949, concluded that it is evident that the bank can deal in bonds and securities but it cannot invest in the long-term investments for earning profits therefrom. Thereafter on considering the preamble of RRB Act, 1976 and Section 18 of the RRB Act, to which attention has been invited by the assessee's counsel and various judgments relied upon by the assessee and the Department, he was of the view that the assessee is a RRB and as such is required to carry out its business as per the aims and objectives of the RRBs and the provisions of Section 18 of the RRB Act, 1976. Referring to the Board's Circular No. 319, dt. 11th Jan., 1982 (1982) 29 CTR (TLT) 43 and Section 22 of the RRB Act, by way of which it has got status of cooperative society for claiming the deduction under Section 80P of the IT Act. However, with respect to its income from other banking activities or the income derived from the banks under Banking Regulation Act, 1949, is taxable as such, on which the deduction under Section 80P or under any other provisions of the IT Act is not admissible. Accordingly, he was of the view that the entire issue has to be looked into the light of specific provision and in the light of aims and objectives vis-a-vis, the business to be carried out by a RRB. He was further of the view that the RRB if and when engaged in the normal banking activities other than the specific business as per the objectives drawn in the RRB Act, 1976, the income on which the provisions of IT Act, 1961 shall apply. However, as far as the deduction under Section 80P is concerned, it has to be seen in the light of business authorized to be carried out with regard to the aims and objectives of the RRB Act, 1976. He was further of the view that the case laws cited by the learned Counsel on behalf of the assessee pertains to the case of cooperative banks, which are treated as co-operative societies under the provisions of Section 80P of the IT Act, whereas the assessee admittedly is a RRB and not a co-operative bank and hence, the deduction admissible to the income derived from the co-operative bank will be admissible to the appellant bank only to the extent it qualifies for such deduction within the meaning of Board's Circular No. 319, dt. 11th Jan., 1982 r/w Section 22 of the RRB Act, 1976. Moreover, even in case of co-operative banks, there are a number of judicial pronouncements including those of Hon'ble apex Court of the country in which it has clearly been laid out that the entire income of a co-operative society carrying on banking business is not exempt. It has been held by the Hon'ble apex Court in Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT (supra) that "every income of co-operative society carrying on banking business is not exempt. If a co-operative society engages itself in any other activity and earns profit therefrom, the income so derived becomes liable to tax.". In the case of Mehsana District Central Co-operative Bank Ltd. v. ITO (supra), the Hon'ble apex Court held regarding voluntary reserve that "the question whether income derived by the assessee co-operative bank from investment of its voluntary reserves other than statutory reserves is exempt under Section 80P(2)(a)(i) depended upon whether the voluntary reserves were utilized in the course of its ordinary banking business." The learned CIT(A), Agra, in case of Farrukhabad Grameen Bank, Fathegarh in Appeal No. 54/CIT(A)-l/Ward-I/Farrukhabad/1999-2000 dt. 29th Feb., 2000 (supra) for asst. yr. 1998-99 has held as under:
In the present case, the long-term investments made for earning interest or dividend cannot be taken as part of banking activities as the liquidity goes down.
5.16 The appellant has invested the money in SLRs and non-SLRs out of the surplus fund. The appellant did not adduce any evidence regarding the surplus fund out of the working capital of the appellant assessee. The investment in FDRs of the bank as also the investment in the post office in KVPs falls in the category of long-term investments. Besides, the appellant made the investments out of the surplus fund, which is not out of the capital employed for running the affairs of the appellant since the appellant cannot withdraw the money from these investments as and when the need arises for the same. Even before the AO the appellant could not adduce anything to this effect if the said funds could be taken as out of the working capital of the appellant.
5.17 Apart from the finding that there was distinction from M.P. State Cooperative Banks Ltd. v. Addl. CIT , the CIT(A) was further of the view that the case of the assessee stands on further different footings since the assessee has admittedly made investment in SLR and non-SLR, which is admittedly separate and distinct from the banking activities. He observed:
...This fact is evident from the break up of profits given by the appellant along with the written submissions furnished during the course of appeal proceedings and further vide a separate application dt. 16th March, 2004 requesting to direct the AO to keep the demand in abeyance till the decision of appeal as under:
Income SLR Non-SLR Banking Total Interest earned 20,63,02,000 4,02,30,000 6,90,17,000 31,55,49,000 Misc. Income - - 43,23,000 43,23,000 Total Income (A) 20,63,02,000 4,02,30,000 7,33,40,000 31,98,72,000 Expenditure (B) 16,61,91,162 3,24,08,171 5,90,80,667 25,76,80,000 Net profit 4,01,10,838 78,21,829 1,42,59,333 6,21,92,000 during the year (A-B)
5.18 Thus, he was of the view that as per the break up of profits given by the assessee himself, the assessee has admittedly earned income from three distinct sources as under:
(i) Interest on SLRs
(ii) Interest on non-SLRs
(iii) Interest and miscellaneous income earned from banking activities.
5.19 He observed that admittedly income from banking activities after deducing expenditure, which has been shown by the assessee at Rs. 1,42,59,333 as against total net income of Rs. 6,21,92,000. He further observed that the case law relied upon by the assessee are not applicable and distinct from the issue and the facts involved in the case under consideration.
5.20 He proceeded to consider that the apex Court in the case of CIT v. Karnataka State Co-operative Bank Ltd. (supra) has held as under:
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 IT Act, 1961. 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.
5.21 He was of the view that in the case of banking business and income therefrom is separately shown from the investment whereas in the case of the assessee, there is nothing relating to the income derived from the income or working circulating capital. Agreeing with the submissions of the AO that the assessee is not a co-operative society engaged in the banking business, but is engaged in the business of RRB, which is a separate and distinct business by itself and is governed by RRB Act apart from Banking Regulation Act, having its own distinct aims and objectives, which are distinct and different from the aims and objectives of the co-operative society engaged in the banking business, he was of the view that under Section 80P(2)(a)(i) deduction is admissible only with regard to the income earned on the business laid down as per RRB-Act whereas income from banking business is not qualified for such exemption. Observing that the area where the RRBs have to function are specially notified and these are not the metros and the urban areas where the banks and institutions are located in which the assessee has admittedly made the investment for earning higher rate of income. Reliance placed by the assessee on Surat District Co-operative Bank Ltd. and Ors. v. ITO and Ors. (supra) was held to be misplaced as the order was held to be distinguishable since it pertained to the case of a co-operative bank and not a RRB.
5.22 Similarly, the judgment in the case of Madhya Pradesh Co-operative Bank (supra), which had been overruled by the apex Court in the case of CIT v. Karnataka State Co-operative Apex Bank (supra), he was of the view that in the said judgment the apex Court has laid down as under:
...There is no doubt, it is not disputed, that the assessee co-operative banks 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 Co-operative Bank Ltd. v. Addl. CIT 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.
5.23 This judgment again was held to be distinguishable on account of the fact that it was in the context of co-operative banks and the funds required to be placed were in State Bank and RBI to enable the co-operative to carry out is banking business, whereas in the case of the assessee, the issue was held to be materially distinct. He was of the view that the investment made in SLR and non-SLR were admittedly outside the purview of banking business in the year under consideration. Thus the judgment was distinguishable.
5.24 The judgment of apex Court in the case of CIT v. Bangalore Distt. Cooperative Central Bank Ltd. (supra) was distinguished on account of the fact that firstly the assessee is not a co-operative society and the Tribunal had given findings of the fact in the case that the interest income is attributable to the business of the assessee and this finding had not been challenged by the Revenue on factual basis nor any material was placed to upset the Tribunal's factual conclusion whereas in the case of the assessee, he was of the view that the facts are entirely distinguishable since here the Department from the beginning is challenging that the income derived by the assessee is not attributable to the business activities of the assessee.
5.25 Accordingly, he was of the view that the Tribunal, Ahmedabad (Special Bench) relying upon the case of CIT v. Karnataka State Co-operative Apex Bank (supra) and Mehsana District Central Co-operative Bank Ltd. (supra) held that the judgment of Supreme Court was in the context of co-operative banks and utilization of its funds from statutory reserves under Section 67(2) of the Gujarat Co-operative Societies Act, 1961 and thus, the interest income from investment made by way of mandatory minimum banking reserves as required by the relevant provisions of Banking Regulation Act and pertaining to income from hiring of safe deposit, were held to be liable for deduction under Section 80P(2)(a)(i) of the IT Act, whereas the facts in the present case were distinguishable.
5.26 He was further of the view that the Tribunal had placed reliance upon the judgment of apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT , wherein it has been held that it is well settled that the 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 utilization. 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. In the present case AO has considered the income taxable by denying the exemption under Section 80P.
5.27 The judgment of Mehsana District Central Co-operative Bank Ltd. v. ITO (supra) was also held to be distinguishable since it pertained to a co-operative society engaged in the banking business. In that context interest earned on the funds utilized from the statutory reserves and from the income of hiring of safe deposits, was held to be qualifying for deduction under Section 80P(2)(a)(i) as the funds were utilized in accordance with the ordinary banking business.
5.28 The case of CIT v. Ramanathapuram Distt. Co-operative Central Bank Ltd. (supra) was again distinguished on account of the fact that this too pertained to a co-operative society carrying on the banking business. The reason, it was stated, for dismissing the civil appeal filed by the Revenue was that it was held that it is not open to the Revenue to urge through different counsel, the same thing again and again.
5.29 Reliance placed upon the judgment of Bombay High Court in the case of CIT v. Ratnagiri District Co-operative Bank Ltd. (supra) on behalf of the assessee urging that this judgment has achieved finality on account of the dismissal of the SLP filed by the Department reported in (2002) 256 ITR (St) 48. The CIT(A), was of the view that this judgment too was distinguishable observing as under:
If the income is derived by a co-operative society (bank) from the business of banking, then only it will fall within the exemption, but if it arises from and out of the business with third party as in case of investment of surplus assets, the exemption is not available because investment of fluid assets is not a part of business of banking. The income must be attributable to banking facility. The investment made to generate income must form part of circulating capital or stock-in-trade of the (co-operative) bank. The business must have a direct or proximate connection with or nexus to the earnings in order to attract the provisions of Section 80P(2)(a)(i). It follows that each investment has to be examined, considered and decided on its own merits applying the above norms derived from the various precedents. In order to apply these principles, investigation of facts and definite findings is necessary. The investments made in IVPs no doubt had 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 have resulted in permanent deprivation of funds for banking activity. It ought to have been examined as to whether such investments had in effect of temporary withdrawal of the funds or the investments made in IVP could be brought back to the banking business. In absence of detailed enquiry in the nature of available surplus and investments thereof, it is difficult to go along with the submissions made by the Revenue. No enquiry in this behalf was made by any of the authorities below. It was obligatory on the part of the fact-finding authorities below to make enquiry and record finding of fact in this behalf. No such attempt was made by either of the authorities below in this regard. Therefore, the Court has to decide these matters on the facts found and available on record. The facts found and available on record do suggest that the interest income was attributable to the assessee's business income and the investment made in IVPs are investments made from the fund generated from the banking business. It has a direct and proximate connection with or nexus to the earning from banking business in order to attract provisions of Section 80P(2)(a)(i). In the facts and circumstances, findings recorded in favour of the assessees and against the Revenue are upheld.
5.30 Referring to the said judgment wherein the Court observed that each investment is to be examined, considered and decided on its own merit in order to apply the principles and for this purpose investigation of facts and definite findings are necessary. Accordingly, in this context, the Court observed that in the absence of detailed inquiry in the nature of available surplus and investment thereof by the Revenue in that case, it was difficult to go along with the submissions made by the Revenue, since no inquiry in this regard had been made by the authorities. In the circumstance, the CIT(A) was of the view that the Court in the case of CIT v. Ratnagiri District Co-operative Bank (supra) had to decide the matter on the facts found and available on record and the position was that the facts and circumstances available on record suggest that the interest income was attributable to the assessee's business income. He was further of the view that even the counsel on behalf of the assessee there had argued from the premises that no payment of interest on the borrowed funds was reflected in the account books, which fact itself was sufficient to indicate that the deposits were received during the course of banking business and the available funds on the given date were of different nature. He further sought to distinguish the said case on the basis of assessee's counsel therein, which is found mentioned in the said judgment at para 10 that if fund established withdrawn on the banking business then the interest earned on such income, would not qualify for exemption and if the income brought in is dependent upon the requirement of the banking business then in such event, such investment would certainly qualify for exemption.
5.31 The facts, on the other hand, in the case in hand were held to be distinguishable by him since here huge funds had been invested outside the purview of banking business. In respect to loan pertaining to RRBs, he further goes on to observe that the figures provided by the assessee, which have been reproduced earlier, show uncontroverted fact that the assessee could earn interest on miscellaneous income from banking operation only to the tune of Rs. 1,22,50,333 as against other interest earned by it to the tune of Rs. 4,79,32,667 (4,01,10,838 - 78,21,829). Accordingly, on the basis of quantum of investment itself, on which the interest has been earned he was of the view that it is self-speaking.
5.32 He further observed that these figures have been given by the assessee with reference to the assessee's entire banking business whereas entire income earned from banking business is not qualified for deduction under Section 80P of the Act, which is available to the co-operative societies engaged in the banking business and to the RRBs with reference to Section 22 of RRB Act, 1976. Accordingly, it could not be held that the entire banking business from the income therein were attributable to the business specified under Section 18B of the RRB Act.
5.33 Accordingly, he was of the view, the assessee is not entitled for deduction under Section 80P with reference to the income earned on SLR and non-SLR which is to the tune of Rs. 4,72,32,667. Thus, the contention of the assessee that it is the income itself in the business venture as per the provisions of Banking Regulation Act, does not hold good as the issue under consideration according to him is whether or not the income earned from such activities is qualified for deduction under Section 80P of the Act.
5.34 He was further of the view that in fact their Lordships of Bombay High Court themselves in para 28 of the said judgment have stated that the judgment was confined only to the facts of these cases in which the judgment was given and the fact remains that in the facts, as placed earlier, their Lordships of Bombay High Court held that no facts were investigated by any authority and the judgment was as such rendered on the facts available on record.
5.35 On the basis of these facts, he was of the view that:
Considering the above proposition of law with reference to the facts of the appellant's case, it is clear that the income derived by the assessee from various investments in SLRs and non-SLRs cannot be regarded as an essential part of its activity and the objectives with which the deduction under Section 80P of the IT Act is extended to a RRB. Therefore, the income derived by the appellant assessee from SLRs and non-SLRs is rightly held as taxable income outside the purview of Section 80P of the IT Act.
6. Aggrieved by these actions, the assessee is in appeal before us.
7. Shri Dayal Saran appearing on behalf of the assessee, assisted by Shri Sahib P. Satsangee invited attention to the order of Tribunal for asst. yr. 1998-99 in the case of the assessee itself and submitted that the said issue is fully covered by this order of the Tribunal since on similar circumstance, the Tribunal had already decided the issue in favour of the assessee.
7.1 With respect to the query from the Bench as to the terminology of SLR and non-SLR, it was submitted that SLRs refer to statutory reserves, which a bank is required to maintain and non-statutory reserves is referred to non-SLR, which are the reserves maintained by the bank over and above the statutory requirement, which varies from week to week.
7.2 On a further query from the Bench whether in the asst. yr. 1998-99, the Tribunal has had an occasion to decide the issue pertaining to SLR income or both SLR and non-SLR income, it was clarified that in asst. yr. 1998-99, the Tribunal had only considered the issue of non-SLR and held it to be exempt. It was further clarified that in that year the AO himself had allowed income from SLR investments and only disallowed non-SLR income which issue was rejected by the CIT(A) and thus only the non-SLR issue travelled to the Tribunal.
7.3 It was further submitted that the entire income of the assessee has been assessed despite the fact that Dy. Secretary of Finance Ministry vide his letter dt. 20th Oct., 1998 informed the chairmen of RRBs that the matter had been taken up with the CBDT placed at p. 177 (legible copy of which had subsequently been placed at p. 265).
7.4 The order of the Tribunal, it was submitted, copy of which is placed at pp. 12 to 15 of the paper book, it had considered this issue. It was further submitted that this issue has been considered by various other Benches of the Tribunal and one of the orders, i.e., the order of the Hyderabad Bench had been confirmed by the Andhra Pradesh High Court (copy of this order, it was submitted is placed at p. 90 and order of the Tribunal, which has been confirmed, it was submitted, is placed at pp. 84 to 89). As such, on the basis of these circumstances, it was argued that the issue of exemption is fully settled and covered in favour of the assessee and as such it deserves to be allowed.
7.5 The learned Authorised Representative inviting attention to Section 22 of the RRB Act and Sections 3 and 18 of the same along with Section 24 of the Banking Regulation Act contended that the issue is covered in favour of the assessee.
7.6 The learned Authorised Representative was required to address the Bench on the aspect of its SLR and non-SLR investments as to how the amount has been invested by the assessee on which the deduction is sought to be claimed.
7.7 The learned Authorised Representative sought time to ascertain the exact facts. As such, the case was adjourned to the next day. On the next date, the attention was invited to p. 264, which was filed on behalf of the assessee in the course of hearing. According to this, it was stated, the total SLR investment in the year under consideration was Rs. 62,64,22,951. In support of the said submissions, reliance was placed upon the letter of the chairman of the bank dt. 22nd July, 2004 placed at p. 261 of the paper book.
7.8 On the aspect of investment of SLR, attention was invited to p. 262 which, it was stated, was the RBI directives/guidelines which is applicable in the year under consideration during which it was incumbent upon the assessee to maintain 25 per cent of the demand time liability as on the last Friday of the second preceding fortnight.
7.9 From the perusal of this document, it is further seen that deposit in excess of SLR requirement as per the note No. 3.2.3 of RBI directives/guidelines at p. 262 has to be automatically treated as non-SLR deposits and interest on such SLR term deposits will be payable as per the rate applicable to the public, i.e., rate of interest offered by the sponsored bank to the public. With respect to SLR term deposit, it is seen from the perusal of this note itself that the sponsored banks have been directed by the RBI to pay 0.5 per cent above the maximum interest rate payable on SLR term deposits, mainly by RRBs upto stipulated requirement, irrespective of the period of maturity of SLR term deposit. The sponsor bank was required to pay preferential rate of interest to RRB only on the portion of its term/short deposits, which are statutorily required to be maintained.
7.10 The attention was also invited to p. 263 which was a letter dt. 29th April, 2002 issued by RBI to all the RRBs. It was further submitted that p. 265 contains the legible copy of documents placed at p. 177, which is the instruction of the Ministry of Finance dt. 20th Oct., 1978, which was not legible. It was submitted on behalf of the assessee that the funds applied to the object of the bank have also been brought to tax since the entire income disclosed by the assessee has been brought to tax.
7.11 In the face of the assertion that the entire income of the assessee has been brought to tax and no exemption has been granted to the assessee, the learned Departmental Representative was required to verify the issue whether entire income has been brought to tax. The learned Departmental Representative Shri Wasim Arsad appearing on behalf of the Department stated that only the income earned from activities not connected with the aims and objectives of the bank have been disallowed, it was his submission that since the assessee has earned an income of about 25 crores in the year under consideration and further has claimed exemption of only five to six crores then only that aspect has been brought to tax. It was his submission that the question of expenses incurred on SLR and non-SLR do not come into picture at all. As such, it is not correct on behalf of the assessee to submit that the entire income earned by the assessee has been brought to tax. It was his contention that CIT(A)_is fully correct on the aspect that how can the assessee on its own allocate proportionate expenditure on SLR or non-SLR and as such they should not be allowed.
7.12 In this background, the learned Authorised Representative was required to specifically address the Bench on the aspect as to what is the exact SLR income on which exemption is sought to be claimed and what is the exact non-SLR income, on which deduction is also claimed. Since the relevant facts were not available with the learned Authorised Representative, he sought time to verify and place a correct picture before the Bench. Accordingly, the case was adjourned to 12th July, 2004.
7.13 On the said date, it was argued on behalf of the assessee that the total income is exempt under Section 80P of the IT Act and the assessee has, on the net profit, as per P&L a/c worked out the claim for exemption. With respect to the query from the Bench as to whether any income of the assessee has been exempted or not, it was his contention that no exemption has been allowed. However, while arguing, it was submitted that since the Tribunal had on the last date of hearing, i.e., 2nd July, 2004 specifically required the assessee to state on record as to the exact SLR investment and non-SLR investment and in this background, the factual matrix was considered. In this exercise, the learned Authorised Representative submitted that it was observed that certain errors with respect to certain figures are there in the assessment order. It was stated that these mistakes, which though had not been challenged before the CIT(A), had come to the notice of the assessee only now when the Tribunal required him to address the issue on facts deserves to be substituted.
7.14 It was stated that as an officer of the Court, it was his humble duty to point out that as per p. 2 of the assessment order, the figure mentioned therein is 62,64,22,951. Similarly, at p. 5 of the assessment order, this figure given by the AO is Rs. 20 crores odd. The correct figure, on the other hand, with respect to SLR should have been 560.79 lakhs. It was his contention that these figures are being submitted, which are on the basis of the Banking Regulation Act. It was fairly conceded that these errors should have been pointed out before the CIT(A). However, the focus of the assessee as well as CIT(A) was only on the legal aspect and the facts of the case had unfortunately not been looked into. It was stated that once wrong facts have been noted, it was the duty of the assessee to point out these correctly. It was his contention that SLR cannot be as per the amount at p. 5 of the assessment order, which is 21,93,00,000.
7.15 In reply, the learned Departmental Representative vehemently contended that the assessee has allocated the expenditure incurred on a proportionate basis arbitrarily itself, thus, it should not be allowed and as such inviting attention to p. 164 of the written submissions of the assessee filed before the CIT(A) on 9th April, 2004, it was submitted, cannot be allowed to the assessee. The attention for this purpose was invited to the observation of the AO that no expenditure has been incurred and it was submitted that this finding was confirmed by the CIT(A). With respect to the errors pointed out by the assessee, it was firstly contended that there was no error with respect to the figures given in the assessment order.
7.16 In this background, the assessee was directed to give in writing instead of addressing the Bench orally as to the total SLR and non-SLR investment and income thereon. The assessee was directed to file copies of the same before the Bench and give one to the learned Departmental Representative. The Revenue was also given an opportunity to make necessary verification on this aspect. The objections, if any, of the Revenue were also invited on whether the assessee should be allowed to get the correct figure regarding the SLR and non-SLR investment substituted at this juncture. Accordingly vide order sheet entry dt. 12th July, 2004 observing as under, the appeal was adjourned to the next date of hearing:
In the course of hearing, it was pointed out by the learned Authorised Representative. Mr. Dayal Saran that the assessee vide letter dt. 7th July, 2004 filed in the Registry in response to the written submissions dt. 5th July, 2004 of the learned Departmental Representative. Mr. Wasim Arshad it was pointed out that the net profit for the asst. yr. 2001-02 was Rs. 6,21,91,455 and not Rs. 6,22,92,000 as mentioned in the submissions made by the Addl. CIT, Circle 2(1), Farrukhabad. In the course of hearing it was further submitted before the Bench that there are certain errors apparent on the face of the record in the assessment order dt. 26th Dec, 2003 which is under appeal. On query from the Bench with reference to the same, it was stated that these errors were unfortunately not pointed out either to the AO in 154 proceedings or to CIT(A) in appeal. These errors, at p. 5 of the assessment order, it was stated, have occurred on account of the fact that certain figures have been wrongly taken by the AO, which do not find mention in the financial statements of the assessee bank. An attempt was made to show how wrong figure had been taken as income from SLR investment at 20 crores odd which it was stated should actually have been only five crores odd. Similarly, total non-SLR investments should actually have been 168 crores odd. In the circumstances, the learned Authorised Representative was directed by the Bench to place in writing the specific errors pointed out orally before the Bench and to give reasons as to how and why the said errors were not pointed out either before the AO or before the CIT(A). The learned Departmental Representative also was directed to verify the said errors, which were pointed out orally and also directed to address the Bench on the stand of the Revenue in taking those facts and figures on record. It was further stated by the learned Authorised Representative that in the course of assessment proceedings, the AO did not give the assessee bank any opportunity to bifurcate the income of the assessee as SLR or non-SLR income and has done the bifurcation himself. Similarly, it was stated, this exercise was also not done by the bank before the CIT(A), accordingly, the learned Authorised Representative sought to place before the Bench the bank's version of the bifurcation of its income as SLR and non-SLR income. The learned Departmental Representative was directed to verify the basis of calculation of figures of SLR or non-SLR income taken by AO and also address the Bench on the aspect of correctness of assessee's figures and the stand of the Revenue whether these figures should be taken on record since they were not placed before the AO and how and why they could not be placed before the CIT(A). In the Court, it was announced that since certain aspects have to be verified and certain clarifications are required, time was given to the Revenue to do the same and it was announced that the case would be fixed for hearing on 26th July, 2004. However, while dictating it was considered that looking at the peculiar nature of the issues, which arise for determination, it would be appropriate first of all to direct the learned Authorised Representative to place in writing the errors sought to be pointed out in the assessment order, put in writing as to how and why the said facts were not brought to the notice of assessing authority under Section 154 or before the CIT(A) when the assessee went in first appeal. The learned Authorised Representative will give his reply in writing on or before 19th July, 2004 and also give one copy of the same to the learned Departmental Representative who on the receipt of the said reply of the assessee will give in writing the stand of the Revenue addressing the issue of correctness of assessee's version and anything else which the Revenue would like to address on this aspect on or before 26th July, 2004. Thereafter any further replies/rejoinder, which either side may deem it necessary to bring to the notice of the Bench should be filed on or before 29th July, 2004 after giving a copy to the other side. The appeal to be listed for hearing on 3rd Aug., 2004. Notice for the same to be issued to either side.
7.17 On the next date of hearing, i.e., 3rd Aug., 2004, the learned Departmental Representative filed written submissions addressing the issue, i.e., errors were pointed out vide letter dt. 7th July, 2004 filed on behalf of the assessee signed by the chairman of the bank and also filed by the counsel of the assessee numbering p. 4.
7.18 In this background, the following fax was sent by the learned Departmental Representative on 5th July, 2004:
Before the Tribunal, Agra Bench, Agra ITA No. 190/Agra/2004; Asst. yr. 2001-02 Farrukhabad Gramin Bank, Farrukhabad VS.
Asstt. CIT, Circle - 2(1), Farrukhabad The assessee has shown in gross income, the income from SLR investment at Rs. 20,89,25,000 and income from non-SLR investment at Rs. 4,02,30,000. The assessee's claim for deduction under Section 80P in respect of these income has been disallowed but the disallowance has been restricted to the extent of deduction claimed which stands at Rs. 6,22,92,000 being the net profit.
Sd/-
(Wasim Arshad) Addl. CIT Circle-2(I), Farrukhabad 7.19 In support of his arguments that the expenses pertaining to SLR and non-SLR should not be allowed, the Departmental Representative faxed the following submissions before the Tribunal on 9th July, 2004:
Before the Tribunal, Agra Bench, Agra In the case Farrukhabad Gramin Bank, Farrukhabad VS.
Asstt.' CIT Asstt. CIT, Circle - 2(1), Farrukhabad ITA No. 190/Agra/2004; Asst. yr. 2001-02 Please see position of investment and interest thereon filed.
SLR Non-SLR
Banking Interest Income 20,63,02,000 4,02,30,000
6,90,17,000
TDR with Bank 20,39,25,000
Other SLR Securities 23,77,000
20,63,02,000
Please see details of rupee earned, as in the annual report (Pie-chart), [3rd page from the end of the report] On A Deposit with banks 3% 20,39,25,000 B Other income 1% 43,23,000 C Interest on advance (69017) 22% 6,90,17,000 D Interest on balance with RBI and other banks (1%) 23,77,000 E Interest on investments (13%) 4,02,30,000 This is the income, wherein A+D = SLR income E = Non-SLR income B+C = Banking income Further, the assessee submits under a column entitled "correct figures" (which same is anything but correct). However, under the "correct figures" the assessee arrives at a net figure, for the three heads, viz., SLR income, non-SLR income and banking income by dividing and apportioning the "total expenditure in proportions to the interest income" which is legally and factually untenable for the following reasons:
1. It has not been brought on record that a one-on-one correspondence exist, between in interest bearing funds and funds deployed in SLR and non-SLR securities and more particularly to that portion which is deployed as time-deposits (FDRs) with the sponsor bank, i.e., there is a lack of demonstrated direct nexus especially in view of the existence of "reserve"... Crores.
2. It is entirely illogical to apportion provisioning for NPA's and other such contingencies against income on SLR and non-SLR investments, which do not admit to any such expenses.
3. It would be incorrect to allow administrative and other overheads against "income on SLR and non-SLR investments" for the simple reason that the application made and maintenance of portfolio are the responsibility of the sponsor bank.
Please note that all in SLR and non-SLR assets, no application for allotment of "securities" has been made by the assessee-bank nor does it have any choice in the selection of portfolio. All of it, is at this discretion, management and control of the "sponsor bank".
Having said that, one has no option but to conclude that the assessee has undertaken this exercise to allow himself that apportionment of expenditure on his terms, even as the issue has not adjudicated thus by the AO.
At best, he can take the "plea" of the assessment being remanded to AO for considering of allowability of expenditure, he cannot suo motu allocate and adjudicate the apportionment of "expenses" himself. That will be foreclosing the issue, especially when the issue of (a) whether expenditure is to be allowed at all, is still open to question and (b) if it is to be apportioned, then on what basis.
Accordingly, the reason for this exercise seems to be a suo motu adjudication of apportionment of expenses.
Thus, the "correct figures" are not to be treated as either correct, genuine or reliable but as a doctored version.
Besides, it is still maintained, that in the absence of a finding to that effect, it cannot be presumed that entire 80P has been disallowed.
If however, the assessee still feels otherwise, he can still file a rectification petition under Section 154 which shall be sincerely disposed of at the earliest.
Sd/-
(Wasim Arshad) Addl. CIT Range-2, Farrukhabad.
7.20 These faxes were referred to by the learned Departmental Representative at the time of hearing on 12th July, 2004, copy of which was forwarded by the Registry to the learned Authorised Representative.
7.21 Accordingly, in this background, the assessee on 3rd Aug., 2004 placed following bifurcation:
Before the Hon'ble Tribunal, Agra Bench, Agra In the matter of Farrukhabad Gramin Bank, Farrukhabad VS.
Asstt. CIT - 2(1), Farrukhabad PAN : AAALF0004B ITA No. 190/Agra/2004 For the asst. yr. 2001-02 Sub. : Asst. yr. 2001-02 In compliance with the directions of the order of the Tribunal dt. 12th July, 2004, the assessee hereby points out the specific errors in the assessment order dt. 26th Dec, 2003, which is under appeal:
1. That the non-SLR investment of Rs. 21,93,00,000 has been mentioned at page No. (5) of assessment order. However, the correct non-SLR investment of the bank is as under:
Non-SLR investment in bonds/debentures/units Rs. 21,93,00,000.00 Inter-bank deposit (non-SLR) Rs. 146,73,81,522.64 ____________________ Total Rs. 168,66,81,522.64
2. that the income of Rs. 20,39,25,000.00 on SLR investments has been mentioned at page No. (5) of assessment order dt. 26th Dec, 2003, the correct income on SLR investment is as under:
Income on approved investments for the purpose of SLR (i.e. NABARD & IRBI bonds of Rs. 3,50,00,000 Rs. 48,75,000 Income on SLR deposit with sponsor bank Rs. 5,12,04,000 Total income on SLR investment Rs. 5,60,79,000
3. that the income of Rs. 402,30,000.00 on non-SLR investments has been mentioned at page No. (5) of the assessment order dt. 26th Dec, 2003. The correct income on non-SLR investment is as under:
Income on non-SLR investment is as under:
Income on non-SLR investment Rs. 3,53,55,000
Income on inter bank deposit (non-SLR) Rs. 15,27,21,000
Rs. 18,80,76,000
The mistake came to the notice of the appellant only after the Hon'ble Bench directed the learned Departmental Representative to submit the submissions in writing that the learned AO has allowed the deduction under Section 80P as the counsel of the appellant had orally submitted before the Hon'ble Bench that no deduction under Section 80P has been allowed and the entire income has been taxed. Therefore, the specific errors in the assessment order could not be pointed out either before AO or before CIT(A) earlier.
As per assurance given by the assessee's counsel before the Bench, the assessee has requested the AO for verification of the correctness.
Thanking you, For Farrukhabad Gramin Bank Sd/-
(A.R. Shiwalkar) Chairman Dt. 15th July, 2004 Countersigned Sd/- (Dayal Saran) Counsel
7.22 On 3rd Aug., 2004, on behalf of the learned Departmental Representative, a letter dt. nil clarifying the position numbering 4 pages along with Annex. A was placed before the Bench. With regard to the figures presented by the assessee before the AO on 3rd Dec, 2003, it was his submission that for RRB, the RBI had clarified that cash and "time deposits". As such the SLR investment was Rs. 62,64,22,951. However, with respect to the non-SLR investment amounting to Rs. 21,93,00,000, it was submitted that this figure was not correct. He further stated that the assessee was never required to supply figures of income on SLR and non-SLR investment. In this background, he stated that the AO relying upon the figures furnished by the assessee in the letter, deduced the income from investments from Schedule 13, where the interest earned on TDR, FDRs at Rs. 20,39,25,000 was adopted as income from SLR investments and with respect to non-SLR investments, income of Rs. 4,02,30,000 was adopted. It was further submitted by him that the assessee had made error in classification of FDR/TDRs with other banks. Accordingly, out of the total TDR deposit of Rs. 2,11,45,44,043 as per Schedule 7, the non-SLR investment should be taken as Rs. 2,74,24,21,002. Accordingly, income from SLR and non-SLR on bifurcation would be as under:
Income on SLR investment 48,75,000
Income on non-SLR investment 3,53,55,000
4,02,30,000
Accordingly, in this background, the following calculations were given:
Stage 1:
On p. 115 of assessee's paper book the Hon'ble Members will find details of SLR and non-SLR investment, presented to the AO, on 3rd Dec, 2003, during the course of proceedings under Section 143(3) for asst. yr. 2001-02.
Vide 8:
(a) Deposits with Bank of India Rs. 591422951
(b) NABARD & IDBI Bonds Rs. 35000000
Total SLR investment Rs. 626422951
Total non-SLR investment
1. HPSFCL Bonds Rs. 1,00,00,000
2. HBI Bonds Rs. 1,00,00,000
3. IDBI Bonds Rs. 2,25,00,000
4. SBI Bonds Rs. 1,00,00,000
5. TFCI Bonds Rs. 80,00,000
6. Units of UTI Rs. 10,98,00,000
7. NCDs of Punjab Wireless Systems Ltd. Rs. 25,00,000
8. NCDs of Rapient Carbides Ltd. Rs. 25,00,000
9. Bank of India Bonds Rs. 1,90,00,000
10. IFCI Bonds Rs. 2,00,00,000
11. ICICI Bonds Rs. 50,00,000
Rs. 21,93,00,000
Remarks:
In this case, for RRBs RBI has clarified that 'cash' and "time deposits" with sponsor banks will qualify as SLRs.
Hence SLR investment as presented at Rs. 62,64,22,951.
(a) However, the figure of Rs. 21,93,00,000 for non-SLR is not correct.
(b) Besides, assessee omitted to supply figures of income on SLR and non-SLR investment.
Stage-2:
The AO in relying upon the figures furnished by the assessee, deduced the income from investments from Sen. 13.
Where interest earned on TDR, FDRs at Rs. 20,39,25,000 was adopted as income from SLR investments.
and Income on investments at Rs. 4,02,30,000 was adopted as the income from non-SLR investment.
Stage 3:
However, the assessee made an error in classification of its FDR/TDR's with other banks, which upto a certain limit are termed SLR but beyond that are termed non-SLR. So, out of a total TDR deposit of 2,11,45,55,043 as per Schedule 7.
(Rs.)
(a) Money at "call and short-notice"
(TDR with sponsor (SLR) bank) 59,14,23,000
(b) TDR's with other banks 146,73,82,000
(This is non-SLR)
(c) Current accounts cash although
eligible is SLR, but 5,57,39,569
(non-SLR) since it exceeds SLR limits,
is to be treated as non-SLR
(d) Further, investments in NABARD
and IRBI bonds 3,50,00,000 (SLR)
(e) Other investment as given earlier vide p. 115 of
21,93,00,000 (non-SLR) paper book
Thus SLR investment is (a) (b) 59,14,23,000 +
3,50,00,000
62,64,22,451
and
non-SLR investment would be (b)+(c)+(e) 146,73,82,000 +
5,57,39,569 +
21,93,00,000
Total non-SLR investment 2,74,24,21,092
Stage 4:
Income from investments had been adopted by AO at 4,02,30,000 which included income from SLR and non-SLR investments, which is bifurcated as under:
(Rs.) Income on "SLR investment" 48,75,000 Income on non-SLR investment 3,53,55,000 4,02,30,000 Thus, out of the figure of 4,02,30,000 adopted by AO as "income on non-SLR investments a sum of 48,75,000 would be income from "SLR investments" and 3,53,55,000 would be "income from non-SLR investments."
Stage 5:
Income on bank deposits The AO relying on Schedule 13 of the annual report presumed income on TDR's were made, in excess of SLR requirements and this excess would qualify as non-SLR.
Accordingly, reconciliation is,
(a) The AO failed to include 23,77,000 being interest on current deposits to the income he considered as SLR, i.e., 20,39,25,000.
However, out of the 20,39,25,000 Income on TDR eligible as SLR 5,12,04,000 Income on non-SLR investment (20,39,25,000 - 5,12,04,000) 15,27,21,000 Income on current deposits to be added and considered as income on non-
SLR investments 23,77,000
Thus, Stage 6
Income on SLR "Income on bank TDR's eligible as SLR
securities "+" income on investments
eligible as SLR" 5,12,04,000+48,75,000
Income on SLR securities 5,60,79,000
Similarly,
Income on Non-SLR "Income on Bank deposits, TDR's
eligible as non-SLR securities"
+ Income from investments considered
as non-SLR"
"15,27,21,000" + 23,77,000" 3,53,55,000
"15,50,98,000" + 3,53,55,000
Income on Non-SLR 19,04,43,000
" Conclusion-1"
The Hon'ble Members may please - 5,60,79,000 19,04,43,000
note that income from SLR and
non-SLR investments being
24,65,22,000 is still in excess
of the "net profit disclosed"
which is 6,21,95,444 and which has
been claimed as exempt Under Section
80P
Now, it must be noted that income from SLR and non-SLR investments, has been treated as ineligible for deduction under Section 80P but the disallowance has been restricted to the extent of deduction claimed under Section 80P which is 6,21,45,444.
Thus, it is not that the entire income from banking and investments have been treated as disallowable, but it is that entire income from SLR and non-SLR investments have been treated as ineligible for deduction under Section 80P but the disallowance has been restricted to the "amount claimed as deduction" which corresponds to the net profit viz., 6,21,45,444.
"Further, conclusion-II"
However, it must be pointed out, that non-inclusion of other TDRs in other banks, although non-SLR investment, but not included in the details filed before the AO on 3rd Dec, 2003 is a 'material omission'.
To recapitulate, Assessee, under the signature of its chairman, had furnished total non-SLR investment as
1. HPSFCL Bonds Rs. 1,00,00,000.00
2. HBI Bonds Rs. 1,00,00,000.00
3. IDBI Bonds Rs. 2,25,00,000.00
4. SBI Bonds Rs. 1,00,00,000.00
5. TFCI Bonds Rs. 80,00,000.00
6. Units of UTI Rs. 10,98,00,000.00
7. NCDs of Punjab Wireless Systems Ltd. Rs. 25,00,000.00
8. NCDs of Rapient Carbides Ltd. Rs. 25,00,000.00
9. Bank of India Bonds Rs. 1,90,00,000.00
10. IFCI Bonds Rs. 2,00,00,000.00
11. ICICI Bonds Rs. 50,00,000.00 ___________________ Rs. 21,93,00,000.00 ___________________ In this figure, he failed to include other TDRs subscribed with other banks.
Now, at this stage, the said details have been submitted, which rightfully ought to be "additional evidence" and the assessee ought to file a formal application before the Bench, regarding its admissibility, the reasons for non-submission and omission and failure to present the same before even the CIT(A).
But, notwithstanding the above, the attention of the Hon'ble Member is drawn to the composition of this TDRs of Rs. 146,73,81,522, which is as per Annex. A. As, one can see, that this non-SLR investment is made even in private banks, like Indus-Ind Bank, Global Trust Bank et al and the area of such subscription is far and beyond the Districts of "Farrukhabad" and "Kannuaj", which has been the case of the AO that the funds are deployed in "areas" for beyond "approved area" under RRB Act.
Hence, this is a significant omission.
Besides, the Bench would observe that once funds are placed from an RRB into a commercial bank albeit at the same place, then there is no restriction or limits to its deployments and these funds may not necessarily be deployed within the "limits" assigned but are in fact being deployed outside the area.
Hence, once the funds shifts to the "sponsor bank" their deployment also undergoes a change from a "restricted area" to a 'global operation' and from "specific purposes" to "commercial ones".
7.23 However, with respect to the aspect whether figures can be corrected at this stage or not, he had no objection though it was submitted that it was the duty of the assessee to point out the same either before the AO or CIT(A). In this background, the case was adjourned to the next date of hearing so as to afford the assessee also an opportunity to appreciate the arguments advanced by the learned Departmental Representative since he has challenged the classification of FDR/TDRs and then SLR and non-SLR classification itself and thus calculations and other issues addressed.
7.24 On the next date of hearing the learned Authorised Representative submitted that there is not much difference in working given by the assessee and the working given by the Departmental Representative and this aspect can be looked into. However, coming back to his basic argument, it was his assertion that as far as ground Nos. 1 to 10 are concerned that the issue pertaining to non-SLR income is fully covered by virtue of the order of Agra Bench of Tribunal and the judgments of Hon'ble Supreme Court and High Court.
7.25 Referring to the order of Agra Bench, it was fairly conceded that the Tribunal has considered only the non-SLR income since in that year there was no occasion to address SLR income in view of the fact that the AO himself had allowed the claim of the assessee. Accordingly, in this background, the fact that SLR investment had not been addressed by the Agra Bench, it is submitted that this aspect is correct.
7.26 In the said circumstances, the learned Authorised Representative was required to address the Bench specifically on the issue as to how income from SLR investment is claimed exempt and to refer to the judgments/orders in support of non-SLR investment income as exempt.
7.27 The learned Authorised Representative invited attention to (2001) 169 CTR (SC) 486 : (2001) 251 ITR 194 (SC) (supra) stating that this is a Full Bench judgment in respect of SLR investment. It was submitted that by virtue of this judgment, the decision rendered by Supreme Court in (supra) had been overruled and as such, the reliance placed upon to same by the AO for denying the SLR investment on the basis of (supra) was not correct. Similarly, the reliance was placed upon (supra), CIT v. Karnataka State Co-operative Apex Bank (supra), which apart from overruling the judgment of Supreme Court (supra) also included the Gujarat State Co-operative Bank, which judgment has been discussed by the AO.
7.28 On the aspect of non-SLR income, attention was invited to in the case of CIT v. Bangalore District Co-operative Central Bank (supra) (copies at pp. 22 and 23) and in the case of CIT v. Ramnathapuram District Co-operative Central Bank Ltd. (supra), copy of which was placed at pp. 95 to 97, operative portion at p. 97 was also referred to.
7.29 Reliance was also placed upon an unpublished order of Bangalore Bench of the Tribunal copy of which is placed at pp. 34 to 37, ITA No. 844/Bang/2000 and stay petition No. 64/Bang/2001.
7.30 Reliance was also placed upon the order of Ahmedabad Special Bench of the Tribunal in the case of Surat District Co-operative Bank and Ors. v. ITO (supra) copy placed at p. 38) and order of Hyderabad Bench of Tribunal dt. 6th March, 2000 in the case of Rayalaseema Gramin Bank v. Jt. CIT in ITA No. 10/Vizag/2000 copy of which is placed at pp. 84 to 89 and the judgment of the Andhra Pradesh High Court which has confirmed the order of Hyderabad Bench of Tribunal, copy of which is placed at p. 90 of the paper book.
7.31 Accordingly, the submission was that the orders of the Tribunal relied upon by the assessee should have been followed for which proposition, reliance was placed upon Agarwal Warehousing and Leasing Ltd. v. CIT and Bank of Baroda v. H.C. Shrivastava (2002) 175 CTR (Bom) 663 : (2002) 122 Taxman 330 (Bom) copy of which placed at pp. 98 to 103 and 104 to 110 respectively in the paper book filed before us. Reliance was also placed upon the judgment of the Karnataka High Court in the case of CIT v. Grain Merchants Co-operative Bank Ltd. (2004) 186 CTR (Kar) 166 : (2004) 134 Taxman 249 (Kar), copy of which was also placed before the Bench. Reliance was also placed upon pp. 16 to 19 of the paper book which contains another judgment of Karnataka High Court in the case of CIT v. Shri Ram Sahakari Bank Ltd. (2004) 186 CTR (Kar) 734 : (2004) 138 Taxman 45 (Kar). The judgment of Punjab State Warehousing Corporation v. CIT (2004) 186 CTR (P&H) 247 : (2004) 138. Taxman 48 (P&H) was also relied upon. Reliance was also placed on the Agra Bench of the Tribunal in the case of assessee, which has been considered on the aspect of income from non-SLR investment.
7.32 The learned Authorised Representative was specifically required to address the Bench as to how the judgments considered by the CIT(A) for denying the claim of the assessee have been wrongly interpreted. The learned Authorised Representative submitted that before the Tribunal, he is placing reliance on more or less the same judgments reliance upon which was placed by the assessee before the CIT(A). It was further put to him that before CIT(A) specific objections to the judgments relied upon by the assessee has been raised by the AO which have been taken into consideration by the CIT(A). Thus the learned Authorised Representative was required to address the Bench as to how the interpretation given to those judgments is not correct according to the assessee. A general reply was given to this specific query in support of the claim that the exemption should be allowed stating that various judgments and orders have been relied upon by the assessee in support of its claim.
7.33 The arguments made in the context of SLR investments were reiterated with respect to non-SLR investments by the learned Authorised Representative reliance was placed upon the order of the Tribunal in its own case.
7.34 It was his submission that the CIT(A) has been guided by the fact that the assessee bank was constituted for the purpose to develop to the notified area and as such, the claim of the assessee has been rejected on account of wrong application of the principles. It was argued that the CIT(A) has failed to appreciate that if the assessee bank does not maintain statutory reserves as per the directions of the RBI and the non-SLR investment, then the assessee bank will not be allowed to venture in the business of banking and thus if the assessee does not venture in the business of banking, the question of developing banking business in the notified area does not arise. It was also submitted that the bank has maintained its statutory reserves guided by RBI directions in the lead bank of the assessee, which is constituted within the notified area and as such when under the specific Acts, by which the assessee bank is functioning. If the assessee failed to maintain the requisite investments in the manner directed to the extent, then the assessee bank would be debarred from the activities of banking. As such, the income derived from these investments of the assessee bank, was on account of the fact the funds were necessarily required to be maintained in the manner prescribed by the Banking Regulation Act. It was submitted that the income of the assessee bank is derived from the business of banking and by virtue of Section 22 of the RRB Act, the assessee bank is deemed co-operative society and as such, on the basis of various judgments and orders, the income earned has to be exempted under Section 80P(2)(a)(i) of the IT Act.
7.35 It was also submitted by him that the CIT(A) has further sought to distinguish the fact that the judgments are not applicable on account of the fact that the cases relied upon are in the context of co-operative societies/banks. It was his contention that the fact that the reliance placed upon the judgment of Supreme Court in the case of (1996) 134 CTR (SC) 92 : (1996) 218 ITR 438 (SC) (supra) has been overruled in the context of non-SLR by (2001) 169 CTR (SC) 486 : (2001) 251 ITR 194 (SC) has not been properly appreciated and which judgment, it was stated, had been relied upon before the Tribunal also in the case of the assessee.
7.36 It was also submitted by him that the observations of the CIT(A) that this may be the surplus funds which have been invested is not correct. Referring to p. 135 of the balance sheet on the back of p. 134, it was submitted that these were not surplus funds of the assessee and these were investments made on the basis of guidelines of RBI. It was further submitted by him that the aspect of circulating capital has been addressed by Ahmedabad Bench at pp. 38 to 83 in the paper book. The attention was invited specifically to p. 38 wherein it was submitted that the aspect of SLR and non-SLR has not been addressed. It was submitted that in the case of the bank, the raw material which goes in is cash and what comes out is also cash and is not earmarked as cash generated from working capital or cash from investment. In the ultimate analysis, heavy reliance was placed on the order of the Special Bench constituted at Ahmedabad.
8. The learned Departmental Representative Shri Wasim Arsad appearing on behalf of the Revenue, on the other hand, placed heavy reliance on the finding and observations of the AO as well as of the CIT(A). Reliance was also placed upon the written submissions filed by the Department on various stages.
8.1 With respect to the submissions of the assessee that the issue pertaining SLR income is covered by the judgment of Supreme Court and Ahmedabad Special Bench decision of the Tribunal, copy of which had been placed at p. 38 of the paper book, namely, Surat District Co-operative Bank Ltd. (supra). It was vehemently contended by him that the said order does not help the assessee bank at all. It was submitted by him that if the investments exceed the prescribed minimum investment under the directions of the RBI, then those investments are automatically termed as non-SLR and investment within the limit are termed as SLR. Accordingly, the Ahmedabad Special Bench of the Tribunal has had an occasion to consider not the income of SLR and has considered only the surplus idle money and non-SLR income. As such, the submissions of the assessee on this aspect are not correct.
8.2 It was further submitted by him that even in the case of income from non-SLR investment, even then the finding of the Special Bench of the Tribunal are context specific and has no bearing on the present case.
8.3 It was argued that this order pertains to a co-operative bank and not RRBs and as such being guided by parent Co-operative Bank Act, the terms and provisions of which are not identical to the RRB Act the finding has been given in the context of these provisions. Thus, the findings given even in the context of non-SLR investment therein are not relevant.
8.4 Elaborating this aspect, the attention was invited to p. 39 of the paper book, i.e., 78 TTJ Ahmedabad Special Bench wherein, it was submitted the fact appreciated are relevant to the case of a co-operative bank deriving income from interest on investments made by co-operative banks in Government securities attributable to utilization of its funds from statutory reserves under Section 67(2) of Gujarat Co-operative Society Act, 1961.
8.5 The other aspect, it was submitted which was considered was 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 which was not relevant.
8.6 Inviting attention to the head notes given at p. 1 of 78 TTJ, Ahmedabad Special Bench (supra), it was contended that the Special Bench appreciated, for the purpose of deduction under Section 80P(2)(a)(i), the specific aspect of investment in respect of non-statutory reserves, which on the facts of that case had been made out of mixed funds. It was submitted that these investments were made out of surplus funds in the year out of the working capital.
8.7 It was emphasized that the entire appreciation of facts was in the context of a co-operative bank. It was submitted that therein it was appreciated that the activities of receiving deposits from customers and utilizing the same for lending or for investment in approved modes are all integral part of the activities of banking business as defined in Section 5(b) of the Banking Regulation Act. It was further submitted that these investments in Government securities and trustee security etc. were held to be the permissible investment specifically on account of the fact that they satisfy the test of being "easily realizable in case of need". Thus in this background, it was urged that the Special Bench held that income from these investments though made in excess of requirements of NSLR and statutory reserves were eligible for deduction under Section 80P(2)(a)(i).
8.8 Accordingly, it was submitted that in this context, the reliance placed upon by the learned Authorised Representative that this order has considered the aspect of SLR investment is not correct.
8.9 With regard to the submissions of the assessee that even in the case of non-SLR, reliance has been placed by the learned Authorised Representative on this order it was reiterated that it pertains to co-operative bank and this material distinction cannot be ignored. The aims and objectives of the two and also sections of both of the Acts materially differ and thus, in view of this difference, the findings given on an appreciation of the enabling Act therein, i.e., the relevant Co-operative Societies Act cannot be applied to the facts of the assessee bank which is created under the RRB Act and has its own distinct aims and objectives.
8.10 It was submitted that exemption is available only to the income which is from activities consonant to the aims and objectives of the assessee banks. The interpretation of different Acts would not necessarily be applicable to the business of banking to which the deduction is allowable under the RRB Act.
8.11 It was further submitted that all these orders, on which reliance has been placed, have all placed reliance upon the judgment of Hon'ble Supreme Court in the case of Bihar State Co-operative Bank Ltd. v. CIT (supra), which pertains to a co-operative bank and not to the RRBs. As such all these judgments on account of this material and specific distinction are not applicable either to SLR or non-SLR income.
8.12 It was further submitted by him that the facts as appreciated in different orders of the Tribunal and also the Special Bench of Ahmedabad order are all in the context of Co-operative Societies Act and in this background, on appreciation of facts, they found that the deployment of reserves is in consonance to the requirement of Co-operative Societies Act. It was argued that these findings are not relevant in the context of RRB and the deployment of reserves in consonance of RRB Act has not been addressed and as such has not been examined by any order or judgment and in fact, since it has not been raised in any of these orders or judgments on account of this fact, the Courts never had an occasion to deal with the said aspect.
8.13 Specific attention was again invited to the italicized portion given below the head notes at p. 1 of the Special Bench order constituted at Ahmedabad (supra) wherein the provisions of Section 67(2) of the Gujarat Co-operative Society Act, 1961 read with Banking Regulation Act were interpreted and discussed. Thus, the finding given that the interest earned from the trustee securities, dividend and UTIs etc. are as per the requirement of the enabling Act there, it was argued.
8.14 Again inviting specific attention to p. 2 of the said order, it was urged, the Tribunal therein interpreted that in the Gujarat Co-operative Society Act, 1961, there is no provision requiring the co-operative bank to invest the amounts transferred in statutory reserve funds in any specific security. Section 67(2) of the Gujarat Co-operative Society Act was also interpreted. It was vehemently contended whereas, in the facts of the present case by virtue of setting out the notified area in which the RRB was created in the area from which the application of funds for developing that area as per the aims and objectives of the RRB Act the income of which is to be exempt.
8.15 As such, the reliance placed upon the said order, it was submitted, was misplaced.
8.16 It was submitted that reliance as such placed upon the findings on which heavy emphasis was placed by the assessee is context specific. It is given on an appreciation of facts in the case of an assessee governed by a Co-operative Society Act that the Tribunal observed:
therefore, it cannot be said as to which reserve has been invested where. As a matter of fact all funds of the bank including the capital, reserves and unappropriated profits constitute a single or mixed fund out of which various loans and advances have been given to borrowers and investment in various Government securities and deposits with other banks etc. have been made. The main object of the co-operative bank is to carry on the business of banking.
8.17 It was stated that it was appreciated by the Tribunal therein that in the case of co-operative bank, the main activity is the business of banking. It was emphasized that whereas in the case of RRBs, the main object is not only banking but that the business of banking carried out in the specified area promoting the aims, and objectives of the RRB Act. It was reiterated that it is not only the activity, which is relevant, but it is also necessary to see that it is from the area which is notified area of the particular RRB and this too for that banking activity which is seeking the aims and objectives of the RRB Act. Referring to the said order it was reiterated and emphasized that the specific facts and Acts were considered by the Tribunal and on account of these facts the Tribunal in the said order came to the conclusion:
all these investments fully satisfy the test easily realisable in the case of need. As such investment in approved securities and approved modes of investment 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 but has enabled the co-operative banks to achieve multiple advantages.
8.18 It was contended by him that this finding is on the specific facts of the case and with regard to the specific objectives of the relevant Act would have been looked into and only then the Tribunal concluded that the twin objectives of the enabling Act, i.e., Co-operative Society Act were fulfilled. It was his contention that in none of the orders of the Tribunal, this aspect has been considered, i.e., objectives of the RRBs and in all the judgments of either the Supreme Court or the High Court this fact has neither been considered nor argued. As such, this material distinction is the reason why the AO has rejected the claim of the assessee. It was reiterated that the case of the Revenue is not that the RRB engaged in the activities, for which it was created should be denied exemption under Section 80P(2)(a)(i). The Revenue is only agitating that the income from an activity which is not towards the aims and objectives of the RRB Act is not eligible to deduction under Section 80P(2)(a)(i).
8.19 It was stated that there is no great sanctity in the arguments on behalf of the assessee bank that the investments so made as per the RBI directions are entitled for exemption. It was his contention that as and when any industry is set up then there are various regulatory authorities, which govern the various aspects of this industrial enterprise by virtue of which in order to make its industry come into existence, various costs/regulatory terms/requirements from different regulatory authorities are to be met or certificates to be obtained like from Pollution Control Boards, securities to be maintained with different banks or Government authorities is the basic requirement, but these costs or income from investments so made cannot be taken as their income from business activity and allowed to claim deduction on it.
8.20 It was his argument that the guidelines of the RBI which the assessee cannot ignore is basically the guideline of a regulatory authority for the banking industry/business and thus by virtue of the deployment of the funds as per the directions of the RBI in the case of the Co-operative Societies Act of different States, it may have been found that the banking business is eligible for deduction under Section 80P(2)(a)(i) by virtue of Banking Regulation Act and State Co-operative Society Acts. However, in the present case, it is not only the Banking Regulation Act, which is relevant, but it is also the RRB Act, which has to be taken into consideration and in case of the assessee, the area is specifically demarcated and notified and thus the income of banking activities from funds deployed towards the aims and objectives of the RRB Act only is eligible for deduction. It was submitted that on the other hand, the income from the banking activities generated by the RRBs, i.e., the assessee which though as per the guidelines of RBI but not in consonance with the ethos of the RRB Act, is not eligible for deduction.
8.21 In the context of the above arguments, it was again reiterated that the Special Bench of the Tribunal in the case of Surat District Co-operative Bank Ltd. (supra) proceeded on the interpretation of the provisions of the Banking Regulation Act and Section 71 of the Gujarat Co-operative Society Act, 1961 and various circulars, notifications etc. issued by RBI from time to time and in the light of these specific Acts and provisions, the Tribunal therein concluded the issue before them in assessee's favour which has no bearing on the present case. Reverting back again to the order of the Special Bench it was emphasized that the Special Bench observed there that all such investments are part of normal transactions carried out by such co-operative banks and the investment as such made by these co-operative banks in consonance with sound banking practice adopted by almost all co-operative banks in the last several years fulfils all the tests of being rated as part of normal banking business and as such eligible for deduction. It was emphasized that the reliance had been placed upon the judgment of Supreme Court in the case of Bihar State Co-operative Bank Ltd. v. CIT (supra) which was not relevant in the case of a RRB.
8.22 It was submitted that even if for a moment, the material distinction of this Special Bench order, namely that it has been rendered in the realm of Cooperative Society Act is ignored and also the fact that it is in the context of non-SLR is also ignored even then another fact, which is necessary to be considered is that therein the basic test applied was that these fixed deposits (Kayani Thapan) and interest on trusty securities, etc. like other Government securities and bonds, i.e., dividend and UTIs, interest on IVPs, etc. "was easily realizable in case of need" and as such available on requirement for normal banking activity of the co-operative society. This aspect, it was considered, was again context specific finding and apart from being easily realisable by the assessee in times of need were also found to be in consonance with the aims and objectives of the relevant Co-operative Societies Act. In the issue at hand, it was vehemently argued that this income has not been earned from the deployment of funds which are in consonance with the aims and objectives of RRB Act. It was also submitted that there has not been a single case of any funds of RRB, which have been invested by it either in the lead bank or in other manner as per the RBI guidelines where it can be said that the said sum in times of need is easily realisable by the RRB. It was his vehement contention that in the case of an exemption, the taxing authority is required to look into the aspect of allowing or denying the same strictly since the exemption is given either to a particular activity or to a particular activity which is area specific. In the present context,' it was argued that it is not only the income from the business of bank, it is also the requirement that the banking activities should take place in a certain area aimed at a certain target group. Thus, the investment of these funds even if they meet the regulatory requirement, i.e., guidelines of the RBI, does not entitle the said bank to claim exemption for an activity, which is not arising from area of its notification or in consonance with aims and objectives of the RRB Act.
8.23 Attention was also invited to CIT v. Bangalore District Central Cooperative Bank Ltd. (supra) referring to paper book p. 23, which contains the said judgment from pp. 20 to 33 as reported in (1998) 148 CTR (SC) 226 : (1988) 99 Taxman 404 (SC) (supra) wherein at p. 407 of the said judgment (relevant p. 23 of the paper book) it was submitted that this judgment again was in the context of Sections 24 and 56 of the Banking Regulation Act, 1949 as well as Section 57(2) of the Karnataka Co-operative Society Act, 1959 and Rule 23(3) of the Karnataka Co-operative Societies Rules, 1960 and in the context of these specific Acts/Rules their Lordships of Supreme Court held "on the fact situation of the case, we do not find any justification to interfere with the conclusions of the High Court. The appeals suffer dismissal. There will be no order as to costs." It was further highlighted by the learned Departmental Representative that even in the said case, the arguments on behalf of the assessees co-operative central bank was that income of the co-operative society carrying on business of banking was attributable to the said activities and there was a finding of fact recorded by the Tribunal therein that the interest income is attributable to the business of the assessee, which finding, it was submitted, had not been challenged on the factual basis by the Revenue and no material as such had been placed before their Lordships of Hon'ble Supreme Court to upset the conclusions of the High Court. Accordingly, on account of these specific facts and different provisions of the State Co-operative Societies Acts and Rules, the appeal of the Revenue was dismissed.
8.24 On the basis of the said judgment it was reiterated that the deployment of reserves in the facts of that case was specifically found to be as per the Societies Act. However, it was submitted that the AO and the CIT(A) in the facts of the present case have come to the finding that there is no parallel provisions in the RRB Act which lays down that any and every banking activity is eligible for exemption. Since the RRB, as its very name suggests, is confined to a specific area and thus, it is the banking activity, no doubt as incorporated by the Banking Regulation Act and regulated by RBI, which is carried out in the certain area for the aims and objectives of the RRBs, it is that activity which is entitled for exemption.
8.25 It was further submitted that when the judgment of Madhya Pradesh was overruled by the Supreme Court then they specifically relied upon this reasoning and the subsequent decision of Hon'ble Supreme Court have relied upon the deployment of reserves as covered by the Act itself and income thereon should be held to be treated as attributable to banking activities.
8.26 It was further submitted that RBI has made the deployment of funds in sponsor bank, which is also qualified as SLR. Moreover it was submitted that at the relevant point of time, no RRB could directly apply to the RBI for Government securities and thus the argument was that all the RRBs had been created to cater to the specific area, but actually the income has resulted from investing as per the RBI guidelines and has resulted in the movement of the money from the development etc. of an area for which purpose it was created to cater instead to the commercial requirement of the sponsor bank. It was this action to which the Revenue, it was stated, was opposed and the exemption for this specific reason was denied to the assessee. Referring to the SLR investments of the RRB Act, it was contended that there is no provision for withdrawal of these SLR investment for meeting the demands of the depositors of the RRB. Those funds, it was contended, conceptually for a regional area are instead always parked with the sponsor bank. It was further contended that the bank under the provisions of RRB Act has no control over this and anyway is not seeing the aims and objectives of RRB Act. Emphasizing this aspect, it was submitted that there is no instance in the history where the RRB has dipped into these reserves. Thus, these activities would not entitle the assessee for exemption.
8.27 The argument advanced was that if the assessee bank can neither have an access to these funds and nor can the assessee bank deploy it towards its aims and objectives, then these funds cannot be said to be so applied towards the development of regional area to which the RRBs cater. As such, the judgment of Supreme Court, on which the reliance has been placed, i.e., CIT v. Bangalore Distt. Co-operative Bank Ltd. (supra) (p. 20 of the paper book) and the Special Bench of Ahmedabad Bench of the Tribunal are not (sic) entirely in a different context and for this reason are (not) applicable.
8.28 Attention was also invited by the learned Departmental Representative to p. 84 of the paper book, which is the order of Hyderabad Bench of the Tribunal rendered in the case of Rayalaseema Giamin Bank v. Jt. CIT (supra). Inviting attention to the same, it was contended that even this order is context specific and as such not relevant to the issue at hand. However, on a perusal of the said order, which is placed at paper book pp. 84 to 89, it was noticed that the copy given by the assessee was not legible. Accordingly, the case was adjourned to the next date of hearing for obtaining a legible copy since reliance on the same has been placed by the assessee and learned Departmental Representative's stand is that it is distinguishable.
8.29 On the next date, a legible copy of the judgment was filed. Referring to the said order, it was submitted that the question which was for consideration before the Hyderabad Bench was the deployment of reserves, wherein there was a finding of fact given by the Tribunal that there was a common pool and investment made in the context of the Banking Regulation Act. It was the Departmental Representative's contention that the issue at hand is not on deployment of reserves or on creation of reserves. It is on the aspect of income earned from SLR and non-SLR investments. It was submitted that the two issues are distinct as both are on opposite sides of the balance sheet. Thus, the order of the Hyderabad Bench of Tribunal is in the context of left hand side of the balance sheet and thus, this order is entirely in different context and cannot be made applicable to the issue at hand. Moreover, the aspect of income neither from SLR nor from non-SLR investments were considered there. Thus simply because this order was in the case of a Gramin Bank does not help the assessee as the question which was examined was entirely different.
8.30 The attention was also invited to an unpublished order of the Tribunal, i.e., ITA No. 7109 to 7119/Bom/9 In the case of Maharashtra State Co-operative Bank v. Asstt. CIT (supra) dt. 12th Aug., 1998 wherein at p. 29 para 25, the alternative plea of the assessee was considered, which was that even if the main plea that the entire interest is exempt is not acceptable then the AO may be directed to examine the working sheet and arrive at the proportionate interest that is taxable. It was submitted that the alternative plea was only to the extent of 25 per cent of the net profits, which was to be compulsorily carried to reserve fund under Section 66(2) of the Mumbai Co-operative Societies Act, it can be considered that the investments representing such statutory reserves are locked up without the assessee bank having any right over the same to deal with as it pleased. Thus, the ratio of the Supreme Court in the case of Madhya Pradesh Co-operative Bank (supra) are said to be applicable only to those proportionate interest. It was submitted that the alternative plea was not considered although the AO was advised to examine the alternative plea so as to avoid controversy in future.
8.31 Thus referring back to the order of the Tribunal in the case of Rayalaseema Giamin Bank (supra), it was his argument that the material distinction between the RRB Act and the State Co-operative Societies Act has not been considered even in the order of the Rayalaseema Giamin Bank (supra) since they had no occasion to consider the same as the issue there was only of deployment of funds, as such, the order of the Tribunal is again context specific. Inviting attention to the said order, it was contended that at para 2 of the said order, it can be seen that the proportionate income from investments were challenged since the AO was of the view that the reserves were created by transferring the amounts from the profit earned and the same have been invested by the assessee in securities and as such was held to be as income not arising in the course of assessee's business of banking and accordingly disallowed by him under Section 80P(2)(a)(i) to that extent. During the arguments on behalf of the assessee before the Hyderabad Bench, it was submitted that the assessee is a deemed co-operative bank under the provisions of Section 18B of the RRB Act, 1976, as such, the assessee bank like any such scheduled bank had to give 25 per cent of its profits as reserve, set apart the same under a reserve account. The arguments advanced were that there is no fetter against the use of the funds for any of the declared activities of the Gramin Bank and these statutory reserves with the bank, it was submitted, could be used as any other fund and as such no specific amount was earmarked and set apart corresponding to the reserve created, and certain of reserve is only an adjustment entry. It was submitted that it is only an appropriation for adjustment and no funds are invested in any specific or earmarked fund against statutory reserve. Conversely, the statutory reserve is not supported by any corresponding specific invested fund. Thus the cash or specific fund is not earmarked towards any reserve and this is a peculiar concept of law. It was stated that the arguments on behalf of the assessee was that whatever cash was available with the bank is investible and altogether available with the bank for investment in any of its activities connected with banking business. It was submitted by the learned Departmental Representative that no arguments on income from SLR or non-SLR investments were advanced and no distinction between Co-operative Societies Act or RRB Act were advanced and as such had not been considered as the question was materially distinct.
8.32 It was further emphasized by the learned Departmental Representative that on behalf of the assessee it was pointed out before the Hyderabad Bench that the judgment of the apex Court in the case of Madhya Pradesh Cooperative Bank (supra) was held to be distinguishable on account of the fact that in the case of Co-operative Societies Act, which was further subjected to certain restrictions and conditions on the utilization of deployment of statutory reserves funds by MP Government for which purpose, certain circular putting restriction on Madhya Pradesh Co-operative Bank were issued by the Revenue and thus in this context, the bank deployed the funds in violation of those rules and directions and for this specific reason, the Supreme Court held that the income arising out of such deployment of fund in violation of these rules could not be treated as income earned out of banking business.
8.33 It was submitted that the arguments advanced on behalf of the Revenue were as under:
The learned Departmental Representative, Shri C.P. Ramaswami on the other hand strongly supported the orders of the lower authorities, and submitted that the appeal of the assessee is liable to be dismissed.
Referring to the said order, it was contended that in the context of these separate and distinct issue and specific arguments advanced confined to the issue at hand from either side, the Tribunal therein came to the conclusion that in the Banking Regulation Act, there are no restrictions on the assessee bank on the utilization of reserve fund. It was his argument that in the case at hand this finding does not render any help since the dispute in the present proceedings does not pertain to the utilization of reserve fund and as such reliance placed upon the said order by the learned Authorised Representative is misplaced. In this background, it was submitted that the reliance thereon and the submission that this order of the Tribunal was confirmed by the Andhra Pradesh High Court does not render any help since the Tribunal in the said order was examining entirely different dispute and moreover arguments as such were also distinct and separate.
8.34 On the basis of these arguments and reading of different orders of the Tribunal and judgment of Courts, it was reiterated that the arguments advanced in the present appeal based on findings given in the assessment order and the impugned order as well as advanced before the Bench, it was stated that the Revenue has successfully demonstrated that these arguments and facts have not been considered in any other order or judgment either of the Special Bench or by the Division Bench of the Tribunal. Moreover, it was submitted that these orders as such are context specific and under the different and distinct Acts and the order of the Hyderabad Bench is on entirely a different issue and as such does not render any help to the issue at hand. It was reiterated by the Departmental Representative that on a reading of the orders and judgments on going through line by line the order of the Special Bench of Tribunal as well as Hyderabad Tribunal, he has been able to demonstrate that this issue has not been examined in any order/judgment.
8.35 Attention was invited to Section 24 of the RRB Act, which deals with the creation of statutory reserves and requirement of the maintenance of SLR. It was his contention that there was no provision for withdrawing nor any instance in practice that the said sum was available to the RRB. The attention was invited to the judgment of Supreme Court in the case of South Malabar Gramin Bank v. Co-ord. Committee of SMGB Emp. Union and Ors. This judgment of the Supreme Court though considering a different aspect, i.e., salary as announced to the employees of RRBs in accordance with pay and allowance and benefits implemented in respect of the employees. It was submitted that in the said judgment, the objectives for which the grameen banks were created was highlighted. A certified copy of the said judgment in CA No. 2218 of 1989 (transfer petition No. 403/1989 at p. 6) was referred to and the importance of objectives which were considered by the Tribunal headed by Justice Abdul Ready were referred to.
Repelling the plea of the employer that financial viability should be the criterion in deciding the wage structure of the RRB employees, the learned Tribunal held:
The RRBs have brought about socio-economic revolution in the hithertounbanked under-developed priority sector by ameliorating the poverty conditions of the under-privileged, SC/STs and other weaker sections of the society. That is the paramount objective of the Act. It should not be lost sight of the fact that the total losses suffered by rural branches of commercial banks is undeniably more than the total losses suffered by the RRBs. But the losses of the rural branches of commercial banks are made up by the other branches in semi-urban and urban areas and the RRBs unfortunately for them cannot transfer the losses to their sponsor banks. The object and purpose is the economic development of the target groups and the achievements in that field certainly outweigh considerations of viability or losses. When the losses are on the increase even in the rural branches of commercial banks, the RRBs alone cannot be singled out to bear the cross. I can find no better authority than the Chairman of the NABARD who categorically stated that the "ghost of profitability" should not haunt us in judging the performance of the RRBs. Establishment of RRBs is a national commitment in the direction of ushering in a welfare State and that is a mandate of the Constitution. It is a fulfilment of hopes and aspirations aroused in the preamble and the directive principles of the constitution that the RRB Act has been enacted and the performance of such institutions in furtherance of those principles, shall not be judged from the curved angle of viability or from the point of view of a private money lender or businessman or from mere profit and loss statement.
It was submitted that although this judgment is in the context of fixation of wages, however, the emphasis is placed on the paramount objectives of the RRB Act, which is to cater to the under-developed section of the society. It was emphasized that the banking activity also is no doubt a developmental activity, but it is catering to all the segments of the society and has a commercial angle to it whereas the RRBs were created specially to cater to the under-developed and under-privileged areas and thus commercial angle is not a paramount aim there since the paramount objectives is to develop these under-developed and under-privileged areas.
8.36 With respect to the income from non-SLR investment, the submissions of the learned Departmental Representative were that the arguments advanced for income from SLR investment would apply to the non-SLR investment. On facts, it was submitted that there are certain differences in figures as available in the assessment orders which were not challenged by the assessee and as such not corrected by the CIT(A) and with respect to which now certain figures have been given by both the sides. It was his contention that on the admissibility of the exemption, the arguments remained the same since these are investments which are found over and above the SLR investments at a particular point of time. It was submitted that the arguments referring to different facts and circumstances in the order of the Tribunal and judgment of Courts in the context of Co-operative Societies Act remain the same are the arguments that these funds are not available for developmental activities in the underprivileged and under-development areas for which RRBs are created also remain the same. The arguments that these funds invested in commercial banks or lead banks and even if in Farrukhabad Branch also remain the same as once it is invested there over and above the statutory requirement, then as far as developmental banking activities of RRB is concerned these funds are not available.
8.37 It was vehemently contended that this criteria could not be judged from the commercial aspect only and the primary object for which the RRB was created has to be seen and the aspect addressed so as to see whether its aims and objectives are being furthered or not. The fact that the RRB earns higher rate of interest from these investments, it was submitted is not a relevant criteria since these funds are not utilized for the development activities in the notified area which has been addressed by the AO at p. 7 of his order, where the limits of the area are fixed. Thus, no doubt that as per instruction of RBI guidelines, investments have to be made and non-SLR investments at different point of time on existing statutory limit arise, but this argument will not hold good at all since in the case of non-SLR there is no necessity for the assessee to invest in the manner invested as in such a situation no penal consequence would be visited upon the assessee. Thus, it was submitted, the fact remains that the banking business was not carried in terms of the aims and objectives of the RRBs Act and as such, the AO was very much right in para 3 at p. 7 to deny the claim to the assessee.
8.38 Inviting attention to the unnumbered page on the left hand side of p. 145 of the paper book, it was submitted that a perusal of this shows that there is a disproportionate investment in investments which do not promote the aims and objectives of the RRB and these investments are guided purely by commercial angle. Inviting attention to the same, it was submitted that almost 234 lacs have been locked up in the investment from commercial angle. It was further submitted that these banks were created specifically to encourage banking in certain deprived socio-economic specified areas and parking of the funds in other investments is contradictory to the very purpose of creating the RRBs.
8.39 With respect to the issue being considered by the Tribunal in the case of the assessee, it was submitted that firstly the Tribunal has proceeded on the basis that SLR investment was allowed by the AO which is not a fact here and secondly no arguments distinguishing the respective Acts, i.e., Co-operative Societies Act and RRB Act were advanced or considered. Similarly, it was submitted that the aims and objectives of the RRBs were not referred and as such not considered by the Bench and the issue was decided on the basis of facts as presented there and considering the Special Bench order which it was submitted has been successfully distinguished and the Supreme Court judgment in (2001) 169 CTR (SC) 486 : (2001) 251 ITR 194 (SC) (supra) which had also been distinguished and they are amongst other reasons revolving on the pursuing of their respective Co-operative societies Acts and distinction vis-a-vis RRB Act was not brought to the notice of the Bench, thus facts and circumstances of the two assessment orders are entirely distinguishable. Various judgments were relied in support of the proposition that res judicata does not apply as facts and circumstances of the two assessment years are different and each judgment lays down the ratio which is not to be blindly applied in each and every case since the ratio would apply only to identical facts and circumstances and not to different facts and circumstances. Thus, the fact in the case at hand pertains to RRB Act, it was reiterated, has not been considered by any order or judgment with regard to SLR and non-SLR and the order of the Tribunal in assessee's own case, it was submitted, was not a bar since admittedly the facts and circumstances of the two assessment years were entirely different and moreover no arguments pointing out the distinction in the case of co-operative society and RRB Act was advanced as such the Tribunal never had an occasion to consider it.
9. In reply, the learned Authorised Representative Shri Dayal Saran appearing on behalf of the assessee submitted that the arguments of the learned Departmental Representative that Special Bench decision of Ahmedabad Bench of the Tribunal in the case of Surat Distt. Co-operative Bank (supra) is not applicable, are not correct since according to him the principle applied therein is in the context of non-SLR. It was submitted that the Departmental Representative is not correct in his submission since it relates to SLR also. Similarly it was submitted that the decision in the case of Mehsana District Central Co-op. Bank v. ITO (supra) and Karnataka Co-operative Society (supra) again relate to the SLR investment, which has been followed by the Tribunal in assessee's own case, though it was conceded on the objection of the Departmental Representative that Agra Bench has only considered the issue of non-SLR and the issue of SLR since allowed by the AO himself in the year was not considered. The Departmental Representative at this point of time again interjected that each decision has to be applied in the context of the ratio laid down therein and moreover, the principle of res judicata, and ratio decided in the case of income-tax proceedings is well established.
9.1 The next reply of the learned Authorised Representative was that the order of the Tribunal in the case of Rayalaseema Qramin Bank (supra) pertains to SLR as well as non-SLR. The order of the Bombay Bench in the case of Maharashtra State Co-operative Bank (supra) pertains to only non-SLR and the observations on which reliance has been placed by the learned Departmental Representative, it was submitted, has been overruled by the Hon'ble Supreme Court.
9.2 It was further submitted that the arguments that the income from banking has been to the extent applied in the notified area, has been exempted, is not correct since the entire income of the assessee has been taxed. It was further submitted by him that RRB has applied for allotment of agricultural securities. Further, the RRBs have been allowed by the RBI to directly apply for revenue securities. At this point of time, the learned Departmental Representative again objected that this was subsequently directed by the RBI and is in a later year and not in the year under consideration. It was further stated on behalf of the assessee that no income from sale or purchase or trading activities has been shown by the assessee.
9.3 It was further interjected by the learned Departmental Representative that the funds in the SLR and non-SLR are not out of banking in the case of RRBs and the arguments advanced have not been considered or made before the Tribunal, Agra in the case of the assessee and this decision as such accordingly is not binding. The fact that these non-SLR investments are guided by the commercial principle, has not been considered by the Agra Bench of the Tribunal and the specific fact of the aims and objectives and the purpose of creating RRB Act was not considered.
9.4 The learned Authorised Representative continuing his reply stated that whatever has been done by the assessee is in the pale of banking activities and as such is entitled for exemption. On this point, it was put to the learned Authorised Representative that on taking note of the objections of the learned Departmental Representative, it is noted that the Department has not objected to the fact that the assessee bank is not a bank engaged in the banking activities. The Department's objection is founded on the fact that banking activity on which exemption is being claimed according to the Department is not in pursuance to the aims and objectives of the RRBs and only that income has been denied exemption. In reply, it was stated by the learned Authorised Representative that the entire income has been denied exemption and the income has been earned from the banking activity. Maintaining SLR and non-SLR investments and income thereon should be allowed exemption since it was within the pale of banking as defined under the Banking Regulation Act. Reliance was placed upon the orders and judgments to which our attention was invited in the course of hearing and it was submitted that the first and foremost decision in this line is judgment of Bangalore State Co-op. Bank (supra), which has been consistently followed in all the said judgments.
10. After the closing of the hearing, learned Departmental Representative filed before the Registry a copy of the order of the Kerala High Court in the case of Kerala Small Industries Development Corporation v. CIT (2004) 190 CTR (Ker) 281 and relied upon East West Rescue (P) Ltd. v. Dy. CIT (2004) 83 TTJ (Del)(SB) 183 : (2004) 89 ITD 259 (Del)(SB) in support for the proposition that the Tribunal can take cognizance of it despite the fact it was not referred before the Bench. Since the order was still under consideration an opportunity was afforded to the assessee to persue the judgment. On the date of hearing, it was put to the learned Departmental Representative that after the conclusion of the hearing it was not appropriate. However, since the learned Authorised Representative stated that he had no objection, both the sides were heard.
10.1 The learned Departmental Representative stated that in that case the assessee is required to subscribe to shares and in the case at hand assessee is required to subscribe to SLR. In both the cases there is no provision for withdrawing and transferring such shares and in both the cases investments though compulsory cannot be held as an object. In that case relying upon Badridas Daga v. CIT Tribunal came to the conclusion that the investment was a capital investment and not a trading capital or circulating capital as such investments were not "business" of the assessee and it was this ratio, the Departmental Representative argued, which was fully applicable to the assessee's case.
10.2 The learned Authorised Representative Shri Dayal Saran, on the other hand, submitted that the case has no relevance to the issue at hand and is in the context of allowance of business expenditure and relates to a company in respect of investment in shares in co-operative society, whereas in assessee's case it was submitted the issue pertains to exemption under Section 80P and on an investment on the direction of RBI.
11. We have heard the rival submissions and perused the material available on record.
11.1 Before we address the issue which arose in the present appeal, we would briefly, at this juncture, like to observe that the reluctance to look into facts and merely address the legal principles is not to be encouraged. In a case which started on the footing that it is fully covered in favour of the assessee, as has been seen, it transpired that only the non-SLR issue was considered by the Tribunal in the earlier year and that too on different facts and circumstances. We were pained to observe that on an examination of facts, it emerged that the amounts mentioned in respect of incomes from SLR investments and non-SLR investments in the assessment order are not correctly mentioned which is a fact admitted by both the parties before us. It is seen that before the CIT(A), this aspect was argued only on the principles of law and facts were completely ignored. The case as has been observed earlier has been adjourned a few times so as to give opportunity to either side to bring the correct facts on record. Without commenting further except that after some exchange as to who is responsible for the figures stated in the assessment order, the stand of the assessee was that the AO had not called for the assessee to give any break-up of income in the category of SLR and non-SLR investment and the argument on behalf of the Revenue is that the figures as supplied by the assessee have been taken by the AO and that the assessee did not point out even before the CIT(A), we would merely like to observe that even if a particular income is claimed to be exempt or the exemption is denied it is necessary to actually state what is the exact amount of the income for which the deduction is being sought and conversely what is the exact amount of income on which deduction is being denied. The focus has been to contest the issue on legal principles and the actualities have unfortunately not been considered relevant. It may not be out of place to mention that this is a situation which is specifically noted in the case of Public Sector Units or State sponsored enterprises and very rarely occurs in cases of private enterprises where even a few hundred rupees are watched with a careful eye. This attitude of carelessness does not behove a State sponsored enterprise which no doubt is created for laudable social causes. Thus, for this reason itself it is all the more reason to give due care attention and caution since these institutions are repository of public trust and funds and created for specified socio-economic benefits. In such a situation, we are of the view, it is all the more necessary to see where each and every rupee is going. The fact that this enterprise presumably must have been managed with this aspect is not doubted since the accounts are audited. However, the comment is only on the aspect that an enterprise must know as to what is the amount on which deduction is being claimed and what is the bifurcation of its various investments in different nomenclature namely SLR and non-SLR investment and other investment etc. Without going into the aspect as to how the factual mistake has not been pointed out to the CIT(A) since the focus on either side has been on the legal aspect only, however, at the same time, being conscious of the fact that the Tribunal is the final fact-finding body which is required to apply the principles of law and the provisions of the relevant Acts to those facts, we are of the view that these factual mistakes need to be corrected. Certain figures were given in writing by either side with respect to the actual income from SLR investments and non-SLR investments and the parties were allowed time to address the Bench on this aspect. However, we are of the view that instead of substituting any figure as an income from SLR investment and non-SLR investment in a hurried manner based upon the submissions made in the course of the argument wherein the focus on either side as can be seen from the perusal of the detailed arguments advanced before the Bench and recorded in the earlier part of the order again on legal principles, we are of the view whether deduction is allowed to the assessee or not and whether it is allowed to SLR investment or non-SLR investment or not, it is necessary to have the actual figures verified. Thus in the circumstances it would be appropriate to restore this issue to the file of the AO with the direction to verify the income of the assessee as per the relevant provisions in the period under consideration as income from SLR investment and income from non-SLR investment. The AO is directed to give the assessee an opportunity of being heard and pass a speaking order in accordance with law on this aspect.
11.2 Coming to the various arguments advanced before us at length, we have taken into consideration the principles laid down by the different judgments of Courts and the issue decided in the orders of the Tribunal to which our attention was invited and the relevant provisions of law which have a bearing on the issue. After a careful analysis and consideration of these, we have come to the following conclusion.
11.3 We propose at the outset to address the provisions of law which are required to be considered before deciding the present issue and which were referred to before us. Section 80P(2)(a)(i) of the IT Acts grants exemption by virtue of operation of Section 22 of the RRB Act, 1976.
Section 80P(2)(a)(i) of the IT Act reads as under:
80P. Deduction in respect of income of co-operative societies-(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 sums specified in Sub-section (2), in computing the total income of the assessee.
(2) The sums referred to in Sub-section (1) shall be the following, namely: (a) in the case of a co-operative society engaged in-
(i) carrying on the business of banking or providing credit facilities to its members.
Section 22 of the RRB Act, 1976 reads as under:
RRB to be deemed to be a co-operative society for purpose of the IT Act, 1961.-For the purpose of the IT Act, 1961 (43 of 1961), or any other enactment for the time being in force relating to any tax on income, profits or gains, a RRB shall be deemed to be a co-operative society.
11.4 The fact that the assessee is a RRB created under the RRB Act, 1976 to cater to the requirements of a specified notified area have already been addressed at length and need not be reproduced since there is no dispute on this aspect. It may also be worth mentioning that investments in the manner and upto the percentage of its time demand liabilities as per the directions of the RBI issued from time to time are mandatory in nature and in the eventuality there is a violation of these directions then the RBI can take action under the law and ensure that the particular bank does not continue to do its business as a banking business. This aspect it may be observed is also an accepted and admitted position over which there is no debate.
11.5 It may also be mentioned that any investment found made over and above the SLR investments on the directions of the RBI are termed as non-SLR investments since the exact amount of required SLR investments may vary from week to week.
11.6 It has been vehemently contended on behalf of the assessee that the order in the case of Surat District Co-operative Bank (supra) rendered by the Special Bench, Ahmedabad fully covers this case as far as the issue pertaining to SLR investment is concerned. The equally vehement and elaborate argument of the learned Departmental Representative, on the other hand, on behalf of the Revenue have been that firstly this is an order which is rendered in the context of the provisions of Gujarat Co-operative Societies Act and on an appraisal of the activities of the concerned bank vis-a-vis the enabling Act there, the finding given by the Tribunal that if is a banking activity has no relevance here as nothing has been advanced so as to show that the provisions of Gujarat Co-operative Societies Act are applicable to the case of a bank created under the RRB Act. Whereas the Revenue right from the beginning has put the assessee to notice that the judgments of co-operative banks will not apply to a RRB. It was also his contention that apart from this fact the order is rendered in the context of non-SLR investment and not in the context of SLR investment. Apart from that, various other arguments have been advanced which have been brought out in the earlier part of this order at length.
11.7 In this background, we are of the view that it is imperative first of all to see certain other relevant provisions also so as to appreciate these arguments.
11.8 The Banking Regulation Act, 1949 defines in Section 5(b) and (c) "banking" as under:
(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, order or otherwise;
(c) "banking company" means any company which transacts the business of banking (in India).
11.9 The business of banking set out in Part-II of the same in Section 6 of this Act is defined as under:
6. Forms of business in which banking companies may engage-(1) In addition to the business of banking, a 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, hoondees, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whether transferable or negotiable or not; the ranting and issuing of letters of credit, traveller's cheque 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 or for safe custody or otherwise; the providing of sale deposit vaults; the 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 discharges 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 associations, institutions, funds, trusts and conveniences calculated to benefit employees or 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;
(1) 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 a nature enumerated or described in this sub-section;
(n) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company;
(o) any other form 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).
11.10 The terms "reserve fund" and "cash reserve" are set out in Sections 17 and 18 in view of the fact that. there is no dispute that maintaining the statutory reserve is a mandatory requirement, the same need not be reproduced.
11.11 It may also be added here that we have also taken into consideration Section 24 of the Banking Regulation Act which deals with maintenance of percentage of assets. It has been noted that Section 56 of the Act under Chapter V which is titled as "Application of the Act to co-operative bank" is not required to be considered so as to decide the issues in the present appeal as the assessee bank is not a co-operative bank.
11.12 The relevant provisions which need consideration of the RRB Act, 1976 are the preamble to the Act which is set out as under:
An Act to provide for the incorporation, regulation and winding up of RRBs with a view to developing the rural economy by providing, for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs, and for matters connected therewith and incidental thereto.
11.13 Section 2(d) of the same defines the term "notified area" as under:
notified area" means the local limits, specified under Sub-section (1) of Section 3, within which a RRB shall operate.
The notified area under Section 3(1) the working area has been notified as the Districts of Farrukhabad and Kannaauj.
11.14 Chapter IV of the RRB Act, 1976 in Section 18 which is the only section which deals with the business of RRB reads as under:
18. Business which a RRB may transact-(1) Every RRB shall carry on and transact the business of banking as defined in Clause (b) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949), and may engage in one or more forms of business specified in Sub-section (1) of Section 6 of that Act.
(2) Without prejudice to the generality of the provisions of Sub-section (1), every RRB may, in particular, undertake the following types of business, namely:
(a) the granting of loans and advances, particularly to small and marginal farmers and agricultural labourers, whether individually or in groups, and to cooperative societies, including agricultural marketing societies, agricultural processing societies, co-operative farming societies, primary agricultural credit societies or farmers' service societies, for agricultural purposes or agricultural operations or for other purposes connected therewith;
(b) the granting of loans and advances, particularly to artisans, small entrepreneurs and persons of small means engaged in trade, commerce or industry or other productive activities, within the notified area in relation to the RRBs.
On a perusal of these above provisions, it is seen that in the case of a RRB, it is not only imperative that the requirements of the Banking Regulation Act, 1949 be fulfilled but even the requirements of the RRB Act, 1976. On a perusal of the above, it is seen that the RRBs came into existence after the implementation of the Act on 26th Sept., 1975. The specific type of business which the RRB was required to engage in can be seen from the perusal of Section 18 which gives effect to the aims and objectives enshrined in the preamble of the Act. It is not any and every banking activity for which RRBs were created but for a specific target group of people which was further qualified by making it area specific. Thus, as per Section 18 of the RRBs Act, the banking income entitled for deduction was the income generated from granting of loans and advances, particularly to a small and marginal farmers and agricultural labourers, these loans could be either to the small and marginal farmers or agricultural labourers either individually or in groups and or to cooperative societies which may include agricultural marketing societies, agricultural processing societies, co-operative farming societies, primary agricultural credit societies or farmers service societies for agricultural purposes or agricultural operations or for other purposes connected therewith. These RRBs engaged in the business of banking could also grant loans and advances (a) particularly to artisans (b) small entrepreneurs and (c) persons of small means engaged in trade, commerce, industry or other productive activities within the notified area in relation to the RRB. It is seen that in the course of the arguments and hearings no evidence has been lead so as to suggest that the income on which deduction is being sought is from the activities of banking business conducted with this target group of socio-economic people within the notified area. The deduction under the Act is given specifically to encourage and promote the upliftment of the target group and not to general banking activity carried out at times may be within the notified area. Thus, the income which is to be considered entitled for deduction is that income which is covered by the definition of banking business as per the Banking Regulation Act and further also by the RRBs Act. The fact that the RRBs are area specific and activity specific which is narrower than the definition given of banking in the Banking Regulation Act is currently obvious and in the case of RRB is aimed at a separate class of socio-economic spectrum can also be seen from the provisions reproduced above. The argument that this classification is not rationale or violative of any constitutional right is not for this forum to examine. This forum is to apply the legislative intent enunciated in the Act. The fact that the definition of banking business in the case of RRB has been further narrowed down by this Act is self-evident. The case of the Revenue is that the income on which deduction is being claimed is not that income as is eminently borne out from the assessment order and the impugned order. The case of the assessee on the other hand is that the issue is covered in its favour by virtue of various orders and judgments. No arguments at any stage have been advanced before us or for that matter before the tax authorities so as to contend that the income on which deduction is being claimed even otherwise is covered under the narrowed definition of banking even in the case of RRB as per Section 18 of this Act. It is not only the fact that the assessee has failed to establish its case on this aspect but that no attempt has been made to establish the case on this footing and merely orders/judgments are relied upon contending that the case is fully covered.
11.15 In this background, we set down to considering the applicability of the judgments/orders on which heavy reliance has been placed. Thus, after a perusal of the relevant provisions, we proceed to consider the judgments/orders on which heavy reliance has been placed. The Authorised Representative has argued that the order of the Special Bench has considered all aspects. Before we proceed to examine the applicability of the principles laid down in the case of Surat District Co-operative Bank Ltd. (supra) and others by the Special Bench, Ahmedabad, we are of the view that it would be most appropriate first of all to discuss the grounds which were raised in these collection of appeals by different co-operative banks. A perusal of the order shows that the Surat District Co-operative Bank Ltd. challenged the action of the tax authorities vide ground Nos. 1 and 4 on the action of the AO disallowing deduction under 80P relying upon the decision of the apex Court in the case of Madhya Pradesh Co-operative Bank Ltd. v. Asstt. CIT (supra). Vide ground No. 2, the challenge was posed to the fact that the alternative contention of the assessee which had not been disposed by the CIT(A). The said ground reads as under:
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.
It is seen that an alternate prayer was also made vide ground No. 3 which reads as under:
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.
11.16 Before this Special Bench in the case of The Kalupur Commercial Cooperative Bank Ltd., the challenge was posed to not granting of deduction under Section 80P(2)(a) on locker rent and interest-tax collected which was held to be not forming the part of banking business.
11.17 Unnati Co-operative Bank Ltd. also challenged the action of the tax authorities in treating the interest on investments as not the assessee's business from banking and denied of deduction to it. Reliance was placed upon the definition of the banking business under the Banking Regulation Act, 1949 so as to contend that it is income from the banking business. Vide ground No. 5, the following ground was also raised:
Your appellant submits that considering the provisions of the Gujarat State Cooperative Societies Act, 1961, which are substantially different from that of the Madhya Pradesh State Co-operative Societies Act, the judgment of the Hon'ble Supreme Court in case of Madhya Pradesh Co-operative Bank Ltd. is not applicable to the facts and circumstances of the appellant bank.
11.18 Identical ground were raised by the Baroda Central Co-operative Bank Ltd.
11.19 A perusal of this order shows that in the case of Surat District Cooperative Bank Ltd. (supra), the AO observed that the co-operative society/bank was obliged to invest the amount in Government securities as per CRR requirement of RBI. On examining, he observed that SLR deposits exceeded the requirement of Section 24 of the Banking Regulation Act being of the view that the CRR requirement and SLR requirement is met by the balance in current account maintained in various banks and balance in current account and fixed deposits with various banks respectively, he rejected the claim of the assessee under Section 80P. This fact is brought out from para 3.1 of the Special Bench order of the Tribunal. The AO also denied deduction under the said section to the receipts of locker rent.
11.20 The Commissioner held in appeal that "banking" has been given wide definition and include accepting deposits or monies from the public for the purpose of lending or investment. The CIT(A) in para 22 of his order observed that as per Section 67 of the Gujarat State Co-operative Societies Act, every society is required to provide at least l/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 of the Gujarat State Cooperative Societies Act. It is worth noting that the CIT(A) appreciated the fact that unlike the Madhya Pradesh law, there is no restriction in Gujarat regarding utilization of funds carried to the reserve fund. The Gujarat law, it is appreciated, permits society to use reserve fund in the business of the society. Thus, the investments made in Central Bank, State Co-operative Bank, Postal Savings Bank in securities and shares were found to be as per provisions of Section 71 of the Gujarat State Co-operative Societies Act and as such entitled for deduction under 80P since these investments were made in Government securities in compliance to the provisions of Banking Regulation Act. On account of this fact, the CIT(A) directed the AO in the Surat Distt. Co-operative Bank Ltd. (supra) to allow deduction under Section 80P(2)(a)(i) in respect of only interest on such investment in Government securities and banks etc. The first appellate authority confirmed the action of the AO only in respect of locker rent and surplus of interest tax collected. As such, the assessee had challenged these two items of addition and although an application was moved before the Special Bench that the Departmental appeal regarding the relief given by the CIT(A) is also pending and as such should be clubbed. However, since only these cases had been referred to the Special Bench, it was ordered that the Revenue's appeal would be heard by a regular Bench separately. These facts emerged from paras 4.2 and 4.3 of the Special Bench order.
11.21 A careful perusal of the order shows that in the case of Surat Distt. Co-operative Bank (supra), the issue before the Tribunal was exemption under Section 80P pertaining to locker and surplus of interest tax collected. In the case of Unnati Co-operative Bank and Baroda Central Co-operative Bank and Baroda Peoples Co-operative Bank Ltd., it is not clear whether the investment which has been referred to in respect of SLR or non-SLR investment although the dispute pertains to the income from Government securities. But the factum of the SLR or non-SLR investment is not clear. On a careful reading it is seen that since the Special Bench was required only to look into the aspect of deduction of income on Government securities which income on a co-joint reading of Banking Regulation Act and Gujarat Societies Act was found to be business income of the assessee bank as such the aspect of income of SLR income or non-SLR income was not required to be considered for deciding the issue. However, this fact itself is not as relevant as the fact that on the questions which was before the Tribunal, it was necessary to examine not only the relevant provisions of the Banking Regulation Act as has been observed but also sections thereof which are particularly relevant to cooperative societies which fact is borne out from paras 22 of the Special Bench order which considers Section 18 of the Banking Regulation Act as modified by Section 56 as applicable to co-operative societies. Similarly, para 23 of the Special Bench order which considers provisions of Section 24 as modified by Section 56 of the Banking Regulation Act and Section 24(2) and Section 24(2A) as modified by Section 56 as applicable to co-operative societies. The most important fact which needs to be mentioned here is that Section 2(24) of the Gujarat Co-operative Societies Act, 1961 which lays down the definition of working capital was necessarily required to be considered by the Special Bench which fact is borne out from para 25 of the said order. Apart from this, Section 67 again of the Gujarat Cooperative Societies Act, 1961 which considers reserve funds also need to be considered along with Section 71 of the Gujarat Co-operative Societies Act, 1961 which takes into consideration investments of funds. A further reading of this order shows that in para 26 of the said order which takes into consideration the fact that the AO denied deduction under Section 80P(2)(a)(i) on account of the judgment of the apex Court in the case of Madhya Pradesh Co-operative Bank (supra). The income which was being considered by the Special Bench was from the investment in Government securities placed by the banks which was held to be not regarded as essential part of the assessee's banking activity inasmuch as the same did not form part of the stock-in-trade or working/circulating capital. In the facts of the present case, the AO has not denied the claim of the assessee on account of the fact that he was of the view that this income did not form part of its stock-in-trade or working capital but on account of the fact that he was of the view that this income was earned from activities which were not in consonance with the requirements of the RRB Act, 1976. The fact that the assessee compiled with the requirements of the Banking Regulation Act were considered to be not enough.
11.22 Thus, apart from this fact that various provisions of different Acts were taken into consideration by the Special Bench before coming to the conclusion in favour of the assessee, it is also necessary to see that different provisions of Banking Regulation Act were also required to be considered which do not require to be considered in the present appeal.
11.23 It is also seen that the arguments and as such findings in the context of working capital is not relevant since this is not the issue at hand and what also emerges is that in all these judgments which were taken into consideration by the Special Bench in none of these cases was the issue of RRB and specific provisions by which they are governed and which have been taken note of by the AO in the present appeal have come up for consideration or discussion by either the Special Bench or by other judgments relied upon by the assessee. It is seen that the Special Bench was not required to consider this aspect at all. For this purpose, brief reference may be made of para 43 of the said order which starts with the sentence:
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...."
(emphasis by way of underlining, italicised in print, provided by us) 11.24 Similarly, a reading of para 45 of the Special Bench also shows the same thing:
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...."
(emphasis by way of underlining, italicised in print, provided by us) 11.25 A reading of the order further shows that the Special Bench appreciated the fact that the judgment of the apex Court rendered in the case of M.P. Co-operative Societies Act was in the context of specific restriction which was placed by the MP Government on the utilization which fact is borne out from para 8.3 of the order of the Special Bench and the facts that the apex Court in the case of Bangalore District Co-operative Bank (supra) appreciated the difference in the case of Madhya Pradesh law and Karnataka law and similarly (1975) 101 ITR 735 (Guj) in the context of Gujarat District Co-operative Societies Act is also worth noting.
11.26 Accordingly, after a careful perusal of the said order, it is seen that in the case of the Special Bench, the Tribunal was not called upon to consider the provisions of RRB Act, 1976 and moreover the Tribunal therein only took into consideration the relevant provisions of the Banking Regulation Act as applicable to the Co-operative Societies Act and also relevant provisions of the Gujarat Co-operative Societies Act, 1961. After this material distinction, various other distinguishable facts and circumstances pertaining to the appeals referred to the Special Bench need not be referred to. However, since the point was laboured by the Revenue, we would state that apart from this, after perusal of the relevant provisions of the Banking Regulation Act as applicable to the Co-operative Societies Act read with the relevant provisions of Gujarat Co-operative Societies Act, the Tribunal therein came to the conclusion that the funds found so invested in consonance with the provisions of these two Acts were also found to be easily realizable which is not a fact in the present case before us as has been argued at length by the learned Departmental Representative and not rebutted whatsoever by the assessee despite a specific finding in the orders of the tax authorities that the funds so invested are permanently blocked as far as the assessee is concerned.
11.27 It may also be further stated that the order of the Special Bench which has relied upon various judgments of the apex Court as well as different High Courts and thereafter concluded the issue in favour of the assessee does not lend any help to the issue at hand as in that case the deduction was denied by the AO purely on the consideration that the apex Court decided the issue in the case of Madhya Pradesh Co-operative Societies Act in favour of the Revenue and the Special Bench. The Special Bench noted the distinctive facts and circumstances in the case of Madhya Pradesh State Co-operative Societies Act and Rules and the Gujarat State Co-operative Societies Act. In the cases before the Special Bench the facts were on the aspect that the funds invested out of reserve fund or working capital etc. according to the AO were not from banking activity. Apart from that various other issues like income of the bank on account of excess collection of interest were considered which are not relevant for deciding the issue at hand. It is necessary thus to mention that while considering these aspects on a perusal of the relevant provisions of the Gujarat Co-operative Societies Act and the provisions of the Banking Regulation Act, the Tribunal taking into consideration various judgments rightly came to the conclusion that this income was from banking activity as such entitled for deduction. The case of the Revenue is that income on which deduction is being claimed is not from banking activity as narrowed down by the RRB Act requirements and the assessee has made no attempt to show that the income on which deduction is being claimed is covered with the narrowed definition of the Banking Regulation Act. Only mandatory requirement of the investments on the directions of RBI have been addressed which we propose to deal with the following areas.
11.28 From a careful perusal of these provisions which have been brought out in the earlier part of this order, namely para 11.12 to 11.14, it is seen that each RRB is necessarily required to confine its operation to the notified area as per Section 12(d)(a) and carry on the activities as laid down in Section 18 of the Act. The case of the Revenue has been that the income is not in consonance with the provisions of the RRB Act, 1976 and the arguments of the assessee, on the other hand, is that the issue is well settled by the judgments taken into consideration by the Special Bench and no arguments have been advanced as we have observed earlier so as to contend that the incomes are in consonance with RRB Act, 1976 and in fact the only reliance is placed upon orders/judgments in which findings are given is the context of the different State Co-operative Societies Act. Apart from that, as observed earlier, assessee has been at pains to emphasize an admitted fact that the investments are mandatory in nature to the extent of SLR investments.
11.29 As far as this aspect is concerned, i.e., the fact that the SLR investments are mandatory in nature, we are of the view that the Revenue has no quarrel with the said submission. The fact that as per the relevant provisions of Banking Regulation Act, 1949 the assessee or any other bank is necessarily required to maintain the fund depending upon its time and demand liability upon a certain percentage as prescribed by the RBI from time to time is not in dispute. The fact that any violation of this mandatory requirement will render the assessee as a non-player in the field is not in doubt. What is necessary to establish before allowing deduction is that the funds so invested are even as per Section 18 of the RRB (Not RRBs) Act are in consonance with them. This fact let alone established has not even been argued or canvassed by the assessee and as we have already observed despite ample opportunity assessee is relying only on legal principles which do not help the assessee in any manner as those principles were laid down in the context of different Co-operative Societies Act of different States and not in the context of RRB Act. It is seen that no arguments have been advanced canvassing that this aspect has been considered in any judgments or order of the Tribunal. Apart firm that, no other basis for claiming deduction of the said income has also been put before us. As has already been observed earlier the assessee has only sought to rely upon the legal principle in the order of the Special Bench. The detailed study of which has shown that before the Special Bench no arguments regarding the mandatory nature of maintaining funds were advanced and even otherwise the Special Bench only took into consideration the application of funds which were found to be in consonance with the requirement of entirely different Acts and provisions and also the fact that therein the AO had not made out a case that the provisions of the RRB Act were being violated. Simply because the assessee had to fulfil certain mandatory requirements in order to ensure being a player in the field does not by itself merit a deduction. In order to claim deduction the income has to come within the ambit of banking business as per the Banking Regulation Act as well as RRB Act in the case of a RRB.
11.30 We are of the view that if for a moment, we come to the conclusion that because in the case of judgments rendered in the context of a Cooperative Societies Act and the relevant provisions thereof even in the case of RRB the income from Government securities etc. should be entitled for deduction then instead of interpreting the law as it stands, we would be intruding in the dangerous arena of rewriting the law which is entirely the domain of the legislature. The legislature in its wisdom has sought to allow deduction to a RRB for transactions as laid down in Section 18 and unless and until the assessee can show that the income earned is from these activities even if the income is in consonance with the definition of banking as per the Banking Regulation Act, the deduction under Section 80P(2)(a)(i) cannot be allowed. We derive support from the observations of the apex Court rendered in the case of Padmasundara Rao (Deed.) and Ors. v. State of Tamil Nadu and Ors. :
The Court cannot read anything into a statutory provision which is plain and unambiguous. A statute is the edict of the legislature. The language employed in a statute is the determinative factor of legislative intent. The first and primary rule of construction is that the intention of the legislation must be found in the words used by the legislature itself.
The Court only interprets the law and cannot legislate. If a provision of law is misused and subjected to the abuse of the process of law, it is for the legislature to amend, modify, or repeal it, if deemed necessary. Legislative casus omissus cannot be supplied by judicial interpretative process.
A casus omissus cannot be supplied by the Court except in the case of clear necessity and when reason for it is found in the four corners of the statute itself. A casus omissus should not be readily inferred and for the purpose all the parts of the statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute. This would be more so if a literal construction of a particular clause leads to manifestly absurd or anomalous results which could not have been intended by the legislature. An intention to produce an unreasonable result is not to be imputed to a statute if there is some other construction available. Where to apply words literally would defeat the obvious intention of the legislation and produce, a wholly unreasonable result the Court must do some violence to the words so as to achieve that obvious intention and produce a rational construction.
No order or judgment of any Tribunal in the context of these provisions has been brought to our notice and the issue simply because in the context of relevant provisions of Co-operative Societies Act read with Banking Regulation Act certain activities were found to be from the business of banking then this cannot stretch to include all incomes of RRBs, unless the law laid by the Act was that any and every normal banking activity is in the nature of banking business in the case of a RRB which is not so. As far as Banking Regulation Act as it exists the definition by virtue of the provisions of the RRB is not so wide and is much narrow not only in terms of the area of focus, i.e., notified area but also in terms of the activities laid down in Section 18 for the purposes laid down in the preamble of the Act which has been brought out in para 11.12 of this order. It may be appropriate at this juncture to draw attention to the following observations of their Lordships of the apex Court in Padmasundara Rao quoted supra:
Courts should not place reliance on decisions without discussing how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they were words in a legislative enactment. Judicial utterances are made in the setting of the facts of particular cases. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases.
Similar caution was emphasized by their Lordships in another judgment of the apex Court namely CIT v. Sun Engineering Works (P) Ltd. their Lordships observed:
It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the Court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, Courts must carefully try to ascertain the true principle laid down by the decision.
Since the issue, the facts and circumstances before the Special Bench were entirely different as is further evident from the various arguments which were advanced in the context of definition of mixed fund laid down by the Gujarat Co-operative Societies Act and the judgments taken into consideration therein the said order in the facts of the present case is not relevant.
11.31 As has been brought out in detail in the earlier part of this order, heavy reliance has been placed upon various judgments of the apex Court which are rendered in the context of the Co-operative Societies Acts of different States. It may be pertinent to briefly refer to those here. Reliance has been placed upon the judgment of the apex Court in the case of CIT v. Karnataka Co-operative Apex Banking (supra). A perusal of this judgment shows that their Lordships followed the view taken by the apex Court in the case of CIT v. Bangalore District Co-operative Central Bank Ltd. (supra). A perusal of this judgment shows that the finding arrived at in favour of the assessee therein was on appreciation of Sections 24 and 56 of the Banking Regulation Act, 1949 which are applicable to co-operative societies r/w Section 57(2) of the Karnataka Co-operative Societies Act, 1959 and Rule 23(3) of the Karnataka Co-operative Societies Rules, 1960. It is seen that in the facts of the present case it is not necessary to consider Section 56 of the Banking Regulation Act, 1949 and other provisions which pertain to co-operative societies as well as the provisions of Karnataka Co-operative Societies Act and the Rules thereunder since the present bank has to establish the claim of deduction in the light of the provision of the Banking Regulation Act further qualified by the provisions of the RRB Act, 1976. We are of the view that it is not any and every banking activity which is allowed deduction by the legislature but only that banking activity which is in consonance with the Banking Regulation Act as well as the relevant State Co-operative Societies Act or the provisions of the RRB Act. The fact that the banks who are not entitled for deduction and as such do not claim also under laudable socio economic services, but for deduction only specific types of banking activities undertaken by co-operative societies or RRBs have been considered. Before us no judgment, or provision of law has been cited so as to contend that banking activities of all banks have been exempted by the legislature from taxation. A consideration of the judgment of the apex Court in the case of Madhya Pradesh Co-operative Bank Ltd. (supra) which has been relied upon by the AO and distinguished by the assessee, we would merely like to observe that therein on an interpretation of restrictions placed by the MP Government under the M.P. Co-operative Societies Act. The view has been taken by the apex Court that the funds found so invested were not easily realizable and it is this aspect of fund has not been easily realizable which has been heavily stressed by the Revenue. The fact that it is in the context of MP Societies Act was the reason that on a perusal of the Cooperative Societies Act of different States the provisions of which were entirely different, different view was taken. This aspect was taken note of by the Special Bench as we have observed earlier when considering the Gujarat Societies Act provisions which were found to be distinguishable from the MP State Co-operative Societies Act and akin to Karnataka State Co-operative Societies Act. These facts and these distinctions do not help the assessee in any manner since it was not only the provisions of Banking Regulation Act which were applicable to Co-operative Societies Act but other provisions of the Banking Regulation Act along with the provisions of RRB Act which are required to be taken into consideration in the present appeal.
11.32 Heavy reliance before us has also been placed upon the unreported order of the Tribunal in the case of Rayalaseema Gramin Bank v. Jt. CIT in ITA No. 10/Vizag/2000 (supra) rendered by the Hyderabad Bench. The argument on behalf of the assessee has been that this order is in the context of a RRB and has been upheld by the Andhra Pradesh High Court and has dealt with the issue of SLR investments. The argument on behalf of the Revenue, on the other hand, has been that this order is not in the context of income from SLR investment and in fact is in the context of the deployment of funds, as such, the provisions of the RRB Act which have been pressed into service by the Revenue necessarily have not been considered by the Tribunal therein. On a careful perusal of the said order, copy of which is placed at pp. 84 to 89 and legible copy thereon was supplied later, shows that no doubt this order is in the context of RRB. However, it is neither in the context of income from SLR investment nor income from non-SLR investment and is on the aspect of deployment of the funds of the RRB. Whereas in the appeal under consideration we are only concerned with the income from SLR or non-SLR investment. This fact is borne out from the finding given by the Tribunal at its internal p. 4 para 6:
We heard both sides in detail. As per the Banking Regulation Act, there are no restrictions on the assessee-bank on the utilization of reserve funds. As a matter of fact, the assessee bank has not earmarked any funds or investments corresponding to the statutory reserve created by it. As far as this bank is concerned, reserve is only a statutory adjustment mandatorily to be carried out by it in its accounts, by debiting in the P&L a/c. In this view of the matter, we set aside the orders of the lower authorities, and direct the AO to allow assessee's claim for proportionate interest income, alleged to be pertaining to the investments made out of reserve funds, under Section 80P(2)(a)(i) of the Act.
11.33 It is further necessary to mention that therein the arguments advanced were pertaining to the earmarking of funds and the availability thereof from reserves etc. 11.34 In this background, the fact that this order has been upheld by the Hon'ble High Court does not help the assessee in any manner since the issue before the Tribunal was entirely different.
11.35 It is seen that all these judgments have been rendered -following the judgment of the apex Court in the case of Bihar State Co-operative Bank Ltd. (supra) which has taken into consideration the provisions of the Bihar Act Clause 4III(1) of the bye-laws and Section 19 of the Bihar Act in the case of cooperative society. Clause one of the aims was to carry or general business of banking.
11.36 Reliance has been placed upon Mehsana District Central Co-operative Bank v. LTO (supra), which has taken into consideration the provisions of Gujarat Co-operative Societies Act, 1961 read with Banking Regulation Act and the definition of banking given under the Banking Regulation Act which was found in consonance with the provisions of Gujarat Co-operative Societies Act, 1961. Similarly the judgment of the apex Court in the case of CIT v. Ramanathapuram Co-operative Bank (supra), was in the context of State Co-operative Societies Act and the relevant provisions thereof.
11.37 As we have already observed that as far as the order of the Tribunal in the case of the assessee itself is concerned, the issue of SLR investment was neither argued nor considered, as such, for the purposes of SLR investment this order will not render any help to the assessee.
11.38 Before us reliance has been placed upon Agarwal Warehousing and Leasing Ltd. v. CIT (supra) for the proposition that the Tribunal cannot review is order and has to refer to a larger Bench. In view of the elaborate discussion which we have made in the earlier part of this order wherein after a careful perusal of the orders and the judgments of different Courts we have come to the conclusion that in the context of income from SLR investment, none of these orders or judgments have addressed this issue on the aspect of deduction available to the RRBs taking into consideration, the specific provisions of the RRB Act, 1976. Thus, on account of this fact agreeing with the principle laid down by this judgment, we are of the view that it does not help the assessee in any manner.
11.39 Before us, reliance has also been placed upon Bank of Baroda v. H.C. Shrivastava (supra), for the proposition that it is necessary for judicial unity and discipline that all authorities below Tribunal must obey the judgment of Tribunal. This judgment too does not advance the case of the assessee since after a detailed perusal of all judgments and orders cited before us, we have come to the conclusion that no order or judgment has taken into consideration the income from SLR investments in the case of RRB taking into consideration the specific provisions of this Act and distinguishing it from the provisions of the State Co-operative Societies Act.
11.40 Accordingly, on account of the detailed reasons, findings and conclusions given in the earlier part of this order, we are of the view that as far as the inadmissibility of the income from SLR investments for exemption under Section 80P(2)(a)(i) is concerned, no interference is called for in the ground raised by the assessee with respect to the SLR investments claiming deduction under the said provision as such are rejected. Before parting we would like to observe that all the judgments/orders referred to us have been considered even if specific mention thereof has not been given.
11.41 Since the arguments advanced in respect of non-SLR investment on behalf of the assessee and the Departmental Representative are more or less identical, the only difference being that the assessee has canvassed that this aspect had been decided in favour of the assessee by the Tribunal in identical facts and circumstances and the case of the Revenue on the other hand has been at the cost of repetition that the facts and circumstances are diametrically distinguishable and are far from being identical since in the year in which the issue has come before the Tribunal, the AO had himself allowed the claim of the assessee with respect to SLR investment and disallowed the claim only on account of non-SLR investment. The argument of the Departmental Representative has also been that apart from this material distinction in the facts and circumstances of the case and before the Tribunal, no arguments were advanced as have been canvassed in the present case and as such, were not considered, examined or addressed before the Tribunal. As such, the Tribunal never examined the issue that the judgments relied upon by the assessee even in non-SLR investments are in the context of the provisions of different State Co-operative Societies Act and the Tribunal has not therein examined the provisions preamble and spirit and the provisions of the RRB Act, 1976 as no arguments were advanced and moreover the facts and circumstances were entirely distinguishable.
11.42 On a careful consideration of the arguments advanced and noting the fact that the facts and circumstances in the two assessment years are entirely different and also without going into a lengthy discussion on the principles laid down by various judgments in the line of res judicata we would merely like to confine ourselves to the finding that there is a material distinction in the facts and circumstances of the two years. Whereas in 1998-99 assessment year wherein the issue travelled to the Tribunal only on non-SLR investment, it is seen that the deduction in the income from SLR investment had already been allowed by the AO himself and as such there was no finding in the assessment order that the funds so invested, i.e., SLR investments though mandatory under the Banking Regulation Act were not in consonance with Section 18 of the RRB Act, 1976. Accordingly, the Tribunal following in the facts and circumstances where SLR investments were allowed by the AO himself and non-SLR investments are those investments which are found to be in excess of the prescribed percentage since the time deposit liabilities varies from time to time. However, here there is a specific finding in the assessment order and the impugned order which has not been rebutted by the assessee. Since no arguments or facts were placed before us to address the aspect that in investments either SLR or non-SLR made are in consonance with the narrowed definition of RRB Act provisions and as we have observed earlier the thrust has only been on the principles laid down by the orders and judgments of the Tribunal and the Courts respectively in an entirely different context and on appreciating entirely different Acts. It is evident that apart from this material distinction no arguments were advanced or canvassed and as such were not considered by the Tribunal addressing the aspect of this specific provisions of RRB Act or considering the judgments in the light of the arguments that they were rendered in the context of the specific provisions of different State Co-operative Societies Act. Thus, reference at this juncture may be again made to the action rendered by the apex Court in numerous judgments where the question examined has to be appreciated in the context of the specific facts and not divorce from the context and deriving strength from that we are of the view that facts and circumstances are entirely distinguishable and the question examined as such was also distinct. Strength is derived from CIT v. Sun Engineering Works (P) Ltd. (supra), Padmasundara Rao v. State of Tamil Nadu (supra). Similarly, the order of the Special Bench which was in the context of Gujarat Co-operative Societies Act and the Banking Regulation Act as can be seen from paras 43 and 45 of the Special Bench order it was appreciated in the light of the fact that as far as the income from SLR investments were concerned, they had already been allowed by the AO, as such, on account of this material distinction, the facts and circumstances of the two years became entirely different. Accordingly on account of the detailed findings and reasons given while discussing the claim on account of income from SLR investments and the discussion in respect of the change in facts and circumstances with respect to the claim of income from non-SLR investment, the assessee's claim with respect to non-SLR investments is rejected. Accordingly the grounds in support of the claim are rejected.
12. The facts pertaining to ground Nos. 11 and 12 are that from the perusal of reserves and surplus of the bank as on 31st March, 2001, it was observed by the AO that this showed an amount of Rs. 1,58,76,000 as additional fund sent by the Government of India for the following purpose.
1. For cleansing the balance sheet 3,72,00,000
2. Towards liquidity 86,76,000
12.1 Observing that this amount of Rs. 4,58,76,000 in the books had been recorded under the head "Share deposit account", he put the assessee to notice vide office notice dt. 16th Dec, 2003 requiring him to give reasons as to why this subsidy should not be added in the total income of the assessee filed its written reply bearing reference No. HO/DVP/JPS-41/29/1302, dt. 22nd Dec, 2003, wherein it was clarified that the said amount was not subsidy but was in the form of equity. In support of this contention, the assessee bank filed photocopies of the letters issued by the Government of India, Ministry of finance, Department of Economic Affairs, Banking Division, New Delhi. The letter has been reproduced at pp. 7 and 8 of the assessment order and reads as under:
Letter F.No. 3-10/95-RRB(14), dt. 31st March, 1995 By this letter Government of India provided Rs. 2,29,38,000 vide cheque No. 553272 dt. 31st March, 1995. This letter specifies that Government took a decision to restructure 49 RRBs in the country and to cleanse their balance sheets and provide for unprovided bad debts and liquidity support. The total amount required to be provided towards cleansing of balance sheet of assessee bank and liquidity support is Rs. 4,58,76,000. According to this letter 50 per cent amount to be provided by Government of India and balance amount to be provided by the sponsor bank and UP Government. The amount received by the assessee bank is to be credited in "share deposit account" till further orders of Central Government.
Letter F. No. 3-10/1995-RRB(8) dt. 26th June, 1995 This letter contains the final decision of the Government of India, therefore, the same is being reproduced herewith for ready reference:
Ministry of Finance Department of Economic Affairs (Banking Division) Jeevan Deep Parliament Street, New Delhi- 110 001.
Dt. the 26th June, 1995 To The Chairman Farrukhabad Gramin Bank, Farrukhabad (UP) Sub: Authorised Capital of Regional Banks Sir, In terms of Section 5 of the RRB Act, 1976 (as amended) the authorized capital of each RRB is Rs. 5 crores. At present the issued capital of RRBs vary from Rs. 50 lakhs to Rs. 1 crore each. AS a part of exercise undertaken by Government for restructuring of 49 selected RRBs including your bank, additional funds in the form of equity is being provided towards cleansing of balance sheet and liquidity support by Central Government, sponsor bank and State Government concerned in the ratio of 50 per cent, 35 per cent and 15 per cent respectively. In the case of 27 RRBs, additional amount already released by Central Government and the matching share which is to be provided by the sponsor bank and State Government concerned added to the existing issued capital of Rs. 1 crore has increased the existing limit of authorized capital of Rs. 5 crores. Government has, therefore, considered this issue in consultation with NABARD and concerned sponsor banks and has decided to enhance w.e.f. 31st March, 1995 the authorized capital in exercise of powers given under proviso to Section 5 of the RRBs Act, 1976 of 37 RRBs including your bank to the extent mentioned against the names of each RRB in the annexure. Thus authorized capital of Farrukhabad Gramin Bank has been enhanced to Rs. 558.760 lakhs (rupees five crores fifty eight lakhs and seventy six thousand only) w.e.f. 31st March, 1995.
Yours faithfully Sd/-
(C.B. Prasad) Under Secretary to the Government of India Copy forward to:
1. Chairman NABARD Head Office, Bombay
2. Chief Officer, RPCD, Central Office, RBI, Bombay
3. The Sponsor Bank (as per list)
4. Chief Secretary, State Government (as per list).
12.2 From the perusal of the above, it was concluded by the AO that the restructuring was designed to improve the business of the assessee-bank and as such the law laid down by the Hon'ble apex Court in the case of Sahney Steel and Press Works Ltd. v. CIT (supra), was held to be applicable, as the decision was seen to be having been given to improve the business of the assessee bank. Accordingly, it was further concluded that the amount received on restructuring as a trading receipt. Relying upon CIT v. Bazpur Co-operative Sugar Factory Ltd. (supra), he was of the view that the manner in which the fund was recorded in the books does not alter the nature of receipt. In this manner, the amount was treated to be liable for tax. However, taking note of the fact that the funds were received in the previous year relevant to the asst. yr. 1996-97 and that the assessee bank had got stay order from Hon'ble Allahabad High Court against the assessment proceedings, the addition of Rs. 4,58,76,000 was made in the year under consideration on a protective basis with the observation that substantive assessment order shall be made for the year 1996-97 as and when the stay order is vacated.
13. The arguments with respect to these grounds before the CIT(A) were that this amount was a share capital relevant to the asst. yr. 1996-97, which had been added in the income of the assessee on protective measure. The AO on observing that the reserve surplus of the bank as on 31st March, 2001 included this amount as addition fund sent by Government of India for cleansing the balance sheet at Rs. 3,72,00,000 and towards liquidity at Rs. 86,76,000, which the assessee has recorded in his books of account as deposits under the head "Share deposit account". Thus about the letters of the Government which have been reproduced at pp. 7 to 9 of the assessment order, the AO noted that the restructuring was designed to improve the business of the assessee and as such held to be as revenue receipts in terms of the judgment of Hon'ble Supreme Court in (supra) and (supra). Considering these submissions, the CIT(A) rejected the claim of the assessee vide para 5 at p. 24 observing as under:
Ground No. 8 is again the protective addition of Rs. 4,58,76,000. The appellant argued that this was the share capital relevant for asst. yr. 1996-97 which has been added in the income of the appellant as a protective measure. The AO noted that the reserve surplus of the bank as on 31st March, 2001 include an amount of Rs. 4,58,76,000 as additional funds sanctioned by the Government of India for cleansing of balance sheet at Rs. 3,72,00,000 and towards liquidity at Rs. 86,76,000. The appellant recorded in the books the said deposits under the head share deposit account. The AO after referring to the letters of the Government referred to at pp. 7 to 9 of the assessment order noted that the restructuring was designed to improve the business of the appellant assessee and relying upon the Hon'ble apex Court judgment in Sahney Steel and Press Works Ltd. v. CIT and CIT v. Bazpur Co-operative Sugar Factory Ltd. same was held to be revenue receipt.
14. Aggrieved by this the assessee is in appeal before us. Our attention was invited to the written submissions filed before the CIT(A), Ghaziabad, copy of which is placed at p. 9 of the paper book. It was submitted that the addition was sought to be made in 1996-97 assessment order, 148 proceedings with respect to asst. yr. 1998-99 were stayed by Allahabad High Court. As such substantive addition could not be made in asst. yr. 1996-97 and the Department has made protective assessment in the year under consideration. It was contended that it was contribution of capital by the Government of India and the observation of the AO at p. 7 that it is a subsidy is not correct. Attention was invited to the letter of the Government of India, which has been reproduced by the AO in the assessment order itself. On the basis of this, it was submitted that this is a capital contribution by the Government and as such addition could not have been made. Relying upon the submissions made, it was reiterated that this year old balance receipt in the year ending and as per specific guidelines of the Government of India and the discussion in the Parliament that these funds were advanced by the RBI to cleanse the balance sheet. Inviting attention to pp. 7 and 8 of the assessment order, it is contended that the share deposit amount is also a capital contributed by the promoters of the bank and cannot be termed as an income by any stretch of imagination. The attention was also invited to the impugned order at p. 24 para 5, wherein at para 5.2, the submissions of the assessee have been rejected. As such, the arguments were that the addition was not warranted.
15. The argument of the learned Departmental Representative is that the addition was rightly made. It was argued that if it was infusion of capital then the requirements of the Companies Act have not been followed. It was conceded that the assessee's claim is not being rejected on this account the claim even in terms of requirements of RRB Act has not been substantiated as the relevant requirements for issued capital etc. are not fulfilled. It was his argument, inviting attention to the relevant provisions of RRB Act, 1976, that where was the prospectus brought out and how is the share allocation or increase in share or capital made without following the requirements of the RRB Act. As such, it was questioned how this issue was justified. The attention was also invited to Section 6 of the RRB Act, which deals with the provision of authorized capital. It was further submitted that there is no bank's resolution filed either before the Court nor has it been stated that there is such a resolution in existence which could be filed. The letter, which has been relied upon in support of the claim, it was argued and which has been reproduced in the assessment order, it was stated, is the only authority, on the basis of which it is being stated that the amount is not taxable. It was his argument that this was not a good enough basis for claiming deduction. As the assessee is bound by relevant provisions of the IT Act and the RRB Act, 1976. It was his submission that since even the Board's approval, which is mandated by the Act is not placed on record and formalities under the Act have not been complied with the question of entertaining the assessee's request in the case does not arise.
15.1 It was further submitted that the letter of the Ministry of Finance is not an authority that the amount is not taxable. Attention was also again invited to Section 6 of the Act, which talks of the increase. Similarly, as far as the argument of the assessee that the issued capital is concerned, it was his submission, it cannot be agreed.
15.2 It was his submission that the nature of the fund is for cleansing the balance sheet, i.e., cleansing the non-performing assets, but right to use the infused funds cannot be treated as equity since the procedure prescribed under the Act has not been followed and as such merely on assessee's say so it cannot be treated to be so. It was further contended that in the circumstances the AO was right in not treating it as capital since, it is evident that unless the assessee demonstrates that the procedure prescribed for the same has been followed the claim has rightly been rejected. The assertion of the assessee itself, the funds have been infused to cleanse the balance sheet, it was argued, decides the issue against the assessee and as such it clearly comes under the principle laid down by the apex Court in the case of Sahney Steel since this is evidently additional support given to the assessee. Thus, these infused funds have rightly on applying the principle of Sahney Steel been brought to tax. Reliance was also placed upon the case of CIT v. TV. Sundaram Iyengar and Sons Ltd. >
16. In reply, it was stated on behalf of the assessee, referring to the arguments of the learned Departmental Representative, attention was invited to Section 67 of the RRB Act. It was stated that the Board meeting relates to the capital for which purpose resolution of Board is necessary, which the Departmental Representative has stated, has not been furnished to the Department or argued here. The learned Departmental Representative clarified that he was referring to the provisions of the RRB Act and under which section the assessee is arguing his funds have been received. It was submitted by the learned Authorised Representative that there was no reason for resolution of the Board since the funds are coming from the Government of India. The arguments of the learned Departmental Representative that the provisions of the Companies Act have not been followed. It was submitted that the institution of the bank is as a RRB, to which Companies Act does not apply. It is further submitted that the decision relied upon of the Supreme Court (supra) is not applicable since there were old balancing treated to be as trading income. It was conceded by the learned Authorised Representative that the submission of the learned Departmental Representative to the extent that Circular No. 599, which has been relied upon, has been withdrawn vide Circular No. 610. Reliance has also been placed upon CIT v. Ramanathpuram District Cooperative Central Bank Ltd. (supra).
17. We have heard the rival submissions and perused the material available on record. We have also taken into consideration the judgments referred before us by either side as well as the judgments referred to by the tax authorities. After a careful perusal of these and considering the relevant provisions of the RRB Act, 1976 as well as the IT Act, 1961 coupled with the peculiar facts and circumstances of the case which have already been referred to in detail while discussing the facts and findings of the tax authorities and various other documents to which our attention was invited, we are of the view that in the peculiar facts and circumstances of the case, the claim of the assessee deserves to be rejected. The facts remains that the funds that were given for cleansing the balance sheet and have been used to write off the losses of the RRB. The revenue loss which was standing in the accounts of the assessee bank on account of these funds have been written off. On account of this fact itself let alone the other facts and circumstances taken into consideration by the tax authorities, the funds received are revenue receipts and cannot be treated to be capital in nature and as such the principle of the apex Court in the case of Sahney Steel (supra) becomes applicable. The fact that the assessment proceedings were stayed by the Hon'ble High Court in asst. yr. 1996-97 left only those course of action open to the AO. Simply because the funds given are also in the same ratio as is borne out by the letter of the Ministry of Finance reproduced in the assessment order is not a good enough reason to treat the funds received as non-taxable as the purpose for which they were given itself decides the issue against the assessee. The losses which the bank incurred while operating were to be written off by these receipts so as to wipe off these losses. Thus if the funds are treated as capital then the very purpose for which the funds were advanced is defeated. Accordingly, being satisfied by the reasoning and finding of the tax authorities and the detailed reasons given above, ground Nos. 11 and 12 are rejected.
18. With respect to ground No. 13, the arguments advanced before the CIT(A) that the AO was not justified in charging the interest under Sections 234B and 234D and further in withdrawing the interest under Section 234A without passing speaking order. The said submission of the assessee was also rejected by the CIT(A) vide para 7.2 after the perusal of the position of the relevant provisions of the Act and relying upon the judgment of apex Court in the case of CIT v. Anjum M.H. Ghaswala and Ors. > The CIT(A) further observed at p. 27 in the context as under:
The charging of interest under Sections 234A, 234B and 234C is mandatory. Even before this judgment, it was settled that interest could be charged through a notice of demand issued to the assessee In view of the clear position of law as has been considered by the Hon'ble apex Court in the above judgment, the charging of interest under Sections 234A and 234B is mandatory. In the instant case, the calculation of interest has also been given in ITNS 150, which further strengthens the stand taken by the AO on this issue.
19. The submission of the learned Authorised Representative was that the charging of interest is mandatory in nature, as such, is consequential to the finding given in the earlier grounds. It was also submitted that the assessee's income in the last twenty years right upto asst. yr. 1998-99 has been considered to be exempt. However, it was submitted that as has been submitted, the interest is mandatory, he would not want to elaborate this issue since it would be consequential to the finding to the earlier grounds. The learned Departmental Representative, in the circumstances, relied upon the provisions of the Act and the orders of the tax authorities.
20. Having heard the rival submissions, in the aforementioned facts and circumstances, the ground being consequential to the findings given in the earlier part of this order, ground No. 13 raised by the assessee is also rejected.
21. In the result, appeal of the assessee is dismissed.
Office Note : "Pending...signature since 7th Oct., 2005 (2004) the appeal was listed for hearing on the applicability of judgment in assessee's case in 147 proceedings. On the next date additional ground was sought to be raised adjourned... hearing concluded on 20th April, 2005. Additional eleven pages, totalling 121 pages in all addressing this aspect attached on 20th April, 2005 after concluding the hearing on the said date."
22. To refer briefly in order to recapulate the background, the appeal was listed for hearing on different dates namely, 1st July, 2004, 2nd July, 2004, 12th July, 2004, 3rd Aug., 2004, 4th Aug., 2004, 6th. Aug., 2004 and finally concluded on 23rd Aug., 2004. Thereafter, before the proposed order which was under dictation was finalized, learned Departmental Representative sent through the Registry petition dt. 2nd Sept., 2004 relying upon the judgment of Kerala High Court in the case of Kerala Small Industries Development Corporation Ltd. v. CIT (supra). Accordingly with some reservations the appeal was fixed in order to afford opportunity to the other side to address this aspect on 28th Sept., 2004 by the Bench. On the date of hearing the action of the learned Departmental Representative in petitioning the Court to consider a judgment after the hearing is concluded was strongly deprecated by the Bench. It was emphasised that once the hearing has been concluded, it was not correct on the part of the Departmental Representative to place before the Bench any further judgment or order. On behalf of the Departmental Representative it was submitted that he is not experienced to argue appeals before the Tribunal and was not conversant with the procedures, as such, this lapse has occurred on account of his ignorance about the procedures. In view of the categoric apology of the learned Departmental Representative and the fact that the learned Authorised Representative, Shri Dayal Saran had no objection, both the sides were heard on this limited aspect i.e. the applicability of the judgment of the Kerala High Court. Accordingly after affording the opportunity on this limited aspect the hearing was concluded on 28th Sept., 2004. The draft order was finalized and placed before the learned AM on 7th Oct., 2004 for his signature. The draft order was not signed till December, 2004 and on 10th Dec, 2004 on behalf of the assessee judgment of the jurisdictional High Court in the case of the assessee itself was placed by the assessee before the Registry. In view of the fact that the draft order was pending with the learned AM since 7th Oct., 2004 the said petition was directed to be placed before the learned AM. The learned AM on 16th Dec, 2004 was of the view that opportunity should be given to the Departmental Representative to address this aspect. The said proposal was agreed to and in the circumstances for this limited aspect the appeal was listed for hearing on 6th Jan., 2005. On the said date on behalf of the Revenue an adjournment application was placed before the Bench stating that in view of the fact that the assessee is seeking to raise additional grounds at this stage the Revenue would want time to oppose the admission of the additional ground proposed to be raised. In view of the fact that there was no additional grounds before the Bench, the action of the Departmental Representative was questioned. For ready reference, the application of the Departmental Representative seeking adjournment is reproduced hereunder:
To, the Hon. Members, 63/4, Kendralaya, Income-tax Appellate Tribunal, Sanjay Place, Agra.
Sir, Sub: Admission of additional grounds of appeal in ITA No. 190/Agra/2004 moved by M/s Farrukhabad Gramin Bank, Farrukhabad for the asst. yr. 2001-02-regarding.
It is brought to your kind notice that the ITA No. 190/Agra/2004 in the case of Farrukhabad Gramin Bank for the asst. yr. 2001-02 is fixed for hearing before the Hon'ble Tribunal on 6th Jan., 2005 but the undersigned have received a copy of the request made by the bank to the Hon'ble Tribunal for admission of the additional grounds of appeal (copy of which is enclosed herewith for ready reference) and, therefore, Shri Washim Arshad, Addl. CIT, Range-2, Farrukhabad who is arguing this appeal was informed accordingly on telephone as well as on fax but he has communicated that a request to Hon'ble Bench may kindly be to give an adjournment for filing objections against the admission of the additional grounds of appeal moved by M/s Farrukhabad Gramin Bank.
Therefore, it is requested that some other date after one month at the convenience of the Hon'ble Bench may kindly be allowed so that the concerned Departmental Representative may be in a position to file objections against the admission of the additional grounds of appeal moved by M/s Farrukhabad Gramin Bank.
Yours faithfully, Sd/-
(P.L. Kelkar) Addl. CIT (senior Departmental Representative).
23. The learned Authorised Representative responding to this submitted that the assessee is in fact with the permission of the Court wanting to move additional grounds and this fact had been communicated by him to the Departmental Representative.
24. The additional grounds sought to be raised by the assessee read as under:
Whether, in the facts and circumstances of the case, the decision of Allahabad High Court in assessee's own case in Writ Civil Miscellaneous Petition No. 132 of 2002, dt. 23rd Nov., 2004 upholding that the income earned from banking business is exempt under Section 80P(2)(a)(i) of the IT Act, 1961-applies to year under appeal.
Whether, in the facts and circumstances of the case the addition of Rs. 4,58,76,000 capital contribution by Government Central and State and sponsored bank-received in financial year 1995-96, added on the protective basis by authorities below in the year under appeal with the direction by authorities below to be considered on substantive basis in financial year 1995-96 cannot be added to the year under appeal in view of decision of Allahabad High Court dt. 23rd Nov., 2004 in assessee's own case in Writ Civil Miscellaneous Petition No. 132 of 2002.
25. The Bench at this juncture took strong exception to the inappropriate stand taken by the assessee. The learned Authorised Representative was required to address the Bench in explaining as to the appropriateness and the correctness of moving additional grounds at this stage after the hearing had been concluded and the draft order had already been placed on the main file before the learned AM right from 7th Oct., 2004. It was put to the learned Authorised Representative that the Bench had exercised its discretion to afford the assessee to address on the aspect of the applicability of the judgment of the jurisdictional High Court and thus the action of the assessee in abusing the trust placed by the Bench in the bona fide exercise of its discretion was strongly deprecated. It was put to the learned Authorised Representative that had the Bench not exercised its discretion to afford the assessee to address the applicability of the judgment relied upon and to hear the other side, the opportunity to hear the sides would not have arisen and thus in the circumstances the abuse of discretion exercised by raising additional grounds after the conclusion of the hearing and the draft order having been written and signed by one member was deprecated. In reply, it was submitted by the learned Authorised Representative Shri Dayal Saran that since the assessee wanted to move additional grounds they had been moved even at this juncture. However, the aspect of the correctness or the appropriateness of moving the additional grounds after the conclusion of the hearing and after the signing of the proposed order by one member was not addressed. On the said date the hearing was adjourned.
26. On the next date, i.e., on 20th April, 2005 the appeal came up for hearing. At the outset learned Authorised Representative Shri Dayal Saran stated that no notice of hearing was given to him. However, he came to know of the hearing through the cause list. In the circumstances it was put to the learned Authorised Representative whether he would like to seek adjournment. However, in categoric term it was stated by him that he was ready to argue and he just wanted to make this point known to the Bench. It was further put to him that in case he would experience any handicap, then the hearing can be adjourned to another date. However, he was ready to argue and he stated that he was not handicapped on account of this fact. The Bench clerk was required to state as to why notice was not sent to the assessee. The Bench clerk on perusal of the file stated that notice to the assessee in some other petition had been sent for 29th April, 2005 and as such it was mistakenly considered that notice for today's hearing had also been sent. Accordingly, for this lapse an apology was tendered by him. In view of the fact that learned Authorised Representative in clear terms submitted that he was not handicapped in any manner the issue was left.
27. Before proceeding it was put to the learned Authorised Representative that certain appeal argued by Shri Wasim Arshad had been de-heard by the Bench comprising of my learned brother Shri M.L. Gusia sitting with some other JM as such if there is any objection on the part of the learned Authorised Representative to the factum of representation of the Department by Shri Wasim Arshad. Shri Dayal Saran stated that neither he nor his assessee had any objection to the said Departmental Representative arguing the case. Shri P.L. Kelkar sought to place before the Bench certain documents to support the right of the Departmental Representative Shri Wasim Arshad to argue. My learned brother was required to state his stand as to whether Shri Wasim Arshad should be allowed to argue on behalf of the Department or not. In view of the fact that there was no opposition on behalf of the assessee to Shri Wasim Arshad arguing on behalf of the Department, my learned brother stated that he has no objection.
28. Thereafter, the proceedings began on the aspect of the appropriateness of raising the additional grounds before the Tribunal at this juncture.
29. The learned Authorised Representative referring to the additional grounds raised, submitted that they deserve to be admitted. It was further stated by him that the judgment of the jurisdictional High Court relied upon by him was published in Farrukhabad Gramin Bank v. ITO . He was specifically required to bring to the notice of the Bench, judgment of any Court in support of the admission of the additional grounds. The learned Authorised Representative in response to this specific and pointed query stated that he was not relying upon any judgment. It was specifically put to him yet again whether he would like to refer to any judgment for. the stand taken by the assessee. In response to this it was again stated that no judgment was relied by him for admission of this additional grounds at this stage. However, a prayer was made that the additional grounds deserve to be admitted.
30. Learned Departmental Representative, on the other hand, submitted that he has no objection if the additional ground is admitted subject to certain qualification. It was put to him that he was required to state in clear terms whether he is opposing or not the admission of the additional grounds. It was submitted by him that he has no objection if the additional grounds are admitted. However it was further stated that the reliance placed by the assessee on the judgment of the jurisdictional High Court is misplaced because the jurisdictional High Court does not say that the income is exempt under Section 80P(2)(a)(i). Accordingly the judgment does not help the assessee. The hearing was concluded.
31. Having heard the rival submissions and taken into consideration the entirety of the facts and circumstances of the case. Taking note of the fact that no judgments could be relied upon or pressed into for support by the learned Authorised Representative for admission of additional grounds at this juncture namely wherein the hearing has been fully concluded and the notice to either side has gone only to address the limited aspect of the applicability of the judgment of the Hon'ble High Court in assessee's case. More so when the proposed draft order has already been on record since 7th Oct., 2004. In the circumstances, the prayer made to the Tribunal to exercise its discretionary right was made. After a careful consideration, we are of the view that the admission of additional grounds at this juncture deserves to be rejected, taking note of the fact that there is no authority in law or any ruling which supports the stand of the assessee, the additional grounds sought to be raised at this juncture are rejected.
32. No doubt the Revenue has no objection if the additional grounds are entertained by the Bench. However, we are of the view that to admit the same at this juncture would tantamount to a mockery of the entire proceedings. No doubt the Tribunal as a final fact-finding body goes to great lengths to accommodate either side in allowing them a full fair and proper opportunity to bring necessary facts and submissions on record but we with great care and caution hesitate to allow the admission of additional grounds after the hearing in the appeal has been fully concluded and more so even where the proposed draft order signed by one of the Members is on record since October, 2004 (the proposed signed order was taken out of the file in December, 2004 before the file was released to the Registry. Thereafter, the sealed order was kept in the custody of Asstt. Register, Agra and was brought on the file in the Court today itself). The action of admitting additional grounds at this stage would not only lay down a dangerous precedent but would also be highly improper and inappropriate and also would tantamount to allowing the assessee to grossly abuse and make travesty of judicial procedure. We are pained to observe that the confidence reposed by the Bench by exercising its discretion to afford the parties an opportunity to address the Bench on the limited aspect of applicability of the judgment in 147 proceedings in the case of the assessee has been attempted to be abused with such callous and utter disregard of judicial proprietary forum and procedure.
33. Reliance is placed by the Bench upon the judgment of the apex Court in the case of Jain Exports (P) Ltd. and Anr. v. Union of India and Ors. wherein the Bench comprising of Mr. Justice M.N. Venkatachalaiah, the then Chief Justice of India, Hon'ble Mr. Justice A.M. Ahmedi and Hon'ble Mr. Justice J.S. Verma who both subsequently went on to become the Chief Justices of India laid down the judgment wherein the action of the petitioners was held to be not bona fide. Their Lordships at p. 61 at para 12 observed as under:
Before we part we must mention that after counsel for the importers could not secure an adjournment when the matter was taken up for hearing on 23rd April, 1993, he argued the matter at length. It was only during the course of the hearing that we inquired of him if he could point out from the record whether or not the transaction had yielded any profit. When he could not give a satisfactory reply he again asked for an adjournment to produce the relevant material which we declined. The hearing concluded on the same day. Notwithstanding the same their advocate on record filed a letter dt. 28/30th, April, 1993 stating that an application was moved for rehearing because a very crucial document having a direct bearing was not brought to the notice of the Court. Even with these application Nos. A3 and 4 of 1993 the so-called crucial document was not appended. In these applications the rehearing was sought on the very same grounds on which an adjournment was sought earlier. This was followed by yet another communication which included a certificate of the chartered accountant to which was appended a statement of accounts showing that the importers had incurred a substantial loss in the sale of high-seas-basis. We are indeed surprised at the attitude of the learned advocates representing the importers. It betrays a misconception that any document can be produced at any time and stage of the proceedings and the Court can be expected to reassemble to give a fresh hearing or a second innings to fill the gaps left by the importers because of their default merely because they have the means to afford it. We cannot countenance such a demand and must deprecate it strongly. We do so and reject both the applications. To allow them would encourage multiplicity of hearings and create a wrong precedent.
34. Accordingly, being guided by the principle laid down by their Lordships therein and also being of the view that the discretion exercised by the Tribunal in order to afford opportunity to address the Bench on the issue of applicability of the judgment of the jurisdictional High Court having been grossly abused by raising additional grounds after the conclusion of the hearing and after the proposed and signed order was pending signature with the other Member, we are of the view that the additional grounds sought to be raised by the assessee deserves to be rejected and this as such is not a fit case in which the discretionary exercise of the powers of the Tribunal should be used.
35. However, with regard to the fact that the judgment has been brought to the notice of the Bench and for this specific purpose an opportunity to either side to address this aspect was granted, we proceed to take judicial note of this judgment without resorting to the additional grounds which have been rejected. A perusal of the judgment (supra) clearly shows that the said judgment is in the context of 147 proceedings taken by the Department. Needless to say that proceedings under Section 147 operate in the realm of a situation where the AO has reason to believe that income has escaped assessment on account of the failure of the assessee to disclose fully and truly the correct facts and a mere change of the opinion of the AO on the same facts would result in 147 proceedings to reopen concluded assessments is quashed on the ground that change of opinion on same facts are not called for. However we would like to take support from the judgment of the apex Court wherein it has been clearly and unambiguously laid down that judgment must be read as a whole and observations in judgments should be considered in the context in which they are made and in the light of the questions that were before the Court. Reliance as such may be placed upon CIT v. Sun Engineering (supra), Mrs. Lally Jacob v. ITO and Ors. . Accordingly the said judgment in 147 proceedings where reopening has been quashed does not help the assessee as facts and circumstances are rightly distinguishable and brought out in the order of the tax authorities and discussed in great detail in the order.
36. A precedent is an authority only for what it actually decides and not for what may remotely or even logically follow from it, a decision on a question that has not been argued cannot be treated as the precedent for which proposition reliance is placed upon Goodyear India Ltd. v. State of Haryana and Ors. (SC).
37. Needless to say that it is incumbent upon the Tribunal to consider the reasons given by the CIT(A) for his decision before upsetting his decision.
38. Reliance may be placed upon the judgments in the case of Omar Salay Mohamed Sait v. CIT , Rameshchandra M. Luthra v. Asstt. CIT Rajesh Babubhai Damania v. ITO , ITO v. K. Ambaji Rao . Reliance may also be placed upon the judgment of apex Court in the case of CIT v. Stepwell Industries Ltd. and Ors. wherein claim was not made either before the ITO or the CIT(A) wherein their Lordships of the apex Court has held that the Tribunal could not allow the claim on assumption of facts.
39. In the result, for the reasons given hereinabove in detail at great length in the earlier part of this order the appeal filed by the assessee is dismissed and the additional grounds sought to be raised at this juncture also dismissed after taking into account the judgment of the jurisdictional High Court in the case of the assessee in 147 proceedings.
40. In the result, the appeal of the assessee is dismissed.
M.L. Gusia, A.M.
1. I have had the privilege of going through the decision rendered by my learned Sister, Smt. Diva Singh, JM, but I do not concur with her findings given in the said decision. Hence, I render my dissenting order as follows.
2. This appeal has been filed by the assessee against the order passed by CIT(A)-I, Agra, on 24th April, 2004 for the asst. yr. 2001-02.
The grounds of appeal read as under:
1. That the authorities below have erred on facts and in law by holding that the deduction under Section 80P(2)(a)(i) of the IT Act, 1961 is not allowable in respect of the income of the bank-assessed as AOP deemed co-operative society.
2. That the authorities below have erred on facts and in law in not following the order passed by Tribunal, Agra Bench, Agra in assessee's own case for asst. yr. 1998-99 in which the Tribunal held that income of the bank was exempt under Section 80P(2)(a)(i).
3. That the authorities below have erred on facts and in law in holding that the decisions of the Hon'ble Supreme Court being in the case of co-operative bank are not applicable to the RRB.
4. That the authorities below have erred on facts and in law in stating that the investments mentioned in the assessment order are not in accordance with the provisions of RRB Act, 1976.
5. That the authorities below have erred on facts and in law in taxing the income from SLR investments and non-SLR investments ignoring the various decisions of Hon'ble Supreme Court, High Courts and Tribunal.
6. 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 investment is its income from the banking business and hence eligible for deduction under Section 80P(2)(a)(i) of the IT Act, 1961.
7. That the orders passed by both the lower authorities below are without appreciating the facts, various submissions, explanation and information submitted by the appellant from time to time which ought to have been considered before passing the impugned orders.
8. That the authorities below have erred on facts and in law in not following the instruction of the Government that the entire income of the rural bank is exempt under Section 80P(2)(a)(i) of the IT Act, 1961.
9. That the authorities below have erred on facts and in law in holding that the interest on SLR and non-SLR investments are not income from banking business inasmuch the investments were made in the course of banking business as per provisions of the statutory relevant provisions and guidelines of the RBI.
10. Because in any view of the case the additions made are highly excessive and liable to be deleted.
11. That the authorities below have erred on facts and in law in treating receipt in the previous year relevant to asst. yr. 1996-97 of Rs. 4,58,76,000 as share contribution by the Government of India, UP Government and sponsor bank-Bank of India as income for the asst. yr. 2001-02 on protective basis. The addition made is liable to be deleted.
12. That the authorities below have erred on facts and in law have ignored that the equity capital of Rs. 4,58,76,000 was sanctioned and provided by Central Government, sponsor bank and State Government concerned in the ratio of 50:35:15 as per letters already on file.
13. That the authorities below have erred on facts and in law in imposing interest under Section 234B Rs. 1,74,75,673 under Section 234D Rs. 70,830 withdrawing under Section 244A Rs. 62,330 without passing a speaking order. The interest imposed is liable to be deleted.
3. The learned Authorised Representative of the appellant also furnished additional grounds of appeal, reproduced below, which have not been accepted by the learned JM. However, I am of the opinion that these additional grounds being based on factual matrix and legal position of the case should have been accepted and taken on record:
Because in the facts and circumstances of the case, the decision of Allahabad High Court in assessee's own case in Writ Civil Misc. Petn. No. 132 of 2002, dt. 23rd Nov., 2004 upholding the assessee's stand that the bank from carrying on banking business finally settles the issue that assessee's income is exempt under Section 80P(2)(a)(i) of the IT Act, 1961.
Because in the facts and circumstances of the addition of Rs. 4,58,76,000- Capital contribution by Government (Central and State) and sponsor bank- received in financial year 1995-96, added on the protective basis by authorities below in the year under appeal with the direction to be considered on substantive basis in financial year 1995-96 cannot be sustained in view of decision of 23rd Nov., 2004 of Allahabad High Court in assessee's own case in Writ Civil Misc. Petn. No. 132 of 2002.
4. The main ground for the consideration of the Tribunal is whether the assessee/appellant bank, which is an incorporated body under the RRB Act, 1976, is entitled to claim exemption under Section 80P(2)(a)(i) of the IT Act, 1961 (Act hereinafter for brevity). For the asst. yr. 1998-99, in ITA No. 208/Agra/2000 vide order dt. 31st July, 2003, the Agra Bench of the Tribunal, comprising of S/s N.K. Karhail (JM) and M.L. Gusia (AM) has already decided the issue in favour of the appellant (hereinafter referred to as FGB for brevity), reversing the decision of the CIT(A), who upheld the order of the AO, holding that the long-term investments made for earning interest" or dividend cannot be taken as part of banking activity as the liquidity goes down and the purpose for which bank has been constituted, namely, making advances to lower strata of society for their upliftment cannot be fully achieved. Hence, these amounts are not eligible for deduction under Section 80P of the IT Act, 1961.
5. A similar decision has been taken by the Tribunal, B-Bench, Lucknow dt. 1st Dec, 2004, in the case of Avadh Gramin Bank, Lucknow, in ITA No. 952/AH/1999 for the asst. yr. 1996-97, where before the Bench, the following submissions were made on behalf of the appellant:
The learned Authorised Representative of the assessee supported the order of the learned CIT(A) and submitted that the very same issue had been considered by the apex Court in the case of CIT v. Bangalore District Cooperative Central Bank Ltd and also in the case of CIT v. Karnataka State Co-operative Apex Bank (2001) 169 CTR (SC) 486 : (2001) 251 ITR 194 (SC). He further submitted that the apex Court overruled its earlier decision in the case of Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT on which the AO placed reliance while denying the benefit of Section 80P(2)(a) of the Act to the assessee. The learned Authorised Representative of the assessee further submitted that the Agra Bench, Tribunal, had considered the similar issue in the case of Farrukhabad Gramin Bank v. ITO passed in ITA No. 208/Agra/2000 vide order dt. 31st July, 2003 and furnished a copy of the said order in support of his submission.
6. After hearing the Authorised Representative of the appellant, the Lucknow Bench observed as under:
There is no dispute to the fact that provisions of Section 80P(2) of the Act are applicable to a RRB. The assessee is a RRB under the RRB Act, 1976, and as per Section 22 of the said Act, it is a deemed co-operative society for the purpose of IT Act. The assessee earned interest income on the long-term investments made in Government securities as also in bonds, debentures, etc. As per Section 5(b) of the Banking Regulation Act and Section 18(1) of the RRB Act, 1976, the activities involved in the banking system have been permitted to the regional banks and as such, the assessee bank can make investment of its funds and earn the interest. The Hon'ble apex Court has held in the case of Karnataka Co-operative Apex Bank (supra) that the interest income on investment on Government securities, fixed deposit, KVP, investment in UTI, etc., out of surplus/idle money are all income attributable to business of banking and are eligible for grant of deduction under Section 80P(2)(a)(i) of the Act. The Agra Bench of the Tribunal in the case of Farrukhabad Gramin Bank has also taken the similar view (supra). In view of the above, we uphold the order of the learned CIT(A) in directing the AO to treat the entire income of the assessee bank as exempt under Section 80P(2)(a) of the Act.
7. Similar view has been taken by the Tribunal B-Bench Allahabad in the case of Barabanki Gramin Bank, Barabanki in ITA No. 21/A11/1999 for asst. yr. 1996-97.
8. The latest decision of the Tribunal, Amritsar Bench dt. 20th Sept., 2004 in the case of Jammu Rural Bank v. ITO (2005) 92 TTJ (Asr) 791 : (2005) 93 ITD 717 (As:) for the asst. yr. 2001-02 also supports the assessee's case. Although, this decision is in respect of claim of Section 43B, but in para 5 on p. 720, the Hon'ble Tribunal have mentioned as under:
There is no dispute about the fact that the assessee was entitled to deduction under Section 80P as it was carrying on the business of banking or providing credit facilities within the meaning of Section 80P(2)(a)(i). Clause (a) of Sub-section (2) provides that in case of a co-operative society engaged in the carrying on the business of banking or providing the credit facilities to its members, the whole of the amount of 'profits and gains of business' attributable to such activity shall be deducted.
9. The appeal for the year 2001-02 normally should have been decided taking into consideration the decisions mentioned earlier and on the basis of the decisions mentioned there. The law is well settled that no Tribunal has any right or jurisdiction to come to a conclusion contrary to the one reached earlier on same facts and same law even when the Members, who decided earlier and those, who take different view are not the same.
10. About the assessee/'appellant As mentioned earlier, the bank is an incorporated body under the RRB Act, 1976, having share capital of the undermentioned persons. For the purpose of IT Act, 1961 and Interest-tax Act, 1974, the status of co-operative society has been assigned under the RRB Act, 1976 and accepted by AO as status taken is co-operative society. This bank has been sponsored by Bank of India, Farrukhabad:
Sl. No. Share ratio Shareholder No. of shares subscribed
1. 50% Govt. of India 5000
2. 35% Bank of India 3500
3. 15% Govt. of UP 1500
11. Issues decided by the AO In the order passed on 26th Dec, 2003, the AO objected to the grant of exemption on the following incomes:
(1) Income from SLR investments by the company required to be made mandatorily by the bank have been held to be not entitled to exemption under Section 80P(2)(a)(i) with the following observations:
...such investments, being outside the purview of banking deposits and not available at the bank's discretion, the income thereon would not qualify for deduction under Section 80P(2)(a)(i).
(2) Income earned from non-SLR investments is not entitled for exemption available under Section 80P(2)(a)(i) of the Act. Hence, while making assessment, the entire net profit shown in the P&L a/c of Rs. 6,21,91,455, which comprised of income from both SLR investments and non-SLR investments including income from business of banking, has been subjected to tax, denying the benefit available under Section 80P(2)(a)(i).
(3) The following amounts received in asst, yr. 1996-97 and standard deduction taken in balance sheet as on 31st March, 2000 by the Government of India are liable to tax:
(i) For cleansing the balance sheet Rs. 3,72,00,000
(ii) For providing liquidity to the
bank on protective basis Rs. 86,76,000
12. CIT(A)'s decision-Brief analysis
The three decisions enumerated earlier by the AO have been confirmed by the CIT(A) on the following grounds:
(a) Regarding income from SLR and non-SLR investments
(i) ... the appellant is not a co-operative society engaged in banking business but is engaged in the business of RRB, which is a separate business by itself and the provisions of two separate Acts, viz., Banking Regulation Act, 1949 and RRB Act, 1976 need not to be mingled with each other as the aims, objectives and business laid down in the two Acts are quite different and distinct. Moreover, the deduction under Section 80P(2)(a)(i) of the IT Act is admissible with regard to the income earned on the business laid down as per the RRB Act, whereas, income from other banking business is not qualified for such exemption. The area where the RRBs have to function is also notified in the RRB Act, 1976, which, in any case, is not the metros and the urban areas, where the banks and institutions are located with which the appellant-assessee has admittedly made investments for earning higher rates of income and profits therefrom.
Again, it is reiterated here at the cost of repetition that the reported judgment is in case of a co-operative bank and the funds required to be placed were in State Bank and RBI to enable the co-operative bank to carry out its banking business. The case of the appellant and the ratio emerging from the cited case are entirely on different footing as there is no similarity of facts or reasoning of the appellant's case with the reported judgments. The similarity of facts is with reference to the status of the appellant, objectives of the appellant, the area of functioning of the appellant as also the investments made by the appellant in the SLRs and non-SLRs, which were admittedly outside the purview of banking business as has been stated above. Therefore, the ratio of the judgment reported in CIT v. Karnataka State Co-operative Apex Bank (2001) 169 CTR (SC) 486 : (2001) 251 ITR 194 (SC) overruling the judgment reported in Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT does not have any connection or applicability so far as the case of the appellant is concerned.
The Hon'ble Bombay High Court have held that if the income of a co-operative society (bank) arises from and out of the business with third party as in case of investment of surplus assets, the exemption is not available because investment of fluid assets is not a part of business of banking. The income must be attributable to banking facility.
Considering the above proposition of law with reference to the facts of the appellant's case, it is clear that the income derived by the assessee from various investments in SLRs and non-SLRs cannot be regarded as an essential part of its activity and the objectives with which the deduction under Section 80P of the Act is extended to a RRB. Therefore, the income derived by the appellant-assessee from SLRs and non-SLRs is rightly held as taxable income outside the purview of Section 80P of the Act."
(b) Regarding two sums of Rs. 3,72,00,000 and Rs. 86,76,000 received from the Government Considering the nature of receipt and the well settled legal position relevant for deciding the nature of such receipts, as discussed above, it is evident that the receipts of Rs. 4,58,76,000 were liable to be taxed.
The receipts were, however, stated to have been received in the year relevant to asst. yr. 1996-97. The AO has noted that on account of stay order from the Hon'ble Allahabad High Court against the assessment proceedings for asst. yr. 1996-97, the receipt is added in the income of the appellant only as a protective measure while the substantive assessment would have to be made in asst. yr. 1996-97 as and when the said order is vacated. Considering these facts and also the fact that the addition has been made only as a protective measure, the AO is directed to follow the findings as and when given with reference to substantive assessment on this income. As regards this appeal is concerned, since the assessment is only as a protective measure, no interference is called for at this stage.
13. Legal position Section 80P allows a deduction in the computation of the total income of a cooperative society. The deduction under Section 80P is allowed from gross total income calculated after ignoring income exempt under Section 10. In order to claim deduction under Section 80P, a co-operative society must establish that it is engaged in carrying on any of the several activities referred to in Sub-section (2) of Section 80P. Sub-section (2) enumerates different heads of exemption. Each is a distinct and independent head of exemption under which 100 per cent deduction is given.
14. In order to claim deduction under Section 80P, a co-operative society must establish that it is engaged in carrying on any of activities mentioned in Sub-section (2) and is having income therefrom. Clause (a)(i) of Sub-section (2) relates to carrying on business of banking or providing credit facilities to its members and stipulates that the whole of the profits and gains from these two activities will be allowed as deduction in computing the income of co-operative societies. Each clause or sub-clause of Section 80P is to be treated as a separate and distinct head of exemption without being influenced by condition(s) of any other clause or sub-clause. In Karnal Co-operative Sugar Mills Ltd. v. CIT , the Court has said that Section 80P has been enacted with the object of promoting the co-operative movement and it has to be liberally construed.
15. Comments on the objections taken by AO and CIT(A) in regard to non-applicability of Section 80P(2)(a)(i) to the assessee's case The CIT(A) has decided that "the appellant is not a co-operative society engaged in the banking business, but is engaged in the business of RRB, which is a separate business by itself and the provisions of two separate Acts viz. Banking Regulation Act, 1949 and RRB Act, 1976, need not be mingled with each....
16. As the decision that RRBs are not co-operative societies goes to the root of the controversy and is of a preliminary nature, this is taken up first to indicate that this view of the learned CIT(A) is thoroughly misconceived and untenable,
17. The appellant before the Tribunal is an RRB governed by the RRB Act, 1976, having been established under Sub-section (1) of Section 3 of the said Act. The RBI has issued licence to the FGB and all its branches to carry on banking business.
18. Section 22 of the RRB Act provides that an RRB' is to be deemed to be a cooperative society for the purposes of the IT Act, 1961 and reads thus:
For the purpose of the IT Act, 1961 (43 of 1961) or any other enactment for the time being in force relating to any tax on income, profits or gains, an RRB shall be deemed to be a co-operative society.
19. It is well-settled rule of interpretation that in construing the scope of a legal fiction, it would be proper and even necessary to assume all those facts on which alone the fiction can operate. As observed by Lord Asquith, in the case of East End Dwellings Co. Ltd. v. Finsbury Borough Council (1951) 2 All ER 587, 599 : (1952) AC 109 (HL):
If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents, which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it.
20. Referring to Section 22 of the RRB Act, 1976, the CBDT has issued a Circular F. No. 178/4/8l-IT(AI), dt. 11th June, 1982, which reads as under:
A question has arisen whether RRBs (to which the provisions of the RRB Act, 1976 apply) can be treated as co-operative societies for the purpose of Section 80P of the IT Act, 1961.
21. There is a specific provision namely, Section 22 in that Act, which is to the following effect:
For the purpose of the IT Act, 1961 or any other enactment for the time being in force relating to only tax on income, profits or gains, a RRB shall be deemed to be a co-operative society.
22. Therefore, the provisions of Section 80P of the Act will also be applicable in respect of RRBs. In this view, deductions admissible under Section 80P(2)(a)(i) have to be allowed in making income-tax assessment of these banks".
23. From the aforesaid discussion, the following two conclusions emerge:
(i) The CIT(A)'s view that RRB cannot be considered as a co-operative society is entirely misconceived in view of the aforesaid Section 22 of the RRB Act.
(ii) A circular issued by the CBDT is binding on the field officers, like the AO. Hence, CIT(A)'s decision that an RRB is not a co-operative bank tantamounts to asking the AO to defy the CBDT's circular, which is binding on him/her. The CIT(A) is not competent to do so.
24. In M.P. Tewari v. Y.P. Chawla, ITO (1991) 91 CTR (Del) 228 : (1991) 187 ITR 506 (Del), it was held that the purpose of issuing such order, instruction, etc., is to ensure the proper administration of the Act. The CBDT is the highest executive authority of the Department. Its power of administration, supervision and control extends over the whole of the Department. The power conferred under Section 119, however, is subject to the following two exceptions:
(i) it cannot interfere with the discretion of AAC see Hon'ble Mr. Justice Iqbal Ahmad, In re (1942) 10 ITR 152 (All), and
(ii) it cannot pass any direction to an AO to make particular assessment in particular manner see ITO v. Eastern Scales (P) Ltd. .
25. The circular does not interfere with the discretion of the CIT(A) and only mentions about the legal position. Hence, the CIT(A) should have accepted the position explained therein and should have decided that the decision is legal and valid. In any case, the AO has not taken a view that Farrukhabad Gramin Bank is not a co-operative society and hence, the CIT(A) has exceeded her power in taking a decision to this effect without giving adequate notice to the appellant.
26. Thus, Farrukhabad Gramin Bank is a co-operative society for the purposes of the IT Act and hence, entitled to the benefit provided by Section 80P(2)(a)(i) if the conditions mentioned therein are satisfied.
27. Whether Farrukhabad Gramin Bank is engaged in banking business ?
The words 'banking or business of banking' are not defined in the IT Act and therefore, for all purposes, these are to be imported from another statute of the Government of India namely, Banking Regulation Act, 1949 (BR Act hereinafter for short). Section 3 of BR Act provides that the said Act shall apply to cooperative banks in the manner and to the extent specified in Part-V. Under Part-V, Section 50 makes various provisions of BR Act applicable to co-operative societies. Accordingly, the definition of the word 'banking' as given in Section 5(b) will apply to RRBs. This reads as under:
... '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, order or otherwise.
28. The learned CIT(A) has failed to appreciate that the banking implies, inter alia, investment of deposits. If the view as taken by the CIT(A) is to prevail, there could be situations when money may be required to lie idle if there is no matching of receipts (deposits) and advances (money lent). Hence, while defining 'banking', care has been taken to avoid this situation by providing in Section 5(b) that 'banking' would, inter alia, include making investments also. The conclusion drawn on a reading of Section 6(1) of BR Act by the CIT(A) that a bank can deal in bonds and securities but it cannot invest in long-term investment for earning profit or interest therefrom is not backed by any legal provision. The bank is playing an active role in the development of rural areas by extending various banking services to different categories of people and for this purpose, income is necessary.
29. Section 80P(2)(a) provides as under:
(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 sums specified in Sub-section (2), in computing the total income of the assessee.
(2) The sums referred to in Sub-section (1) shall be the following, namely : (a) in the case of a co-operative society engaged in-
(i) carrying on the business of banking or providing credit facilities to its members, or...
the whole of amount of profits and gains of business attributable to any one or more of such activities.
30. The expression used in Clause (a)(i) is carrying on the business of banking (and not carrying on banking activities). Business of banking has a larger connotation to revolve around all activities which are intimately connected with such activities and are also instrumental to carrying on such activities would also come under banking activities. Making investment of surplus funds is connected with regular business operations and hence the income arising out of such investment is also part of income from banking business. Investment generated out of income being utilized in normal activities of granting loan. Making of such investments was connected with business of banking or providing credit. Money invested out of surplus is clearly a banking business.
31. Further, the CIT(A) has not appreciated that the words used in Section 80P(2)(a)(i) in the context of giving exemption are 'attributable to banking business'-not derived from such business. Hence, deduction under Section 80P(2)(a)(i) is to be allowed to a co-operative society engaged in any one or more of the activities as specified in Clause (a) of Sub-section (2) of Section 80P to the extent of whole of the amount of profits and gains of business attributable to any one or more of such activities. The word 'attributable' here has a larger connotation. Its scope is wide and covers the other receipts incidental to such activities. Accordingly, a co-operative society engaged in carrying on the business of banking as specified in Sub-clause (i) of head (a), earning income by way of commission and brokerage by dealing in bills of exchange, subsidy from Government, admission fee from members, incidental charges and financial penalties, will be entitled to claim deduction in respect of such incidental receipts also because these are all attributable to the business of banking.
32. There are a number of decisions in the context of Chapter VI-A of the Act, where the meaning of the words 'attributable to' has been explained. In Cambay Electric Supply Industrial Co. Ltd v. CIT , the meaning of the words 'attributable to' has been explained saying that it is of very wide import.
33. Hence, giving a limited meaning to the phrase 'attributable to', as confined to mere taking of deposits and lending money by way of advances and deposits as done by CIT(A) would be a very narrow interpretation of the above mentioned words and would be wholly unjustified and legally untenable.
34. It may be mentioned in this context that where the Government wanted to give a restricted benefit, it has used the expression 'derived from' as in the cases of new industrial undertakings, hotels, etc. But in the case of banking business, it has used the phrase 'attributable to' and is continuing with the same. Hence, there is no ground to give restricted meaning to this phrase in the context of banking business.
35. The foregoing discussion meets the objections raised based on SLR investments and non-SLR investments to the effect that income from investments is eligible for exemption. However, to make the issues raised clear beyond any doubt, the following further submissions are being made for consideration:
(i) SLR investments Co-operative societies/banks are statutorily required by the RBI to invest and maintain with the RBI an average daily balance of not less than 3 per cent of total demand and time liabilities of a banking company. There is no escape from such investment, which is necessary for carrying on the banking business. These investments are being strictly monitored and done as per the instructions/guidelines issued by the RBI/NABARD. There is no change in this regard in the asst. yr. 2001-02 and 1998-99 for which year the claim of exemption has been approved by the Tribunal. Interest on such investments is necessarily a part of the banking business/operations and hence, there could be no case for holding that the benefit of Section 80P(2)(a)(i) cannot be available in respect of such investments.
(a) The Tribunal, Agra Bench, Agra, in assessee's own case in ITA No. 208/Agra, for asst. yr. 1998-99 has held:
After hearing rival contentions and judicial pronouncements cited from both the sides, we noted that the Hon'ble Supreme Court in the case of CIT v. Kamataka State Co-operative Apex Bank (2001) 169 CTR (SC) 486 : (2001) 251 ITR 194 (SC) 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 placement of such funds being imperative for the purpose of carrying on banking business, the income therefrom would be income from 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'.
36. Other decisions which support Farrukhabad Gramin Bank's case:
(b) CIT v. Bangalore Distt. Co-operative Central Bank Ltd. (supra);
(c) CIT v. Kamataka State Co-operative Apex Bank (supra);
(d) Hon'ble Tribunal, Ahmedabad, Special Bench-Surat Distt. Co-operative Bank Ltd. and Ors. v. ITO and Ors. (2003) 78 TTJ (Ahd)(SB) 1;
(e) Hon'ble Tribunal, Hyderabad, Bench-A, dt. 6th March, 2000 in the case of Rayalseema Grameen Bank v. Jt. CIT, Spl. Range, Guntur;
(f) Hon'ble Andhra Pradesh High Court in the case of CIT v. Rayalseema Grameen Bank.
37. The judgment of Andhra Pradesh High Court in the case of CIT v. Rayalseema Grameen Bank (supra), which is completely in favour of the assessee. The said decision was not challenged before Supreme Court by the Department as no SLP was filed and thus has been accepted by the Department.
38. The established principle is that if the Revenue has not challenged the correctness of the law laid by the Hon'ble High Court and has accepted it in the case of one assessee then it is not open to the Revenue to challenge its correctness in the case of other assessee, as held by Hon'ble Supreme Court in Berger Paints India Ltd. v. CIT , Union of India v. Kaumudini Narayan Dalai and Anr. and CIT v. Narendra Doshi .
39. It is submitted that in asst. yr. 1998-99, the AO had himself exempted the income from SLR investments and taxed only income from non-SLR investments, which was also deleted by the Tribunal, following the decision of Hon'ble Supreme Court in CIT v. Karnataka State Co-operative Apex Bank (supra) and in appeal in number of cases in cases of gramin banks. All that the AO had considered was that income from SLR investment is exempt and it was only the income from non-SLR investment, which is not exempt.
40. Obviously, in view of the decision for asst. yr. 1998-99, the AO and CIT(A) should have accepted the decision of Tribunal for an earlier year in the appellant's own case. But this has not been done.
41. The AO has, however, given the following reasons for denying the benefit for SLR investment income:
The existence and maintenance of these reserves, is not a sine quo non for banking and banks do not have any control over them. On the contrary, these are governed by the Government, fiscal and monetary policy imperatives. Accordingly, it stands to reason that funds outside of banking system, over which the banks neither have discretion nor control and which are designed to fulfil objectives not of the bank, would not be an essential part of banking system and inasmuch as there is no provision for their withdrawal, they are effectively out of the purview of the bank.
Accordingly given the above, it is submitted that such 'investments' being outside the pale of banking activity and not available at the bank's discretion, the income thereon would not qualify for deduction under Section 80P(2)(a).
42. The reason given is so unconvincing that no detailed comments on the same are necessary.
43. Unfortunately, without appreciating the legal and factual position and the fact that in the context of judicial discipline, the CIT(A) was bound to follow the jurisdictional Tribunal's decision, the view of the AO has been confirmed by the CIT(A). The Bombay High Court in the case of Bank of Baroda v. H.C. Srivastava (2002) 175 CTR (Bom) 663 : (2002) 122 Taxman 330 (Bom) has held that it is necessary for judicial unity and discipline that all authorities below Tribunal must accept as binding judgment of the Tribunal. Prima facie, both the AO and the CIT(A) have flouted this cardinal principle of judicial (discipline) without mentioning any plausible/reasonable ground for not following the decision of the Tribunal, Agra Bench, on the issues decided.
44. The position taken by the AO and the CIT(A) is also not in consonance with the views expressed by the apex Court. The Hon'ble Supreme Court in the case of Union of India v. Kamlakshi Finance Corporation Ltd. (2002) 123 Taxman 66 (sic), held that order of the higher authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not acceptable to the Department is in itself an objectionable phrase, and is the subject-matter of an appeal, can furnish no ground for not following it unless its operation has been suspended by a competent Court. The Hon'ble Supreme Court remarked that:
... It cannot be too vehemently emphasized that it is of utmost importance that, in disposing of the quasi judicial issues before them, Revenue officers are bound by the decisions of the appellate authorities. The order of the Appellate Collector is binding on the Asstt. Collectors working within his jurisdiction and the order of the Tribunal is binding upon the Appellate Collectors and Asstt. Collectors, who function under the jurisdiction of the Tribunal... (p. 712).
45. Although each year, being independent year on the other, the principle of res judicata or estoppel by records applies to Civil Court does not apply to income-tax proceedings. Yet, for the sake of consistency and for the purpose of finality in all categories, including litigation arising out of fiscal statute, earlier decision on the same should not be reopened unless fresh facts are brought in subsequent year, as held in CIT v. ARJ Security Printers , Radhasoami Satsang v. CIT and Union of India v. Satish Pannalal Shah .
46. No fresh facts or grounds have been indicated in the orders passed by the AO and CIT(A). They have merely reappraised the facts and the legal decisions considered earlier and have come to a conclusion, which is different from that reached. The orders passed merely show change of mind and do not establish that the income from SLR investments is not entitled to the benefit conferred by Section 80P(2)(a)(i) to gramin banks.
47. Non-SLR investments Investment of the surplus funds beyond the amounts required to be invested to meet the requirements of SLR/CRR is of the same nature as SLR investment with the difference that there is no compulsion under the BR Act to make such investments. These are temporary investments of surplus funds and are easily realizable in case of need. Their nature has been described in the case of Surat Distt. Co-operative Bank Ltd. and Ors. v. ITO and Ors. (supra) thus:
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 realizable in case of need and in case of liquidity crisis by their premature encashment. The Government securities and other trustee securities are also easily realizable as such securities are freely transferable in open market and the amounts can be realized as and when needed. All these investments fully satisfy the test of 'easily realizable in case of need'. Such investments in approved securities and 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 but have enabled the co-operative banks to achieve multiple advantages. Such investments should, therefore, be regarded as integral part of banking activities carried on by these societies.
48. 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 accruing to cooperative banks are all income attributable to business of banking and are eligible for grant of deduction under Section 80P(2)(a)(i).
49. The decisions, where SLR/CRR investments have been considered to be a normal banking business, have been discussed later.
50. Government grants/subsidies The two amounts given by the Government for cleansing the balance sheet and for providing liquidity have, obviously, been received in the context of banking business carried on by gramin banks and even if these amounts are considered to be profit of such banks (not conceded), these would be entitled for full deduction in terms of Section 80P(2)(a)(i). This is clear from the discussion about case law (infra).
51. In any case, the amounts have not been given as grants or subsidies by the Government. The user of such funds cannot decide about their taxation. The two letters from the Ministry of Finance, Department of Economic Affairs, extracted in the assessment order passed by the AO clearly establish that the amount of Rs. 4,58,76,000 (Rs. 3,72,00,000 + Rs. 86,76,000) has been given for increasing the equity capital of the FGB and hence, it is a capital receipt not liable to tax. The relevant portion from letter No. 3-10/95-RRB(8) dt. 26th June, 1995 reads thus:
Sub. : Authorised Capital of RRBs Sir, In terms of Section 5 of the RRB Act, 1976 (as amended) the authorized capital of each RRB is Rs. 5 crores. At present, the issued capital of RRB vary from Rs. 50 lakhs to Rs. 1 crore each. As a part of exercise undertaken by Government for restructuring of 49 selected RRBs, including your bank, additional funds in the form of equity is being provided towards cleansing of balance sheet and liquidity support by Central Government, sponsor bank and State Government concerned in the ratio of 50 per cent, 35 per cent and 15 per cent, respectively. In the case of 27 RRBs, additional amount already released by Central Government and the matching share which is to be provided by the sponsor bank and State Government concerned added to the existing issued capital of Rs. 1 crore has increased the existing limit of authorised capital of Rs. 5 crore. Government has, therefore, considered this issue in consultation with NABARD and concerned sponsor banks and has decided to enhance w.e.f. 31st March, 1995 the authorized capital in exercise of powers given under proviso to Section 5 of the RRBs Act, 1976 of 27 RRBs, including your bank, to the extent mentioned against the names of each RRB in the Annexure. Thus, authorized capital of Farrukhabad Gramin Bank has been enhanced to Rs. 558.760 lakhs (rupees five crores fifty eight lakhs and seventy six thousand only) w.e.f. 31st March, 2005.
52. Apparently, by the amount provided, the shares of GOI, BOI and Government of UP in FGB have enhanced. Hence, by no stretch of imagination such amount can be considered as income as it has been clearly mentioned in the Government's letter that 'the authorized capital of Farrukhabad Gramin Bank has been enhanced to Rs. 559.760 lakhs' (rupees one crore original capital + Rs. 458.760 lakhs since received). The amount has been recorded in the FGB's book under the head 'Share deposit account'.
53. In view of the above, the two amounts cannot be considered as income and therefore, the decisions in the cased of Sahney Steel and Press Works Ltd. v. CIT and CIT v. Bazpur Co-operative Sugar Factory Ltd. relied upon by the AO for taxing these amounts have no application in the facts and circumstances of the two receipts and therefore, need no comments, being wrongly applied. Since the receipts do not constitute income at all, their taxation, even on protective basis, cannot be held justified. The CIT(A) has, while commenting about these receipts, has not applied her mind to the facts of the case in making comments regarding these. Hence, the addition made needs to be deleted.
54. Case laws on the issues involved During the course of hearing at various levels, namely, at the AO's, CIT(A)'s and Tribunal stages, number of cases have been cited in favour and against the issue involved namely whether the income from investments-SLR or non-SLR and amounts received from the Government are exempt from tax. Mentioning about all cases and views expressed for and against the issues involved would make this discussion long, winding and cumbersome. Hence, only brief references are being made regarding few Court cases taking into account the factual and legal background under the following heads:
(A) Legal interpretation
(i) A passing reference has been made at p. 5 (supra) mentioning the decision in the case of Karnal Co-operative Sugar Mills Ltd. v. CIT (supra), that the provisions of Section 80P have to be liberally construed. This view is further supported by the following decisions from the apex Court : CIT v. South Arcot District Co-operative Marketing Society Ltd. .
It has been said in this decision that as the provision for exemption was intended to encourage co-operative societies, liberal construction should be given to the language employed in the provision.
Broach Distt. Co-operative Cotton Sales, Ginning and Pressing Society Ltd. v. CIT This decision has been given with reference to Section 81(1)(c) and it has been reiterated in this decision that Section 81(1) was intended to encourage and promote the growth of co-operative societies and consequently, a liberal construction must be given to the operation of that provision.
Hence, to construe the terms 'banking'/'business of banking' in a narrow sense, ignoring the definition of 'banking' given in Section 5(b) of the BR Act and excluding income from investments (whether SLR or non-SLR) and Government subsidies/grants would be against the spirit echoed by the highest Court of the country in the two decisions mentioned earlier.
(B) Interpretation in case of doubt
(i) The meaning of the term 'banking business' is very clear from the definition given in Section 5(b) of BR Act and hence, issues regarding interpretation in favour of or against the assessee should not arise. However, in his written arguments filed before the CIT(A), the AO has raised this issue in the following way:
In the end, I submit that Andhra Pradesh High Court delivered judgment in favour of assessee while Gujarat High Court delivered judgment in favour of Revenue. Thus, there is a controversy and ambiguity regarding admissibility of deduction under Section 80P of the IT Act. In such a circumstance, I draw your kind attention towards the undermentioned cases in which the Hon'ble Supreme Court held that in the fiscal matters the doubts and ambiguity should be decided in favour of Revenue. The copy of judgment in these cases has already been filed before your Goodself on 6th April, 2004. These cases are:
(a) Novopan India Ltd. v. CCE ;
(b) Liberty Oil Mills Ltd. v. CCE ;
(c) Orissa State Warehousing Corporation v. CIT (1999) 153 CTR (SC) 177;
(d) Dr. (Mrs.) Renuka Datla v. CIT (2000) 158 CTR (AP) 555
(ii) The preponderance of views of the Courts, including the Supreme Court, is that ambiguity should be resolved in favour of the assessee. If the provisions of a taxing statute are clear and unambiguous, full effect must be given to them irrespective of any consideration of equity. Where, however, the provisions are couched in language, which is not free from ambiguity and admits of two interpretations, a view, which is favourable to the subject, should be adopted. The fact that such an interpretation is also in consonance with ordinary notions of equity and fairness would further fortify the Court in adopting such a course CIT v. Madho Pd. Jatia 1976 CTR (SC) 438 : (1976) 105 ITR 179, 183-4 (SC), CIT v. Vegetable Products Ltd. and Alladi Venkateswasrlu v. Government of Andhra Pradesh 1978 CTR (SC) 44 : (1978) 41 STC 394, 398 (SC).
(iii) There are a number of other decisions to similar effect, which cannot be incorporated in this discussion considering the need for brevity. However, in case more authorities are considered necessary for supporting this view, a reference can be made to pp. 353 and 354 of the book "Income-tax Law (5th Edn.) by Chaturvedi and Pithisaria. In this book, the situations where benefit of doubt is not available to assessee have also been mentioned but the instances given do not apply to the facts and law applicable in Farrukhabad Gramin Bank's case.
(iv) A passing reference to the four decisions mentioned by the AO is necessary to show how these decisions do not support the proposition expounded by the AO. The first two cases relate to the Central Excise. In Liberty Oil Mills (P) Ltd. v. CCE , , following Novopan India Ltd. v. CCE 1994 (6) SCC 80, 88, it has been said that in the case of an ambiguity or doubt regarding an exemption provision in a fiscal statute, the ambiguity or doubt will be resolved in favour of the Revenue and not in favour of the assessee.
(v) These decisions do not advance the AO's view that advantage of ambiguity should be given to the Revenue because as has already been pointed out earlier, there is no ambiguity involved. Further, these decisions have to be considered in the background of the two Supreme Court decisions advocating liberal interpretation in the context of provisions of Section 80P/81.
(vi) The decision in the case of Orissa State Warehousing Corpn. (supra) has no application as the same has been given in the background of a situation, where the language used is 'derived from'-not 'attributable to'. The observations made in the last decision too do not support the theory made out by the AO. Firstly, it was not a case, where availing of any exemption under Chapter VI-A was involved. The situation considered related to 'Kar Vivad Samadhan Scheme' and in this context, the Court has said that 'a provision granting exemption or concession should not be stretched in favour of the assessee by means of analogy, inference and a priori notions. This is not being done as the definition of 'banking business' given in Section 5(b) of the BR Act clearly says that this activity includes investment also.
(vii) Hence, the argument, regarding the ambiguity and the interpretation to be in favour of the Revenue, is far-fetched, and has no relevance in the context of issue under discussion.
(C) Meaning of the 'carrying on the business of banking'
(i) The definition of 'banking' as already mentioned earlier, is not given in the IT Act. Hence, its meaning in other Acts becomes relevant. The definition given under the BR Act has already been extracted at p. 7, where it has been defined to mean 'lending or investment of deposits of money from the public'. Hence, making of SLR or non-SLR investments, apparently, comes within the purview of 'banking'.
(ii) Even in dictionaries the term 'bank' has been used in a comprehensive manner. In Webster Comprehensive Dictionary (International Edition), the term 'bank' has been defined to mean an institution for lending, borrowing, exchanging, issuing or caring for money. In Tomlin's Law Dictionary, bank (in commercial law) has been said to signify a place, where a great sum of money is deposited, returned by exchange or otherwise disposed of to profit. In these definitions, the words 'caring for money' and 'disposed of to profits' would include making money, including making of investments when the surplus amounts are not required for lending. The money cannot be allowed to lie idle.
(iii) The decision that incomes from SLR/non-SLR investments are not entitled to exemption is based on a wrong appreciation of the position of gramin banks and their status as deemed co-operative societies. There has been a mix up of issues. The RRB Act, 1976 was enacted to provide for the incorporation, regulation and winding up of RRBs with a view to developing the rural economy by providing for the purpose of development of agriculture, trade, commerce, industry and other productive activities in the rural areas, credit and other facilities, particularly to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs and for matters connected therewith and incidental thereto.
(iv) The RRBs are authorized to undertake the following types of business:
(i) Granting of loans and advances, particularly to small and marginal farmers and agricultural labourers, whether individually or in groups, and to cooperative societies, including agricultural marketing societies, agricultural processing societies, co-operative farming societies, primary agricultural credit societies or farmers' service societies, for agricultural purposes or agricultural operations or for other purposes connected therewith.
(ii) Granting of loans and advances, particularly to artisans, small entrepreneurs and persons of small means engaged in trade, commerce or industry of other productive activities, within the notified area in relation to the RRBs.
(v) The RRBs are inspected by the national bank for agricultural and rural development. The RRBs are permitted to open branches by the RBI on the recommendation of NABARD.
(vi) The discussion about the functioning of the RRBs does not indicate that RRBs are prohibited to make investments in any manner of its surplus fund. There is also no prohibition that the investments cannot be made in the securities of the institutions functioning from 'metros'. As a co-operative society, engaged in banking business, certainly RRBs are entitled to make investments out of their surplus funds. There is no adverse comments in regard to making of such investments from the inspecting body, i.e., NABARD. All these show that there is no prohibition for making investments and this would not constitute 'non-banking business'.
55. Coming to case law, there are ample decisions to show that the three categories of incomes objected to at the levels of AO and CIT(A) (and, of course, upheld by the Tribunal and accepted by the IT Department in the case of Etah Gramin Bank) are entitled for exemption under Section 80P. A beginning in this regard is being made mentioning about cases where income is earned, prima facie, from sources, which cannot be considered as banking, have been held to be income liable to deduction in case of co-operative societies covered by Section 80P(2)(a)(i).
56. In CIT v. Madurai District Co-operative Bank Ltd. , income from letting out the surplus meeting hall of the assessee, which was assessed as business income was held eligible for deduction.
57. In CIT v. Grain Merchants Co-operative Bank Ltd. , income received by the cooperative society by letting out the premises belonging to it, as also interest received out of the funds deposited in the Reserve Bank and other banks have been held exempt under Section 80P(2)(a)(i) for the asst. yrs. 1989-90 to 1991-92.
58. In CIT v. Grain Merchants Co-operative Bank Ltd. (supra), the High Court has said that from the reading of Clauses (k) and (1) of Section 6 of the BR Act, it appears that in addition to the business of banking set out in Clause (b) of Section 5 of the BR Act, acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purpose of the banking company and also selling/improving or leasing or otherwise dealing with all or any part of the property and rights of the company, also should be treated as a banking business.
59. Hence, income received by co-operative bank by letting out premises belonging to it was exempt from payment of tax under Section 80P(2)(a)(i).
60. Similarly, income from interest, dividends, Government subsidies, locker rents, etc., have been held to be exempt in the following cases.
61. In CIT v. Madurai District Co-operative Bank Ltd. (supra), following CIT v. Madurai District Central Co-operative Bank Ltd. (1984) 42 CTR (Mad) 27 : (1984) 148 LTR 196 (Mad), it has been held that interest on securities, subsidy from Government, interest from other co-operative institutions and banks, dividend received by the assessee were business income entitled to deduction under Section 80P(2)(a)(i).
62. Similar view has been taken in the case of this very bank in the decision reported in CIT v. Madurai District Central Co-operative Bank Ltd. (2000) 164 CTR(Mad)71.
63. In CIT v. Ahmednagar District Central Co-operative Bank Ltd. , income earned by a co-operative bank by way of commission/fee for collecting electricity charges for and on behalf of its customers has been held to be income from banking activity, qualified for deduction under Section 80P(2)(a)(i).
64. In CIT v. Ratnagiri District Central Co-operative Bank Ltd. , SLP dismissed by the Supreme Court (2002) 256 ITR (St) 48 and (2003) 260 ITR (St) 272, interest accrued on the investment made in Indira Vikas Patra was held income arising out of banking business eligible for deduction under Section 80P(2)(a)(i).
65. In CIT v. Ramanathapuram District Co-operative Central Bank Ltd. , it has been held that 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 same were eligible for deduction under Section 80P(2)(a)(i).
66. In CIT v. Nawanshahar Central Co-operative Bank Ltd. , the decision is that income from investment in PSEB Bonds, which was in the nature of security specified under Section 20 of the Indian Trusts Act, 1882, and therefore, was an investment in accordance with the mandatory provisions of Section 44 of the Punjab Cooperative Societies Act, 1961 and hence was eligible for deduction under Section 80P(2)(a)(i) for the asst. yr. 1994-95.
67. In CIT v. Sri Ram Sahakari Bank Ltd. , interest and dividend income of Rs. 2,50,664 derived out of investment in national savings certificates, Indira Vikas Patras, Kisan Vikas Patras, short-term deposits in banks and shares of Maharashtra State Financial Corporation of India, were held to be eligible for deduction under Section 80P(2)(a)(i). This view has been followed in ITO v. Karnataka Central Co-operative Bank Ltd. (2004) 186 CTR (Kar) 737 : (2004) 266 LTR 635, 636 (Kar).
68. In CIT v. Rajasthan State Co-operative Bank (2004) 186 CTR (Raj) 266 : (2004) 136 Taxman 458 (Raj), income from investment of reserves and other funds in various securities is income from banking business so as to be exempt under Section 80P(2)(a)(i) and the investment of the reserves and other funds in various securities does not require the sanction of the Registrar of the Co-operative Societies under Section 63 of the Co-operative Societies Act.
69. In CIT v. Sri Ram Sahakari Bank Ltd. (supra) and ITO v. Karnataka Central Co-operative Bank Ltd. (supra), the assessee, a co-operative bank, claimed deduction under Section 80P(2)(a)(i) in respect of interest and dividend income derived out of investments in national savings certificate, Indira Vikas Patra, Kisan Vikas Patra, short-term fixed deposits in banks and shares of Maharashtra State Financial Corpn. of India. The assessee had made said investments out of its surplus funds. It has been held that since the assessee had utilized its surplus or voluntary reserve funds in course of its ordinary banking business, it was entitled to deduction as claimed.
70. There are other decisions too, where similar views, including deduction for Government subsidies, have been held to be deductible, but the foregoing decisions clearly establish that the view taken against the FGB by the AO and CIT(A) is not correct. Hence, other decisions are not being mentioned keeping in view the need for brevity in these submissions.
71. Position regarding the decisions considered in the CIT(A)'s order CIT v. Bangalore District Co-operative Central Bank Ltd. (supra) This decision, it has been said, is applicable in relation to only income from SLR investments, which are deductible and not to non-SLR investments. Hence, its application in the context of non-SLR investments has been objected to. However, there is no discussion about SLR or non-SLR income in this decision. The position as emerges from the order of the AO is that the ITO held that the investments were made out of reserves and disallowed the claim. The Tribunal accepted the contention of the assessee that interest income was attributable to the assessee's business income. The matter was remitted to the ITO to determine the deduction available to the assessee under Section 80P(2)(a)(i). The High Court agreed with the Tribunal. On further appeal to the Supreme Court, it was held, affirming the decision, that there was no dispute that the assessee was a co-operative society carrying on the business of banking. Hence, assessee was entitled to special deduction under Section 80P(2)(a)(i).
CIT v. Karnataka State Co-operative Apex Bank (supra).
This decision too, it has been said, relates to SLR investments. The decision in this case is that where assessee, co-operative bank was required to place part of its funds with State Bank or RBI to enable to it carry on its banking business, placement of such funds being imperative for purpose of carrying on banking business, income derived therefrom was income from assessee's business falling under Section 80P(2)(a)(i). In this decision, the Court has overruled its earlier decision in Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT (supra) and approved the decision in the case of Bangalore District Cooperative Central Bank (supra).
Malprabha Gramin Bank, Dharward v. Jt. CIT It is said that this decision deals with income from statutory reserve, where the decision of the Andhra Pradesh High Court in the case of Rayalseema Grameen Bank (supra) has been mentioned, upholding income from interest as eligible for deduction and hence, it deals with the situation of SLR investments. Yet, even income from SLR investments too has been taxed. Surat District Co-operative Bank Ltd. and Ors. v. ITO (supra)--a decision of the Tribunal, Special Bench, Ahmedabad In this case, besides approving deduction of income relating to SLR investments under Section 80P(2)(a)(i), the Tribunal has also upheld deduction from non-SLR investments (supra at p. 12). However, this decision has been discarded saying that the provisions of Co-operative Societies Acts of States are wide while the provisions of RRB Act, 1976, are limited to the regional area only. Further, in the former enactment, the intention of legislature is to develop the co-operative movement while in the case of RRB Act, the intention is to develop the rural economy on regional basis, therefore, each and every rule of co-operative society is not applicable on the RRBs. If the investment is made by the RRBs beyond the area, that is the normal commercial banking, which is liable to income-tax like the business of other commercial banks. Obviously, this decision has not been considered helpful in a casual way without appreciating the findings in the background of the facts.
Mehsana District Central Co-operative Bank Ltd. v. ITO This decision supports the appellant's case. This decision is on the same lines as the decision in CIT v. Karnataka State Co-operative Apex Bank (supra). It has been said 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. Hence, income derived by placing of funds with the SBI/RBI has been held to be deductible under the aforesaid provisions of Section 80P.
72. The assessee bank filed writ petition against the reopening of the assessments for the asst. yrs. 1995-96 to 1997-98 and the Hon'ble Allahabad High Court pronounced its decision on 23rd Nov., 2004 by quashing the proceedings and holding that the income of the assessee bank is exempt under Section 80P of the Act. The said decision is reported in Farrukhabad Gramin Bank v. ITO >
73. Therefore, in view of facts and circumstances of the case, the benefit of Section 80P(2)(a)(i) is available to gramin banks, including the FGB, not only in respect of income arising from taking deposits and lending money on interest but also in respect of income from investments without any distinction between investments made because of SLR/CRR compulsions or otherwise. The amounts received from Government, Central, State and from sponsoring bank--Bank of India--as contribution towards equity capital is a capital receipt, not liable to tax. Though the gramin banks are regulated by RRB Act, their status under the IT law is that of a co-operative society in view of deeming provision in Section 22 of the RRB Act and hence, all the benefits that are available to a co-operative society under Section 80P(2)(a)(i) can be availed of by FGB consequent to its being deemed as such. There are umpteen Court decisions, important amongst them having been incorporated in the foregoing discussion, which support the view that income from investments too arises from banking business, being attributable to such business, and hence, the same is also entitled to deduction.
74. In view of the above, the appeal of the assessee is allowed.
REFERENCE UNDER Section 255(4) OF THE IT ACT, 1961 Diva Singh, Judicial Member Since there is a difference of opinion between the Members while adjudicating the captioned appeal the following questions are referred to the Hon'ble President of Tribunal for hearing by the Third Member as contemplated in Section 255(4) of the Act. On ground Nos. 11 and 12 there appears to be no dissent in view of p. 10 last para of the dissent order. Similarly ground No. 13 dismissed as consequential is also not dissented.
1. Whether while writing a dissent, can the dissenting Member refer to in the dissent order, unpublished orders or judgments not referred to by either side or made available to the colleague on the Bench as well as the Revenue while writing the order in favour of the assessee ?
2. Whether merely the act of banking activity entitles the assessee to claim exemption under Section 80P(2)(a)(i) or is the banking activity in terms of Section 3(1) of the RRB Act, 1976 as per the notification in the Districts of Farrukhabad and Kannauj i.e., the target area is entitled for exemption in the facts of the case ?
3. Is the Tribunal while dealing with issues of exemption to be governed merely by law as considered in different context in different legislations or are the specific facts of the case inasmuch the notification under Section 3(1) of RRB Act, 1976 in the facts of the case in each year under consideration is to be considered ?
4. Can the issue be stated to be covered by the orders of the Tribunal in the earlier years, where no facts qua the SLR income being exempt are discussed since assessment is made in those years on the basis that SLR income is exempt ? Thus, can those orders of the Tribunal be stated to have considered the exemption qua the SLR and non-SLR income wherein admittedly, no arguments or facts even before the Tribunal on the specific target area and target group of the banking activities are addressed ?
5. Can the Tribunal, a final fact-finding body ignore the facts brought out in the orders of the tax authorities and addressed at length from either side, especially in the background, where on facts, both the Members agree that verification is required since the issue on facts has been restored to the AO by the JM (vide para 11.1 pp. 70-72) on which aspect there is no dissent by the learned AM, since that issue has not been touched at all in the dissent order ? As such can the order be said to be covered when on facts both after verification is required ?
6. Where on facts both Members are in agreement that verification on facts is required, in the circumstances, can the issue be stated to be covered by the earlier orders of the Tribunal, where admittedly no discussion on facts on SLR income is there in those years by the Tribunal ?
7. Can additional ground be admitted after proposed order is written and signed lying pending over 70 days with the dissenting Member with no explanation offered who refixes for clarification and admits the additional grounds to decide the issue in favour of the assessee ? Does this amount to abuse of the process of law and is it in consonance with judicial propriety ?
M.L. Gusia, A.M. Since there is a difference of opinion between the Members while adjudicating the captioned appeal so many questions have been raised by the learned JM and I do not agree with such questions framed for consideration of the Third Member of the Tribunal.
I, therefore, propose the concise question as under:
Whether, on facts and in circumstances of the case, the assessee 'Farrukhabad Gramin Bank, Farrukhabad1 is deemed to be a co-operative society under Section 22 of the RRB Act, 1976. If so, whether the assessee bank is eligible for deduction under Section 80P of the IT Act on the amount of 'profits and gains from business' attributable to such activities.
R.V. Easwar, Vice President
1. The assessee is a RRB, governed by the provisions of the RRB Act, 1976. Under Section 22 of the Act, it is deemed to be a co-operative society for the purposes of the IT Act, 1961. It was established in the year 1976 mainly with a view to providing basic banking facilities in the remote rural areas and to mobilize savings from rural masses who were not adequately served by the commercial banks as the branch network of commercial branches was limited to urban or semi-urban areas only. The bank's objective was to discharge the responsibilities under Section 18(2)(a) and (b) of the RRB Act, 1976 by extending credit facilities through implementation of various Government sponsored schemes for social and economic upliftment of the weaker sections of the society and to small and marginal farmers, village artisans, landless labourers for the purpose of agriculture and allied activities, trade, commerce, etc. The assessee-bank is a scheduled commercial bank and is authorized to do banking business as defined in the Banking Regulation Act. The area of operation of the bank is Farrukhabad and Kannauj Districts, where the main occupation of the people is agriculture (potato). The bank provides services to the customers through its network of 82 branches and 2 extension counters in two Districts, 14 Blocks and 6 Tehsils. The head office is situated in Sahyog Bhavan, Chaurasi, Fatehgarh in Farrukhabad District.
2. In the return filed for the assessment year under appeal, the assessee claimed exemption under Section 80P(2)(a)(i) in respect of the net profit of Rs. 6,21.91,455 shown in its P&L a/c, on the footing that the entire income represents profits and gains attributable to the business of banking. The AO, for reasons stated in the assessment order which are not reproduced here for the sake of brevity, rejected the assessee's claim and brought the entire amount shown above to tax, as also a sum of Rs. 4,58,76,000 received by the assessee and shown under the "share deposit account" in the balance sheet. In short, so far as the net profit shown in the P&L a/c is concerned, which was brought to tax, the AO took the view that both the interest from SLR investment and non-SLR investment was taxable. The relevant amounts of interest from SLR investments and non-SLR investments are mentioned in the orders of the IT authorities. The view taken by the AO was confirmed by the CIT(A). When the matter was carried in appeal to the Tribunal, Agra Bench, the learned JM, who passed the leading order, rejected the claim of the assessee-bank and upheld the orders of the IT authorities. The learned AM dissented and hence the present reference under Section 255(4) of the IT Act.
3. The learned JM has proposed the following seven questions and points of difference:
1. Whether while writing a dissent, can the dissenting Member refer to in the dissent order, unpublished orders or judgments not referred to by either side or made available to the colleague on the Bench as well as the Revenue while writing the order in favour of the assessee ?
2. Whether merely the act of banking activity entitles the assessee to claim exemption under Section 80P(2)(a)(i) or is the banking activity in terms of Section 3(1) of the RRB Act, 1976 as per the notification in the Districts of Farrukhabad and Kannauj i.e., the target area is entitled for exemption in the facts of the case ?
3. Is the Tribunal while dealing with issues of exemption to be governed merely by law as considered in different context in different legislations or are the specific facts of the case inasmuch the notification under Section 3(1) of RRB Act, 1976 in the facts of the case in each year under consideration is to be considered ?
4. Can the issue be stated to be covered by the orders of the Tribunal in the earlier years, where no facts qua the SLR income being exempt are discussed since assessment is made in those years on the basis that SLR income is exempt ? Thus, can those orders of the Tribunal be stated to have considered the exemption qua the SLR and non-SLR income wherein admittedly, no arguments or facts even before the Tribunal on the specific target area and target group of the banking activities are addressed ?
5. Can the Tribunal, a final fact-finding body ignore the facts brought out in the orders of the tax authorities and addressed at length from either side, especially in the background, where on facts, both the Members agree that verification is required since the issue on facts has been restored to the AO by the JM (vide para 11.1 pp. 70-72) on which aspect there is no dissent by the learned AM since that issue has not been touched at all in the dissent order ? As such can this order be said to be covered when on facts both after verification is requested ?
6. Where on facts both Members are in agreement that verification on facts is required, in the circumstances, can the issue be stated to be covered by the earlier orders of the Tribunal, where admittedly no discussion on facts on SLR income is there in those years by the Tribunal ?
7. Can additional ground be admitted after proposed order is written and signed lying pending over 70 days with the dissenting Member with no explanation offered who refixes for clarification and admits the additional grounds to decide the issue in favour of the assessee ? Does this amount to abuse of the process of law and is it in consonance with judicial propriety ?
4. However, the learned AM did not agree with the above questions and proposed the following single question for reference to the Third Member:
Whether, on facts and in circumstances of the case, the assessee 'Farrukhabad Gramin Bank, Farrukhabad' is deemed to be a co-operative society under Section 22 of the RRB Act, 1976. If so, whether the assessee bank is eligible for deduction under Section 80P of the IT Act on the amount of 'profits and gains from business' attributable to such activities.
5. Before I deal with the orders of both the learned Members and sort out the precise controversy which I should decide under Section 255(4), it is necessary to briefly refer to the gist of what the dissenting Members have held in their respective orders which put together run to about 161 pages. The learned JM who wrote the leading order has rejected the assessee's claim on the following grounds:
(a) According to the provisions of the Banking Regulation Act read with the provisions of the RRB Act, the assessee bank can give loans only to a particular target group in a particular area and therefore, only the income which arises from such loans can be considered as income from 'banking business' eligible for deduction under Section 80P(2)(a)(i). The income from other activities carried on by the bank cannot qualify for the deduction.
(b) The definition of banking business of RRB, such as the assessee under Section 18 of the RRB Act, is narrower than the definition of banking business under the Banking Regulation Act.
(c) The various judgments relied on by the assessee in support of its claim are distinguishable on facts as they have been rendered under different Acts and many of them have not considered the RRB Act. Further those decisions were not rendered in the context of the interest from SLR or non-SLR investments.
(d) The earlier order of the Tribunal for the asst. yr. 1998-99 passed in the assessee's own case by a co-ordinate Bench was rendered in the context of interest from non-SLR investment. For the year under appeal, interest from both SLR and non-SLR investments are in dispute and therefore, the earlier order does not govern the present year.
6. The learned JM has embarked upon the very elaborate discussion of the issue, but so far as I can see, with respect, the gist of the detailed discussion appears to be the above four salient points.
7. The learned AM has adopted the following reasonings in support of his dissent:
(a) Judicial consistency and discipline requires that the earlier order of the co-ordinate Bench of the Tribunal for the asst. yr. 1998-99 should be followed.
(b) There is no difference between the interest on SLR investment and the interest from non-SLR investment in nature and character. Both types of interest relate to the banking business carried on by the assessee. Whereas the interest from SLR investments is from investments which are compulsorily to be made by the assessee as per directions of the RBI, the non-SLR investments are those investments which the assessee voluntarily makes in order to meet requirement of its business. They are also of temporary in nature and are easily realizable in case of need. They are thus closely connected to the banking business of the assessee.
(c) Section 80P(2)(a)(i) allows deduction in respect of the profits and gains of business "attributable" to the business of banking carried on by a cooperative society. The word "attributable" is wider in connotation than the words "derived from" and the legislature having deliberately and advisedly used the former expression, any income which has some connection with the banking business carried on by the assessee is eligible for the deduction and it is not necessary for the assessee to show that the income is derived from the business of granting of loans to the target group.
8. The learned AM also embarked upon the detailed discussion of the issue, but it appears to me, with respect, that the above three points represent the gist of his order. He has also referred to the various authorities which have been relied upon by both the sides as has been done by the learned JM.
9. I now revert to the questions framed by the learned Members. Since they have not agreed on the questions to be referred under Section 255(4), I will have to first identify the precise controversy in respect of which the learned Members differed, without really being bound by the manner in which the points of difference have been framed. In my opinion, the precise controversies are only two:
(i) Whether the income of the assessee by way of interest from both SLR and non-SLR investments is eligible for the deduction under Section 80P(2)(a)(i) of the IT Act ?
(ii) Whether the Tribunal can make observations relating to the merits of the addition of the amount of Rs. 4,58,76,000, when the addition itself has been made only on protective basis for the year under consideration, and when admittedly it would fall for consideration only in the asst. yr. 1996-97 ?
10. So far as the first question is concerned, it is my humble opinion, after considering the very elaborate and learned arguments advanced before me by both the sides and after perusing the elaborate orders passed by both the learned Members, that the assessee is entitled to the deduction under Section 80P(2)(a)(i) in respect of interest from both SLR and non-SLR investments. The section does not make any distinction between the two types of interest. What has to be seen is whether the income in respect of which deduction is claimed is attributable to the business of banking. There can be no dispute that the assessee, though a rural bank is deemed to be a co-operative society for the purpose of the IT Act, 1961 as provided in Section 22 of the RRB Act. Thus the primary condition that the person who claims the deduction shall be a co-operative society is satisfied. When I turn to the question as to what will constitute the business of banking in the case of a RRB such as the assessee, I need to refer to Section 18 of the RRB Act. Sub-section (1) says that every RRB shall carry on and transact the business of banking as defined in Section 5(b) of the BR Act, 1949. The sub-section goes on to say that the RRB may engage in one or more forms of business specified in Section 6(1) of the BR Act. Section 5(b) of the BR Act says that 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, order or otherwise. Section 6(1) of the BR Act contains several clauses which describe what are all the other forms of business in which a banking company may engage itself. Reading Section 18(1) of the RRB Act together with Section 5(b) and Section 6(1) of the BR Act, it seems clear to me that the assessee-bank may engage itself not only in banking business but also in the other forms of business listed in Section 6(1) of the BR Act. Clause (a) of Section 6(1) of the BR Act, inter alia provides that the acquiring, holding etc., of securities and investments of all kinds is one of the various businesses which a banking company may carry on. When I turn to Section 18(2) of the RRB Act, it says that without prejudice to the generality of the provisions of Sub-section (1), every RRB may in particular, undertake the following types of business, namely:
(a) the granting of loans and advances, particularly to small and marginal farmers and agricultural labourers, whether individually or in groups, and cooperative societies, including agricultural marketing societies, agricultural processing societies, co-operative farming societies, primary agricultural credit societies or farmers service societies, primary agricultural purposes or agricultural operations or for other purposes connected therewith;
(b) the granting of loans and advances, particularly to artisans, small entrepreneurs and persons of small means engaged in trade, commerce or industry or other productive activities, within the notified area in relation to the RRB.
Reading all these provisions together it seems fairly clear to me that the various types of businesses which the RRB may carry on in addition to the primary business of banking are to be treated as closely connected to or an incidental part of the business of banking and no real distinction can be made between the two. The acquiring and holding of securities and investments of all kinds, which is a business permitted to be carried on by a RRB under Section 6(1)(a) of the BR Act r/w Section 18(1) of the RRB Act, is an activity which is closely and inextricably connected to the business of banking. Normally the RRB just as any other commercial bank, is obliged to place a particular percentage, prescribed by the RBI, of its reserves in investments. There are called SLR investments, the abbreviation SLR meaning "statutory liquidity ratio". It is statutory because it is to be invested in accordance with the directions of the RBI. The word "liquidity" suggests that the investments are to be made in order to ensure that the liquidity position of the bank is sound so that in case of any contingency the bank has no difficulty in meeting its liabilities towards the depositors. The very purpose and object of the SLR investment is to safeguard both the assessee-bank as well as the depositor and I am unable to see how the activity of investment can be viewed as not forming part of the banking business. I am also in agreement with the view expressed by the learned AM that there can be no real distinction between the SLR investment and non-SLR investment. Even the non-SLR investments, which are investments made by the assessee-bank voluntarily and without any statutory compulsion are made with the same object as in the case of the SLR investments. It must be remembered that Section 6(1)(a) of the BR Act permits a bank to acquire and hold securities and investments of all kinds and I am not able to see why this activity should be permitted, unless it was absolutely necessary to regard the same as part of the banking activity, though described as another form of business. It must be remembered that the BR Act applies to all banking companies and when the business of acquiring and holding securities and investments of all kinds is specifically permitted to be carried on by a banking company, it must have been done only with the view to strengthening the liquidity position of the bank in which the public reposes confidence. I also find that the definition of "banking" says that it means the accepting, for the purpose of lending or investment, of deposits. Thus a bank including the RRB may accept deposits from the public not only for lending the monies, but also for the purpose of making investments. With all these provisions, I am really unable to see how the activity of investing either in SLR or in non-SLR investment can be divorced from the business of banking, ft also seems to be significant that Section 5(b) of the BR Act defines the word "banking" and not the words "business of banking". Section 80P(2)(a)(i) of the IT Act, however uses the wider expression "business of banking". Thus whichever way the matter is looked at, I find it difficult to say that the activity of making investments in SLR or non-SLR investments should be considered not part of the business of banking. In my view, the learned JM, with respect, would appear to have attached undue emphasis upon Section 18(2) of the RB Act, to hold that only the income from the granting of loans to the target group within the notified area in relation to the assessee-bank can be considered as income from banking business. It seems to me, with respect, that Section 18(1) of the RRB Act and the provisions of Section 5(b) and Section 6(1) of the BR Act have not been given their due importance in resolving the controversy. I am unable to concur with the finding of the learned JM in the view that Section 18 of the RRB Act contains a narrower definition of banking.
11. I may incidentally add that the IT authorities were not right in their view that the investments, both in SLR and non-SLR were made in metropolitan and urban areas, which are beyond the notified areas of operation of the assessee-bank and, therefore, for this reason also the deduction cannot be given. It must be remembered that the opportunities for sound investments are available mostly in metropolitan and urban areas and they are not easily available in the areas of operation assigned to the assessee-bank. But for this reason, it cannot be said that the investments are not part of the business of banking.
12. One more thing which the learned AM has highlighted, which appears to have escaped the attention of the learned JM, is that Section 80P(2)(a)(i) uses the words "attributable to" to the business of banking. It is now well settled, especially after the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT , that these words are wider in scope and connotation than the words "derived from". The use of the former expression in the section suggests that it is not necessary that the income in respect of which deduction is claimed should be derived from the activity of granting loans to the target group. The income may relate to any other activity which is inextricably linked with the banking activity and this view is also strengthened by the use of the words "business of banking", as against "banking", in the above section. I have already indicated the difference between the two expressions. I have also indicated that at any rate the word "banking" itself has been defined by Section 5(b) of the BR Act to mean the accepting of the deposits either for lending or for investment.
13. I may now turn to the decisions. Firstly, the order of the Tribunal in ITA No. 208/Agra/2000, dt. 31st July, 2003 for the asst. yr. 1998-99 may be referred to. This order has been sought to be distinguished by the learned JM on the ground that it dealt with only interest income from non-SLR investment. Even for the year under appeal, the interest from non-SLR investments is the subject-matter of dispute. It is a different matter that for the year under appeal, the interest from SLR investments is also in dispute. I have gone through the order of the Tribunal. It is clear therefrom that in that year the Tribunal was concerned with the interest from non-SLR investment, such as FDRs, deposits with bank, Government securities, UTI etc. Even so the Tribunal held that the interest income from non-SLR investment was eligible for the deduction. In doing so, the Tribunal relied on the following authorities:
(i) CIT v. Karnataka State Co-operative Apex Bank (2001) 169 CTR (SC) 486 : (2001)251 ITR 194 (SC);
(ii) Order of the Special Bench of the Ahmedabad Bench of the Tribunal in the case of Surat District Co-operative Bank Ltd. and Ors. v. ITO (2003) 78 TTJ (Ahd(SB) 1.
14. The Tribunal also relied on Circular No. 319, dt. 11th Jan., 1982 [(1982) 29 CTR (TLT) 43] to the effect that for the purposes of the IT Act, 1961 a RRB shall be treated as co-operative society and will be entitled to the deduction under Section 80P(2)(a)(i) of the Act. With respect, the learned JM, ought to have followed the order of the Tribunal which has been passed by a co-ordinate Bench in the assessee's own case. If the learned JM was of the view that certain aspects of the matter were not considered by the earlier Tribunal, it would have been in order for the learned JM to have persuaded the learned AM to refer the matter to the Hon'ble President for constituting a Special Bench to decide the case.
15. I may first refer to the judgment of the Supreme Court in CIT v. Bangalore District Co-operative Central Bank Ltd. . In this case the assessee claimed deduction under Section 80P(2)(a)(i) of the IT Act on the income by way of interest on Government securities and dividends on shares of the Industrial Financial Corporation. The ITO held that the investments were made out of reserves and disallowed the claim. On appeal, the AAC found that the reserve fund of the assessee was about Rs. 33 lakhs and the circulating capital was about Rs. 22 lakhs and held that the investment was out of the reserve fund and confirmed the assessment. On appeal, the Tribunal accepted the contention of the assessee that the interest income was attributable to the assessee's business income. The Kamataka High Court having upheld the order of the Tribunal, the matter was carried in appeal to the Supreme Court by the CIT. The Supreme Court held that since the Tribunal has found that the income in question is attributable to the business of banking, the assessee was eligible for the deduction.
16. I may now refer to the judgment of the Supreme Court in CIT v. Karnataka State Co-operative Apex Bank (supra). There it was held that the interest arising from investment made in compliance with statutory provisions to enable it to carry on banking business, out of reserve fund by a cooperative society engaged in banking business, is exempt under Section 80P(2)(a)(i) of the Act, since the placement of such funds was imperative for the purpose of carrying on banking business. It was held that the income would be from the assessee's business of banking. It was further held, overruling the earlier judgment in the case of Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT , that there is nothing in phraseology of the above section which makes it applicable only to income derived from working or circulating capital. Subsequently, in Mehsana District Central Co-operative Bank Ltd. v. ITO , the Supreme Court held, following CIT v. Karnataka State Cooperative Apex Bank (supra) that income from utilization of funds for statutory reserves was exempt under Section 80P(2)(a)(i). In the same decision, the Supreme Court also held that income from hiring out safe deposit vaults, received by a co-operative bank was part of the ordinary banking business of a bank as shown by Section 6(1)(a) of the BR Act and therefore, it is income from the business of banking and deductible under Section 80P(2)(a)(i) of the IT Act. In the same decision, in the absence of necessary facts, the question whether the income derived by the assessee from the investment of its voluntary reserves has been utilized by it in the course of its ordinary banking business was restored to the CIT(A) since the material placed by the assessee before the assessing authorities such as the balance sheets, accounts etc., was not considered at any stage for some reasons or the other. It appears that the IT authorities in the present case have distinguished the judgment of the Supreme Court in Mehsana (supra) on the ground that no decision has been rendered by the Supreme Court on the question of the income from investment of voluntary reserves, which is akin to the income from non-SLR investments. It is clear to me that the question was not decided because of the absence of necessary facts. It is also of significance that the assessee's claim was not rejected at the threshold by the Supreme Court. It is a matter of proving that the investment in non-SLR was made in the ordinary course of the banking business. To establish that claim, the assessee before me has drawn my attention to the accounts from which I find that all the investments have been shown under one head in the balance sheet without being bifurcated into SLR and non-SLR. Schedule 8 which gives the break-up of investment does not also make any distinction between SLR and non-SLR investments. Paragraph 8 of the directors' report says that the bank has made prudent and profitable investment of its funds, that all the investments have been approved by the board of directors and were made under the guidance of the Bank of India which is the sponsor bank, that the guidelines of RBI have been followed, that for the sake of profitability and viability, the fund management is handled by the Asset Liability Management Committee at the head office as per new investment policy, that the branches are maintaining their current account with the Bank of India/SBI in order to have better cash management/bill collection at branches and they deposit their surplus cash always in sponsor bank branches to earn interest and that the board of directors makes quarterly reviews of the investments made by the bank. The learned Departmental Representative submitted before me that this statement shows that the motive of the bank is to earn more profits, which is a deviation from its main aim to help weaker sections of rural India. He also pointed out that the entire advances amounting to Rs. 3,443 lakhs made during the year were not made to weaker sections which is also deviation from the aims and objects of the bank. I am not in the present appeal concerned with whether the activities of the bank are being carried on in accordance with its aims and objects or whether there has been any deviation. That is the subject of concern of the RBI which controls the banking system in our country. A reading of the directors' report regarding investment, on the contrary, indicates that the investments are made in accordance with the guidelines of RBI and that the fund management is made in such a manner as to be conducive to the profitable running of the banking business. This in turn shows that the investment policy is fashioned in such a manner as to subserve the profitable conduct of the banking activity and hence to be treated as part of or incidental to the business of banking.
17. The order of the Special Bench, Ahmedabad in the case of Surat District Co-operative Bank and Ors. v. ITO and Ors. (supra) also dealt with income from investments made in excess of requirements of SLR and statutory reserves, in Government securities, fixed deposits, Indra Vikas Patra and Kissan Vikas Patra and other approved modes of investment and held that the same was eligible for deduction under Section 80P(2)(a)(i). All the relevant judgments on this point have been considered elaborately in the order which I respectfully follow, as has been done by the Tribunal in its order for the asst. yr. 1998-99. The learned JM has sought to distinguish the judgments on the ground that they have been rendered under different Acts concerning co-operative banks or that they were not rendered in the context of income from SLR or non-SLR. The order of the Special Bench cited above in fact did consider the income from investments made in excess of the requirements of the SLR which means that it did consider the income from non-SLR investments. It seems to me that the learned JM has, with respect, erroneously sought to distinguish the orders of the Special Bench. The issue decided by the Special Bench is the same as in the present case, both in respect of income from SLR and in respect of income from non-SLR and it would have been in conformity with judicial discipline to follow the said order. The fact that the Special Bench decision was rendered under different enactment and hence inapplicable appears to me a superficial way of distinguishing the same. Whatever be the enactments, since all of. them relate to the banking business and since the Special Bench has also considered the issue from the angle of the Banking Regulation Act as well as the provisions relating to the Gujarat Co-operative Societies Act, 1961 which are substantially similar to SLR and non-SLR investments with which the present case is concerned, the decision was fully applicable to the present case which aspect appears to have been overlooked by the learned JM. Not only that, it is the ratio of the decision which ought to have been kept in mind. The Special Bench has examined the nature of the income from investment made in accordance with the statutory investments and those made in excess of the statutory requirements and held that there is in essence no difference between the two. This is precisely the issue in the present case.
18. There are two circulars which are relevant. The first is dt. 11th Jan., 1982. In Circular No. 319 issued by the CBDT, it says that RRB is to be treated as co-operative society for the purpose of Section 80P(2)(a)(i) of the IT Act, in view of Section 22 of the RRB Act. This aspect I have already noticed in the beginning of the order.
19. The next circular, which in fact is an earlier circular dt. 20th Oct., 1978 issued by the Banking Division, Department of Economic Affairs, Ministry of Finance, Government of India. It says that since RRB is deemed to be a co-operative society under Section 22 of the RRB Act, its entire income is deductible as per Section 80P of the IT Act. This circular makes no distinction between the interest from SLR investment and the interest from non-SLR investment.
20. For the above reasons, I agree with the view expressed by the learned AM in respect of question No. 1 as formulated by me.
21. So far as the second question is concerned, the learned JM has treated the amount of Rs. 4,58,76,000 received by the assessee from the Government of India as amount received to recoup the losses suffered by the assessee in the course of business and hence taxable as revenue receipt. The learned AM has noted that since the assessment of the amount has been made only as protective measure, the substantive assessment to be made in the asst. yr. 1996-97 if and when the stay on the assessment proceedings granted by the Hon'ble Allahabad High Court is vacated, no interference is called for at this stage. The protective nature of the addition has been confirmed by him. The learned JM however made observations on the merits of the dispute and has held that the amount is taxable as revenue receipt. I am inclined to agree with the view taken by the learned AM since even according to the Department the amount is assessable only in the asst. yr. 1996-97. However, some difficulty is caused by the observations of the learned JM who has decided the issue on merit, which if allowed to stand would prejudice the case of the rival parties when the issue is considered in the asst. yr. 1996-97. When the assessment of the amount has been made admittedly on protective basis, no observations on the merits of the addition ought to have been made. The view taken by the learned AM appears to me to be the correct view. I therefore, agree with the same and leave it to the parties to thrash out the issue in the assessment proceedings for the asst. yr. 1996-97. The second question as formulated by me is answered accordingly.
22. Before 1 part with the case, I must make some observations regarding the manner in which the questions have been framed by the learned JM as reflecting the points of difference. I have already extracted them earlier. The questions are academic in nature and most of them only touch upon the propriety of the steps taken during the decision-making process. Such questions cannot be referred as points of difference under Section 255(4). These issues are to be discussed and sorted out between the Members themselves, whether they concur or they are constrained to take different views. The points of difference envisaged by Section 255(4) are only with respect to the merits of the decision, not with respect to the conduct of the other Member with reference to the decision-making process. Those are all internal matters with which the section is not concerned nor is it proper to make a grievance out of the same by proposing such questions to the Hon'ble President under Section 255(4). Framing such questions tends to cause irreparable damage to the Tribunal as an institution and undermines its fair name and reputation. Such self-inflicted injuries, in my humble opinion, shall be avoided at all costs. The framing of the points of difference under Section 255(4) shall not be made a platform to expose what is perceived to be non-judicial behaviour by the other Member or to ventilate any grievance against the other Member with respect to the steps taken by him during the judicial decision-making process. Further some of the questions, such as question Nos. 5 and 7 are framed in such a manner that they attribute certain traits to the other Member in dealing with the matter. What transpires between the Members in the course of the discussions and prior to their forming a definite opinion with regard to the case should, in my humble opinion and with great respect to everybody concerned, never be brought out in the form of points of difference.
23. The appeal will now go before the regular Bench for being disposed of in accordance with the opinion of the majority.
H.L. Karwa, J.M.
1. The Hon'ble Vice President, Shri R.V. Easwar sitting as Third Member has given opinion vide order dt. 25th Nov., 2005 in respect of following questions:
(1) Whether the income of the assessee by way of interest from both SLR and non-SLR investments is eligible for the deduction under Section 80P(2)(a)(i) of the IT Act ?
(2) Whether the Tribunal can make observations relating to the merits of the addition of the amount of Rs. 4,58,76,000, when the addition itself has been made only on protective basis for the year under consideration, and when admittedly it would fall for consideration only in the asst. yr. 1996-97 ?
2. The Hon'ble Vice President has concurred with the views of the learned AM in respect of question Nos. 1 and 2 (supra). Thus, in accordance with the majority view, the assessee's appeal is allowed.
3. In the result, the assessee's appeal is allowed.