1. This judgment shall also govern the disposal of Misc. Civil Case No. 210 of 1984 (CIT v. Bhopal Co-operative Central Bank Ltd).
2. This is a reference made by the Income-tax Appellate Tribunal (hereinafter referred to as 'the Tribunal'), at the instance of the Revenue, (Commissioner of Income-tax) under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act '), to answer the following question :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the income derived by the assessee from interest on securities was exempt as per provisions of Section 80P(2)(a)(i) of the Income-tax Act, 1961 ?'
3. This reference arises out of the assessment for the years 1967-68, 1968-69, 1969-70, 1970-71, 1971-72, 1972-73 and 1973-74. By these seven reference applications which are consolidated for the sake of convenience, the Commissioner of Income-tax, Madhya Pradesh-I, Bhopal, approached the Tribunal to make a reference to this court to answer the question referred to above. The assessee, Bhopal Co-operative Central Bank Ltd., had some (security) deposits and the Income-tax Officer did not exempt interest derived on securities from tax under Section 80P(2)(a)(i) of the Act, but the Appellate Assistant Commissioner, on appeal, held that these security deposits were banking assets and the income therefrom in the shape of interest will be banking income and will be exempted under Section 80P(2)(a)(i) of the Act and the same view has been upheld by the Tribunal and, therefore, at the instance of the Department, this reference has been made by the Tribunal to answer the question referred to above.
4. The assessee is a co-operative society deriving income from interest on deposits, interest on securities, commission, subscription, subsidy, donation and locker rent, etc. During the course of the assessment proceedings for the assessment years, i.e., from 1967-68 to 1973-74, the assessee claimed that the whole of its income was exempt as per provisions of Section 80P(2)(a)(i) of the Act as the said income was derived from banking business. The Income-tax Officer, however, repelled the assessee's submission and assessed the entire income derived by the assessee from the above source to income-tax holding that the income derived by the assessee was not entitled to exemption under Section 80P(2)(a)(i) of the Act.
5. Against the order of the Income-tax Officer, the assessee preferred an appeal before the Appellate Assistant Commissioner who allowed the assessee's appeal holding that the assessee was carrying on banking business and as per provisions of Section 24 of the Banking Regulation Act, 1949, the banking companies had to maintain a certain percentage of their assets in the form of securities and hence the securities held by the banking companies under Section 24 of the Banking Regulation Act, 1949, would form part of stock-in-trade and the income derived therefrom will be income arising from the banking business and exempted as per provisions of Section 80P(2)(a)(i) of the Act.
6. The Revenue challenged the order of the Appellate Assistant Commissioner in appeal before the Income-tax Appellate Tribunal. Before the Tribunal, it was submitted on behalf of the Department that the assessee invested its surplus funds in long-term investment and not in short-term deposits and hence these securities did not form part of its stock-in-trade and, therefore, the interest derived by the asssessee-bank from these securities was not exempt from the provisions of Section 80P(2)(a)(i) of the Act.
7. The Tribunal after considering the rival contentions of the parties, affirmed the order of the Appellate Assistant Commissioner and held that the income derived by the assessee from interest on securities was already exempt as per provisions of Section 80P(2)(a)(i) of the Act.
8. The Department was not satisfied with the judgment of the Tribunal. Therefore, it made an application under Section 256(1) of the Act before the Tribunal for making a reference before this court. Hence, this reference for our answer to the question as referred to above.
9. On behalf of the assessee, it was submitted that the assessee is a cooperative society engaged in the business of banking and the income derived by the assessee-bank is from banking business. The words 'banking business' has got a wide connotation which covers the entire business of the bank as provided under Section 24 of the Banking Regulation Act, 1949, and, therefore, he claimed exemption for the whole of its income. Learned counsel submitted that the bank, in the present shape, was formed under the Madhya Pradesh Co-operative Societies Act, 1960, and, therefore, its functions are governed under the provisions of the Madhya Pradesh Co-operative Societies Act, 1960 (hereinafter referred to as the 'Societies Act'). Under Section 43(2) of the Societies Act, a society is required to transfer, unless exempted by a general or special order of the Registrar, at least 25% of its profits to its reserve fund. Under Section 44 of the Societies Act, investment of funds has been dealt with and Sub-section (2) of Section 44 provides that the reserve fund of a society shall be invested or utilised only in such a manner and on such terms and conditions as may be laid down by the Registrar in this behalf. Learned counsel further submitted that the securities held by the bank as part of its assets were in the nature of stock-in-trade of the society and, therefore, income arising therefrom was part of its business income and, therefore, it will be exempt under Section 80P of the Act. Learned counsel placed reliance on the decision of their Lordships of the Supreme Court in Bihar State Co-operative Bank Ltd. v. CIT : 39ITR114(SC) , wherein their Lordships have held that the object of the bank is to carry on the general business of banking, its normal business was to deal in money and credit and did not consist only in receiving deposits and lending money to its members or other societies. It was a normal mode of carrying on banking business to invest moneys in such a manner that they are readily available. The moneys laid out in the form of deposits did not cease to be part of the bank's circulating capital. The interest from the deposits arose from the business of the bank and was exempt from income-tax.
10. Following the decision of the Supreme Court in Bihar State Co-operative Bank's case : 39ITR114(SC) , the Karnataka High Court in Addl. CIT v. M. Ranga Pai : 100ITR413(KAR) , the Gujarat High Court in Addl. CIT v. Ahmedabad District Co-operative Bank Ltd. : 101ITR733(Guj) and the Gauhati High Court in Assam Co-operative Apex Bank Ltd. v. CIT , held that income in the shape of interest derived on such security deposits made in compliance with Section 24 of the Banking Regulation Act, 1949, is not liable to be assessed to income-tax, in view of the provisions of Section 80P of the Act.
11. It is further submitted that the assessee's income from interest on securities will be exempt under Section 80P of the Act because the banking companies have to maintain a percentage of assets in the form of securities. In this regard, it is pertinent to refer to Section 24 of the Banking Regulation Act, 1949 (Act No. X of 1949), which reads as under:
'24. Maintenance of a percentage of assets.--(1) After the expiry of two years from the commencement of this Act, every banking company shall maintain in India in cash, gold or unencumbered approved securities, valued at a price not exceeding the current market price, an amount which shall not at the close of business on any day be less than twenty per cent. of the total of its time and demand liabilities in India.
Explanation.--For the purposes of this section, 'unencumbered approved securities' of a banking company shall include its approved securities lodged with another institution for an advance or any other credit arrangement to the extent to which such securities have not been drawn against or availed of... '
12. Section 56 of the Banking Regulation Act, 1949, will also apply to a co-operative society engaged in the banking business. Therefore, it is crystal clear that Section 24 of the Banking Regulation Act, 1949, referred to above has full application to co-operative societies engaged in banking business and as such they have to comply with the provisions of Section 24 of the Banking Regulation Act, 1949. In the instant case, the securities deposited by the assessee in consonance with the provisions of Section 24 of the Banking Regulation Act, 1949, will, therefore, form part of its stock-in-trade and income in the shape of interest arising therefrom will be income arising from the banking business which shall not be liable to be assessed to tax under Section 80P of the Act.
13. The Income-tax Officer has not found any other thing about the nature of investment in securities except security deposits in compliance with the provisions of Section 24 of the Banking Regulation Act, 1949, and, therefore, the assessee's case is fully supported by the authority of their Lordships of the Supreme Court's decision in Bihar State Co-operative Bank Ltd.'s case : 39ITR114(SC) , and the same view was followed in CIT v. Bombay State Co-operative Bank Ltd. : 70ITR86(SC) . Their Lordships have held that interest received on Government securities held by a co-operative society qualifies for exemption under Section 80P of the Act.
14. Learned counsel appearing for the Revenue submitted that the assessee has been holding the same securities and there had been no transaction at all and, therefore, it is liable to be assessed to tax. But the securities deposited in compliance with Section 24 of the Banking Regulation Act, 1949, will not change the nature of holding from stock-in-trade to investment. In the instant case, the assessee-bank has shown the interest received on securities as interest received on investment. Therefore, the argument as advanced on behalf of the Revenue is not available to him in the instant case.
15. Learned counsel appearing for the Revenue referred to the decision of this court in M.P. State Co-operative Bank Ltd. v. Addl. CIT : 119ITR327(MP) and submitted that the investment of the reserve fund in securities was not to meet the withdrawal by the depositors or other transactions as was the case with the circulating capital or stock-in-trade and the reserve fund cannot be taken to be circulating capital or stock-in-trade of the assessee. The case referred to by the Revenue is distinguishable on facts. In the above referred case, the deposits were in respect of securities earmarked for reserve fund and provident fund which constituted investments. Therefore, the Tribunal came to the conclusion that these two investments did not form part of the assessee's stock-in-trade or circulating capital and hence the interest from these investments did not amount to income from the business of banking. But, in the instant case, the situation is quite different. The security was deposited by the assessee-bank in compliance with the mandatory provisions of Section 24 of the Banking Regulation Act, 1949, and, as had been held by the Supreme Court, the interest derived from such securities will be treated as part of the assessee's stock-in-trade and it amounts to income from the business of banking which is specifically exempt from tax under Section 80P of the Act. Therefore, in our opinion, the argument as advanced by learned counsel appearing for the Revenue has no substance and hence we repel it.
16. From the aforesaid discussion, we have reached the conclusion that the income from interest on securities derived by the assessee (bank) alone is exempt under Section 80P of the Act and for the reasons given above, we answer the question referred to us in the affirmative. However, in the circumstances of the case, we pass no orders as to costs.