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income-tax Officer Vs. Gujarat State Co-operative Land - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(1984)8ITD354(Ahd.)
Appellantincome-tax Officer
RespondentGujarat State Co-operative Land
Excerpt:
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.....
Judgment:
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 [1966] 61 ITR 563 (All.), Addl. CIT Ahmedabad District Co-operative Bank Ltd. [1975] 101 ITR 743 (Guj.) and Co-operative Cane Development Union Ltd. [1973] 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 [1975] 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: (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).

3. 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.

4. 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:-- (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:Interest from trustees securities, viz., Baroda electricsupply loan 2,375Interest on short-term deposit with Union Bank ofIndia 49,151Interest from loans and securities included instatutory reserve 14,250Interest on staff provident fund investments 2,38,186Interest of staff loans 1,20,763 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: (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.

(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.

(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.

5. (a) The membership of the bank shall be open to: (a) Government, (b) All societies registered under the Act in the area of operation of the bank, (c) All tenants as qualified and eligible for loan under the Saurashtra Land Reforms Act, (d) All other persons who (i) are of the age of majority, (ii) are competent to contract, and (iii) have not been convicted of any offence involving moral turpitude, or if convicted a period of four years should have elapsed since his release, (e) firms, companies, associations, trusts or societies registered under the Societies Registration Act, 1960, provided that they hold agricultural land and borrow loan from the bank, (f) any statutory body or any body corporate established under any law for the time being in force: Provided further that their admission shall be subject to the provisions of the Act and rules.

All persons who are co-applicants for loans, coparceners, lineal ascendants or descendants of the applicant and members of the family and all other persons who have a right, title or interest in or upon in the property of the applicant or any person who enters into any transaction with the bank provided that such persons: (iii) have not been convicted of any offence involving moral turpitude or if convicted, a period of four years should have elapsed since his release.

Such nominal members shall pay nominal membership fee of Rupee one each. No share certificate will be issued and the bank's usual receipt issued for the payment of entrance fee and membership fee will be considered as proper evidence for such nominal membership.

The fees should be non-refundable and will be carried to reserve fund.

Such nominal members shall have no right to vote at any meeting of the members whose names are entered in the subsidiary register maintained at the branches.

Such members shall not be eligible for the purpose of voting, election an nomination as provided under these by-laws; The Funds of the bank may be raised by (a) shares, (b) debentures, (c) Government loans and deposits, (d) borrowing from State Bank of Saurashtra or State Bank of India or any other Bank or Agricultural Refinance and Development Corporation or any other financial institution under Government guarantee, (e) non-government deposits, (f) other borrowings, (g) fees, and (h) donations.

Provided that the aggregate amount of the funds raised under Clauses (b), (c), (d), (e), and (f) shall not exceed twenty times the aggregate amount of paid-up share capital and reserve fund and building fund minus accumulated losses, if any, of the bank and the aggregate amount of funds raised under Clauses (e) and (f) shall not exceed four times the aggregate amount of paid-up share capital and reserve fund and building fund minus accumulated losses, if any, of the bank or such other higher limit as may be sanctioned by the Registrar.

Provided further that the total amount due on debentures and outstanding at any time should not exceed the limit prescribed in Section 119 of the Act.

According to the revenue, the mode of raising funds do not include the normal business of banking, i.e., receiving of deposits at interest from the members of the public, which is an essential ingredient of a banking business, It is also the contention of the revenue that the assessee is not covered by Section 5(b) of the Banking Regulations Act. Thus, in order to consider whether the assessee's activity is of banking, strong reliance was placed on the meaning of expression 'banking' under the Banking Regulations Act.

It is true that the expression 'banking' is not defined in the 1961, Act. At the same time the reliance placed on the provisions of the Banking Regulations Act in order to consider the meaning of expression 'banking', in our opinion, would not be justified inasmuch as the said definition is intended to cover the activities of the institutions which are governed by the said Act. The Supreme Court in Bihar State Co-operative Bank Ltd. v. CIT [I960] 39 ITR 114, inter alia, observed that it is normally the business of a bank, to lay out its idle and surplus fund in such securities and debentures as will be easily realisable for the purpose of its main business of banking, namely, to giving credit to its customers.

Thus, according to the above decision, the main business of banking in general sense is to give credit facilities to the customers. In the instant case, the assessee whose activity is governed by its by-laws provides for granting credit facilities to the members inasmuch as the borrower has to become a member of the bank and the advances are regulated in accordance with the shareholding held by the bank. It is, therefore, difficult to appreciate the contention of the revenue that the activity of banking and the activity of providing credit facilities are two distinct activities which could be said to be mutualy exclusive. As pointed out earlier, the banking business includes providing credit facilities to the customers. Even a co-operative society which is not carrying on banking business but only provides credit facilities to the members would be governed by the said clause, e.g., of Co-operative Housing Society. Therefore, it is not correct to say that the co-operative society like the assessee which provides credit facilities to the members cannot be said to be carrying on banking business. In other words, if a co-operative society is carrying on business of banking, such activity would include providing the credit facilities to the customers. However, the exemption would not be lost if the co-operative society as a part of its business activity is carrying on the business of providing credit facilities not in the course of banking business but in the course of its other activities like a Co-operative Housing Society extending such facilities to its members. Such a society also may claim exemption under the above sub-section. Strong reliance was placed by the revenue on the decision of the Andhra Pradesh High Court in the case of Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd.'s (supra). A close reading of the said decision would show that the ratio of the said decision should be confined to the facts which govern that case. The question referred to their Lordships. For the opinion was whether, on the facts and in the circumstances of the case, the assessee's income from interest on securities earned by the investment of funds other than the debenture redemption (sinking) funds was exempt from tax in terms of Section 81(i)(a) or Section 81(v) of the Act. A page 480 of the report it is, inter alia, observed as follows: ... That apart, as seen from the provisions of by-law No. 80, investment of funds referred to therein relate to a stage after the assessee-bank had in fact earned its profits. It can by no stretch of reasoning be held that they relate to the earlier stage when the assessee was in the process of actually earning profits. The interest income from securities purchased from and out of such funds which are not profits earned in prior years cannot be treated as business income of the assessee. True, as submitted by Mr. Siva Rao, the expression used is 'in respect of' but not 'in the course of' in Section 81(i)(a). In our judgment the aforesaid expression 'in respect of' relates to the profits and gains of business carried on by the co-operative society. The use of the words 'in respect of' will not advance the case of the assessee unless it is proved that the profits earned by investment in Government securities have been derived in its business of providing credit facilities to its members. The assessee in the instant case failed to prove the same.

The Tribunal, therefore, was justified in bifurcating the amounts pertaining to the income earned from the investment of the debenture redemption (sinking) fund and the other funds in Government securities while applying the provisions of Section 81(i)(a). We are, therefore, in entire agreement with the finding of the Tribunal that the amounts in dispute are income from securities pure and simple, chargeable to tax under Section 18 and not entitled to be exempted under Section 81(i)(a) of the Income-tax Act". (p. 480) ... In the instant case the specific question, though raised by the assessee, was not referred for our opinion by the Tribunal. However, the assessee should have preferred an application under Section 256(2) requiring the Tribunal to submit a statement of case on that question if it had considered it to be a mixed question of fact and law, as the Tribunal thought that the only question that arises for the opinion of this Court is the one now referred to us. Even assuming that it is open to the assessee to argue that aspect of the case, we are satisfied on the facts and in the circumstances that the Tribunal was perfectly justified in upholding the finding of the Appellate Assistant Commissioner that the funds other than the debenture redemption (sinking) fund do not amount to the trading or business assets and the income earned therefrom by the investment in Government securities is not business income entitled to be exempted under Section 81(i)(a) ..." (p. 481) Thus, it will be clear that the above decision was rendered on the facts as found by the Tribunal and the assessee did not choose to pursue the matter further. Therefore, in the said case on facts it was found that the profits earned by investment in Government securities could not be said to have been derived in its business of providing credit facilities to its members by the assessee. In absence of meterial in this regard, the Tribunal proceeded to bifurcate the income from investment chargeable under Section 18 of the Act and under Section 81(i)(a) as they then stood. In the present case, therefore, it is necessary to examine the main aspeot of the matter whether the investment as made by the assessee could be said to have been made in course of its business of banking or in connection with providing credit facilities to its members. In other words, whether the investment made by the bank could be said to be its stock-in-trade. In this connection we may again refer to the decision of the Gujarat High Court in the case of Ahmedabad District Co-operative Bank Ltd. (supra): ... as has been said by the Supreme Court in Bihar State Cooperative Bank v. CIT [1960] 39 ITR 114, it is normally the business of a bank to lay out its idle and surplus funds in such securities and debentures as will be easily realisable for purposes of its main business of banking, namely, of giving credit to its customers. One of the most important factors which would help in distinguishing whether Government securities and debentures or fixed deposits held by a bank are in the nature of investments or are part of stock-in-trade is whether such securities or debentures are easily realisable or not. The laying out by a bank of its surplus and idle funds in easily realisable securities or debentures or deposits may be with twin objectives, viz., to encash them readily in case of need and not to lose interest by keeping them idle. Merely because they are the securities or debentures payable at a certain specified period or that there was no variation in them would not convert them into investments pure and simple. In view of the finding of fact by the Tribunal that the instant Government securities and municipal debentures held by the assessee-bank were easily realisable securities, the Tribunal was justified in holding that they were stock-in-trade and not in the nature of investments. It follows that the interest on the securities was exempt from tax by virtue of Section 81 or Section 80P of the Income-tax Act, 1961. (p. 733) The object-clause of the assessee as set out earlier not only covers the activity of advancing loans to various person or persons as specified therein but also includes the purchase and sale of securities of the Government of India as also the Government of Gujarat and other securities as laid down in Section 20 (clauses a, b, c and d, of the Indian Trust Act, 1882) and also to act as an agent for buyers and sellers subsequently. One of the objects, therefore, is to purchase and sale Government securities. Therefore, it cannot be said that the investment made in securities was not a part of the business activity of the assessee. Since the main business of the assessee is to advance loans either to persons specified or for the objects specified, the floating funds held by it is part of its stock-in-trade and the income arising out of employment of these funds in the manner regulated by it must be held to be the part of its businsss activity. In this connection it may be noted that the income which is sought to be excluded from exemption and brought to tax by the ITO included interest on staff provident fund investment. Now so far as this item is concerned, it has been brought to our notice that for the assessment year 1977-78, i.e., in the subsequent year, the ITO on the basis of the letter received from Regional Provident Fund Commissioner, Gujarat State, has held that 'the assessee holds provident fund interest and the committee which manages the provident fund is the trustee. As the assessee holds provident fund investment in the capacity as trustee, the income from provident fund investment is not included in the income of the assessee'. The said position, in our opinion, would hold good for the assessment year under appeal also and as a consequence the interest on staff provident fund investment item No. 4 is excluded on the ground that it is covered by the exemption claimed by the assessee.

The other item (item No. 1) relates to short-term deposit with the Union Bank of India. In the light of the decision of the Gujarat High Court in Ahmedabad District Co-operative Bank Ltd.'s case (supra), investment in short-term deposit could be treated as employment of surplus funds in realisable deposits with the objective to encash the same easily in case of need and not to lose interest by keeping them idle. The interest so earned, therefore, cannot be considered de hors the assessee's activity of employing its funds in course of its business. For the same reasons, interest on loans and securities included in statutory reserve as also interest on staff loan has to be treated as the employment of idle fund in the course of its business activity and the said income also is exempt, in our opinion, under Section 80P(2)(a)(i). Similarly the interest on trust securities also is part of the investment in approved securities in accordance with the object clause of the assessee, the income, therefore, also is liable to exemption.

5. It may not be out of place to refer to the decision of the Rajasthan High Court in the case of Rajasthan Rajya Sahakari Bhoomi Vikas Bank Ltd. (supra) (unreported). In that case also the said society, which was engaged in banking business, inter alia, claimed exemption from interest under Section 80P(2)(a)(i). The claim for said exemption was rejected and a general deduction of Rs. 20,000 was granted on the ground that the income from interest was assessable under Section 18.

The AAC in appeal upheld the contention of the assessee that it had made investment of certain percentage of its liquid funds in prescribed securities as per instructions of the RBI and those instructions were binding on the assessee carrying on banking business. The purpose of making investment on securities was primarily not to earn cash but to make available the amount for payment to the creditors as and when demanded. The appeal was, accordingly, allowed by the AAC and the decision of the AAC was upheld in appeal by the Tribunal on appeal by revenue. A reference under Section 256(1) was moved which was rejected by the Tribunal and the further application under Section 256(2) was also rejected by their Lordships by holding that investment in Government securities, etc., is a part of stock-in-trade or circulating capital and that the issue was conclusively determined by the decision of the Supreme Court in the case of Bihar State Co-operative Bank (supra) and by Privy Council in Punjab Co-operative Bank Ltd. v. C1T [1940] 8 ITR 635. It is also material to note that in the case of Madras Co-operative Central Land Mortgage Bank Ltd. similar controversy arose and the AAC on appeal by the assessee upheld its claim to treat the income from interest as a part of its business income. In this connection para 7 of the order of the AAC reveals that action under Section 263 was proposed by the Commissioner for withdrawing exemption already granted in respect of income from interest on securities, etc., and the Commissioner later on dropped the proposed proceedings. Thus, it would be clear that in case of Land Mortgage Banks in Rajasthan and Madras it has been held that investments in securities, etc., is part of the banking business and the income therefrom was exigible to exemption under Section 80P(2)(a)(i). We see no reason to depart from the above view. We, accordingly, hold that the Commissioner (Appeals) was justified for the reasons recorded by him as also for the reasons set out by us aforesaid in upholding the claim of exemption as made by the assessee.

6. We now turn to the other appeals relating to the assessment years 1973-74 and 1974-75. In this appeal the first ground which is common to both the years relates to the validity of reopening of assessment under Section 147(b) of the Act. The other ground is that the Commissioner (Appeals) erred in holding that except for income from property, rest of the income was business income and as such exempt under Section 80P(2)(a)(i). After completion of the original assessment on 31-12-1975 for the assessment year 1973-74 and on 31-12-1976 for the assessment year 1974-75, the ITO on the basis of the information said to have come into possession came to the conclusion that the income of the assessee has escaped assessment within the meaning of Section 147(b). He, therefore, brought to tax the undermentioned income for the respective years under appeal in the course of reassessment proceedings. The particulars of income brought to tax in reassessment proceedings as aforesaid are set out hereunder:supply loan 2,3754.75 per cent interest from fixed depositswith banks (Commercial) 24,167 26,542Interest from securities4.75 per cent Baroda electric loan 4,7504.75 per cent B.M.C. loan 4,7504.75 per cent G.S.F.C. loan 4,750 14,25Interest from staff loan 61,103Assessment year 1974-75Interest (5.75 per cent) from Gujarat StateDevelopment loan of Rs. 50 lakhs 1,43,750Interest from 4.75 per cent B.S.U. loan 2,375 1,46,125Add interest from fixed deposit withnationalised banks as per statement 8,78,921Interest from trustee securities comprised of4.75 per cent loans of Rs. 3,00,000 14,25Interest from staff provident fund investments 19,774Interest from loan to staff 1,04,708 11,17,653 7. The matter was carried in appeal before the Commissioner (Appeals) and it was contended firstly, that this was a case of mere change of opinion which did not clothe the ITO with the power to reopen the completed assessments. Secondly, it was contended that provisions of Section 144B of the Act did not apply to the assessment proceedings.

Lastly, it was contended on merits that there was no justification for bringing to tax in reassessment proceedings the income as set out in the above table. The Commissioner (Appeals) agreed with the assessee's contention that this was merely a change of opinion and, therefore, the ITO had not jurisdiction to reopen the assessment. He did not accept the contention founded on the ground that provisions of Section 144B did not apply to the reassessment proceedings. On merits, the Commissioner (Appeals) agreed that the above income as set out in the table aforesaid was exempt from tax. In coming to this conclusion he relied on his order for the assessment year 1976-77.

8. Being aggrieved the revenue has come up in appeal before us. Placing reliance on the entries made in the order sheets for the respective years, the learned departmental representative contended that the ITO had relied on two facts to support his action to reopen the assessments under the provisions of Section 147(b). Firstly, he referred to the draft assessment order for the assessment year 1976-76 in which certain facts have been stated which had come to the knowledge of the ITO after completion of the assessment. Secondly, the ITO had placed reliance on the decision of the Supreme Court in Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287. Amplifying the first contention, the learned departmental representative submitted that in the view of the ITO, the assessee did not carry on the banking business and he supported his decision by relying on the decision of Andhra Pradesh Co-operative Central Land Mortgage Bank, Ltd.'s case (supra). Since the assessee, in the opinion of the ITO, did not carry on the banking business, the income earned by it was not totally exempt as held in the course of the original assessment. The income from investments, according to the ITO, other than debenture redemption (sinking) fund was taxable. Shri Shah, on the other hand, contended that the decision in the case of Kalyanji Mavji & Co. (supra) has been substantially overruled by the Supreme Court in the case of Indian & Eastern Newspaper Society v. CIT [1979] 119 ITR 996. Therefore, reliance on the said decision would not justify the reopening of the assessments. Secondly, the reliance on the decision of the Andhra Pradesh High Court in the case of Andhra Pradesh Co-operative Central Land Mortgage Bank Ltd. (supra) was misplaced as the said decision should be confined to the facts of the case and did not propound any proposition of law. Lastly, on merits relying on the said submissions as were canvassed for the assessment year 1976-77, which have been discussed in detail in paragraph 4, it was submitted that the assessee's income was exempt under Section 80P and, therefore, no income has escaped assessment within the meaning of Section 147(b).

9. We have carefully considered the rival submissions. The provisions of Section 147(b) fall into two parts. Firstly, the ITO should have reason to believe that income has escaped assessment. Secondly, it should be in consequence of information received after the original assessment that he should have reason to so believe. If either of the conditions is not satisfied, the action of the ITO would be without jurisdiction. In other words, both the conditions are cumulative and if there is failure on the part of the ITO to satisfy either of the conditions, the proceedings under Section 147(b) would fail. To put it differently, both the conditions must be satisfied by the ITO when he assumes jurisdiction. So far as the first condition, viz., that the income has escaped assessment on the basis of the reasons recorded by him is concerned, in the view which we have taken in connection with the appeal relating to the assessment year 1976-77 and following the reasons recorded therein, we hold that the assessee was entitled to exemption under Section 80P(2)(a)(i) as claimed by it in the original assessment and allowed by the ITO at that time. Therefore, the income sought to be assessed in reassesssment proceedings, in our opinion, being exempt from tax, no income could be said to have escaped assessment within the meaning of Section 147(b). As a consequence the first condition required for assumption of jurisdiction is not satisfied in the instant case. The proceedings would, therefore, fail.

So far as the second condition is concerned, in the view which we have taken, it is not necessary strictly to deal with this aspect of the matter because even if the said condition is satisfied, the proceedings would still be without jurisdiction. We, therefore, do not propose to go into the question as to whether there was information leading to the belief that income has escaped assessment within the meaning of Section 147(b).


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