Income Tax Appellate Tribunal - Pune
Shri Mahavir Co-Operative Bank Ltd. vs Income-Tax Officer on 18 January, 1991
Equivalent citations: [1991]37ITD130(PUNE)
ORDER
K.R. Dixit, Judicial Member
1. What is banking? That is the principal question with which we are concerned in this appeal.
2. Briefly, the assessee had acquired an immovable property in satisfaction of a debt in the year 1976 and sold it in 1982 resulting in profit which the ITO taxed as capital gains. He rejected the assessee's claim to exemption under Section 80P(2)(a)(0 because according to him purchasing property and selling it at a profit could not be treated as banking activity. He also rejected assessee's claim of exemption under Section 80P(2)(c)(/i) on the ground that the assessee was not deriving income from any activity other than bank. Before the Commissioner the following grounds were taken that the ITO had erred in treating Rs. 96,158 as capital gains. In fact it is exempted under section SOP and (2) treating Rs. 3,218 as taxable income from locker rent. The Commissioner has confirmed the ITO's order observing as follows :
Rent received is shown as income from house property, In the balance sheet the said building is shown as an asset under the head "Building". Depreciation is claimed in the accounts, The rental income is considered as income other than banking business. In view of these facts it appears that the appellant is treating the said building as an investment not connected with co-operative activities. It may be mentioned that the building was acquired in 1976 and sold in 1982 after a gap of six years. No circumstances are indicated to show that the sale was to liquidate the assets of co-operative: banking activities. It is therefore held that the building was not an asset of co-operative banking activities. The income from sale of the said building would therefore not. constitute the income from banking activities.
It can be seen that the A AC has not dealt with the question of exemption under Section 80P(2)(c)(/0- Before the Tribunal the following grounds have been taken:
(1) The AAC erred in treating Rs. 3,218,income from locker rentas taxable income [though it is co-op income (exempt) from banking business], (2) The AAC erred in treating Rs. 96,158 as capital gains arising out of sale of C.S.No.2100 E-Ward, Kolhapur an asset acquired in satisfaction of loan advanced in co-operative banking business.
3. Additional grounds:
The lower authorities in the case of Mahavir Co-op Bank Ltd., Kolhapur for assessment year 1983-84 both on facts and law erred in :
(a) correctly calculating the amount of capital gains and (b) not allowing deductions under Section 80P(2)(c).
4. We shall first deal with the claim under Section 80P(2)(a)(f) which raises the above question. The property is tenanted for the assessment year 1982-83. The rental income has been assessed and shown as income from house property.
5. On behalf of the assessee it was first of all submitted that the Commissioner had based his order on the stand taken by the assessee but the question whether the assessee was entitled to exemption was a legal question and had to be decided on the merits. He therefore first of all drew our attention to the definition of 'banking' under the Banking Regulation Act, 1949 which is as follows :
"Banking" means the accepting for the purpose of landing or investment, of deposits, of money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise.
He submitted that money-lending was part of banking business and the bank's money was its stock-in-trade relying on the Supreme Court decision in the case of CIT v. Nainital Bank Ltd. [1965] 55 ITR 707 (SC). From this proposition he submitted that any asset acquired from the money was also stock-in-trade and hence the property which the bank acquired here in settlement of debt was its stock-in-trade. That being so, according to him, the property acquired was not a capital asset and so there was no question of levying tax on capital gains.
He also relied on the following authorities in support of his arguments: The Patiala State Bank, In re. [1941] 9 ITR 95 (Bom.) the observations in which were, according to him, confirmed by the Privy Council in Patiala State Bank v. CIT [1943] 11 ITR 617. He drew our attention to the following observations in the case of A.H. Wadia v. CIT [1949] 17 ITR 63 (FC) at page 107 :
Mere ownership of properties even if purchased from a source which originally was employed in the money-lending business, does not automatically make such properties part of such business, in the absence of any finding that the income of these properties was being used in that business or that those properties were subsequently treated as stock-in-trade of that business except perhaps in the case of banking institutions.
(Emphasis supplied) On the basis of this he submitted that in the case of a Bank the property so acquired would be stock-in-trade. He pointed out that this proposition has been again relied upon in the case of Coimbatore Anupparpalayam Bank Ltd. v. CIT [1961] 42 ITR 576 (Mad.) at page 587. He also pointed out that in the case of Bareilly Corporation Bank Ltd. v. CIT (No. 2) [1952] 22 ITR 528 the Allahabad High Court was concerned with a similar case and it had held that the purchase of the immovable property and the subsequent sale thereof was a transaction entered into by the bank in the course of money-lending business.
6. His next submission was that even if the acquisition of immovable property was an investment the income there from was income from banking relying upon the following authorities:
Bihar State Co-op Bank Ltd. v. CIT [1960] 39 ITR 114 (SC) CIT v. Bombay State Co-operative Bank Ltd. [1968] 70 ITR 86 (SC) U.P. Co-op Bank Ltd. v. CIT [1966] 61 ITR 563 (All.) Madras Co-operative Central Land Mortgage Bank Ltd. v. CIT [1968] 67 ITR 89 (SC) According to him even if there was a capital gain it did not lose the character of income from banking relying upon the decision of the Supreme Court in the case of CIT v. Cocanada Radhaswami Bank Ltd. [ 1965] 57 ITR 306. He made an alternative submission that if the property was considered to be not exempt then the difference in the sale price and the cost price was Rs. 75,900 and not Rs. 96,158 as computed by the ITO,
7. At the outset the learned departmental representative did not contest this position regarding the actual computation of the difference between the sale price and the cost price as submitted on behalf of the assessee. Thereafter he made his submission on the main question. According to him the scheme of Section 80P showed that capital gain was not included in the exemption mentioned therein and what was not specifically provided for as exemption could not be exempted relying upon CIT v. Gupta & Sons (P.) Ltd. [1984] 146ITR506(MP), certain observations at page 509. He pointed out that the exemption under section SOP was in respect of profits and gains of the business and not capital gains. Profits and gains, he said, was part of revenue receipt while this was a capital receipt relying upon the following authorities:
O.M.S.PL.A. Alagappa Chettiar v. CIT [1966] 59 ITR 440 (Mad.) S.T.S. Swaminathan Chettiar v. CIT [1966] 62 ITR 125 (Mad.) Dolores Hay McClell and v. Commissioner of Taxation of the Commonwealth of Australia [1971] 82 ITR 272 (PC) G. Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC) at page 597 Saroj Kumar Mazumdar v. CIT [1959] 37 ITR 242 (SC) CIT v. Krishna Industrial Corporation Ltd. [1913] 92 ITR 261 (AP) CIT v. P.K.N. Co. Ltd. [1966] 60 ITR 65 (SC) His next submission was that the capital gain was a separate item from business profits relying upon the decision of the Supreme Court in the case of CIT v. Express Newspapers Ltd. [1964] 53 ITR 250. He also relied on the following decisions:
CIT v. Mugneeram Bangur & Co. (Land Department) [1965] 57 ITR 299 (SC), CIT v. West Coast Chemicals & Industries Ltd. [1962] 46 ITR 135 (SC) and United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC).
Thereafter he drew our attention to Section 6 of the Banking Regulation Act which provides in Sub-section (1) that "In addition to the business of banking a banking company may engage in any one or more of the following forms of business, namely:- in clauses (a) to (0) of that sub-section various activities have been mentioned. He submitted that the definition in Section 5(b) of that Act was of banking and the other activities of a bank were mentioned in the sub-section 6 because thereby the bank was enabled to carry on the activities in addition to banking. He submitted the decision of the Madhya Pradesh High Court dealt with this problem in the case of Bhopal Co-operative Central Bank v. CIT [1988] 169 ITR 573. The Court while conceding that the expression "attributable to" in the said section was wider than the expression "derived from" had observed that apparently any income which may be derived in connection with any of the activities which fell within the definition of the term 'banking' in the Banking Regulation Act would be treated as income attributable to banking. It held that income from locker rent did not appear to be co-related to any of the activities mentioned in the said definition. The learned departmental representative submitted that the lending activity of the bank ended by lending the amount on mortgage and realizing it by taking over the property and that therefore the selling of the property was dies-connected there from and not included in the banking activity. He referred to the decision of the Supreme Court in the case of Rustom Cavasjee Cooper v. Union of India AIR 1970 SC 564 (earlier known as bank nationalisation case) wherein the Court had held and observed inter alia that any commercial activity which bankers had given time engaged in could not be included in the term 'banking' and that the field of banking could not be extended to include trading activities (in paras 37 and 38). According to him if the meaning was extended to any investment as suggested by the assessee's counsel the definition of banking would lose its meaning. He submitted that investment here meant investment in readily realisable securities and pointed out that Supreme Court in the case of Bihar State Co-operative Bank Ltd. (supra) had observed as follows:
It is a normal mode of carrying on banking business to in vest moneys in a manner that they are readily available and that is just as much a part of the mode of conducting a bank's business as receiving deposits or lending moneys or discounting hundies or issuing demand drafts. That is how the circulating capital is employed and that is the normal course of business of a bank.(at page 122) He submitted that in that case the investment was in circulating capital while in the present case the circulating capita! was converted into fixed capital and the sale took place thereafter. He referred to the decision of the Bombay High Court in the case of CIT v. Mahindra & Mahindra Ltd. [1973] 91 ITR 130 and the explanation of circulating capital therein at page 134. He submitted that the cases relied upon by the assessee's counsel were before the Banking Regulation Act but we had to examine this matter in the light of that Act. He finally submitted that the assessee itself had treated the asset as capital asset by claiming and getting depreciation. In this connection he referred to the decision of the Bombay High Court in the case of Surat People's Co-operative Bank Ltd. v. .CIT [1958] 33 ITR 396 where the meaning of investment either as capital or stock-in-trade was explained.
8. The learned counsel for the assessee rejoined that exclusion of that which was not specifically mentioned, i.e., capital gains under section SOP was a general proposition but capital gains was included in banking activity which was mentioned in section8OP. He then submitted that the decision of the Supreme Court in the case of Express Newspapers Ltd. (supra) and United Commercial Bank Ltd. (supra) were both explained by its later decision in the case of Cocanada Radha swami Bank Ltd. (supra). Referring to the learned departmental representative's argument on Section 6(f) of the Banking Regulation Act he submitted that acquisition of property was part of banking activity because it was consequence of the lending. He submitted that the observations of Madhya Pradesh High Court in the case of Bhopal Co-operative Central Bank (supra) which have been summarised above were in his favour because there it was mentioned that the expression "attributable to" was wider than the expression "derived from" and that therefore the sale of the property and the consequent capital gain was part of the banking activity. Further he submitted that by readily realisable securities the immovable property could not be excluded because it was possible to mortgage or sell that property and obtain liquid funds. Regarding the learned departmental representative's argument that in this case moneys had been invested in a capital asset he reiterated his earlier argument that the acquired asset was stock-in-trade because the source was money which was stock-in-trade. Referring to the argument that profit and gain of business was a revenue receipt, he relied upon the meaning of the word 'profit' in Websters New International Dictionary where it was mentioned as valuable return and therefore according to him it could be by way of capital receipt. Lastly he stated that the treatment given by the assessee regarding capital asset was not binding on him because this question had to be judged objectively.
9. Consideration of this matter involves application and interpretation of Section 80P(2), Banking Regulation Act, in the light of the above case law and the treatment given by the assessee to the asset acquired by it.
10. We shall therefore first begin by noticing the said Section 80P(2). It is quite true that this section nowhere specifically mentions capital gain but the question is whether there is any scope for mentioning it specifically. The general rule of exclusion of something not mentioned specifically would apply only if there is a scope for mentioning it. Sub-clauses (a), (b) and (c) deal with types of co-operative societies according to their activities. It is only when we come to Sub-clauses (d), (e)and (f) that some differentiation by way of type of income is mentioned. Sub-clause (d) while mentioning interest or dividend confines it to such income from investment with other co-operative societies. It is not a differentiation in general terms such as dividend income from business income etc. Sub-clause (e) refers to income from letting of godown etc. but that is not a division of income as mentioned in the Act. It is only Sub-clause (f) which makes some differentiation on the basis of types of income, i.e., interest on securities or income from house property as mentioned in the Act but that again is confined to the limit of Rs. 20,000 and again restricts it further by excluding certain specified societies. Thus the above scheme clearly shows that there was no intention to make any differentiation on the basis of types of income generally regarding all kinds of co-operative societies. Therefore it would not be reasonable to expect a specific mention of capital gains in the exemption. We have therefore to look at Sub-section (2)(a) (f) which mentions profit and gain of business attributable to the business of banking and to decide whether the income of the assessee would be included in this expression. The Madhya Pradesh High Court in the case of Bhopal Co-op. Central Bank Ltd. (supra) has stated that the expression "attributable to" is wider than the expression "derived from" but in doing so it was following the Supreme Court decision in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113ITR 84. In that case the Supreme Court was concerned with the question whether profits worked out as per Section 41(2) on the sale of certain machinery by the assessee-company could be said to be profit and gain attributable to the business of generation or distribution of electricity. It observed ". . .profits and gains attributable to the business of the specified industries (here generation and distribution of electricity) forms a component of the total income... it is obvious that in computing the total income of the concerned assessee... the balancing charge arising as a result of sale of old machinery and building and worked out as per Section 41 (2) irrespective of its real character will have to be taken into account and included as income of the business." (Emphasis supplied). It is thus clear that Court had included this income because of the statutory position and the words italicised clearly show that it was only for that reason that the character of that income, i.e., from the sale of machinery was not taken into account. Therefore although the expression "attributable to" may be wider than the expression "derived from" the question of drawing some limit to the inclusion does arise. In the present case the assessee has earned capital gain as a result of sale of certain immovable properties and the character of that income is to be ascertained as against the activity which a bank is expected to engage in. That brings us to consideration of the Banking Regulation Act. The definition in Section 5(6) is exhaustive of the term banking because it says what banking means. The activities mentioned in Section 6 are in addition which a banking company is permitted under the Act to engage in. That section therefore cannot be relied upon for the purpose of our present enquiry. It is in connection with this lending activity of the assessee that it had acquired the asset. That position cannot be disputed. Thereafter it sold the asset and earned certain capital gains. The question therefore whether capital gains is attributable to lending or investment. The case law before the Banking Regulation Act also deals with similar income and it cannot be said that those decisions are not relevant for our purpose. The starting point was the proposition that the money is stock-in-trade for the bank. That cannot be disputed. The next step was that money converted into any other asset is also stock-in-trade relying upon the decisions mentioned above. It is at this stage that the controversy starts. Can it be said that money of a bank converted into any asset remains its stock-in-trade, whatever be that kind of asset? The case of Patiala State Bank (supra) is not of much assistance because in that case the Court was concerned with the question whether income derived from certain properties which had been taken over by the bank was in connection with its business. That expression is far too wide to be of any relevance for our purpose.
11. In the case of A.H. Wadia (supra) the Court had stated that except perhaps in the case of banking institution mere ownership of property purchased from a source used in money-lending business did not automatically make that property part of the business. This is not clear enough in the observation to state positively that in the case of banking institution all forms of property acquired from a source used for money-lending business is a part of that business. The Court has clearly used the words except, perhaps. We are next to consider the decision of the Madras High Court in the case of Coimbatore Anupparpalayam Bank Ltd. (supra). In that case the bank had purchased properties belonging to its debtors in execution of decrees. Thereafter it sold the properties and the Court held as follows:
that the properties at the time they were purchased represented the converted form of the stock-in-trade of the banking business of the assessee, viz., money, and, therefore, unless there was clear and irrefutable evidence that the assessee intended to take thee quivalent of their value out of its money-lending business, the profit made by the resale of the properties must necessarily be regarded as profits of the money-lending business. And as there was no indication whatever to show that the assessee ever sought to treat the acquisition of these properties as investment or to show that the amount spent on their acquisition and improvement ceased to be part of the stock-in-trade of its business, the profit realised by their sale was taxable profit of its business.
This case therefore clearly shows that the treatment given by the assessee to the asset is a material. In the present case the assessee has claimed depreciation on this is property and in the resolution of the Directors when acquiring that property it has been specifically mentioned that "there is no alternative other than to acquire permanently the building..." (Emphasis supplied).
12. In the case of Bareilly Corporation Bank Ltd. (supra) the bank had acquired immovable property and sold it subsequently and the question was whether the income from that sale was its business income. The High Court held that this income was from a transaction entered into by the bank in the course of its money-lending business. No one denies here that this income of the assessee is in the course of its business but the question is, as stated above, whether that income can be said to be attributable to the banking business. The definition of banking clearly mentions lending and it is that principle activity with which a bank is expected to concern itself.
13. We began this order by asking the question what is banking and we must now answer that question. It is money-lending. From the beginning it has been so and it has continued to be so. It is not without reason that Section 6 of Banking Regulation Act separates the additional activity which a bank is permitted to carry on from the meaning given to banking under Section 5(b). The Hon'ble Supreme Court in the aforesaid bank nationalisation case made it clear that any commercial activity which bankers had at a given time engaged in cannot be included in banking. Any other activity therefore of the bank which handicaps a bank from carrying on its money lending activity cannot be included in banking. It has rightly been pointed out by the learned departmental representative that the bank is expected for this reason to invest in readily realisable securities so that money is available to it for the purpose of lending. The Supreme Court has also said so. "It is normal mode of carrying on banking business to invest money that they are readily available." Bihar State Cooperative Bank Ltd.'s case (supra) at page 122. In the present case the money has been invested in immovable property which in our view is not a readily realisable security. The learned counsel stated that it is such security on the ground that it can be mortgaged but we are unable to accept it. Any immovable property is not like a gold or silver bar or government security which can be readily sold in the market. Even mortgaging and obtaining money thereon would take time. In the present case the bank has acquired immovable property. It may be true that this acquisition was incidental to realisation of its dues but the bank could have got the property sold and realised its dues instead of acquiring it and keeping it for a long time and selling it thereafter. It may be beneficial to the bank's business to acquire and sell the property and no one prevents the bank from doing so. But the question is whether acquiring the immovable property and selling it at a profit is banking business the profit of which would be exempt under Section 8OP. To this we must give the answer no.
14. It is true in the case of Cocanada Radhaswami Bank Ltd. (supra) the Supreme Court explained its earlier decision in the case of Express Newspapers Ltd. (supra) but it did so by slating that:
the said decision was mainly based upon the character of capital gains and not upon their non-inclusion under the heading 'Business. In the case of Express Newspapers Ltd. (supra) the Court had observed that the fact that the capital gains are connected with the capital asset of the business cannot make them a profit of the business. They are only deemed to be the income of previous year and not the profits or gains arising from the business during that year." In that case the Court observed that the income from security held by the bank was part of the business if the securities were part of the trading asset. The argument presumably therefore is that if the asset is a part of the trading asset then capital gains resulting from the sale of that asset would also be business income. But as indicated above the Court has said that the decision in the case of Express Newspapers Ltd. (supra) was mainly based upon the character of the capital gains. Therefore a good deal depends upon that. In the case of Express Newspapers Ltd. (supra) the character of the capital gains was transport of a factory while in the case of Cocanada Radhaswamy Bank Ltd. (supra) the Court was concerned with securities which formed part of the trading assets. In the present case the asset has been regarded by the assessee as a capital asset. It has claimed depreciation on it and the resolution of the Board at the time of acquiring it states that the bank intended to acquire it permanently. The resolution also states that the property should be acquired by the bank for its ownership. Therefore the capital gains here cannot be regarded as part of the assessee's business income. The exemption is of profit and gains of business which would be a revenue receipt and not of capital gains flowing from the transfer of immovable property. The learned counsel relied upon the dictionary meaning of 'profit' which may include capital gains but here we are concerned with the profits and gains of business. Therefore that representation would not help the assessee's case. Therefore we hold that the assessee would not be entitled to exemption in respect of capital gains. However, it has been calculated wrongly at Rs. 96,158 whereas the assessee's counsel pointed out that the correct figure would be Rs. 75,900. The learned departmental representative has not contested this and we therefore hold that it is that amount which would be liable to be taken into account.
15 to 17. [These paras are not reproduced here as they involve minor issues.]