IN THE HIGH COURT OF HIMACHAL PRADESH SHIMLA IT Appeal No. 8 of 2002. Judgment reserved on: 13.8.2008 Date of decision : August 27, 2008 Commissioner of Income Tax …Appellant Versus. Kangra Cooperative Bank Ltd. . …Respondent. Coram: The Hon’ble Mr. Justice Deepak Gupta, Judge . The Hon’ble Mr. Justice V.K.Ahuja, Judge. Whether approved for Reporting ? Yes For the Appellant : Ms. Vandana Kuthiala & Mr.. Vinay Kuthiala, Advocates For the Respondent: Mr. K.D.Sood, Advocate. Deepak Gupta, J . This appeal has been admitted on the following question of law :- “Whether on the facts and circumstances of the case the ITAT was right in law in holding that the interest income earned by the assessee on deposits made with H.P. State Cooperative Bank in the shape of F.D.Rs is income derived from Banking business and therefore eligible for deduction u/s 80p(2)(a)(i) of the Income Tax Act?” The brief facts necessary for decision of the case are that the assessee is a Cooperative Bank created under the H.P. - 2 - Cooperative Societies Act, 1968. Section 57 of the Act reads as follows:- 57. Reserve funds:- (1). Every society shall maintain a reserve fund in respect of the profits, if any, derived from its transactions. (2) Of the net profits of a society in each year there shall be carried to the reserve fund not less than twenty five per centum or such higher proportion as may be prescribed for such society or class of societies. (3) Save to the extent, and in such manner, as may be prescribed, no part of its reserve of a society shall be invested or deposited:- (a) in the post office savings bank; or (b) in any of the securities, specified in section 20 of the Indian Trust Act, 1882 (2 of 1882) other than those specified in clause (c) of that section; or ( c) in any other bank approved by the Registrar. A bare perusal of this section shows that every society is required to maintain reserve funds and that at least 25% of the profits of the society in each year are to be carried to the Reserve Funds. These funds are not to be used for the business of the society except in the manner which may be provided. Sub section (4) provides that the portion of the reserve fund not being used in the business of the society, shall be invested in post office savings bank, or in any security specified under Section 20 of the Indian Trust Act or any other bank approved by the Registrar. - 3 - There is no dispute that the assessee has invested the amount available in the reserve fund in the H.P. State Cooperative Bank which is also a Cooperative Society. The assessing officer relying upon the judgment of the apex Court in Madhya Pradesh Cooperative Bank Ltd. v. CIT [1996] 218 ITR 438, came to the conclusion that the income derived from the investment of statutory reserve could not be regarded as income from banking activities and as such the interest amount earned by the assessee from such securities did not quality for exemption under Section 80P(2)(a)(i) of the Income Tax Act, 1961 ( for short : the Act), which reads as follows:- “Deduction in respect of income of co-operative societies: 80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in subs-section (2) 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 co-operative society engaged in- (i) carrying on the business of banking or providing credit facilities to its members, or” Reference may also be made to Section 80P(2)(d) of the which reads as follows:- - 4 - 80P(2) (d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income. The assessee filed an appeal before the Commissioner, Income Tax and the Commissioner partly allowed the appeal and remanded the case to the Assessing Officer. The assessee then approached the Income Tax Appellate Tribunal ( for short: ITAT) in appeal. The ITAT found that the decision of the Apex Court relied upon by the assessing officer has been over-ruled by a larger bench of the Apex Court in Commissioner of Income Tax versus. Karnataka State Cooperative Bank Apex Bank [2001]231 ITR 194, and thereafter allowed the appeal. The revenue has now challenged this order before this Court. Ms. Vandana Kuthiala has not denied the fact that the decision of the Apex Court in Madhya Pradesh Co-operative Bank’s case (supra) stands overruled by a larger bench in the Karnataka State Cooperative Apex Bank’s case. The pertinent finding of the Apex Court read as follows:- “…… There is no doubt, and it is not disputed, that the assessee- cooperative bank is required to place a part of its funds with the State bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has - 5 - not, by reason of section 80P(2)(a)(i), to pay income tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived there-from would be income from the assessee’s business. We are unable to take the view that found favour with the Bench that decided the case of Madhya Pradesh Co-operative Bank Ltd. [1996] 218 ITR 438 (SC) that only income derived form circulating or working capital would fall within section 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital.” This decision has been reiterated in Commissioner of Income Tax versus Ramanathapuram Distt. Co-op. Central Bank Ltd ,[ 2002 ] 255 ITR 423. The Karnataka High Court in Commissioner of Income Tax and another versus. Sri Ram Sahakari Bank Ltd. [2004] 266 ITR 632, held that the interest on investments and short term fixed deposits in banks was entitled to be deducted under Section 80P(2)(a)(i) of the Act. In fact in Commissioner of Income Tax versus. Nawanshahar Central Co-operative Bank Ltd., [2007] 289 6 (SC), the apex Court has held that where under the provisions of the Cooperative Societies Act, the Cooperative Bank is statutorily required to place part of its funds in approved securities, the income attributable thereto is not taxable under Section 80P(2)(a)(i) of the Income Tax Act, 1961. - 6 - In the present case we have noted above that under Section 57, every cooperative society including the assessee is required by law to keep a percentage of its profits in a reserve funds. These reserve funds can only be invested or deposited in a certain manner. Applying the ratio of the judgment in Nawanshahar Central Cooperative Bank’s case (supra), it is apparent that any interest on such investments is required to be deducted under Section 80p(2)(a)(i) of the Act. Faced with this situation, Ms. Vandana Kuthiala raised a plea that there is nothing on record to show that the Registrar has given approval for deposit of this amount in the H.P. State Cooperative Bank. To say the least, this is an argument of desperation. This stand was not raised at any stage before the Income Tax Authorities. Such a plea cannot be permitted to be raised at this stage. Even otherwise, there is sufficient material on record to show that the Registrar has been approving the balance sheets of the assessee bank which itself will imply the approval of the Registrar. Furthermore, the investments have been made in H.P. State Cooperative Bank which is also a Cooperative Society and therefore even under Section 80P(2)(d) - 7 - of the Act, interest income from investments made in any Cooperative Society would also be entitled for deduction. In view of the above discussion, we find no merit in appeal of the revenue which is accordingly rejected. ( Deepak Gupta ), J. August 27, 2008 ( V.K.Ahuja ),J. s.