* THE HON’BLE SRI JUSTICE V.V.S.RAO AND 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 of 2008; 315, 392, 410, 413 of 2010; and 24 of 2011 % 07.6.2011 # Commissioner of Income Tax-III, Hyderabad ... Appellants VERSUS $ 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 referred 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 THE HON’BLE SRI JUSTICE V.V.S.RAO AND 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 of 2008; 315, 392, 410, 413 of 2010; and 24 of 2011 June 07, 2011 Between: Commissioner of Income Tax-III, Hyderabad … Appellant AND The Andhra Pradesh State Cooperative Bank Limited, Hyderabad … Respondent THE HON’BLE SRI JUSTICE V.V.S.RAO AND 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 of 2008; 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 Section 260A of the Income-tax Act, 1961 (hereafter, the Act) the common question of law raised by the Revenue is whether a cooperative society carrying on the business of banking is entitled to claim exemption under Section 80P(2)(a)(i) of the Act in respect of the income derived out of the investments made from voluntary reserves of such society? At the outset, we may notice the factual background in ITTA No.86 of 2003 filed by the Commissioner of Income Tax-III, Hyderabad against the Andhra Pradesh State Cooperative Bank Limited (the APCOB). The APCOB is a cooperative society engaged in the business of banking. For the assessment year 1997-98 they filed return declaring Rs.57,652/- as income from the property and Rs.83,60,46,867/- as income from the business of banking. The assessee claimed deduction of business income under Section 80P(2)(a)(i) of the Income-tax Act. The assessing officer, namely, the Deputy Commissioner of Income-tax took up the return for scrutiny and found that the assessee had Rs.61,87,16,546/- as statutory reserve invested in short term and long term deposits. During the assessment year the interest income from the deposits stood at Rs.7,02,69,336/-. This was claimed as deduction being interest from the business of banking. Out of this, an amount of Rs.6,95,66,643/- was disallowed by the assessing officer on the ground that the assessee did not obtain prior approval in respect of investments against statutory reserves as required under Section 46 of the Andhra Pradesh Cooperative Societies Act, 1964 (the Societies Act) and Rule 37(2) of the Andhra Pradesh Cooperative Societies Rules, 1964 (the Societies Rules). The assessing officer came to the conclusion that the investments against reserve funds in all cases of cooperative banks cannot be treated as investments for the purpose of Statutory Liquidity Ratio (SLR), that even if it is in tune with Reserve Bank of India (RBI) guidelines SLR under the Banking Regulation Act, 1949 (the BR Act) and the reserve fund under the Societies Act are different from each other, that even if investment of reserve fund is treated as SLR compliance the assessee has to obtain necessary approval before exercising the choice, and that the factum of utilization of reserve fund for the business should be taken into consideration for the purpose of allowing relief under the Act. Even though the assessee produced the proceedings of the Registrar of Cooperative Societies (the RCS) issued on 30.10.1996 approving utilization of investments against reserves for the purpose of business, the assessing officer did not give weight to the same on the ground that it does not relate back 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 the RCS as sufficient compliance with Section 46 of the Societies Act read with Rule 37(2) of the Societies Rules. The appellate authority considered the interest accruing from 30.11.1996 as qualified for deduction and came to the conclusion that the restrictions for utilization of reserve fund in banking business would not be applicable if prior sanction of the RCS is obtained by the cooperative society and that such sanction would not, however, be necessary if the investments are made in SLR securities, and that in the absence of any prior sanction the investments made in non- SLR securities would not be eligible for exemption under Section 80P(2)(a)(i) of the Act. He also held that, the income on the investments in securities against reserve fund not utilized for SLR purposes (non-SLR investments not being under any compulsion) under any provisions of the BR Act have to be treated at par with similar investments by any other business activity. They are, therefore, not attributable to banking business and consequently will not qualify for exemption. While holding that the interest income relatable to non-SLR investments accrued during the period from 31.10.1996 to 31.3.1997 will not qualify for exemption, the appeal was partly allowed directing the assessing officer to modify the assessment order accordingly. APCOB’s appeal being ITA No.694/Hyd/2000 under Section 253 of the Act before the ITAT, Hyderabad Bench “A” was heard along with the cross appeals filed by the Revenue. By common order dated 25.9.2001, the appeals filed by the assessees were allowed and the appeals filed by the Revenue were dismissed. The learned Tribunal held that no distinction can be made of income earned from SLR securities and non-SLR securities with the income arising from investments made out of reserve fund under Section 80P(2)(a)(i) of the Act. In coming to this conclusion, the learned Tribunal relied on the decision of the Supreme Court in CIT v Karnataka State Cooperative Bank Ltd[1]. The Senior Counsel for the Income-tax, Mr.S.R.Ashok, would rely on Karnataka State Cooperative Bank, Mehsana Dist. Central Cooperative Bank Ltd v ITO[2] and CIT v Nainital Dist. Cooperative Bank[3] to submit that every cooperative society engaged in the business of banking is regulated by the Societies Act and the Societies Rules, the BR Act and the Reserve Bank of India Act, 1934 (the RBI Act). Every cooperative bank is under an obligation to adhere to SLR norms prescribed by the RBI from time to time. Income from SLR reserve is alone qualified for exemption and the income derived from other investments is not deducible under Section 80P(2)(a)(i) of the Act. He would further contend that the income from the investment of non-statutory reserves voluntarily is outside the purview; not attributable to the banking business and, therefore, the income derived from non-SLR is not entitled for deduction 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 the interest income earned from the banking business and voluntary reserves and that there is no concept of voluntary or non-statutory reserves in the banking industry. In law, a cooperative bank is required to keep certain amount as reserve and the other money is stock in trade for the cooperative society which can be used for earning more money. A cooperative society is not expected to keep its cash reserve or so-called non-SLR funds idle to the detriment of the business and, therefore, any income earned by investment of any funds of the bank is attributable to banking business. The Senior Counsel also raised a preliminary objection as to maintainability of the appeals. Referring to the question of law framed in the memorandum of appeals by the Revenue he would urge that when the question of law is neither raised before the Tribunal nor considered, it cannot be permitted to be raised before the High Court. The High Court cannot adjudicate such a question which was not raised before the Tribunal. He relies on the decision of the Supreme Court in S.P.Mansinghka (P) Ltd v CIT[4]. In support of their contention on the core issue the Counsel relied on Karnataka State Cooperative Bank, Mehsana DCCB, CIT v Sri Ram Sahakari Bank Ltd[5], CIT v H.P. State Cooperative Bank Ltd[6], CIT v Muzaffar Nagar Kshetriya Gramin Bank Ltd[7] and CIT v Nawanshahar Central Cooperative Bank Ltd[8]. Maintainability of appeal Before taking up the core issue, we would address the question of maintainability. Section 260A of the Act was inserted by the Finance (No.2) Act, 1998 with effect from 01.10.1998. Sections 256, 257, 260 and 261 were also amended to provide an appeal to the High Court directly against orders of the Tribunal. The appellate power, however, was limited to consideration of a substantial question of law. Section 260A(2)(c) of the Act mandates that proceedings under Section 260A(1) of the Act shall be in the form of memorandum of appeal precisely stating the substantial question of law involved in the case. Prior to amendments introduced by the Finance (No.2) Act, 1998, the Tribunal was the final adjudicatory forum in so far as finding of facts are concerned. If any question of law is raised either by the Revenue or by the assessee, the Tribunal was empowered under Sections 256(1) and (2) of the Act to state the case and refer the question of law arising out of the order of the Tribunal in appeal to the jurisdictional High Court. The answer by the High Court on the question of law would then be the basis for the Tribunal to dispose of 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 Act and a question of law pleaded in the memorandum under Section 260A 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 of the Tribunal in an appeal or proceeding before them under Section 256 and a substantial question of law which is involved in the case.” If a question of law was not raised before the Tribunal or such question of law does not arise out of the case decided by the Tribunal, an appeal under Section 260A of the Act is barred. To that extent, the Senior Counsel is correct and is well supported by the ratio in S.P.Mansinghka (P) Ltd. The said case arose under Section 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 Division Bench of the Supreme Court observed that, “when a question of law is neither raised before the Tribunal nor considered by it, will not be a question arising out of the order of the Tribunal and the High Court will be acting beyond its jurisdiction in dealing with any such question”. Whether this binding ratio bars these appeals? We are afraid this aspect of the matter does not arise in these cases. We have given the précis of the orders of the CIT (Appeals) as well as the Tribunal impugned in these appeals. Before the CIT (Appeals) the assessee raised the plea that the investment of non-SLR reserves voluntarily also amounts to business of banking and that the income therefrom is attributable to the main activity. Before the Tribunal the assessee filed appeal in so far as the department appeal went against them, and the Revenue also filed appeals. The question was specifically raised and a specific issue was framed by the Tribunal touching upon this aspect. After perusing the orders of the CIT (Appeals) as well as the Tribunal, we are convinced that, the Revenue specifically raised the issue and also tried to distinguish the 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 in these appeals was very much in issue before the CIT (appeals) as well as before the Tribunal. Whether the income from voluntary reserves is exempted Chapter VIA of the Act stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in Sections 80C to 80U. The chapter is divided into four distinct parts, namely, A to D. Part D deals with deductions in respect of certain incomes. Section 80P is a special provision providing for the deduction in respect of income of co-operative societies. As defined in Section 2(19) of the Act, “co-operative society” means “a co-operative society registered under the Co-operative Societies Act, 1912, or under any other law for 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 COOPERATIVE 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 the case of a cooperative society engaged in— (i) carrying on the business of banking or providing credit facilities 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 other articles intended for agriculture for the purpose of supplying them to its members, or (v) the processing, without the aid of power, of the agricultural produce of 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 of materials and equipment in connection therewith for the purpose of supplying them to its members. The whole of the amount of profits and gains of business attributable 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 the society; (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 a primary co-operative 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) “primary co-operative agricultural and rural development bank” means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural 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 exemption under the above provision. In plain terms, if a cooperative society is engaged in carrying on the business of banking the amount earned from any one or more such activities in relation to the business of banking can be claimed as deduction. The word ‘attributable’ was considered by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd v CIT[9] holding that, “the expression ‘attributable to’ is certainly wider in import than the expression ‘derived from’.” It was also held that by using the expression ‘attributable to’, the legislature intended to cover receipts from sources other than the actual conduct of business. Section 80P of the Act grants deduction in respect of various categories of income of a cooperative society. If any cooperative society carries on the business of banking, the interest income received by a cooperative society on its investment/deposits is attributable to banking business. The provision does not make any distinction in so far as the interest earned by deposit in a bank and interest earned on the compulsive deposit which is made as required under the relevant statute. It is no doubt true that a cooperative society may be required to earmark some portion of its capital for exclusive deposit in Government prescribed securities or banks. A cooperative society may earn profits by way of interest by parking their funds in high-yielding deposits or may earn income by circulating its capital among its members in the course of their banking business. All the income from banking business which is referable to Section 80P(2)(a)(i) of the Act would qualify for deduction under the Act. ‘The business of banking’ is one of many expressions not defined in the Act. Which are the activities that can be considered attributable to the business of banking? Indisputably the assesses, in these cases being cooperative banks, are subject to the regulations 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 with all the orders, rules and regulations issued by the RBI while carrying 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 or otherwise, and withdrawable by cheque, draft, order or otherwise”. As per Section 5(c) of the BR Act “banking company” means “any company which transacts the business of banking in India”. Section 6 of the BR Act lists ‘any one or more’ of the forms of the business as enumerated in Sections 6(1)(a) to (o) of the BR Act in addition to the business of banking. Section 6(1)(a) of the BR Act enumerates every conceivable activity of banking including, “the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities” and under Section 6(1)(n) of the BR Act, the doing of all such other things as are incidental or conducive to the promotion or advancement of the business of the company. Thus reading of Sections 5(b), (c) and Section 6 of the BR 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 obligation or otherwise being income from banking business, would be eligible for exemption under the said provision. Does Section 80P(2)(a) of the Act make a distinction between income received by a cooperative bank from statutory deposits and the income from non-statutory deposit of surplus funds? The answer must be in the negative. The income earned by the cooperative bank either by deposit of the prescribed percentage of its reserves or by deposit of their surplus funds is exempted. The income from either category of the deposits is certainly attributable to the business of banking. Indeed as a prudent business practice, no banking company or no entity engaged in the business of banking would keep its amount idle. By parking the funds, 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 the benefit of its members. As long as the deposit of the surplus funds in the other banks for the purpose of earning interest is not unauthorized or not barred by any of the applicable statutes, the income is certainly attributable to the business of banking. There is no concept of voluntary or non-statutory reserves as urged by the Revenue. In so far as the profits and gains from the business of banking by deposit of surplus funds of the bank is concerned, there cannot be any distinction between SLR reserves and non-SLR reserves although the maintenance of cash reserve and SLR are obligatory under below referred provisions of the RBI Act and the BR Act. Section 45 of the Societies Act lays down the method and manner of disposal of the profits earned by the cooperative society. Under Section 45(3)(a) of the Societies Act, a cooperative society shall transfer not less than 25% of net profit to the reserve fund and in case the total amount transferred becomes equal to the amount of paid up capital, the amount to be transferred can be reduced to a sum not less than 10% of such profits. For doing so the prior permission of the RCS is required. Section 46 of the Societies Act requires every society to act with due care and diligence and invest or deposit its funds which are not immediately required for the business of the society either in postal savings banks, securities specified in Section 20 of the Indian Trusts Act, 1882, in the shares and securities of any other society or with any Nationalised Bank or Scheduled Bank or the concerned District Cooperative Central Bank. As per Rule 37 of the Societies Rules reserve fund is intended to meet unforeseen losses. When the reserve fund of the society exceeds 25% of its working capital, the excess can be utilized in the business of the society with the sanction of the RCS. In other words, a cooperative bank can utilize the reserve fund over and above 25% of the working capital for the purpose of banking business which includes the deposits which yield interest. Further when a society is prohibited by its by-laws from borrowing either from its members or others, the whole of its reserve fund may be utilized in its business. If a cooperative bank derives income by lending money to its members the same being business of banking, is eligible for deduction. Therefore, to say that the income derived from voluntary non-statutory deposits would not be eligible for deduction is illogical and cannot be sustained. As a matter of fact, in all these cases, a finding was recorded that the RCS issued necessary permission to