1 ta96.08 IN THE HIGH COURT OF JUDICATURE AT BOMBAY, BENCH AT AURANGABAD TAX APPEAL NO. 96 OF 2008 The Commissioner of Income Tax-I, Aayakar Bhavan, PMT Building, B-Wing, Shankar Seth Road, Swargate, Pune-37. Appellant versus The Ahmednagar Merchants Co-op. Bank Ltd., Market Yard, Station Road, Ahmednagar. Respondent TAX APPEAL NO. 103 OF 2008 The Commissioner of Income Tax-I, Aayakar Bhavan, PMT Building, B-Wing, Shankar Seth Road, Swargate, Pune-37. Appellant versus The Nagar Urban Co-op. Bank Ltd. Bank Road, Ahmednagar. Respondent TAX APPEAL NO. 104 OF 2008 The Commissioner of Income Tax-I, Aayakar Bhavan, PMT Building, B-Wing, Shankar Seth Road, Swargate, Pune-37. Appellant 2 ta96.08 versus The Ahmednagar Merchants Co-op. Bank Ltd. Market Yard, Station Road, Ahmednagar. Respondent TAX APPEAL NO. 122 OF 2008 The Commissioner of Income Tax-I, Aayakar Bhavan, PMT Building, B-Wing, Shankar Seth Road, Swargate, Pune-37. Appellant versus Pravara Sahakari Bank Limited A/p Loni, Tal. Rahata, Dist.Ahmednagar. Respondent ---------- Shri Alok Sharma, Asstt. Solicitor General for appellant. Shri A. P. Kolte, Advocate, for the Respondents. Coram: Smt. Nishita Mhatre & M. T. Joshi, JJ. Judgment reserved on : 22.07.2011 Judgment pronounced on : 12.08.2011 Judgment (Per: Smt. Mhatre, J.) 01. These Tax Appeals have been heard together as a common question of law is involved in all these appeals. The issue is, whether the income derived by a cooperative bank from the sale of government securities is banking business and would qualify for a deduction under Section 80P (2)(a)(i) of the Income Tax Act, 1961 ("The Act" for short) while computing its total income. 3 ta96.08 02. The assessee in Income Tax Appeal No. 96 of 2008 had filed its returns of income for the assessment year 2004-05, declaring its total income as Nil. The Assessing Officer disallowed the assessee's claim for deductions under Section 80P(2)(a)(i) of the Act, on profit derived from the sale of government securities amounting to ` 58,00,281/=. Being aggrieved by this order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals)-I, Pune (for short “Commissioner (Appeals)”). The appellate authority directed the Assessing Officer to verify whether the investments were made in the securities permissible for investments under the Banking Regulation Act, 1949 or the Maharashtra Cooperative Societies Act, 1960 ("MCS Act") read with the Indian Trusts Act. The Commissioner (Appeals) further held that if these were permissible investments under the aforesaid Acts, the assessee would be entitled to deductions under Section 80P(2)(a)(i) of the Act. That order was passed on 1.8.2007. 03. Being aggrieved by the order dated 1.8.2007 of the Commissioner (Appeals), the Revenue preferred an appeal before the Income Tax Appellate Tribunal, Pune. The Tribunal has dismissed the appeal of the revenue, by relying on various decisions. The Tribunal has upheld the decision of the 4 ta96.08 Commissioner (Appeals) that the income derived from the trading in government securities formed a part of the income derived from the banking business, in view of the provisions of Section 6 of the Banking Regulation Act and, therefore, was a permissible deduction. The Tribunal followed the decisions of its Co-ordinate Benches in the case of Rajkot Nagrik Sahakari Bank Ltd. (2005) 98 TTJ (Rjt) 330 and Pimpalgaon Merchants Cooperative Bank Ltd. in ITA No. 254/PN/05. 04. In Tax Appeal Nos. 103, 104 and 122 of 2008, the facts involved are the same. However, the assessment year varies and the income derived from the sale of the government securities is different in each case. 05. The main submission of Mr. Sharma, the learned Assistant Solicitor General, was that the income earned by the cooperative banks from the sale of government securities, does not qualify for a deduction under Section 80P(2)(a)(i) of the IT Act. He submits that such income cannot be considered to be obtained from banking business and therefore must be treated as income from other sources. According to him, this issue has been answered by the Supreme Court in the case of M/s The Totgars Cooperative Sale Society Limited vs. Income Tax Officer, Karnataka, reported in [2010] 188 TAXMAN 282 (SC) and 5 ta96.08 therefore the impugned decision of the Income Tax Appellate Tribunal (for short “ITAT”) is incorrect. 06. On the other hand, Mr. Kolte, the learned Advocate appearing for the assessees, has submitted that the investment in and sale of govt. securities is a part of banking business. He draws our attention to Section 6 of the Banking Regulation Act and submits that the sale of govt. securities is one of the activities that a cooperative bank can engage in as a part of its business in banking. The learned Advocate has relied on the judgments of the Supreme Court in the cases of (i) Commissioner of Income Tax vs. Ramnathapuram Dist. Co-op. Central Bank Ltd., (2002) 175 CTR (SC) 297, (ii) Commissioner of Income Tax vs. Nawanshahar Central Co-operative Bank Ltd. (2007) 208 CTR (SC) 438, (iii) Commissioner of Income Tax vs. Karnataka State Cooperative Apex Bank, (2001) 169, CTR (SC) 486, and the judgments of this Court in Commissioner of Income Tax vs. Ratnagiri District Central Cooperative Bank Ltd., (2002) 174 CTR( Bom.) 160, and Commissioner of Income Tax vs. Solapur Nagari Audyogic Sahakari Bank Ltd. and ors, (2010) 229 CTR (Bom) 73, in support of his contentions. 6 ta96.08 07. All the assessees in these appeals are cooperative banks as defined in Section 2(10) of the MCS Act. Their business is conducted in accordance with Section 56 of the Banking Regulation Act. They are required to invest a part of their surplus funds in approved securities. The Banking Regulation Act is applicable to cooperative societies conducting the banking business subject to certain modifications as stipulated in Section 56. Some of the definitions contained in the main Act are altered as provided under Section 56 to suit co-operative banks. Besides this, Section 5A of the principal Act is substituted and it provides that the Banking Regulation Act would have effect in respect of cooperative bank notwithstanding anything contained to the contrary in any a bye-law of a cooperative society, or any agreement executed by it or any resolution passed by the society. Any such provision in a bye-law, or agreement or resolution, which is repugnant to the provisions of the Act, would be void. Section 6 of the principal Act, which describes the forms of business in which the banking company may engage, is modified to the extent that the word "company" is substituted by the word "cooperative society.". 7 ta96.08 08. Section 6 of the Banking Regulation Act names the types of businesses in which a banking company, or for that matter, in view of the provisions of Section 56 of the Act, a co- operative bank, may engage. These include; "(a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hoondees, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting an d dealing in stock, funds, shares, debentures, debenture stock bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposits vaults; the collecting and transmitting of money and securities;" 8 ta96.08 Evidently, therefore, purchasing and selling of securities would be included in the banking business. 09. The relevant part of Section 80P of the Income Tax Act for our purpose reads as below; "80P. Deduction in respect of income of co- operative societies. (1) Where, in the case of an assessee being a cooperative 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, (a) in case of a co-operative society engaged in- (i) carrying on the business of banking or providing credit facilities to its members, (ii) to (vii) ..................................................................... (b) to (f)........................................................................ the whole of the amount of profits and gains of business attributable to any one or more of such activities. (3)........................................................................................... (4) The provisions of this section shall not apply in relation to any cooperative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank. " Explanation.--- For the purposes of this sub-section,- (a) "co-operative bank" and "primary agricultural credit society" shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949); (b) .......................................................................................... . 9 ta96.08 10. In M/s The Totgars Cooperative Sale Society Limited (supra), the Supreme Court considered whether an assessee, which provides credit facilities to its members and also markets the agricultural produce of its members, was entitled to deductions on the interest from the income derived from such sources, under Section 80P (2)(a)(i) of the Act. The Court held that interest from such income would fall under the head "income from other sources" and consequently, the assessee-society would not be entitled to deductions under Section 80P (2)(a)(i) of the Act. Kapadia, J. (as he then was) speaking for the Bench, has observed thus; "10. At the outset, an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under Section 80P(2)(a)(i) of the Act is not the interest received from the members for providing credit facilities to them. What is sought to be taxed under Section 56 of the Act is the interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes. Assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question, before us, is - whether 10 ta96.08 interest on such deposits/securities, which strictly speaking accrues to the members' account, could be taxed as business income under Section 28 of the Act? In our view, such interest income would come in the category of "Income from other sources", hence, such interest income would be taxable under Section 56 of the Act, as rightly held by the Assessing Officer. In this connection, we may analyze Section 80P of the Act. This section comes in Chapter VI-A, which, in turn, deals with "Deductions in respect of certain Incomes". The Headnote to Section 80P indicates that the said section deals with deductions in respect of income of cooperative Societies. Section 80P(1), inter alia, states that where the gross total income of a cooperative Society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee-Society. An income, which is attributable to any of the specified activities in Section 80P(2) of the Act, would be eligible for deduction. The word "income" has been defined under Section 2(24)(i) of the Act to include profits and gains. This sub-section is an inclusive provision. The Parliament has included specifically "business profits" into the definition of the word "income". Therefore, we are required to give a precise meaning to the words "profits and gains of business" mentioned in Section 80P(2) of the Act. In the present case, as stated above, assessee-Society regularly invests funds not immediately required for business purposes. Interest on such investments, 11 ta96.08 therefore, cannot fall within the meaning of the expression "profits and gains of business". Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee-Society provides credit facilities to its members, it earns interest income. As stated above, in this case, interest held as ineligible for deduction under Section 80P(2)(a)(i) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as "investment". Further, as stated above, assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this "retained amount" which was payable to its members, from whom produce was bought, which was invested in short-term deposits/securities. Such an amount, which was retained by the assessee-Society, was a liability and it was shown in the balance-sheet on the liability-side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or in Section 80P(2)(a)(iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the Assessing Officer was right in taxing the interest income, indicated above, under Section 56 of the Act. 12 ta96.08 11. An alternative submission was advanced by the assessee(s) stating that, if interest income in question is held to be covered by Section 56 of the Act, even then, the assessee-Society is entitled to the benefit of Section 80P(2)(a)(i) of the Act in respect of such interest income. We find no merit in this submission. Section 80P(2)(a)(i) of the Act cannot be placed at par with Explanation (baa) to Section 80HHC, Section 80HHD(3) and Section 80HHE(5) of the Act. Each of the said sections has to be interpreted in the context of its subject-matter. For example, Section 80HHC of the Act, at the relevant time, dealt with deduction in respect of profits retained for export business. The scope of Section 80HHC is, therefore, different from the scope of Section 80P of the Act, which deals with deduction in respect of income of cooperative Societies. Even Explanation (baa) to Section 80HHC was added to restrict the deduction in respect of profits retained for export business. The words used in Explanation (baa) to Section 80HHC, therefore, cannot be compared with the words used in Section 80P of the Act which grants deduction in respect of "the whole of the amount of profits and gains of business". A number of judgements were cited on behalf of the assessee(s) in support of its contention that the source was irrelevant while construing the provisions of Section 80P of the Act. We find no merit because all the judgements cited were cases relating to Cooperative Banks and assessee-Society is not carrying on Banking business. We are confining this 13 ta96.08 judgement to the facts of the present case. To say that the source of income is not relevant for deciding the applicability of Section 80P of the Act would not be correct because we need to give weightage to the words "the whole of the amount of profits and gains of business" attributable to one of the activities specified in Section 80P(2)(a) of the Act. An important point needs to be mentioned. The words "the whole of the amount of profits and gains of business" emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society. In this particular case, the evidence shows that the assessee- Society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income falls in the category of "Other Income" which has been rightly taxed by the Department under Section 56 of the Act." (emphasis supplied) 11. It must be noted here that in Totgars case {supra) what was sought to be taxed under Section 56 of the Act, was the interest income derived from the surplus invested in their term deposits and securities which surplus was not required for the purposes of business. The assessee marketed the agricultural produce of its members. The sale proceeds of such produce were retained by the bank at times and this was the income generated 14 ta96.08 with which the Apex Court was concerned. The fund which was retained by the bank and not required for its business purposes, was invested in specified securities. The court considered whether the interest on such deposits/securities could be taxed as business income under Section 28 of the Act when, strictly speaking, it had accrued to the members' accounts. It is in these circumstances that the court held that the interest income from such investments would be income from other sources and would be taxable under Section 56 of the Act. Evidently, none of its earlier judgements pertaining to deductions available for Co operative Banks under Section 80P (2)(a)(i) of the Act have been considered by the Court as the assessee before it was a society which was not engaged in the business of banking. 12. In the case of Commissioner of Income Tax vs. Karnataka State Cooperative Apex Bank, the Supreme Court considered facts which were similar to the present case. The assessee-cooperative bank in that case was required to place a part of its funds with the State Bank of India, or the Reserve Bank of India, in order to enable it to carry on its banking business. The Court, therefore, was of the view that the income derived from the funds so placed would not be liable to tax, in view of the provisions of Section 80P (2)(a)(i) of the Act. The Court further held that there was no reason to take the view that only such income, 15 ta96.08 which is derived from circulating or working capital, would fall within the scope of Section 80P(2)(a)(i), as the phraseology of that provision did not merit such a construction. 13. In the case of Mehsana District Central Co- operative Bank Ltd. vs. Income-tax Officer, the same Bench of the Supreme Court followed its decision in Karnataka State Cooperative Apex Bank, and held that the income derived by the assessee-bank from hiring out its safe deposit vaults is a part of the ordinary banking business and, therefore, deductible under Section 80P (2)(a)(i) of the Act. 14. Again in the case of Commissioner of Income-tax vs. Ramnathapuram District Cooperative Central Bank Limited, the Supreme Court considered whether the interest on securities or subsidies received from the government and dividend business income of the assessee was liable to be deducted under Section 80P (2)(a)(i) of the Act. The Court followed its earlier decisions in Karnataka State Cooperative Apex Bank, and Mehsana District Central Co-operative Bank Ltd. (supra). It was further observed in para 4 thus; 16 ta96.08 "4. We do not think that it is open to the Revenue to urge, through different counsel, the same thing again and again. We are satisfied that the answer to the question has been correctly given in the decisions aforementioned and in the order under appeal. " 15. Similarly in the case of Commissioner of Income- tax vs. Nawanshahar Central Co-operative Bank Ltd., the Court considered a case where the assessee-cooperative bank was statutorily required to place a part of its fund in approved securities. The Court held that the income arising from such investments was attributable to the business of the bank, falling under the head "profits and gains of business" and, therefore, deductible under Section 80P (2)(a)(i). The Court followed its earlier decisions which we have referred to earlier. 16. Thus, the consistent view of the Supreme Court has been that where a cooperative bank invests its funds in government securities or in securities which, it is statutorily required to invest, the income derived from such investment is liable to be deducted under Section 80P (2)(a)(i). 17. This Court in the case of Commissioner of Income- tax vs. Ratnagiri District Central Cooperative Bank 17 ta96.08 Limited, considered the judgements of the Supreme Court in Bangalore District Central Cooperative Bank and M.P Co- operative Bank Ltd. and held thus; "26. Let us turn to the impugned orders, which are subject of the present proceedings so as to apply the above emerging principles to the facts of each case at hand. The investments made in I.V.Ps. no doubt had an effect of withdrawing funds from the banking business. Mere withdrawal of funds is not sufficient. It must be proved that the withdrawal of funds have 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 I.V.P. could be brought back to the banking business. In absence of detailed enquiry in the nature of available surplus and investments thereof, it is difficult to go along with the submissions made by the revenue. No enquiry in this behalf was made by any of the authorities below. It was obligatory on the part of the fact finding authorities below to make enquiry and record finding of fact in this behalf. No such attempt was made by either of the authorities below in this regard. We are, therefore, left with no other alternative but to decide these matters on the facts found and available on record. 18 ta96.08 27. The facts found and available on record do suggest that the interest income was attributable to the assessees' business income and the investment made in I.V.Ps. or investments made from the fund generated from the banking business. It has a direct and proximate connection with or nexus to the earning from banking business in order to attract provisions of section 80P(2)(a)(i) of the Act. It was expected of the authorities below to go into factual aspect of the matter and to find out as to whether the investments made were from surplus funds or from the funds which were temporarily surplus in the hands of the bank. It was further expected of the authorities below to find out whether the investments made in I.V.Ps. ceased to be circulating capital or that the securities could not be used as working capital or that it did form part of the circulating capital or stock in trade of the bank, so as to reach to the finding that the interest earned therefrom and shown as forming part of the banking activity qualified for exemption. 28. We, therefore, confine our judgment to the facts of these cases as found by the Tribunal and in some cases by the CIT (A), wherein in the facts and circumstances, it was held that the interest income derived from I.V.Ps. by the assessees was clearly from and out of banking business and, therefore, entitled to exemption under section 80P(2)(a)(i) of the Act and that the said income had been derived from the interest on securities of the Central Government, which were easily capable of being converted into liquid 19 ta96.08 funds so as to make it available to the assessee banks for their banking business. Confining our judgment to the facts of the cases in hand, we uphold the findings recorded in favour of the assessees and hold against the revenue." 18. Later, this court, in the case of Commissioner of Income-tax vs. Solapur Nagari Audyogic Sahakari Bank Limited, considered whether the interest derived by a cooperative bank by investing its surplus fund in Kisan Vikas Patra and/or Indira Vikas Patra, would