Commissioner Of Income Taxiii, Hyderabad v. $ The Andhra Pradesh State Cooperative Bank Limited, Hyderabad

* THE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN INCOME TAX TRIBUNAL APPEAL Nos.86 of 2003711, 715, 718 of 2006; 241, 243 of 2007; 50, 107, 149, 162, 163, 289 of2008; 315, 392, 410, 413 of 2010; and 24 of 2011 % 07.6.2011 -# Commissioner of Income TaxIII, Hyderabad VERSUS ... Appellants $ The Andhra Pradesh State Cooperative Bank Limited, Hyderabad... Respondent < GIST: > HEAD NOTE: ! Counsel for Appellants: M/s.S.R.Ashok, A.V.Krishna Koundinya, V.R. Badri ^Counsel for Respondents: M/s.C.Kodanda Ram, K.Vasant Kumar, S.Ravi, N.Siva Reddy, K.Krishna Masthan, Y.Ratnakar, A.V.Raghu Ram, Dr.C.P.Ramaswami, Ms.Anjali Agarwal ? Cases referred1)(2001) 251 ITR 194 (SC) : (2001) 7 SCC 654 : AIR 2001 SC 3332 2)(2001) 251 ITR 522 (SC) : (2009) 17 SCC 6213)(2009) 318 ITR 62 (Uttarakhand)4)AIR 1967 SC 16265)(2004) 266 ITR 282 (Bom)6)(2010) 323 ITR 1 (HP)7)(2010) 323 ITR 202 (All)8)(2004) 289 ITR 6 (SC) : (2007) 17 SCC 6119)(1978) 113 ITR 84 (SC) : (1978) 2 SCC 644 : AIR 1978 SC 109910)(1990) 176 ITR 117 (SC) : AIR 1990 SC 124911)(1992) 196 ITR 188 (SC) : AIR 1992 SC 1622 : (1992) 3 SCC 7812)(1993) 204 ITR 412 (SC) : AIR 1993 SC 2529 : (1993) 91 STC 450 (SC)13)(1960) 39 ITR 114 (SC) : AIR 1960 SC 78914)(1968) 70 ITR 86 (SC)15)(1996) 218 ITR 438 (SC) : (1996) 2 SCC 54116)(1998) 232 ITR 282 (SC) : (1998) 6 SCC 129 : AIR 1999 SC 295517)(2008) 306 ITR 392 (SC) : (2008) 9 SCC 33718)(2002) 255 ITR 423 (SC) : (2009) 17 SCC 620 19)(2003) 63 ITR 63 (P&H)20)(2010) 3 SCC 223 THE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN INCOME TAX TRIBUNAL APPEAL Nos.86 of 2003711, 715, 718 of 2006; 241, 243 of 2007; 50, 107, 149, 162, 163, 289 of2008; 315, 392, 410, 413 of 2010; and 24 of 2011 June 07, 2011 Between: -Commissioner of Income TaxIII, Hyderabad AND … Appellant The Andhra Pradesh State Cooperative Bank Limited, Hyderabad … Respondent THE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN INCOME TAX TRIBUNAL APPEAL Nos.86 of 2003 711, 715, 718 of 2006; 241, 243 of 2007; 50, 107, 149, 162, 163, 289 of2008; 315, 392, 410, 413 of 2010; and 24 of 2011 COMMON JUDGMENT:(Per Hon’ble Sri Justice V.V.S.Rao) In this group of Income Tax Tribunal Appeals under Section260A of the Income-tax Act, 1961 (hereafter, the Act) the commonquestion of law raised by the Revenue is whether a cooperativesociety carrying on the business of banking is entitled to claimexemption under Section 80P(2)(a)(i) of the Act in respect of theincome derived out of the investments made from voluntaryreserves of such society? At the outset, we may notice the factualbackground in ITTA No.86 of 2003 filed by the Commissioner ofIncome Tax-III, Hyderabad against the Andhra Pradesh StateCooperative Bank Limited (the APCOB). INCOME TAX TRIBUNAL APPEAL Nos.86 of 2003 711, 715, 718 of 2006; 241, 243 of 2007; 50, 107, 149, 162, 163, 289 of2008; 315, 392, 410, 413 of 2010; and 24 of 2011 COMMON JUDGMENT:(Per Hon’ble Sri Justice V.V.S.Rao) In this group of Income Tax Tribunal Appeals under Section260A of the Income-tax Act, 1961 (hereafter, the Act) the commonquestion of law raised by the Revenue is whether a cooperativesociety carrying on the business of banking is entitled to claimexemption under Section 80P(2)(a)(i) of the Act in respect of theincome derived out of the investments made from voluntaryreserves of such society? At the outset, we may notice the factualbackground in ITTA No.86 of 2003 filed by the Commissioner ofIncome Tax-III, Hyderabad against the Andhra Pradesh StateCooperative Bank Limited (the APCOB). The APCOB is a cooperative society engaged in thebusiness of banking. For the assessment year 1997-98 they filedreturn declaring Rs.57,652/- as income from the property andRs.83,60,46,867/- as income from the business of banking. Theassessee claimed deduction of business income under Section80P(2)(a)(i) of the Income-tax Act. The assessing officer, namely,the Deputy Commissioner of Income-tax took up the return forscrutiny and found that the assessee had Rs.61,87,16,546/- asstatutory reserve invested in short term and long term deposits. During the assessment year the interest income from the depositsstood at Rs.7,02,69,336/-. This was claimed as deduction beinginterest from the business of banking. Out of this, an amount ofRs.6,95,66,643/- was disallowed by the assessing officer on theground that the assessee did not obtain prior approval in respect ofinvestments against statutory reserves as required under Section46 of the Andhra Pradesh Cooperative Societies Act, 1964 (theSocieties Act) and Rule 37(2) of the Andhra Pradesh CooperativeSocieties Rules, 1964 (the Societies Rules). The assessing officercame to the conclusion that the investments against reserve fundsin all cases of cooperative banks cannot be treated as investmentsfor the purpose of Statutory Liquidity Ratio (SLR), that even if it isin tune with Reserve Bank of India (RBI) guidelines SLR under theBanking Regulation Act, 1949 (the BR Act) and the reserve fundunder the Societies Act are different from each other, that even ifinvestment of reserve fund is treated as SLR compliance theassessee has to obtain necessary approval before exercising thechoice, and that the factum of utilization of reserve fund for thebusiness should be taken into consideration for the purpose ofallowing relief under the Act. Even though the assessee producedthe proceedings of the Registrar of Cooperative Societies (theRCS) issued on 30.10.1996 approving utilization of investmentsagainst reserves for the purpose of business, the assessing officer did not give weight to the same on the ground that it does not relateback to actual utilization by the assessee during the previous year. In the appeal against the assessment order dated 27.3.2000,the CIT (Appeals) treated the letter dated 30.10.1996 issued by theRCS as sufficient compliance with Section 46 of the Societies Actread with Rule 37(2) of the Societies Rules. The appellate authorityconsidered the interest accruing from 30.11.1996 as qualified fordeduction and came to the conclusion that the restrictions forutilization of reserve fund in banking business would not beapplicable if prior sanction of the RCS is obtained by thecooperative society and that such sanction would not, however, benecessary if the investments are made in SLR securities, and thatin the absence of any prior sanction the investments made in non-SLR securities would not be eligible for exemption under Section80P(2)(a)(i) of the Act. He also held that, the income on theinvestments in securities against reserve fund not utilized for SLRpurposes (non-SLR investments not being under any compulsion)under any provisions of the BR Act have to be treated at par withsimilar investments by any other business activity. They are,therefore, not attributable to banking business and consequently willnot qualify for exemption. While holding that the interest incomerelatable to non-SLR investments accrued during the period from31.10.1996 to 31.3.1997 will not qualify for exemption, the appealwas partly allowed directing the assessing officer to modify theassessment order accordingly. APCOB’s appeal being ITA No.694/Hyd/2000 under Section253 of the Act before the ITAT, Hyderabad Bench “A” was heardalong with the cross appeals filed by the Revenue. By commonorder dated 25.9.2001, the appeals filed by the assessees wereallowed and the appeals filed by the Revenue were dismissed. Thelearned Tribunal held that no distinction can be made of incomeearned from SLR securities and non-SLR securities with the incomearising from investments made out of reserve fund under Section 80P(2)(a)(i) of the Act. In coming to this conclusion, the learnedTribunal relied on the decision of the Supreme Court inCIT vKarnataka State Cooperative Bank Ltd[[1]]. The Senior Counsel for the Income-tax, Mr.S.R.Ashok, wouldrely onKarnataka State Cooperative Bank, Mehsana Dist. CentralCooperative Bank Ltd v ITO[[2]]andCIT v Nainital Dist. CooperativeBank[[3]]to submit that every cooperative society engaged in thebusiness of banking is regulated by the Societies Act and theSocieties Rules, the BR Act and the Reserve Bank of India Act,1934 (the RBI Act). Every cooperative bank is under an obligationto adhere to SLR norms prescribed by the RBI from time to time. Income from SLR reserve is alone qualified for exemption and theincome derived from other investments is not deducible underSection 80P(2)(a)(i) of the Act. He would further contend that theincome from the investment of non-statutory reserves voluntarily isoutside the purview; not attributable to the banking business and,therefore, the income derived from non-SLR is not entitled fordeduction under the said provision. M/s.C.Kodanda Ram, Senior Counsel, Y.Ratnakar, Dr.C.P.Ramaswami and A.V.Raghu Ram appearing for the assesses,would contend that there cannot be any distinction between theinterest income earned from the banking business and voluntaryreserves and that there is no concept of voluntary or non-statutoryreserves in the banking industry. In law, a cooperative bank isrequired to keep certain amount as reserve and the other money isstock in trade for the cooperative society which can be used forearning more money. A cooperative society is not expected tokeep its cash reserve or so-called non-SLR funds idle to thedetriment of the business and, therefore, any income earned byinvestment of any funds of the bank is attributable to bankingbusiness. The Senior Counsel also raised a preliminary objectionas to maintainability of the appeals. Referring to the question of law framed in the memorandum of appeals by the Revenue he wouldurge that when the question of law is neither raised before theTribunal nor considered, it cannot be permitted to be raised beforethe High Court. The High Court cannot adjudicate such a questionwhich was not raised before the Tribunal. He relies on the decisionof the Supreme Court inS.P.Mansinghka (P) Ltd v CIT[[4]].In supportof their contention on the core issue the Counsel relied on KarnatakaState Cooperative Bank, Mehsana DCCB, CIT v Sri Ram Sahakari BankLtd[[5]],CIT v H.P. State Cooperative Bank Ltd[[6]],CIT v Muzaffar NagarKshetriya Gramin Bank Ltd[[7]]andCIT v Nawanshahar CentralCooperative Bank Ltd[[8]]. Maintainability of appeal Before taking up the core issue, we would address thequestion of maintainability. Section 260A of the Act was insertedby the Finance (No.2) Act, 1998 with effect from 01.10.1998. Sections 256, 257, 260 and 261 were also amended to provide anappeal to the High Court directly against orders of the Tribunal. The appellate power, however, was limited to consideration of asubstantial question of law. Section 260A(2)(c) of the Actmandates that proceedings under Section 260A(1) of the Act shallbe in the form of memorandum of appeal precisely stating thesubstantial question of law involved in the case. Prior toamendments introduced by the Finance (No.2) Act, 1998, theTribunal was the final adjudicatory forum in so far as finding of factsare concerned. If any question of law is raised either by theRevenue or by the assessee, the Tribunal was empowered underSections 256(1) and (2) of the Act to state the case and refer thequestion of law arising out of the order of the Tribunal in appeal tothe jurisdictional High Court. The answer by the High Court on thequestion of law would then be the basis for the Tribunal to disposeof the appeal before them during pre-1998 period. A question of law referred to the High Court under Sections 256(1) and (2) of the Actand a question of law pleaded in the memorandum under Section260A of the Act is not an academic or general question of law. Such question of law should be one which “arises out of an order ofthe Tribunal in an appeal or proceeding before them under Section 256and a substantial question of law which is involved in the case.” If a question of law was not raised before the Tribunal or suchquestion of law does not arise out of the case decided by theTribunal, an appeal under Section 260A of the Act is barred. Tothat extent, the Senior Counsel is correct and is well supported bythe ratio in S.P.Mansinghka (P) Ltd. The said case arose underSection 55 of the 1922 Act which is the precursor of Section 256(1)of the Act. Ruling on the scope of the said provision, the DivisionBench of the Supreme Court observed that, “when a question of lawis neither raised before the Tribunal nor considered by it, will not be aquestion arising out of the order of the Tribunal and the High Court willbe acting beyond its jurisdiction in dealing with any such question”. Whether this binding ratio bars these appeals? We are afraid thisaspect of the matter does not arise in these cases. We have giventhe précis of the orders of the CIT (Appeals) as well as the Tribunalimpugned in these appeals. Before the CIT (Appeals) the assesseeraised the plea that the investment of non-SLR reserves voluntarilyalso amounts to business of banking and that the income therefromis attributable to the main activity. Before the Tribunal theassessee filed appeal in so far as the department appeal wentagainst them, and the Revenue also filed appeals. The questionwas specifically raised and a specific issue was framed by theTribunal touching upon this aspect. After perusing the orders of theCIT (Appeals) as well as the Tribunal, we are convinced that, theRevenue specifically raised the issue and also tried to distinguishthe decision of the Supreme Court relied on by the assessee. We,therefore, reject the submission of the Senior Counsel and hold that these appeals are maintainable and the question of law raised inthese appeals was very much in issue before the CIT (appeals) aswell as before the Tribunal. Whether the income from voluntary reserves is exempted Chapter VIA of the Act stipulates that in computing the totalincome of an assessee, there shall be allowed from his gross totalincome, in accordance with and subject to the provisions of thisChapter, the deductions specified in Sections 80C to 80U. Thechapter is divided into four distinct parts, namely, A to D. Part Ddeals with deductions in respect of certain incomes. Section 80P isa special provision providing for the deduction in respect of incomeof co-operative societies. As defined in Section 2(19) of the Act,“co-operative society” means “a co-operative society registeredunder the Co-operative Societies Act, 1912, or under any other lawfor the time being in force in any State for the registration of co-operative societies”. Insofar as relevant for the purpose,subsections (1) and (2) of Section 80P of the Act read as under.80-P . DEDUCTION IN RESPECT OF INCOME OF COOPERATIVESOCIETIES.—(1) Where, in the case of an assessee being acooperative society, the gross total income includes any incomereferred to in sub-section (2), there shall be deducted, inaccordance with and subject to the provisions of this section, thesums specified in sub-section (2), in computing the total incomeof the assessee.(2) The sums referred to in sub-section (1) shall be the followingnamely:—(a)in the case of a cooperative society engaged in—(i)carrying on the business of banking or providing creditfacilities to its members, or (ii)a cottage industry, or(iii)the marketing of agricultural produce grown by its members, or(iv)the purchase of agricultural implements, seeds, livestock or otherarticles intended for agriculture for the purpose of supplying them to itsmembers, or(v)the processing, without the aid of power, of the agricultural produceof its member, or(vi)the collective disposal of the labour of its members, or(vii)fishing or allied activities, that is to say the catching, curing,processing, preserving, storing or marketing of fish or the purchase ofmaterials and equipment in connection therewith for the purpose ofsupplying them to its members.The whole of the amount of profits and gains of businessattributable to any one or more of such activities:Provided that in the case of a cooperative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members,namely:—(1)the individuals who contribute their labour or, as the case may be,carry on the fishing or allied activities;(2)the cooperative credit societies which provide financial assistance to thesociety;(3)the State Government;(4) The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or aprimary co-operative agricultural and rural development bank.Explanation.—For the purposes of this sub-section,—(a)“co-operative bank” and “primary agricultural credit society” shallhave the meanings respectively assigned to them in Part V of theBanking Regulation Act, 1949 (10 of 1949);(b)“primary co-operative agricultural and rural development bank”means a society having its area of operation confined to a taluk andthe principal object of which is to provide for long-term credit foragricultural and rural development activities.(clauses (b) to (f) of subsection 3 omitted as not relevant) The whole of amount of profits and gains of business‘attributable to’ one or more such activities is eligible for exemptionunder the above provision. In plain terms, if a cooperative societyis engaged in carrying on the business of banking the amountearned from any one or more such activities in relation to thebusiness of banking can be claimed as deduction. The word‘attributable’ was considered by the Supreme Court in CambayElectric Supply Industrial Co. Ltd v CIT[[9]]holding that, “the expression‘attributable to’ is certainly wider in import than the expression ‘derivedfrom’.” It was also held that by using the expression ‘attributableto’, the legislature intended to cover receipts from sources otherthan the actual conduct of business. Section 80P of the Act grants deduction in respect of variouscategories of income of a cooperative society. If any cooperativesociety carries on the business of banking, the interest incomereceived by a cooperative society on its investment/deposits isattributable to banking business. The provision does not make anydistinction in so far as the interest earned by deposit in a bank andinterest earned on the compulsive deposit which is made asrequired under the relevant statute. It is no doubt true that acooperative society may be required to earmark some portion of its capital for exclusive deposit in Government prescribed securities orbanks. A cooperative society may earn profits by way of interestby parking their funds in high-yielding deposits or may earn incomeby circulating its capital among its members in the course of theirbanking business. All the income from banking business which isreferable to Section 80P(2)(a)(i) of the Act would qualify fordeduction under the Act. ‘The business of banking’ is one of many expressions notdefined in the Act. Which are the activities that can be consideredattributable to the business of banking? Indisputably the assesses,in these cases being cooperative banks, are subject to theregulations under the RBI Act, the BR Act and the Societies Act. There is also no dispute that all these assesses, in these cases,obtained licences under the BR Act. They are bound to comply withall the orders, rules and regulations issued by the RBI whilecarrying on banking business. Section 5(b) of the BR Act defines“banking” to mean, “accepting for the purpose of lending or investment,of deposits of money from the public, repayable on demand orotherwise, and withdrawable by cheque, draft, order or otherwise”. Asper Section 5(c) of the BR Act “banking company” means “anycompany which transacts the business of banking in India”. Section 6of the BR Act lists ‘any one or more’ of the forms of the business asenumerated in Sections 6(1)(a) to (o) of the BR Act in addition tothe business of banking. Section 6(1)(a) of the BR Act enumeratesevery conceivable activity of banking including, “the receiving of allkinds of bonds, scrips or valuables on deposit or for safe custody orotherwise; the providing of safe deposit vaults; the collecting andtransmitting of money and securities” and under Section 6(1)(n) of theBR Act, the doing of all such other things as are incidental orconducive to the promotion or advancement of the business of thecompany. Thus reading of Sections 5(b), (c) and Section 6 of theBR Act along with Section 80P(2)(a) of the Act, it becomes clear that the income received by a cooperative bank from deposits,whether or not they are made in discharge of a statutory obligationor otherwise being income from banking business, would be eligiblefor exemption under the said provision. that the income received by a cooperative bank from deposits,whether or not they are made in discharge of a statutory obligationor otherwise being income from banking business, would be eligiblefor exemption under the said provision. Does Section 80P(2)(a) of the Act make a distinctionbetween income received by a cooperative bank from statutorydeposits and the income from non-statutory deposit of surplusfunds? The answer must be in the negative. The income earned bythe cooperative bank either by deposit of the prescribed percentageof its reserves or by deposit of their surplus funds is exempted. The income from either category of the deposits is certainlyattributable to the business of banking. Indeed as a prudentbusiness practice, no banking company or no entity engaged in thebusiness of banking would keep its amount idle. By parking thefunds, immediately not required for the business in other banks,interest can be earned to the benefit of the cooperative society. Every cooperative society is expected to make profits for thebenefit of its members. As long as the deposit of the surplus fundsin the other banks for the purpose of earning interest is notunauthorized or not barred by any of the applicable statutes, theincome is certainly attributable to the business of banking. There isno concept of voluntary or non-statutory reserves as urged by theRevenue. In so far as the profits and gains from the business ofbanking by deposit of surplus funds of the bank is concerned, therecannot be any distinction between SLR reserves and non-SLRreserves although the maintenance of cash reserve and SLR areobligatory under below referred provisions of the RBI Act and theBR Act. Section 45 of the Societies Act lays down the method andmanner of disposal of the profits earned by the cooperativesociety. Under Section 45(3)(a) of the Societies Act, a cooperativesociety shall transfer not less than 25% of net profit to the reservefund and in case the total amount transferred becomes equal to the amount of paid up capital, the amount to be transferred can bereduced to a sum not less than 10% of such profits. For doing sothe prior permission of the RCS is required. Section 46 of theSocieties Act requires every society to act with due care anddiligence and invest or deposit its funds which are not immediatelyrequired for the business of the society either in postal savingsbanks, securities specified in Section 20 of the Indian Trusts Act,1882, in the shares and securities of any other society or with anyNationalised Bank or Scheduled Bank or the concerned DistrictCooperative Central Bank. As per Rule 37 of the Societies Rulesreserve fund is intended to meet unforeseen losses. When thereserve fund of the society exceeds 25% of its working capital, theexcess can be utilized in the business of the society with thesanction of the RCS. In other words, a cooperative bank can utilizethe reserve fund over and above 25% of the working capital for thepurpose of banking business which includes the deposits whichyield interest. Further when a society is prohibited by its by-lawsfrom borrowing either from its members or others, the whole of itsreserve fund may be utilized in its business. If a cooperative bankderives income by lending money to its members the same beingbusiness of banking, is eligible for deduction. Therefore, to say thatthe income derived from voluntary non-statutory deposits would notbe eligible for deduction is illogical and cannot be sustained. As amatter of fact, in all these cases, a finding was recorded that theRCS issued necessary permission to the assesses to use thesurplus reserve fund for the banking business. Assuming that thereis no such sanction of the RCS for utilization of the reserve fund inthe business of the society the same will not make any difference inso far as deduction allowed by Section 80P(2)(a)(i) of the Act. The assessee cooperative banks are scheduled banks asdefined under Section 2(e) of the RBI Act read with the SecondSchedule thereto. As per Section 42 of the RBI Act, every The assessee cooperative banks are scheduled banks asdefined under Section 2(e) of the RBI Act read with the SecondSchedule thereto. As per Section 42 of the RBI Act, every schedule bank shall maintain with RBI an average daily balance,the amount of which shall not be less than such percentage of thetotal demand and time liabilities in India as may be notified by theRBI. In addition to the cash reserve to be maintained by the RBI,every banking company is required to create a reserve fund and,before declaration of dividend, transfer to the reserve fund a sumequivalent not less than 20% of such profit. Further, under Section18 of the BR Act, every banking company, not being a scheduledbank, shall maintain cash reserve with itself or by way of balance ina current account with the RBI. Such cash reserve shall beequivalent to at least 3% of total of its demand and time liabilitiesas on the last Friday of the second preceding fortnight. UnderSection 24(2-A) of the BR Act in addition to the daily balancerequired to be maintained under Section 42 of the RBI Act and cashreserve required to be maintained under Section 18 of the BR Act,every banking company shall maintain not less than 25% or suchother percentage as prescribed by the RBI, in cash or gold valuedat a price not exceeding the current market price or inunencumbered approved securities. This, in banking parlance, isoften referred to as SLR. The SLR to be maintained by acooperative bank is dealt with by Section 24 of the BR Act asmodified by Section 56 of the said Act. The SLR, cash reserve orreserve fund required to be maintained by a scheduled bank or acooperative bank under the provisions of the RBI Act or the BR Actas referred to herein above, are all the activities which are part ofbusiness of banking. The non-SLR and non-reserve fund is stock-in-trade for a cooperative bank for the business of banking asdefined under Sections 5(b) and (c) read with Section 6 of the BRAct. In so far as the income earned from these deposits isconcerned, Section 80P(2)(a)(i) of the Act does not make anydifference nor it is possible to read any such limitation havingregard to the language of the said provision. Every income“attributable to any or more of business of banking” shall be deducted from the gross total income. It is well settled that a provision for deduction or tax reliefshould be interpreted liberally in favour of the assessee. Such aprovision should be construed as to fully achieve the object of thelegislature and not to defeat it (seeCIT v South Arcot Distt. Coop.Marketing Society Ltd[[10]],Bajaj Tempo Ltd., Bombay v CIT[[11]]and CIT vN.C.Budha Raja & Co.,[[12]]). Applying the settled rule of interpretationand liberally interpreting sub-section 2(a)(i) of Section 80P of theAct, the conclusion is inevitable that whatever be the amount ofprofits and gains of business of a cooperative society attributable toits banking transactions or credit transactions with members isexempt from income tax. If Section 80P(2)(a) of the Act is givenrestrictive meaning as including the interest earned only on thestatutory deposits made by a cooperative society, it would amountto supplying causus omissus and has to be avoided by the Court. InBihar State Co-operative Bank Ltd v CIT[[13]]the SupremeCourt considered the scope of the notification issued by the CentralBoard of Revenue under Section 60 of the Income Tax Act, 1922(1922 Act) which exempted the profits of any cooperative societyfrom the tax payable under the 1922 Act. The assessing officergranted exemption but, in the reassessment proceedings, the orderof the assessing officer was reversed, and the Income TaxAppellate Tribunal (ITAT) referred the matter to the High Courtunder Section 66(1) of the 1922 Act. The Revenue argued thatmoneys laid out in deposit in other banks stand apart and,therefore, do not get the benefit of exemption. Repelling thesubmission, the unanimous Division Bench of the Supreme Courtheld as follows. InBihar State Co-operative Bank Ltd v CIT[[13]]the SupremeCourt considered the scope of the notification issued by the CentralBoard of Revenue under Section 60 of the Income Tax Act, 1922(1922 Act) which exempted the profits of any cooperative societyfrom the tax payable under the 1922 Act. The assessing officergranted exemption but, in the reassessment proceedings, the orderof the assessing officer was reversed, and the Income TaxAppellate Tribunal (ITAT) referred the matter to the High Courtunder Section 66(1) of the 1922 Act. The Revenue argued thatmoneys laid out in deposit in other banks stand apart and,therefore, do not get the benefit of exemption. Repelling thesubmission, the unanimous Division Bench of the Supreme Courtheld as follows. As we have pointed out above, it is a normal mode ofcarrying on banking business to invest moneys in a mannerthat they are readily available and that is just as much a part ofthe mode of conducting a Bank’s business as receivingdeposits or lending moneys or discounting hundies or issuingdemand drafts. That is how the circulating capital is employedcarrying on banking business to invest moneys in a mannerthat they are readily available and that is just as much a part ofthe mode of conducting a Bank’s business as receivingdeposits or lending moneys or discounting hundies or issuingdemand drafts. That is how the circulating capital is employed and that is the normal course of business of a bank. Themoneys laid out in the form of deposits as in the instant casewould not cease to be a part of the circulating capital of theappellant nor would they cease to form part of its bankingbusiness. The returns flowing from them would form part of itsprofits from its business. In a commercial sense the directorsof the Company owe it to the bank to make investments whichearn them interest instead of letting moneys lie idle. It cannotbe said that the funds of the bank which were not lent toborrowers but were laid out in the form of deposits in anotherbank to add to the profit instead of lying idle necessarily ceasedto be a part of the stock-in-trade of the bank, or that the interestarising therefrom did not form part of its business profits. InCIT v Bombay State Cooperative Bank Ltd[[14]],the SupremeCourt held in favour of the respondent therein that the interestreceived from Government securities held by the society as itsstock-in-trade qualified for exemption under the Government ofIndia notification issued under Section 60 of the 1922 Act. RelyingonBihar Sate Cooperative Society Ltdthe Supreme Court observedthat the business of banking is not restricted to receiving depositsand lending money of its price or other Societies and that themoney laid out in the form of deposit did not cease to be part ofcirculating capital earning and interest from the deposits arose fromthe business of banking and, therefore, exempt from income-taxunder the above mentioned notification. Karnataka State Cooperative Apex Bankwas concerned withthe exemption of interest income from mandatory investment madeout of the reserve fund. As there was a conflict between theM.P.Coop. Bank Ltd v CIT[[15]]andCIT v Bangalore Distt. Coop. Central BankLtd[[16]], a three Judge Bench of the Supreme Court considered thematter and agreed withBangalore Coop. Central Bank. In M.P. Coop.Bank,it was held that the interest on Government securities placedwith the State Bank or Reserve Bank would not qualify forexemption under Section 80P of the IT Act and that suchinvestment could not be regarded as an essential part of bankingactivity. On the contraryBangalore Coop. Central Banktook the view Karnataka State Cooperative Apex Bankwas concerned withthe exemption of interest income from mandatory investment madeout of the reserve fund. As there was a conflict between theM.P.Coop. Bank Ltd v CIT[[15]]andCIT v Bangalore Distt. Coop. Central BankLtd[[16]], a three Judge Bench of the Supreme Court considered thematter and agreed withBangalore Coop. Central Bank. In M.P. Coop.Bank,it was held that the interest on Government securities placedwith the State Bank or Reserve Bank would not qualify forexemption under Section 80P of the IT Act and that suchinvestment could not be regarded as an essential part of bankingactivity. On the contraryBangalore Coop. Central Banktook the view that the interest income on the investment made in compliance withthe statutory provisions in order to carry on the business of bankingare part of the business activities falling within the scope of Section80P(2)(a)(i) of the IT Act. This decision is an authority for theproposition that, even though the investment made in theGovernment securities in compliance with the statutory provisionsdoes not form part of stock in trade or working capital, still theinterest income therefrom would qualify for exemption underSection 80P of the IT Act. InMehsana District Central Co-op. Bankthe Supreme Courtreiterated the test observing that to be able to answer the questionwhether deduction under Section 80P(2)(a)(i) of the IT Act can beallowed, it is necessary to ascertain whether the income derived bya cooperative society from the investment of its voluntary reserveshas been utilized by it in the course of its ordinary business. It washeld therein that interest income upon statutory reserves is eligiblefor deduction. InCIT v Ponni Sugars and Chemicals Limited[[17]]the SupremeCourt considered the conditionalities for availing exemption underSection 80P(2)(a)(i) of the IT Act. The relevant observations are asfollows. Under Section 80P(1), where the gross total income of a co-operative society includes any income referred to in Sub-section(2) then the sums specified in Sub-section (2) shall be deductedfrom the gross total income to arrive at the total income of theassessee-society. In order to earn exemption under Section80P(2) a co-operative society must prove that it had engaged itselfin carrying on any of the several businesses referred to in Sub-section (2). In that connection, it is important to note that underSub-section (2), in the context of co-operative society, Parliamenthas stipulated that the society must be engaged in carrying on thebusiness of banking or providing credit facilities to its members.Therefore, in each case, the Tribunal was required to examinethe Memorandum of Association, the Articles of Association, theReturn of Income filed with the Department, the status ofbusiness indicated in such Returns etc. (emphasis supplied) InCIT v Ramanathapuram Distt. Coop. Central Bank Ltd[[18]], following theKarnataka State Coop Apex Bank,another three JudgeBench of the Supreme Court agreed with the view of the High Courtof Madras that the interest on securities, subsidies received fromthe Government and dividend of the cooperative society is entitledto deduction under Section 80P(2)(a)(i) of the IT Act. This case isan authority for the proposition that dividend income also wouldqualify for exemption. (emphasis supplied) InCIT v Ramanathapuram Distt. Coop. Central Bank Ltd[[18]], following theKarnataka State Coop Apex Bank,another three JudgeBench of the Supreme Court agreed with the view of the High Courtof Madras that the interest on securities, subsidies received fromthe Government and dividend of the cooperative society is entitledto deduction under Section 80P(2)(a)(i) of the IT Act. This case isan authority for the proposition that dividend income also wouldqualify for exemption. Nawanshahar Central Coop Bank Limited, a cooperative societyregistered under the Punjab Cooperative Societies Act, 1961,claimed deduction of interest from investment of amount in PSEBBonds, 2003 First Series (the Bonds). The assessing officerdisallowed the claim taking a view that the income from the Bondscould not be treated to be income attributable to the bankingbusiness within the meaning of Section 80P(2)(a)(i) of the IT Act. The assessee’s appeal failed but the appellate Tribunal allowed theclaim. Before the Punjab and Haryana High Court the question waswhether the income from investment in the Bonds is entitled todeduction under the IT Act. Observing that the investment was inaccordance with the mandatory provisions of Section 44 of thePunjab Co-operative Societies Act, 1961 the Punjab and HaryanaHigh Court inCIT v Nawanshahar Central Cooperative Bank Ltd.,[[19]]ruled that, “such income would be automatically entitled to deductionand that it is only in respect of the voluntary reserves that it is necessaryto find as to whether the investment had been made in the ordinarycourse of banking business”. The decision of the Punjab andHaryana High Court was affirmed inNawanshahar Cooperative Central Bank, wherein the Supreme Court observed as under. This Court has consistently held that investments made by abanking concern are part of the business of banking. The incomearising from such investments would, therefore, be attributable to thebusiness of bank falling under the head “Profits and gains of business”and thus deductible under Section 80-P(2)(a)(i) of the Income Tax Act,1961. This has been so held in Bihar State Coop.Bank Ltd. v. CIT,(1960) 39 ITR 114 (SC) : AIR 1960 SC 789, CIT v. Karnataka StateCoop.Apex Bank, (2001) 251 ITR 194 (SC) : (2001) 7 SCC 654 : AIR2001 SC 3332, and CIT v. Ramanathapuram Distt. Coop.CentralBank Ltd., (2002) 255 ITR 423 (SC): (2009) 17 SCC 620.banking concern are part of the business of banking. The incomearising from such investments would, therefore, be attributable to thebusiness of bank falling under the head “Profits and gains of business”and thus deductible under Section 80-P(2)(a)(i) of the Income Tax Act,1961. This has been so held in Bihar State Coop.Bank Ltd. v. CIT,(1960) 39 ITR 114 (SC) : AIR 1960 SC 789, CIT v. Karnataka StateCoop.Apex Bank, (2001) 251 ITR 194 (SC) : (2001) 7 SCC 654 : AIR2001 SC 3332, and CIT v. Ramanathapuram Distt. Coop.CentralBank Ltd., (2002) 255 ITR 423 (SC): (2009) 17 SCC 620. The principle in these cases would also cover a situation where a cooperative bank carrying on the business of banking isstatutorily required to place a part of its funds in approved securities. InH.P. State Cooperative Bank Ltd, the assessee earnedinterest of deposits made out of non-SLR funds. The Tribunal heldin favour of the assessee and allowed exemption under Section80P(2) of the Act. A Division Bench of the Himachal Pradesh HighCourt held that the interest earned on deposits made out of non-SLR funds is directly attributable to the business of banking and,therefore, exempt from income-tax. The Division Bench made the following observations with which we respectfully agree. The principle in these cases would also cover a situation where a cooperative bank carrying on the business of banking isstatutorily required to place a part of its funds in approved securities. InH.P. State Cooperative Bank Ltd, the assessee earnedinterest of deposits made out of non-SLR funds. The Tribunal heldin favour of the assessee and allowed exemption under Section80P(2) of the Act. A Division Bench of the Himachal Pradesh HighCourt held that the interest earned on deposits made out of non-SLR funds is directly attributable to the business of banking and,therefore, exempt from income-tax. The Division Bench made the following observations with which we respectfully agree. Any banking institution, carrying on banking business will not keep itsreserves uninvested where they earn no income. The question whicharises is whether the income earned on account of interest on depositsmade out of the non SLR funds can be said to be attributable to thebanking activities of the bank. There can be no dispute with thepreposition that the word attributable is much wider in scope thanderived. The Legislature has used the words "attributable to" inconjunction with the phrase "any one or more of such activities". ... ... The words used by the legislature are very important.The first word used is attributable, which is much wider in scope thanthe word derived. The second phrase used is any one or more of suchactivities. Any banking business providing credit facilities to itsmembers and investing the sums deposited by the members of thesociety is part of banking business. ... ... We are, therefore, of the considered view that theinvestment of the funds by the banks including the non reserves werepart of the banking activities since no bank would like its reserve fundsto remain idle and not earn any interest. This is not only prudentbusiness management but is also a part of the activity of banking.Therefore, the interest earned on such deposits is directly attributableto the business of banking. The Allahabad High Court also took a similar view in Muzaffar Nagar Kshetriya Gramin Bank Ltdobserving that the depositexceeding SLR was also in relation to banking activity, and henceincome accrued out of such deposit is also attributable to thebanking business which is deductible under Section 80P(2)(a)(i) ofthe Act. The Senior Counsel for the Revenue brought to our noticethe decision of Uttarakhand High Court inNainital Dist. CooperativeBankwherein it was held that the income received by a cooperativebank from house property is not covered under income frombanking business. Our attention has also been invited toTotgars’ Cooperative Sale Society Limited v ITO[[20]]in support of hiscontentions. As observed by the Supreme Court therein the saiddecision was confined to the facts of the said case and theirLordships were not dealing with cases relating to cooperativebanks. Both the decisions, therefore, do not assist the learnedSenior Counsel. In all these appeals, the learned Tribunal correctlyrecorded a finding that the income earned by the respondents/cooperative banks is attributable to the business of banking and,therefore, exempt from income-tax under Section 80P(2)(a)(i) of theAct. We do not find any reason to disagree with the view of thelearned Tribunal. In the result, for the above reasons, these appeals fail andare, accordingly, dismissed, without any order as to costs. _______________ (V.V.S.RAO, J) June, 2011 ______________________________ (RAMESH RANGANATHAN, J) NOTE:L.R. Copy be marked.(By order)YS In the result, for the above reasons, these appeals fail andare, accordingly, dismissed, without any order as to costs. _______________ (V.V.S.RAO, J) June, 2011 ______________________________ (RAMESH RANGANATHAN, J) NOTE:L.R. Copy be marked.(By order)YS [1](2001) 251 ITR 194 (SC) : (2001) 7 SCC 654 : AIR 2001 SC 3332[2](2001) 251 ITR 522 (SC) : (2009) 17 SCC 621[3](2009) 318 ITR 62 (Uttarakhand)[4]AIR 1967 SC 1626[5](2004) 266 ITR 282 (Bom)[6](2010) 323 ITR 1 (HP)[7](2010) 323 ITR 202 (All)[8](2004) 289 ITR 6 (SC) : (2007) 17 SCC 611[9](1978) 113 ITR 84 (SC) : (1978) 2 SCC 644 : AIR 1978 SC 1099[10](1990) 176 ITR 117 (SC) : AIR 1990 SC 1249[11](1992) 196 ITR 188 (SC) : AIR 1992 SC 1622 : (1992) 3 SCC 78[12](1993) 204 ITR 412 (SC) : AIR 1993 SC 2529 : (1993) 91 STC 450 (SC)[13](1960) 39 ITR 114 (SC) : AIR 1960 SC 789[14](1968) 70 ITR 86 (SC) [15](1996) 218 ITR 438 (SC) : (1996) 2 SCC 541[16](1998) 232 ITR 282 (SC) : (1998) 6 SCC 129 : AIR 1999 SC 2955[17](2008) 306 ITR 392 (SC) : (2008) 9 SCC 337[18](2002) 255 ITR 423 (SC) : (2009) 17 SCC 620 [19](2003) 63 ITR 63 (P&H) [20](2010) 3 SCC 223(2010) 3 SCC 223