S. Rajaratnam, Accountant Member -
(1.) THESE four departmental appeals arise out of the common order of the Commissioner (Appeals), in the case of Karnataka State Co-operative Apex Bank Ltd., Bangalore, for the assessment years 1975-76 to 1978-79.
(2.) The assessee is a co-operative society registered under the Karnataka Co-operative Societies Act, 1959. As its name indicates, it has been established as an apex co-operative institution for helping other co-operative credit institutions in the state to do service in the nature of a bankers' bank and to serve as an apex body. The assessee had claimed relief in respect of its income from interest on securities under one of the sub-clauses under Section 80P and its claim had been allowed in the original assessments. The ITO subsequently, became aware of the decision of the Madhya Pradesh High Court in M.P. State Co-operative Bank Ltd. v. Addl. CIT 119 ITR 327 and had reopened the assessments purportedly under Section 147 of the Income-tax Act, 1961 ('the Act'). The assessee argued that it was entitled to the exemption in view of the decision of the Allahabad High Court in CIT v. Co-operative Cane Development Union Ltd.  118 ITR 770 and also some other cases. The assessee's objections were found unacceptable and the ITO included the following further income of Rs. 36,752 for the assessment year 1975-76, Rs. 2,28,794 for the assessment year 1976-77, Rs. 3,18,885 for the assessment year 1977-78 and Rs. 2,77,606 for the assessment year 1978-79. The assessee repeated its stand before the first appellate authority, this time, with success. The first appellate authority found that the decision of the Madhya Pradesh High Court rested on the wordings of Section 81 of the Act before its substitution by Section 80P of the Act. According to him, the presence of the words 'attributable to' in Section 80P enlarged its scope. He found that the decision of the Allahabad High Court was based upon the interpretation of the words 'attributable to' in the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT  113 ITR 84. In this view, he allowed the assessee's appeals for all the four years. In the departmental appeals, it is contended that the ITO had brought to tax only the net income after deducting the expenses from interest on securities which formed part of the reserve fund which, according to the revenue, did not form part of the circulating capital. The decision of the Madhya Pradesh High Court in M.P. State Co-operative Bank Ltd. case (supra), it Was claimed, would squarely apply. The very fact that the income was assessed as interest on securities, it was argued further, would also support its stand. The learned departmental representative relied upon these grounds taken in the grounds of appeal. He further drew our attention to the decision of the Andhra Pradesh High Court in Andhra Pradesh Cooperative Central Land Mortgage Bank Ltd. v. CIT  100 ITR 472 which also, according to him, supported the revenue's case. He referred to the decision of the Kerala High Court in Malabar Co-operative Central Bank Ltd. v. CIT  101 ITR 87 where it was pointed out that it was for the assessee, though it was a bank, to show that the securities held by it were held as stock-in-trade in order to be eligible for exemption under Section 80P. The observations of the Supreme Court in the case of CIT v. Canara Bank Ltd.  63 ITR 328 were also relied on for the proposition that it is certainly open to a bank to have securities as an investment and not always as trading assets. According to him, reserve fund was to be used only in extreme emergencies as provided under the bye-laws under the Co-operative Societies' Act and was not available as working capital and they should not be released for normal trade requirements. This asset was sterilized and it stands to reason that such income therefrom is not considered as part of the income from its normal business. The learned representative for the assessee, however, claimed that none of the decisions relied upon by the learned departmental representative was concerned with the inference of the words 'attributable to found in Section 80P. Only the Allahabad High Court decision in the case of Co-operative Cane Development Union Ltd. (supra) was concerned with this interpretation. This interpretation is based upon the view of the Supreme Court decision in the case of Cambay Electric Supply Industrial Co. Ltd. (supra). He, therefore, claimed that the last word has been said in favour of the assessee's claim for exemption. He further pointed out that some of the decisions relied upon by the revenue were in the context of Section 81 (prior to the introduction of Section 80P) as pointed out by the learned Commissioner (Appeals).
We have carefully considered the records as well as the arguments. The assessee is an apex co-operative society acting as an apex institution for credit co-operative societies in the State. This is its only business. Besides income from interest on advances made to the other co-operative societies, it has also interest on securities, interest on deposits and dividends from member societies. There is no dispute regarding the claim for exemption in respect of income under other heads of income except in respect of interest on securities which were invested out of reserve fund. It is common ground that 25 per cent of the profits had to be carried to the reserve fund and that under Rule 23 of the Karnataka Co-operative Societies Rules, 1060, such reserve fund had to be invested in approved securities in the manner laid down under Section 58 of the Karnataka Co-operative Societies' Act, 1959. Thus, these securities out of reserve fund could not be pledged or otherwise employed except with the sanction of the Registrar and they are intended 'to meet unforeseen losses'. This is the statutory requirement in respect of all co-operative societies in the State. It is the assessee's case that the assessee is eligible for exemption of the entire income including the interest on securities being investments out of reserve fund under Section 80P(2) on the ground that it is the sum referred therein as the income "of a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members . . . ." It is not in dispute that the assessee is a co-operative society engaged in carrying on the business of banking for providing credit facilities to its members. Section 80P(2) also specifies the amount of income that would be exempt in the hands of such an assessee. Such amount under Section 80P(2)(a) is 'the whole of the amount of profits and gains of business attributable to one or more of such activities'. The only activity that is relevant in the assessee's case is the activity of 'banking or providing credit facilities to its members' as it has no other activity. That does not mean that the entire income of such an assessee would be automatically exempt. Only such income of such society which is attributable to 'the business of banking or providing credit facilities to its members' will be exempt. There is no difficulty, therefore, in accepting the argument of the learned departmental representative that the income would not be exempt, if idle surplus funds are deployed by the institution merely as an investment. It is, therefore, not necessary to consider in detail all the authorities cited by him for this proposition. Though we are in agreement with him on this proposition, we find that this proposition does not help the revenue in the facts and circumstances of the assessee's case. Since the assessee's business is admittedly one which is listed as one of the activities eligible for relief under Section 80P, the only issue is whether the interest on securities invested out of reserve funds could be treated as income attributable to the assessee's activity in the facts and circumstances of the assessee's case. Merely because the interest on securities is assessable under a separate head, it docs not mean that it has ceased to be business income. This has been established long time ago. The Supreme Court in CIT v. Cocanada Radhaswami Bank Ltd.  57 ITR 306 has referred to a number of earlier decisions and stated as under :
The heads described in Section 6 and further elaborated for the purpose of computation of income in Sections .7 to 10 and 12, 12A, 12AA and 12B are intended merely to indicate the classes of income : the heads do not exhaustively delimit sources from which income arises. This is made clear in the judgment of this Court in the United Commercial Bank Ltd.  55 ITR 17, 24 (SC), that business income is broken up under different heads only for the purpose of computation of the total income : by that break up the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by the Indian Income-tax Act for computation of income.
Hence, ground No. 3 in all these appeals seeking restoration of the reassessment orders merely on the ground that income from the securities has been assessed as interest on securities is devoid of any merit. This is not a case where idle surplus funds have been utilised for making investments. The facts found and which are not in dispute are that the assessee had no option either in the matter of creation of the reserve fund at 25 per cent of its profits or investment thereof in Government securities. The assessee cannot remain in business and still ignore the statutory requirements. Hence, it will be well nigh impossible to hold that such income is not 'attributable to' the assessee's 'business of 'banking or providing credit facilities to its members'. The Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra) pointed out that the words 'attributable to' had a wider import than the expression 'derived from' and that these words were intended to cover receipts from sources other than the actual conduct of business of generation or distribution of electricity, though the decision was rendered in the context of the use of the self same words in Section 80E of the Act. It was for this reason that the Allahabad High Court in the case of Co-operative Cane Development Union Ltd. (supra) held that even a co-operative society carrying on the business of supply of sugarcane had the right to exemption in respect of interest on securities invested out of 25 per cent of its profits as required by statutory provisions. If a co-operative society engaged in the business of supply of sugarcane could get the exemption on the ground that the interest on securities is derived from its business, the assessee could not be in a worse position when such credit institutions invest in securities even in the ordinary course of business. The decision of the Allahabad High Court, in our opinion, should squarely help the assessee in this case. The learned departmental representative had banked on the decision of the Madhya Pradesh High Court in the case of M.P. State Co-operative Bank Ltd. (supra). In this case, securities invested out of reserve funds could be utilised in case of loss or winding up. The Karnataka Co-operative Securities Act does not mention winding up, but only a loss as an event for use of the reserve fund. This, by itself, may not make all the difference. But the decision was rendered under the context of Section 81, where the wording was different. It reads as under :
Income of co-operative societies.--Income-tax shall not be payable by a co-operative societyï¿½
(i) in respect of the profits and gains of business carried on by it, if it is--(a) a society engaged in carrying on the business of banking or providing credit facilities to its members ;
Provided that, in the case of a co-operative society which is also engaged in activities other than those mentioned in this clause, nothing contained herein shall apply to that part of its profits and gains as is attributable to such activities and as exceeds fifteen thousand rupees.
The words 'attributable to' are, no doubt, there. But these words qualify activities other than those exempted. Again the decision of the Madhya Pradesh High Court did not turn on the words 'attributable to' which were judicially interpreted by the Supreme Court even as noticed in the Allahabad High Court decision. Hence, what we are concerned with is not whether the securities form circulating capital or not for purpose of ascertaining whether the assessee would be entitled to exemption on interest from securities. We have to find whether the interest income is attributable to the assessee's business in any of the listed activities. Since the assessee's business was 'banking or providing credit facilities to its members', we have to hold that the assessee was rightly exempted on this income at the first instance. We would also like to point out the decision of the Gauhati High Court in the case of Assam Co-operative Apex Bank Ltd. v. CIT  112 ITR 87 mainly because it deals with an institution comparable in every respect with the assessee. In this case, interest on securities was not exempted by the ITO under Section 81 prior to its substitution by Section 80P. The assessee filed a revision petition before the Commissioner seeking this relief. The Commissioner declined to grant the relief under Section 264 of the Act in the view that securities were not held as part of the trading assets. In his view, only a dealer in securities could be eligible for the benefit. The Gauhati High Court observed as under:
If the Commissioner had found that the contention of the petitioner was not tenable on the facts of the case, that is to say, if the Commissioner had found that the securities were not factually part of the trading assets of the petitioner or that the petitioner as a banking concern was precluded from making investment in such securities under the rules or laws governing that banking concern, the interest on such securities would not have been part of its trading profits. However, the Commissioner came to a clear finding that the interest on securities could be held to have been related to the society's banking business. Nevertheless, it found that since the petitioner was not dealing in securities and since the profit and loss was not disclosed in a statement as such dealer in securities, the petitioner was not entitled to the benefit under the Section of the Act.
In our opinion, the Commissioner's finding that only a dealer in securities is entitled to the benefit under Section 81 and that a co-operative society, which has invested its available funds in securities and has received some interest thereon, is not entitled to any exemption in regard to such interest under the Section, is clearly wrong. We are also of the opinion that the Commissioner's finding 'in no circumstances can the investment and securities be regarded as income from business' is also clearly wrong in view of the decision cited above.
It proceeded further to observe that the heads of income under which interest on securities came to be assessed was not decisive and that the Commissioner was wrong in his view that a co-operative society, which has invested its available funds in securities and had received some interest thereon, is not entitled to any exemption in regard to such interest. Mere absence of a contrary allegation on the part of the Commissioner to the effect that the securities were not held as part of the assets of banking business, it was considered justified, setting aside the order of the Commissioner as well as that of the ITO. In other words, the view of the Gauhati High Court was that, prima facie, interest income from securities of a similar co-operative apex bank was eligible for exemption under Section 81 even with its narrower scope compared to the present Section 80P. Hence, in any view of the matter, we find no justification for withdrawing the exemption earlier allowed by the ITO in the case of the assessee which was obliged to buy the securities in order to remain in business of 'banking for providing credit facilities to its members', a business specifically listed under Sub-clause (i) of Clause (a) of Sub-section (2) of Section 80P. It is possible to hold that interest income, in the facts of the assessee's case, is business income in every sense. At any rate, there cannot be any doubt that this income is 'attributable to' the said business. The common order of the first appellate authority is, therefore, upheld.
4 . In the result, the appeals are dismissed.