K.T. Thakore, Accountant Member -
(1.) THIS set of three appeals relate to the assessment years 1973-74, 1974-75 and 1976-77. As all these appeals involve common grounds and contentions, they are disposed of by this combined order for the sake of convenience. We first proceed to deal with IT Appeal No. 1750 (Ahd.) of 1980 which relates to the assessment year 1976-77. The only ground which is material for our purpose reads as follows:
The learned Commissioner (Appeals) erred in law and on facts in holding that except, income from property, the rest of the income was business income and, therefore, qualify for exemption under Section 80P(2)(a)(ii). He further erred in holding that all the investments represented stock-in-trade.
The assessee is a co-operative society registered under the Gujarat Cooperative Societies Act ahd is engaged in the business of providing long-term finance to its members. The activities of the assessee-bank are governed through its bye-laws and instructions issued by the RBI as also the State Government from time to time. In order to meet the resources of finance for the business, the assessee-company had resorted to floating of debentures, borrowings from banks and deposits from public at interest. The bye-laws also permit the assessee to buy and sell securities. The assessee-bank submitted its return of income on 1-6-1976, declaring a taxable income of Rs. 8,085 being income from property. It also furnished the audited profit and loss account and balance sheet. In the return of income and in the statement accompanying it, the assessee had shown business income of Rs. 15,10,632, which was claimed as exempt under Section 80P of the Income-tax Act, 1961 ('the Act'). It, however, submitted a revised statement disclosing therein income from property at Rs. 17,322. The balance income of Rs. 2,74,20,362, which was showr. as business income, was claimed as exempt from tax under Section 80P. In the course of the assessment proceedings the assessee-bank made various submissions in support of its claim that its business income was not liable to tax. It was claimed firstly, that various investments made by the assessee are part of its business activities and, therefore, they should be treated as in course of business. Secondly, it was doing money-lending business and as such the investments made by it should be treated as part of and in course of money-lending business. Thus, the investments should be treated as its stock-in-trade. Thirdly, general investment made by the assessee should be treated as floating cash and not made out of profits which is to be utilised for various activities of the year from time to time including meeting of statutory obligations for investment in debenture redemption fund. Lastly, the reserve fund has been created because the assessee was doing money-lending business as per the directions of the RBI. The assessee supported its contention by relying on the decisions in the cases of U.P. Co-operative Bank Ltd. v. CIT  61 ITR 563 (All.), Addl. CIT Ahmedabad District Co-operative Bank Ltd.  101 ITR 743 (Guj.) and Co-operative Cane Development Union Ltd.  Tax. 35(1)-377. According to the ITO, the contentions raised by the assessee were not acceptable. He pointed out that the decision in U.P. Co-operative Bank's case (supra) was not applicable as it related to banking business. The ITO was of the opinion that the assessee was not a bank and as such could not be said to be engaged in the banking business. THIS view was supported firstly, on the ground that the objects of the society were to grant mortgage credit to bona fide land owning members and grant of loans to tenants and co-operative farming societies. Secondly, in view of Section 5(b) of the Banking Regulations Act, 1949, the assessee could not be said to be carrying on banking business. It was not accepting money from public for purpose of lending or investment and the main source of the assessee was to raise funds by issue of debentures as also raising of share capital by enrolling members of the assessee-bank as shareholders. Further relying on the decision of the Andhra Pradesh High Court in Andhra Pradesh Co-operative Central Land Mortgage, Bank Ltd. v. CIT  100 ITR 472, the ITO observed that in that case the society carried on a business of similar nature as conducted by the assessee. The assessee's case clearly fell within the ratio of the said decision. According to the said decision, the income from investment other than those from debenture redemption fund was not exempt. The investment of other funds in the Government securities was not necessary for carrying on business by the assessee. Thus, according to the ITO, the assessee was entitled to the following deductions:
(a) Income from providing credit facility to its members.
(b) Income derived from investment of debenture redemption (sinking) fund in Government securities.
(c) Interest or dividend derived by the assessee from its investment with any other co-operative society.
The income derived from other investments or funds other than what is stated above, i.e., general reserve, statutory reserve, staff benefit fund and staff provident fund was liable to tax. The ITO thereafter referred to the provisions contained in Section 80P(2)(a)(i) and pointed out that the said section exempted income of a co-operative society engaged in carrying on business of banking or providing credit facilities to its members. The expression 'banking' was not defined under the Act, Therefore, according to the ITO, the definition of the said expression has to be construed having regard to the provisions contained in Section 5(b) of the Banking Regulations Act. The said definition, therefore, did not cover the asses-see's case. As a consequence only the income from providing credit facilities to the members was wholly exempt under the aforesaid provisions. The ITO, therefore, pointed out that the instructions of the CBDT contained in Circular No. F-21/3/67/IT-D(18) dated 11-5-1967 relating to the case of U.P. Co-operative Bank Ltd. (supra) was not applicable. The mainstay of the ITO's decision was that the assessee could not be said to be carrying on business of banking for the reasons set out in his order and that the assessee's case was governed by the decision of the Andhra Pradesh High Court in Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd.'s case (supra). As a consequence he held that investment held by the assessee could not be treated as its stock-in-trade. Consequently, the income from investment was exigible to tax and not exempt. Therefore, for the reasons set out in his order, the ITO brought to tax a sum of Rs. 4,25,655 as income from business which was held to be taxable and the income from property resulting in determination of total income at Rs. 4,33,740.
(2.) Being aggrieved the assessee carried the matter in appeal before the Commissioner (Appeals). The mainstay of the assessee's contention was that its income was wholly exempted under Section 80P except in regard to income from property. In other words, the assessee's claim was that it was entitled to exemption of its business income. It was pointed out in this connection that in all seven categories of business income were exempt under Section 80P. One of the categories related to 'business of banking or providing credit facilities'. The business of banking or providing credit facilities is treated as one business. The further bifurcation into two different types of business, namely banking business and business of providing credit facilities was not called for. If the banking business and the business of providing credit facilities were to be considered as distinct businesses, they would have formed part of distinct categories and would not have been grouped together. The distinction, therefore, made by the ITO between banking business and the business of providing credit facilities to members was a distinction without difference because the bank has to provide credit facilities to its customers. In the instant case, the advances were only made to the members of the society. It was next pointed out that the investment made by the bank, which is a dealer in cash, must be treated as its stock-in-trade. In this connection reliance was placed on the decision of Cooperative Cane Development Union Ltd. (supra). It was next pointed out that the approach of the ITO to determine the banking functions only with reference to the definition expressed for banking under the Banking Regulations Act was not the correct approach. The fact that the land mortgage banks were excluded from the purview of the said Act would not disentitle the assessee from being treated as a bank. It was next submitted that the assessee's activities were also controlled by the RBI inasmuch as it was required to submit periodical returns, its books were subject to inspection by the RBI and its activities were under the constant vigil of the RBI. It was further pointed out that the decision in Andhra Pradesh Co-operative Land Mortgage Bank Ltd.'s case (supra) was not applicable in the instant case inasmuch as the said decision should be confined to the facts which obtained in that case. The other High Courts like the Rajasthan High Court and the Madras High Court have taken a contrary view. The assessee thereafter drew attention to the provisions of Gujarat Co-operative Societies Act as also the bye-laws of the bank and in particular the object clause. It was pointed out that the assessee was borrowing funds from time to time and was dealing in money and credit. Its investments were made as a part of its business activity and represented its stock-in-trade. The investments, therefore, were a part of its circulating capital. The holding of investment did not represent investment of surplus fund or idle money but represented investment as a part of its stock-in-trade to provide credit when the need arose. Relying on the decision in Ahmedahad District Co-operative Bank Ltd.'s case (supra), it was pointed out that investment made by the assessee in securities should be treated as its trading assets. For the same reasons, it was contended that advances made to staff or investment in provident fund account should be treated as investment in course of business. These contentions found favour with the Commissioner (Appeals) who held that the income of the assessee was exempt under Section 80P(2).
Being aggrieved the revenue has come up in appeal before us. The learned departmental representative reiterated the same grounds as are set out exhaustively by the ITO in his order and submitted before us that the business of the assessee was not of banking but providing of credit facilities. In this connection he relied on the provisions of the Banking Regulations Act. He next pointed out that according to the decision of the Andhra Pradesh High Court in Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd.'s case (supra), the income from providing credit facilities was only exempt. The mainstay of Shri Kathuria's submission before us was that unlike banks the assessee-bank used to raise funds by issue of debentures and by raising its share capital by making the members shareholders of the bank. The fact was that the Banking Regulations Act did not apply to the assessee's activity. It was clear that the assessee was not a bank as is ordinarily understood. As a consequence the investments held by the assessee other than those for the purpose of redemption debentures cannot be treated as its stock-in-trade. Consequently, the income from such investment was clearly exigible to tax. Inasmuch as the exemption stipulated under Section 80P(2) did not extend to such income, the learned departmental representative pointed out that the Commissioner (Appeals) had erred in not considering the decision of the Andhra Pradesh High Court in Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd.'s case (supra) which clearly governed the controversy. The other decisions referred to before the Commissioner (Appeals) related to the cases of co-operative banks carrying on banking business and, therefore, the said decisions were not applicable. It was next pointed out that interest received from the provident fund balances kept in the bank at the behest of the Provident Fund Commissioner had nothing to do with the business activity of the assessee which related to grant of long-term advances on mortgage of land. Similarly the interest derived from the loans granted to the staff could not be said to be a part of the business activity of the assessee. The activity of the assessee has to be considered with reference to the objects of the assessee-bank and if these were kept in view, the income derived by it from various sources other than out of investment kept for redemption of debentures could not be treated as its business income exigible to exemption. It was next pointed out that there was an essential distinction between the banking business and the business to provide credit facilities to members. In a case of this type the income from latter activity only was exempt because it was not established that the assessee was carrying on banking business as is ordinarily understood nor the assessee's case is governed by the definition of expression 'banking' under the Banking Regulations Act. Shri Shah, on the other hand, relying strongly on the order of the Commissioner (Appeals), pointed out that the decision in Andhra Pradesh Cooperative Central Land Mortgage Bank Ltd.'s case (supra) was clearly distnguishable on facts. He referred to certain observations at page 481 of the report according to which the Tribunal, as a matter of fact, had found that certain investments held by the said assessee could not be said to have been held in the course of its business. Now the finding of the Tribunal was not challenged by the assessee under Section 256(2) of the Act and as the said finding had become final their Lordships were pleased to decide the issue having regard to the admitted facts. Therefore, the said decision cannot be an authority for the proposition so strongly canvassed by the revenue that the assessee's case must be governed by the said decision. On the contrary, the Rajasthan High Court in a recent decision in the case of Rajya Sahakari Bhoomi Vikas Bank Ltd. (unreported) have clearly upheld the finding reached by the Tribunal that the investment made by the Rajastan Land Mortgage Bank were its stock-in-trade and their Lordships declined to grant a reference on the finding of facts reached by the Tribunal. Shri Shah then referred to the decision of the AAC and in particular the observations made by the AAC in the said order stating that in the case of Madras Land Mortgage Bank and action under Section 263 of the Act, which was proposed by the Commissioner to tax the income from investment was later on dropped and the matter was not pursued. Shri Shah, therefore, pointed out that what was true in regard to the Rajasthan Land Mortgage Bank and the Madras Land Mortgage Bank would be true in the instant case. It was next pointed out that according to the decision of the Gujarat High Court in Ahmedabad District Co-operative Bank Ltd.'s case (supra), the business of banking included the providing of credit facilities and there was no distinction as sought to be made by the revenue. Unless it was shown that the investments made by the assessee were in regard to its idle funds, the normal presumption should be that such investments which were made in order to fulfil certain statutory requirements as also to meet the needs of the business must be held to be of business account. As regards the balances kept by the Provident Fund Commissioner, Shri Shah pointed out that the Provident Fund Commissioner had authorised retention of these balances with the bank and in fact in subsequent year the ITO has accepted the assessee's claim in this regard. Similarly the interest received on loans granted to 1he staff must be held to be a part and parcel of the assessee's activity of lending money and could not be treated as investment de hors its business activities. Shri Shah then referred to written submissions which were placed before the Commissioner (Appeals) which have been dealt with by. him at length in his order.
(3.) WE have carefully considered the rival submissions. The short point which arises in this appeal relates to the claim for exemption as made by the assessee under the provisions of Section 80P(2)(a)(ii) on the ground that its activities constituted business in banking. As a consequence investments made by the assessee represent its stock-in-trade. In order to appreciate the controversy we first refer to the provisions of Section 80P as are relevant for the controversy at issue:
(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 busiress of banking or providing credit facilities to its members, or
** ** **
the whole of the amount of profits and gains of business attributable to any one or more of such activities:
The above section provides that in the case of a co-operative society when the gross total income includes any income referred to in Sub-section (2), the sum specified in Sub-section (2) is allowable as deduction in computing the total income. In the case of a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members, the whole of the amount of profits and gains of business attributable to the said activity is allowable as a deduction. Now, the mainstay of the revenue's contention that while the assessee can be said to be carrying on business of providing credit facilities to its members, it is not carrying on business of banking. Therefore, its income as is attributable to the investment made in connection with providing credit facility to the members alone is exempt. The income from other investments, according to the revenue authorities, is taxable inasmuch as such income is not covered by the provisions as aforesaid. The particulars of income which is sought to be taxed are set out hereunder:
With a view to consider the revenue's submission in this regard, we may first look to the object clause as well as other relevant by-laws of the assessee-bank:
The objects of the bank shall be:
(i) To advance loans for the purposes enumerated in Section 116 of the Act.
(ii) To grant loans to any person or persons, corporate body established under any law for the time being in force, on such terms and conditions including nature of security as the Board may decide from time to time. It shall be competent for the bank to make advances to borrowing contractors including co-operative societies and Panchayats at such rate of interest, and on such terms and conditions as the Board may decide, provided such contractors are members of the Bank.
(iii) To grant loans to tenants under the various Land Reforms and Tenancy Acts in force in the area of operation of the bank.
(iv) To grant loans to the co-operative farming societies.
(v) To grant financial assistance to societies functioning mainly for the purposes of promoting schemes of land improvement.
(vi) To organise and finance such societies, associations or unions from amongst the members of the bank for the purpose of service and supply of mechanical and farm equipments for agricultural and irrigation purposes and for which loan finance is provided by the bank.
(vii) To make advances at such rate of interest and on such terms and conditions as the Board may decide to consignors of mechanical and farm equipment supplied to the members of the bank provided such consignors are members of the Bank.
(viii) To buy and sell securities of the Government of India, the Government of Gujarat or other securities specified in Clauses (a), (b), (c) and (d) of Section 20 of the Indian Trust Act, 1882, and to act as agents for buyers and sellers of such securities.
(ix) To grant loans to any statutory body and to any body corporate established under any law for the time being in force on such terms and conditions as may be decided by the Board from time to time.
4. The Bank shall have powers to:
(a) float debentures on such terms and conditions as may be approved by the Government on the security of its assets and mortgages of immovable property,
(b) receive deposits and borrow money otherwise than by issue of debentures,
(c) acquire such immovable properties and construct such buildings as it may consider necessary for the proper conduct of its business,
(d) appoint such staff as it considers necessary for the conduct of its affairs,
(e) open branches and reconstitute them at suitable places in the area of operation of the bank,
(f) to decide the form and nature of security for the grant of loans for the purposes mentioned in these by-laws,
(g) to do such other things as are incidental to or conducive to and requisite for above objects.;