N.R. Prabhu, Accountant Member -
(1.) THE only ground of appeal in this case-is that the revenue authorities were in error in holding that the assessee was not entitled to the benefits of deduction under the provisions of Section 8OP(2)(a)(0 of the Income-tax Act, 1961.
(2.) It is contended on behalf of the assessee that the denial of relief under Section 80P(2)(a)(i) of the Act was totally unwarranted. The main thrust of the argument of the learned Counsel for the assessee is that the assessee being a company governed by the Banking Regulations Act, 1949, its income from investment would have to be treated as in the nature of business income. Adverting to the definition of "banking" as per the Banking Regulations Act, 1949, it is contended that the same would include accepting deposits for the purpose of lending, or investments or deposits. This definition should put at rest the unseemly controversy generated by the revenue authorities. The income accruing to a banking institution from its investments, as per the above definition, would constitute its business income and, therefore, it would be exempt under Section 80P(2)(a)(i) of the Act. Our attention, in this connection, has been invited to the decision of the apex court in Bihar State Co-operative Bank Ltd. v. CIT  39 ITR 114. In the said case, the Supreme Court has clearly held that it was a normal mode of carrying on banking business to invest moneys in such a manner that they were readily available and, further that the moneys laid out in the form of deposits did not cease to be part of the assessee's circulating capital. The court further held that the interest from the deposits arose from the business of the bank and was, therefore, exempt from income-tax, under Notification No. 35, dated 20th October, 1934 and Notification No. 33, dated 18th August, 1945, under which certain incomes were made exempt from tax. The assessee further invites our attention to Section 70 of the Maharashtra Co-operative Societies Act, 1960. Under this section, it is mandatory for a co-operative society to invest or deposit its funds in one of the several modes laid down therein. The investments made by the assessee in various co-operative societies in HDFC and also in Indira Vikas Patra were in pursuance of the provisions as contained in Section 70 of the Maharashtra Co-operative Societies Act, 1960. The failure to invest the funds in the manner laid down therein, the assessee contends, would have entailed prosecution to the persons in-charge of the conduct of the business of the assessee. Our attention is also invited to certain decisions of the Tribunal wherein, in circumstances similar to the ones obtaining in this case, relief under Section 80P(2)(a)(i) of the Act was granted by the Tribunal. In this connection, the assessee referred to the decisions of the Tribunal in the case of Ahmednagar Dist. Central Co-op. Bank Ltd. v. ITO  33 ITD 683 (Pune) and Maharashtra State Co-operative Land Development Bank Ltd. v. ITO  41 ITD 491 (Bom.). The decision of the Supreme Court in CIT v. Bombay State Co-operative Bank Ltd.  70 ITR 86, on which a lot of store is laid by the revenue authorities is totally inapplicable to the facts of the case. In that case, the decision went against the taxpayer only for the reason that the Notification No. F.D. (C.R) R. Dis. No. 291-I.T./25, dated August 25, 1925 issued under Section 60 of the Indian Income-tax Act, 1922, liberally granting certain exemptions, was made inapplicable to interests received from Government securities held by the society as investments. It is in the light of that Notification that the Supreme Court decided that the interests received from the Government securities would be ineligible for exemption. How this decision could be pressed into service to deny the assessee the relief claimed in the return is, according to the assessee, not understood. It is then submitted that a major part of the assessee's income was by way of interest from other co-operative banks. Of the total interest of Rs. 1,04,10,694, only three items of interest aggregating Rs. 5,91,164 alone were from parties which were not cooperative banks. The break-down of this figure is as under :
The interest received by a co-operative bunk from another co-operative bank is declared to be exempt under Section 80P(2)(d) of the Act. Thus, even if the decision were to go against the assessee, what could be brought to tax out of the total interest of Rs. 1.04 crore is only a sum of Rs. 5 lac and odd. Here again, the assessee would be entitled to deduction of proportionate interest paid by the assessee to its depositors and other incidental expenses, leaving hardly any balance on which deduction under Section 80P(2)(a)(Q could be denied. In such circumstances, it is claimed that the denial of exemption was totally unjustified.
The learned Departmental Representative, on the other hand, relies on the orders of the revenue authorities.
(3.) WE have heard the parties to the dispute and, in our view, the relief claimed by the assessee has been denied without appreciating the relevant provisions of the Income-tax Act. Under Section 80P(2)(a)(i) of the Act, where a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members, the whole of the amounts of profits and gains of the business would be exempt from tax. Section 5 of the Banking Regulations Act defines "banking" as accepting deposits for the purpose of lending; or investments or deposits of money from the public repayable on demand or otherwise, etc. These activities of a banking institution would take within its fold not only lending but also making investments of the surplus moneys available. Section 70 of the Maharashtra State Co-operative Societies Act requires every co-operative society engaged in banking activities to deposit its surplus funds in a particular manner under the pain of prosecution for default. When such is the position in law, it would be difficult to comprehend that the income from investments in the manner prescribed under the law would be anything but income from banking activities carried on by the co-operative society. The decision of the Supreme Court, which has been strongly relied upon by the assessee in Bihar State Co-operative Bank Ltd. (supra) does lend support to the contention of the assessee. In the said case, the Supreme Court has, in no uncertain terms, held that the normal mode of carrying on banking business is investing moneys in such manner that they were readily available and that moneys laid out in the form of deposits did not cease to be part of the assessee's circulating capital. In the light of this decision of the apex court, nobody can be left with any doubt as to the nature of the income that accrued to the assessee from its deposits with the co-operative banks and other financial institutions and also in bonds issued by the Government. As has been rightly pointed out by the assessee, the decision relied upon by the revenue, namely the one in Bombay State Co-operative Bank Ltd.'s case (supra) can easily be distinguished on facts. That decision went in favour of the revenue only because the exemption was claimed by the assessee in that case under a Notification issued under Section 60 of the Indian Income-tax Act and under the terms of this Notification, exemption was made inapplicable to interests received from Government securities. It was in those circumstances the Supreme Court had no difficulty in holding that the income by way of interest received from Government securities would not be exempt under the said Notification. There is also force in the other arguments of the assessee, namely, that the interest received by the assessee was mostly by way of interest deposits from co-operative banks which is exempt under Clause (d) of Section 80P(2) of the Act. The exercise undertaken by the revenue, it would appear in the circumstances, has become futile and we direct the Assessing Officer to allow the claim of the assessee for relief as claimed.;