Tribunal Dated 25.1.2006, (Which Is Underchallenge) In Appeals v. Commissioner Of Income Tax Reported In 292Itr 205

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR ------------------------------------------------- REPORTABLE ITAT. The appeals No. 56/07 and 105/06, arise outof the common judgment of the Tribunal, dated25.1.2006, for the assessment years 1998-1999, and2000-2001, whereas appeal No. 31/2007, arise out of the judgment of the Tribunal, dated 09.6.2006relating to the assessment year 2003-2004. All the three appeals relate to same assessee. Theseappeals were admitted on different dates, framingsubstantial question of law, though in differentlanguage, however the substantial question of law,involved in all the three appeal is as under: “Whetherinthefactsandcircumstances of the case, the amount ofinterest earned by the respondent Bank onvarious loans extended to its employeesfrom deposit of P.F. and Housing loan iseligible to be exempted under Section 80P(2) (a) (i) of the Act, 1961.” The necessary facts are that the assessee is a co-operative society, and carries on bankingactivities, including providing credit facilitiesto its members. In the relevant assessment years,certain additions were made by the assessingofficer on account of interest, received by the assessee, on loans, given to the staff of theassessee, being PF loans, and House loans. TheAssessing officer, denied the claim of exemption ofthese amounts, under Sec. 80 P(2) (a) (i). Then onappeal, in some matters, learned Commissioneraccepted the contention of the assessee, and foundit to be exempted, while in another cases, the viewtaken by the assessing officer, was upheld. Thematters were then, carried to the Tribunal, by boththe sides, in respect of the orders passed,regarding respective years, and in all the cases,the learned Tribunal has held, that such amount isexempted from tax, under Sec. 80P (2) (a) (i). The learned Tribunal has held that the interest, earned on the loan, given to staffmembers, whether it be against PF deposit, or forhousing building, is exempted under Section 80P (2)(a) (i). It was noticed that, that Bench had alsotaken a similar view, in the case of the assessee,in other years, therefore, the claim of theassessee was accepted. Likewise, in the judgment ofthe Tribunal dated 09.6.2006, this judgment of the 4 Tribunal dated 25.1.2006, (which is underchallenge) in appeals No. 56/07 and 105/06) hasbeen followed. Arguing the appeal, it is contended by thelearned counsel for the revenue, that under Sec.80P (2) (a) (i), only such amount of profit andgains of business, as are attributable to thecarrying on business of banking, or providingcredit facilities to its members, by the assessee,is exempt, while income by way of interest receivedby the assessee, on loan given to its employees,against PF, or for house building loan, does notfall within the said definition, and is therefore,not exempt. On the other hand, learned counsel for theassessee submitted, that the assessee is a bank,and giving loan is essential banking activity ofthe assessee. Simply because the persons to whom,loan has been given, happen to be the employees,does not militate against the exemption, availableunder Sec. 80P (2) (a) (i). It is contended, that the expression “business of banking” is required tobe given a wider meaning, by adopting a liberalapproach, and is not required to be construed verystrictly. It is submitted, that as a matter offact, all income derived by the assessee beingCooperative Society, is exempted under Sec. 80P (2)(a) (i). Learned counsel relied upon a judgment ofAllahabad High court in Gorakhpur Kshetriya GraminBank Vs. Commissioner of Income Tax reported in 292ITR 205. We have heard learned counsel for the parties and have considered submissions. Beforeproceeding further, we may gainfully quote Sec. 80P(2) (a) (i), which reds as under:- Deduction in respect of income of co-operative societies. the expression “business of banking” is required tobe given a wider meaning, by adopting a liberalapproach, and is not required to be construed verystrictly. It is submitted, that as a matter offact, all income derived by the assessee beingCooperative Society, is exempted under Sec. 80P (2)(a) (i). Learned counsel relied upon a judgment ofAllahabad High court in Gorakhpur Kshetriya GraminBank Vs. Commissioner of Income Tax reported in 292ITR 205. We have heard learned counsel for the parties and have considered submissions. Beforeproceeding further, we may gainfully quote Sec. 80P(2) (a) (i), which reds as under:- Deduction in respect of income of co-operative societies. “80P (1) Where, in the case of anassessee being a co-operative society, thegross total income includes any incomereferred to in sub-section (2), there shallbe deducted, in accordance with andsubject to the provisions of this section,the sums specified in sub-section (2), incomputing the total income of the assessee. (2) The sums referred to in sub-section(1) shall be the following, namely:- (a) in the case of a co-operative society engaged in- (i) carrying on the business of banking orproviding credit facilities to its members,or (ii) a cottage industry, or (iii) the marketing of the agriculturalproduce grown by of its members, or (iv) the purchase of agriculturalimplements, seeds, livestock or otherarticles intended for agriculture for thepurpose of supplying them to its members,or (v) the processing, without the aid ofpower, of the agricultural produce of itsmembers, or (vi) the collective disposal of the labourof its members, or (vii) fishing or allied activities, that isto say, the catching, curing, processing,preserving, storing or marketing of fish orthe purchase of materials and equipment inconnection therewith for the purpose ofsupplying them to its members,the whole of the amount of profits andgains of business attributable to any oneor more of such activities: Provided that in the case of a co-operative society falling under sub clause(vi), or sub-clause (vii), the rules andbye-laws of the society restrict the votingrights to the following classes of itsmembers, namely:- (1) the individuals who contribute theirlabour or, as the case may be, carry on thefishing or allied activities;(2) the co-operative credit societies whichprovide financial assistance to thesociety; (3) the State Government; (b) in the case of a co-operative society, being a primary society engaged insupplying milk, oilseeds, fruits, orvegetables, raised or grown by its members to-- (i) a federal co-operative society, being asociety engaged in the business of supplying milk, oilseeds, fruits, orvegetables, as the case may be ; or(ii) the Government or a local authority;or(iii) a Government company as defined insection 617 of the Companies Act, 1956 (1of 1956), or a corporation established byor under a Central, State or ProvincialAct, (being a company or corporationengaged in supplying milk, oilseeds, fruitsor vegetables, as the case may be, to thepublic),the whole of the amount of profits andgains of such business; (c) in the case of a co-operative societyengaged in activities other then thosespecified in clause(a)or clause (b) (eitherindependently of, or in addition to, all orany of the activities so specified), somuch of its profits and gains attributableto such activities as does not exceed,--(i) where such co-operative society is aconsumer's co-operative society, [onehundred thousand rupees]; and(ii) in any other case [fifty thousandrupees]. For the present purpose, we may read the provisions in an abbreviated manner as under: (c) in the case of a co-operative societyengaged in activities other then thosespecified in clause(a)or clause (b) (eitherindependently of, or in addition to, all orany of the activities so specified), somuch of its profits and gains attributableto such activities as does not exceed,--(i) where such co-operative society is aconsumer's co-operative society, [onehundred thousand rupees]; and(ii) in any other case [fifty thousandrupees]. For the present purpose, we may read the provisions in an abbreviated manner as under: “Where in case of the assessee, beinga Cooperative Society, being engaged incarrying on the business of Banking, orproviding credit facilities to itsmembers, whole of the amount of theprofit and gains of the business,attributable to any one or more of suchactivity, shall be deducted, in computingthe total income of the assessee.” Then, admittedly the income in question isnot claimed to be attributable, to the profits andgains of business, arising out of providing creditfacilities to its members; Therefore, the precisequestion required to be considered is as to“whether the interest in question can be said to bethe amount of profits and gains of the businessattributable to carrying on the business of bankingby the assessee.” Then, we may refer to the provisions ofSec. 5 of the Bank Regulation Act, 1949. Clause(b) whereof defines the expression “banking” asunder:- “banking means the accepting, for thepurpose of lending or investment, ofdeposits of money from the public, repayableon demand or otherwise, and withdrawal bycheque, draft, order of otherwise; Then chapter part 2 provides for the business of banking companies, and Sec. 6, enumerates theforms of business, for which banking companies may engage. For the present purpose, relevant clause would be, clause (a) and Clause (j) thereof, whichread as under:- “(a) the borrowing, raising, or taking upof money; the lending or advancing ofmoney either upon or without security;thedrawing,making,accepting,discounting, buying, selling, collectingand dealing in bills of exchange,hoondees, promissory notes, coupons,drafts, bills of lading, railwayreceipts,warrants,debentures,certificates,scriptsandotherinstruments and securities whethertransferable or negotiable or not; thegranting and issuing of letters ofcredit, traveler's cheques and circularnotes; the buying, selling and dealing inbullion and specie; the buying andselling of foreign exchange includingforeign bank notes; the acquiring,holding, issuing on commission,underwriting and dealing in stock, funds,shares, debentures, debenture stock,bonds, obligations, securities andinvestments of all kinds; the purchasingand selling of bonds, and investmentsof all kinds; the purchasing and sellingof bonds, scripts or other forms ofsecurities on behalf of constituents orothers, the negotiating of loans andadvances; the receiving of all kinds ofbonds, scripts or valuables on deposit orfor safe custody or otherwise; theproviding of safe deposit vaults; thecollecting and transmitting of money andsecurities;” “(j) establishing and supporting oraiding in the establishment and supportof associations, institutions, funds,trusts and conveniences calculated tobenefit employees or ex-employees of thecompany or the dependents or connections of such persons; granting pensions andallowances and making payments towardsinsurance; subscribing to or guaranteeingmoneys for charitable or benevolentobjects or for any exhibition or for anypublic, general or useful object;” At the outset, we may observe, that if we were to find that the income of interest, in question, can be said to be the amount of profitsand gains of business, attributable to the carryingon business of banking by the assessee, obviously,it would be exempt under Sec. 80P (2) (a) (i), and not otherwise. “(j) establishing and supporting oraiding in the establishment and supportof associations, institutions, funds,trusts and conveniences calculated tobenefit employees or ex-employees of thecompany or the dependents or connections of such persons; granting pensions andallowances and making payments towardsinsurance; subscribing to or guaranteeingmoneys for charitable or benevolentobjects or for any exhibition or for anypublic, general or useful object;” At the outset, we may observe, that if we were to find that the income of interest, in question, can be said to be the amount of profitsand gains of business, attributable to the carryingon business of banking by the assessee, obviously,it would be exempt under Sec. 80P (2) (a) (i), and not otherwise. From the reading of the provisions of Clause (b) of Sec. 5, it is clear, that the bankingmeans, the accepting, for the purpose of lending or investment, of deposits of money from the public,repayable in the manner, provided therein. Thus, the essential element is of receiving the money forthe purpose of lending or investment, of depositfrom the public, as distinguished from a limited group of person, whether it be the members, or the share holders, or otherwise. In this background, the provisions of Clause (a) of Section6, are also required to be read, and if so read, inthe background, the provisions of Clause (a) ofSection 6, are also required to be read, and if soread, the background of Sec.5(b), it is obvious,that all the activities enumerated in Clause (a) ofSec. 6, have to be undertaken, with the public atlarge, and not confined to the members or shareholders, or otherwise, limited category of thepersons. Section 6 also catalogs various otheractivities, where it is intended to comprehendlimited dealings also, and where such activitiesprovides, it is provided with specific constrains.In that regard, we may come to clause (j),whichpermits, establishing and supporting or aiding inthe establishment and support of associations,institutions, funds, trust and companies calculatedto benefit the employees or ex-employees of thecompany, or the dependents, or connections, of suchpersons; granting pensions and allowances, andmaking payments towards insurance; subscribing toor guaranteeing moneys for charitable or benevolentobjects. Again these activities are not intended to be qua the public, but it is intended to be, forthe purpose of employees, or ex- employees of thecompanies or the dependents of such persons. Thus,where the activity was permitted to be undertakenby the Bank, as a form of business, in which it mayengage, qua the employees, it was specificallyprovided in Sec. 6 (j). With this background, we may refer to someof the cases, cited on the side of the assessee, orcoming to our notice. At this place, we may observethat we are mindful of the fact, that advancingloans is inherently one of the banking activity,and interest earned thereon, would inherently beprofit and gains of business, attributable tocarrying on the business of the banking. But then,the precise distinction, which is writ large forthe present purpose, and which is required to beappreciated, and considered, is, as to whether theactivity of the assessee, in advancing loan,against PF deposits/house building, was an activityundertaken by the assessee, as a bank, or it was aact of an employer, qua the employee, and employer, With this background, we may refer to someof the cases, cited on the side of the assessee, orcoming to our notice. At this place, we may observethat we are mindful of the fact, that advancingloans is inherently one of the banking activity,and interest earned thereon, would inherently beprofit and gains of business, attributable tocarrying on the business of the banking. But then,the precise distinction, which is writ large forthe present purpose, and which is required to beappreciated, and considered, is, as to whether theactivity of the assessee, in advancing loan,against PF deposits/house building, was an activityundertaken by the assessee, as a bank, or it was aact of an employer, qua the employee, and employer, Learned counsel for the assessee, madeavailable for our perusal, an office order of theassessee dated 27.5.1999, to the effect, that theBoard of Directors, in the meeting dated 6.1.1999,adopted a resolution No. 6 to implement, HouseBuilding Advance Loans' Scheme, applicable to theCentral Cooperative Bank employees' and enclosingcopy of that scheme, it was directed, that thefacilities of that scheme be made available to theemployee of the assessee Bank, as well, withimmediate effect. Copy of scheme has also been madeavailable, and a look at that shows, that theobject of this scheme is to provide cash creditlimit, to the officers, and employees of the bank,in accordance with requirements, for consumablegoods,essentialfunctions,foodgrains,celebrating festivals, and stipulating limit, up towhich, loan can be sanctioned, to the extent,dependent on pay and admissible DA, to the employeeconcerned, likewise another scheme has also beenmade available, which provides for loan for house building, specifically made applicable, to thepermanent employee of the Bank only. Again providing limits to extent of which, the loan canbe given, to be dependent on the extent of salaryand pension receivable by the employee, or the sumof Rs. 2 lacs, whichever is less. It was submittedby the learned counsel for the assessee, that thisscheme has been approved by the Registrar,Cooperative Societies, and thus, the assessee bankhas been authorized to advance such loans. After going through the scheme andresolution, in our view, to say the least, thisadvancing of loan, cannot be said to be any part ofthe banking activity of assessee as a bank, assuch. Firstly, this type of activity is notcomprehended by Sec. 6 (j) of the Act of 1945. Secondly, it is not a part of the scheme of theBank, as the Bank, where this facility is providedto the employees of the assessee bank, who happenedto be bank, as an employer to the employees, and one of the facility is available, only to theconfirmed permanent employee of the assessee.Thirdly the Registrar, as such, is not concernedwith any banking activity of the assessee society. The Registrar as such has control over theassessee, being a cooperative society, under theprovisions of Rajasthan Co-operative Society Actonly, and the Registrar has not given anydirections to the assessee Society, in the matterof undertaking banking activity, rather the schemehas been approved only for providing facilities tothe employees by the employer, the assessee, whohappens to be the Bank. In other words, the activity of the bank,in advancing loans to be house building loans, orthe PF loans, was not the advancement to thecustomers of the bank, as such, who may havehappened to be the employees, as well; but theadvances are to the employees only. In one of theorders, learned Commissioner, has cataloged theobject of the society being, to carry on bankingactivities, and providing credit facilities to its In other words, the activity of the bank,in advancing loans to be house building loans, orthe PF loans, was not the advancement to thecustomers of the bank, as such, who may havehappened to be the employees, as well; but theadvances are to the employees only. In one of theorders, learned Commissioner, has cataloged theobject of the society being, to carry on bankingactivities, and providing credit facilities to its members. At this place, we may also observe, thatat our directions, learned counsel for the assesseemade available, for our perusal, bye-laws of thebank, which catalogs objects of the bank, and theseobjects are only to provide credit facilities, toits members, and to raise deposits from the membersand in the event of consent being received fromNABARD/reserve Bank of India, from non members. Inother words, this is none of the objects of theBank, to give loans or to provide creditfacilities, to its employees, who are not itsmembers. In that view of the matter also, it cannotbe said, that even if the matter was to beconsidered, on the parameters of the objects ofsociety as such, either activity in advancing loan,being loan against PF deposits, or house buildingloan, was the activity of the assessee society, assuch, de-hors it being an employers. Now we may consider the judgment cited by the learned counsel for the assessee, being in Gorakhpur Kshetriya Gramin Bank, in that case also,the Cooperative society was engaged in the businessof banking, i.e. carrying on its banking business,and providing credit facilities to its members. Thereceipts therein shown by the Bank, included theamount, being pay recovered from the employees,recovering training cost, security for future.These receipts were held by the assessing officerto be not arising from bank business, and as such,be not exempt. The commissioner deleted theadditions, and the Tribunal upheld the order of theassessing officer. It was on these facts that theAndhra Pradesh High court held, that the businessof banking cannot be carried without the aid of theemployees and, therefore, whatever bank hasreceived either towards the excess provision of payrecovered form the resigning staff, or trainingcost, or recovery and forfeiture of the security ofthe employees, is attributable to the activity ofcarrying on business of banking. Therefore, it wasfound, that entire income in respect of theaforesaid activity does form part of, and isattributable to carrying on business, of banking, and is thus, exempt. It was also noticed, that itis not the case of revenue that apart from carryingon the business of bank, the assessee is alsorunning any training institute for training of thepersons, in the banking industry, for providingservices of trained persons to other banks. Allahabad High court relied upon the judgment ofthe Bombay High court in CIT Vs. AhmednagarDistrict Central Co-operative Bank Ltd., where thecommission earned by the co-operative bank fromMaharashtra State Electricity Board for collectingelectricity bills from the public on their behalfis attributed to the business of banking, likewise,reliance was also placed on a judgment of KarnatakaHigh Court in CIT Vs. Grain Merchants Co-operativeBank Ltd where rent received form the Co-operativebank from letting out portions of building wasexempt. In our view, this judgment does not helpthe case of the assessee. So far as the judgment in Grain Merchants case is concerned, incomeconsidered therein is covered by different clausesof Sec. 80P, and therefore that is of no relevance.While in Ahmednagar District Central Co-operativeBank’s case there was no doubt, that the amountscame to the assessee in its functioning, as a bankonly, and not in its functioning in any othercapacity. Thus, nothing turns in favour of theassessee, on the basis of this judgment either. In our view, this judgment does not helpthe case of the assessee. So far as the judgment in Grain Merchants case is concerned, incomeconsidered therein is covered by different clausesof Sec. 80P, and therefore that is of no relevance.While in Ahmednagar District Central Co-operativeBank’s case there was no doubt, that the amountscame to the assessee in its functioning, as a bankonly, and not in its functioning in any othercapacity. Thus, nothing turns in favour of theassessee, on the basis of this judgment either. Then, the learned counsel for the assesseehas invited our attention to a judgment of theTribunal, being that of a Jaipur Bench, in the caseof Rajasthan Rajya Sahakari Bhoomi Vikas Bank Vs.DCIT, reported in 29 World Tax 286, of course, inthis judgment, it has been held, that advancementbeing essential part of the activity of bankingbusiness, the interest earned by the assessee onadvance, to staff can be said to be attributable tothe business of banking, and as such, income waseligible for deduction, under Sec. 80 P (2) (a)(i). But then, this judgment simply proceeds onthe basis of earlier judgment of the Tribunal dated 30.7.2001. However, in view of the fact thatconsidering in the matter, to adjudicate upon thecorrectness, even the subsequent judgment of theTribunal taking the same view, we are not bound bythis judgment of the Tribunal. Then, we may refer to the judgment ofAndhra Pradesh High Court, in Commissioner ofIncome Tax Nakapalli vs. Anakapalli Co-operativeMarketing Society Ltd., reported in 245 ITR 616,wherein it has been held, that twin requirementsare to be satisfied being 1. providing creditfacility must be one of the activities of thesociety, and 2. the income attributable to such anactivity must be towards profit or gains therefromshould be one of the main source of income, and theincome so earned by the society must have a director proximate nexus or connection with the businessof the society. Then, in that case, it wasconsidered that issuance of certificate, whileforwarding the loan applications and recommendingthe sanction of loan de-hors granting payment, andamount of profit or gains thereby, cannot be said to be activity by a society. Then, we may also refer to judgment of Hon'ble Supreme Court in CIT Vs. Karnataka StateCo-operative Apex Bank (reported in 251 ITR 194).In this case, the reference was made to largerbench, in view of two conflicting judgment ofHon'ble Supreme Court, being reported in 218 ITR438 (Madhya Pradesh Co-operative Bank Ltd. Vs.Addl. Commissioner of Income Tax) and 233 ITR 282CIT Vs Bangalore Distt. Co-operative Central BankLtd, and the judgment in Madhya Pradesh CooperativeBank was not found to be correct. It was found,that the assessee Cooperative Bank was to placepart of its funds with the State Bank or the Reserve Bank of India, to enable it to carry on itsBanking business, and it was held, that that beingso, any income derived from fund, so placed, arisefrom the business, carried on by it, and the amountis exempt. It was further held that placement of such fund, being imperative, for the purpose ofcarrying on banking business, the income derivedtherefrom, would be income, from the assessee's 22 business. Thus, we find that it could be onecategory of income, capable of being claimedexemption, if the income was to arise from an act,which was imperative for assessee, to be done forthe purpose of carrying on its banking business.We may repeat, that advancing loan against PFdeposit, or advancing house building loan, was notat all imperative for the assessee Bank, to enableit to carry on its banking business. such fund, being imperative, for the purpose ofcarrying on banking business, the income derivedtherefrom, would be income, from the assessee's 22 business. Thus, we find that it could be onecategory of income, capable of being claimedexemption, if the income was to arise from an act,which was imperative for assessee, to be done forthe purpose of carrying on its banking business.We may repeat, that advancing loan against PFdeposit, or advancing house building loan, was notat all imperative for the assessee Bank, to enableit to carry on its banking business. In our view, an advancement of loan to theemployee was not in the capacity of the banker, butwas in the capacity of it being an employer to itsemployees, in the form of loan against PF deposits,and for the loan for house building. Admittedly,interest in question has been received form theemployees who are not its members. judgment of the Tribunal as well of Jaipur Benchbeing dated 20.6.1986, reported in 19 ITD 674,(Rajasthan Rajya Sahakari Upbhokta Vikas Bank Ltd.Vs. Income Tax Officer), wherein para 10, it has been held by the Tribunal, in respect of intereston advances to its staff, and sale of old newspapers, that it would be difficult to treat them atpar with the monies that are lent to the customers.The assessee, having been formed with a view toenlarge co-operative movement, and that too as abank, the staff, could not be said to be members assuch, and, therefore, interest on loan given tostaff, cannot be said to be relatable to bankingbusiness. The net result of the aforesaid discussionis that substantial question involved is requiredto be, and is, answered against the assessee, andin favour of the revenue, and it is held, that theamount of interest earned by the assessee onvarious loans extended to its employees, on PF andhouse building loan, is not eligible to be exemptedunder Sec. 80 P (2) (a) (i). Consequently, the appeals are allowed andthe impugned orders of the Tribunal are set aside,and orders passed by the assessing authorities arerestored. /ns./