1.(i) That the Ld. CIT(A) erred in law and on facts of the case in corning to the conclusion that the interest income of Rs. 572.99.
lacs (out of the amount of Rs. 10,77,60,566/- shown in the para 4.0 of his order) earned on deposits with U.P. Co-operative Bank and other banks is covered Under Section 80P(2)(i) of I.T. Act, 1961 relying on the decisions given by Hon'ble Supreme Court in the cases of CIT v. Karnataka State Cooperative Apex Bank 251 ITR 194 and CIT v. Rani Nath District Central Bank 255 ITR 423.
(ii) In the present case, the deposits have been shown by the assessee bank in its balance sheet-as Investment and therefore in view of the CBDT Circular No. 528 dated. 16.12.88, the income therefrom is to be assessed as Income From Other Sources. In the cases relied on by the Ld. CIT(A), the deposits/ security were held as Stock in Trade and hence income therefrom was held to be Business Income eligible for deduction Under Section 80P(2)(i) of the I.T. Act, 1961.
2. That the order of the ld. CIT(A) being erroneous in law and on facts may be set aside and the order of the assessing officer may be restored.
2. The only issue involved is whether assessee will be entitled to exemption Under Section 80P(2)(a)(i) of interest and discount amounting to Rs. 10,77,60,566/-, commission, exchange and brokerage amounting to Rs. 15,41,695/-, misc. income amounting to Rs. 3,10,792/-, and locker rent amounting to Rs. 1,79,180/-. The A.O. disallowed the claim on the ground that assessee has shown these income from investment and hence they are. assessable as income from other sources. The ld. CIT(A) considered the decision of Hon'ble Supreme Court in Ram Nath District Cooperative Central Bank 265 ITR 423 and in CIT v. Bangalore District Cooperative Central Bank Ltd. 233 ITR 282 and of Gujarat State Cooperative Bank Ltd. 251 ITR 523 and held in assessee's favour and allowed the claim. The ld. CIT(A) observed as under: 4.3. I have carefully considered the reply given by the appellant and perused the assessment order. The' Hon'ble Supreme Court in case of Ram Nath District Cooperative Bank 255 ITR 423 have held that interest on securities and subsidies from government and dividend are business income deduction available Under Section 80P(2)(a)(i) to the appellant. The Hon'ble Supreme Court in case of CIT v. Bangalore District Cooperative Central Bank Ltd. 233 ITR 282 have held , that the cooperative society engaged in banking, interest on government securities and dividends on shares of Industrial Finance Corporation. Find by Tribunal that interest income was attributable to assessee's business, assessee entitled to specific deduction Under Section 80P(2)(a)(i) in respect of such income. Further the Hon'ble Supreme Court in case of CIT v. Karnataka State Cooperative Apex Bank 251 ITR 194, have held that investment made out of reserve fund to enable it to can on banking business. His income of banking business and deduction Under Section 80P(2)(a)(i) is allowable to the assess. As regards locker rent also the Hon'ble Supreme Court in case of Gujarat State Cooperative Bank Ltd. v. CIT 251 ITR 523 have held that the interest earned from utilized for statutory reserves - deposit and borrowings etc. In view of the decision cited as the interest from banking business is allowable as deduction, the Assessing Officer is not justified in not allowing deduction Under Section 80P(2)(a)(i) on the interest of discount amounting to Rs. 10,77,60,556/- Similarly, the commission exchange and brokerage is also related to the banking business activities and the - locker rent is also allowable as per the decision of Hon'ble Supreme Court, therefore, the deduction Under Section 80P(a)(i) is allowable to the assessee on these two items also. As regards the income from sale of non banking assets amounting to Rs. 7,407/-and miscellaneous income of Rs. 3,10,792/- is concerned, the appellant has not brought any material on record to show that these incomes are related to the banking activities, therefore, the Assessing Officer has rightly not allowed deduction Under Section 80P to the appellant in respect of these two items. The disallowance of Rs. 7,407/- and Rs. 3,10,792/- are upheld. The appellant would get relief of Rs. 10,77,60,556/- on account of interest on discount Rs. 15,41,695/- on account of commission exchange and brokerage and Rs. 1,79,180/- on account of locker rent.
3. We have heard the ld. D.R. and considered his submissions, material on record and case laws cited by him. Further, banking business as per Banking Regulations Act, 1949 has been defended as under: Forms of Business in which Banking Companies may engage (i) in addition to the business of banking a banking company may engage on any one or more of the following forms of business, namely; (a) the borrowing, raising, or taking up of money, the lending or advancing a money either upon or without security; the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hunches, promissory notes, coupons, drafts, bills of landing, railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whether transferable or negotiable of not; the granting and issuing of letters of credit, traveller's cheques and circulars notes: the buying and selling of foreign exchange including foreign bank notes, the acquiring, holding, issuing on commission, underwriting and dealing' in stock, funs, shares, debentures, debentures stock, bonds, obligations, securities and investment of all kinds; the purchasing and selling of bonds , scrips or other form of securities on behalf of constituents or others, the negotiating of loans and advances, the receiving of all kinds of bonds, scripts or valuables on deposit or for sale custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities; (b) acting as agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers but excluding the business of a (managing agent or secretary and treasurer) of a company.
(c) contracting for public and private loans and negotiating and issuing the same; (d) the effecting, insuring, guaranteeing, undertaking and issuing the same; (e) The effecting, insuring, guaranteeing , underwriting, participating in managing and carrying out of any issue, public or private of State, municipal or debenture stock of any company corporation or association and the lending of money for the purpose of any such issue; (f) Carrying on any transacting every kind of guarantee and indemnity business; (g) Managing, selling and realizing any property which may come into the possession of the company in satisfaction or post satisfaction of any of its claims; (h) Acquiring and hold and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security, for any loans or advances or which may be connected with any such security; (j) Undertaking the administration or estates as executors, trustee or otherwise; (k) Establishing and supporting or aiding in the establishment and support of association, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons' granting pensions and allowances and making payments towards insurance, subscribing to or guaranteeing money, for charitable or benevolent objects or for any exhibition or for any public general or useful object; (l) The acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company; (m) Selling, improving, managing, developing, exchanging, issuing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company; (n) Acquiring and undertaking the whole or any part of the business of any person of company, when such business is of a nature enumerated or described in this sub section; (o) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; (p) any other form of business which the Central Govt. may by notification in the official gazette, specify as a form of business in which it is lawful for a banking company to engage.
2. No banking company shall engage in any form of business other than those referred to in Sub-section (1).
4. From this, it is clear that Banking business is not confined to merely accepting the deposits and lending it to the borrowers which is usually done out of circulating capital. Banking business extends to large number of activities as outlined above. It includes holding and dealing in stock, bonds, securities, providing safe deposit vaults etc and also activities in investment in addition, to main activity.
Therefore, it is not correct to say that banking business is limited to keeping deposits and lending the same to the borrowers. It is only a common sense presumption but not the legal one.
In Section 5(b) of Banking Regulation Act, banking is also defined as under: Banking means accepting, for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise and withdrawal by cheque, draft or otherwise.
5. We are in agreement with the ld. CIT(A) that the definition of investment is fairly wide and therefore several investments in which assessee is dealing' would be covered in this definition.
6. In M.P. Co-operative Bank Ltd. v. ACIT 218 ITR 438 (S.C.), it was held that where reserve funds of Apex Bank were invested in Govt.
Securities under instructions of the State Government and the Govt.
instructions were that reserve fund could not be utilized as working capital, then interest on Govt. Securities forming part of reserve funds are not entitled to special deduction Under Section 81 (now Section 80P(2)(a)(i)).
7. However, in CIT v. Bangalore District Coop. Central Bank Ltd. 233 ITR 282 (SC). Hon'ble Supreme Court held that where Coop, society is engaged in banking business, then interest earned on government securities and dividend on shares of Industrial Finance Corporation would be business income of the bank and hence it will be entitled for special deduction.
8. As there was a difference of opinion between two judgments of Supreme Court on the issue, the matter was referred to a larger Bench in CIT v. Karnataka State Coop. Apex Bank 251 ITR 13(SC), the larger Bench consisting of three judges of the Hon'ble Supreme Court. In CIT v. Karnataka State Coop. Apex Bank 251 ITR 194 (SC) held as under: Interest arising from investment made, in compliance with statutory provisions to enable it to carry on banking business, out of reserve fund by a cooperative society engaged in banking business, is exempt under Section 80P(2)(a)(i) of the Income tax Act, 1961. The placement of such funds being imperative for the purpose of carrying on banking business the income therefrom would be income from the assessee's business.
There is nothing in the phraseology of Section 80P(2)(a)(i) which makes it applicable only to income derived from working or circulating capital.
Madhya Pradesh Cooperative Bank Ltd. v. Addl. CIT overruled. CIT v. Bangalore District Cooperative Central Bank Ltd. approved.
9. In CIT v. Rathnagiri District Central Coop. Bank Ltd. 254 ITR 697 (Bom) Hon'ble Bombay High Court held that interest earned on Indira Vikas Patra is income from banking business as they were capable of being converted into liquid fluids. Hon'ble Bombay High Court held as under: Held on the facts, that the investments made in Indira Vikas Patras no doubt had an effect of withdrawing funds from the banking business. More withdrawal of fluids is hot sufficient. It must be proved that the withdrawal of funds had resulted in permanent deprivation of funds for banking activity. It ought to have been examined as to whether such investments had an effect of temporary withdrawal of the funds or the investments made in Indira Vikas Patra could be brought back to the banking business. The facts found and available on record suggested that the interest income was attributable to the assessee's business income and the investment made in Indira Vikas Patras was investment made from the fund generated from the banking business. It had a direct, and proximate connection with or nexus with the earning from banking business and attracted the provisions of Section 80P(2)(a)(i). The assessee were entitled to the deduction under Section 80P(2)(a)(i) in relation to income from Indira Vikas Patras. (It was made clear that the judgement was confirmed to the facts of these cases as found by the Tribunal and in some cases by the Commissioner' (Appeals), where in the facts and circumstances, it was held that the Interest income derived item Indira.Vikas Patras by the assessees was clearly from and out of banking business).
10. In CIT v. Ramananthapuram Dist. Coop. Central Bank Ltd. 255 ITR 423 (SC), Hoh'ble Supreme Court, held that interest on securities, subsidies from government and dividend are income from banking business.
Held, that (i) interest on securities (ii) subsidies from the Government, and (iii) dividend received by the assessee, a cooperative society carrying on banking business, were business income of the assessee, and the assessee was entitled to deduction under Section 80P(2)(a)(i) of the' Income tax Act, 1961, in respect thereof.
CIT V. Karnataka State Cooperative Apex Bank and Mehsana District Central Cooperative Bank Ltd. v. ITO followed.
Held also that CIT v. Karnataka State Cooperative Apex Bank and Mehsana District Central Cooperative Bank Ltd. v. ITO are correctly decided.
11. In Mehsana District Coop. Central Bank Ltd. v. ITO 251 ITR 522 (SC), Hon'ble Supreme Court held that interest earned on utilization of statutory reserve as well as voluntary reserve and rent on safe deposit vaults are banking business income.
Where the assessee, a cooperative bank, derived (i) income from utilization of its fluids for statutory reserves Under Section 67(2) of the Gujarat Cooperative Societies Act, 1961 and (ii) income from hiring out of safe deposit vaults; Held (i) that the assessee was entitled to deduction Under Section 80P(2)(a)(i) of the Income-tax Act, 1961, in respect of interest earned from funds utilised for the statutory reserves.
(ii) That provision of safe deposit vaults was part of the ordinary banking business of a bank as shown by Section 6(1)(a) of the Banking Regulation Act, 1949, and , therefore, income derived by the assessee from the hiring out of safe deposit vaults was income from the business of banking and deductible under Section 80P(2)(a)(i).
Decision of the Gujarat High Court in Gujarat State Cooperative Bank Ltd. v. CIT reversed on those points.
Held also that the question whether income derived by the assessee cooperative bank from the investment of its voluntary reserves other than statutory reserves is exempt under Section 80P(2)(a)(i) depends upon whether the voluntary reserves were utilized in the course of its ordinary banking business.
12. In CIT v. Nawanshahar Central Coop. Bank Ltd. 263 ITR 320, it was held that investment in PSEB Bonds are entitled to deduction Under Section 80P(2)(a)(i): Held, that it was admitted that the investment in the PSEB bonds was in the nature of security specified Under Section 20 of the Indian Trusts Act, 1882, and, therefore, was an investment in accordance with the mandatory provision of Section 44 of the Punjab Cooperative Societies Act , 1961. This being so, it was clearly a statutory investment and the interest on this investment was eligible for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961.
There is nothing in the phraseology of that section which makes 'it applicable only to income derived from working or circulating capital. Thus, the question as to whether investment made in the statutory/ reserves had come out of working or circulating capital or out of surplus funds was of no consequence.
13. In CIT v. Sri Rain Shakari Bank Ltd. 266 ITR 632, It was held that income from investment in NSC, IVPS, KVPS and shares in Bank are entitledfor deduction Under Section 80P(2)(a)(i).
The assessee, a registered cooperative society, made investments in National Savings Certificates, Indira Vikas Patra, Kisan Vikas Patras, short term fixed deposits in banks out of its surplus funds.
The Assessing Officer disallowed the deduction claimed by the assessee Under Section 80P(2)(a)(i) of the Income tax Act, 1961. The Commissioner (Appeals) took the view that the deduction was admissible only against the income from Banking business and since the income derived out of the funds was not a part of ordinary banking business of the assessee, the deduction was not admissible.
The Tribunal held that the assessee had rightly claimed the deduction and directed the Assessing Officer to read the assessment by granting deduction. On appeal: Held., that none of the authorities had come to the conclusion that the assessee had not utilised its surplus or voluntary reserve funds in the course of its ordinary banking business. But the view taken by the Commissioner (Appeal) was that the determination of the nature claimed by the asscssee could be granted only in a case where investments were made out of statutory reserve funds. The reasoning was contrary to the law laid down by the Supreme Court. Thus, the view taken by the Tribunal had to be upheld as correct.
14. Similarly in ITO v. Karnataka Central Coop. Bank Ltd. 266 ITR 635 (Kar) it as held that interest and dividend earned from investment in other banks are entitled for deduction under Section 80P. In CIT v.Rajasthan State Coop. Bank 272 ITR 600 (Raj.) It was held that where funds are required to be invested with RBI and SBI then income derived from such funds are banking business income and is entitled for deduction Under Section 80P(2)(a)(i).
15. The present assessee bank has earned interest from other coop, bank on IVP/KVP or on investment. in other banks and bonds from Govt.
Securities on reserve funds investments and from hiring of safe deposit vaults. They are all part of banking business and hence are entitled for deduction Under Section 80P(2)(a)(i).