- (1.) These appeals have been referred to a Bench of three learned Judges, in view of the apparent conflict between the two judgments (of Benches of two learned Judges of this Court) in M. P. Co-operative Bank Ltd., Jabalpur v. Additional Commissioner of Income-tax, Madhya Pradesh, Bhopal (1996), 2 SCC 541 and Commissioner of Income-tax, Bangalore v. Bangalore District Co-operative Central Bank Ltd., (1998) 6 SCC 129.
(2.) The question in appeal relates to what was Section 80(I) and is now Section 80-P of the Income-tax Act, 1961, which reads thus : "80-P (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 (ii) - (viii) the whole of the amount of profits and gains of business attributable to any one or more of such activities. The question in appeal reads : "Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the interest income arising from the investment made out of reserve fund is exempt under Section 80-P(2)(a)(I) of the Income-tax Act"
(3.) In the case of M. P. Co-operative Bank Ltd. this Court noted instructions of the Madhya Pradesh Government which required the investment of the reserve funds of Apex Banks and observed that, by reason thereof, no part of the Reserve Fund could be utilitised as working capital nor could any part of the Reserve Fund deposits be withdrawn except with the permission of the Registrar to meet losses or at the time of winding up and not otherwise. In the circumstances, the Revenue contended that the securities relating to the Reserve Fund could never be considered to be the circulating or working capital of the bank or its stock in trade to qualify for exemption under Section 81 of the Income-tax Act. The Court noted that a co-operative bank was legally obliged to place certain Government securities with the State Bank or the Reserve Bank of India and these securities could not be withdrawn by the bank at its will and could only be withdrawn in certain situations, as referred to hereinabove. It was therefore, difficult, the Court said, to comprehend how such Government securities relating to the reserve fund could be considered the bank's stock in trade or circulating capital. It was understood in baking parlance that circulating capital was that which was put into circulation or turned over to earn profit. Government securities coming out of the Reserve Fund, which could not be easily encashed and which could be utilised only when the contingencies mentioned arose, could not be considered circulating capital or stock in trade. The Court, therefore, came to the conclusion, on first principles, that the interest on Government Securities, placed with the State Bank or the Reserve Bank of India would not qualify for exemption under Section 81 (now, Section 80-P) of the Income-tax Act. Such investment could not be regarded as an essential part of banking activity inasmuch as the same did not form part of stock in trade or working or circulating capital.;