INCOME TAX OFFICER v. RAJASTHAN STATE CO-OP. BANK LTD
[Citation -1986-LL-0603-4]

Citation 1986-LL-0603-4
Appellant Name INCOME TAX OFFICER
Respondent Name RAJASTHAN STATE CO-OP. BANK LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 03/06/1986
Assessment Year 1978-79 1981-82
Judgment View Judgment
Keyword Tags co-operative societies act • banking regulation act • interest on securities • government securities • co-operative society • business of banking • sale of securities • co-operative bank • statutory reserve • foreign exchange • lending of money • banking company • stock-in-trade • share capital • foreign bank • cash balance • reserve bank • cash credit
Bot Summary: A. KALYANASUNDARAM, A.M. ORDER These are two year's appeals by the Revenue, on the issue of exemption under s. 80P2(a)(i) a to whether the whole of the income of the Co-operative Bank is out of banking business or only a part can be said to be related to banking business. The claim of the assessee Bank, which was formed under the Co- operative Societies Act for carrying on the business of Banking and recognised as a Scheduled Bank by the RBI was that the entire income is form the Banking business for the reason that it carried on only for the reason that it carried on only the business of Banking. The assessee is a Co-operative societies formed under the Rajasthan Co-operative societies Act, 19 53 for the purpose of the carrying on the business of Banking and is recognised as a co-operative Bank by the RBI and is covered by the Banking Regulation Act, 19 49. 3 of its bye-laws are : to promote the economic interest of the members of the Bank in accordance with the Co-operative principles ; to receive money on current, saving, fixed deposit or other accounts and to raise or borrow form time to time such sums of money as may be required for the purposes of the bank ; to grant loans to co-operative institutions registered or deemed to be registered under the Act and the members enrolled as per provisions of the bye laws ; to lend money or grant overdrafts to, or to open cash credit for, depositors and members of the bank's staff on the security of Fixed deposits : Gover. Counsel for the assessee submitted that though the assessee ha been formed under the Cooperative Societies Act, it would have to be governed any by the Banking Regulation Act, 19 49, as it is formed with the sole purpose of carrying of carrying on the business of Banking and the Act specifically provides that a Cooperative Bank would have to strictly conform with the Act and any provisions which Governed or was applicable under any the law would no longer apply to its, which would only mean that even the Co- operative Societies Act would not apply. The meaning of the term banking and the business of banking is given in that Act, has to be applied to the assessee Bank and only if it is found to carry on activities not specified to be a banking business, that activity can be said to be as not reliable to or attributable to the banking business. The rule is a general rule which shall govern all Cooperative Societies excepting the one which has been formed to carry on the banking business, as only on that basis it has been allowed to be a bank and also recognised as a scheduled bank.


A. KALYANASUNDARAM, A.M. ORDER These are two year's appeals by Revenue, on issue of exemption under s. 80P2(a)(i) to whether whole of income of Co-operative Bank is out of banking business or only part can be said to be related to banking business. 2 . claim of assessee Bank, which was formed under Co- operative Societies Act for carrying on business of Banking and recognised as Scheduled Bank by RBI was that entire income is form Banking business for reason that it carried on only for reason that it carried on only business of Banking. view of ITO was that though assessee Bank carried on only activity of banking, yet when it comes to expiation of income under s. 80P, it has to be limited to only that much of income as are related to lending/borrowing and income from such securities which has to be so kept to meet time and demand liabilities and would not apply such income on securities invested out of reserve funds for reasons that compliance of ss. 54, 55 & 63 of Co-operative Societies Act, have not been made. 3 . CIT(A) followed earlier year's order of Tribunal in assessee's case and held that investment in Government and other securities are part of activity of Bank and therefore, entire income is exempt. 4 . Revenue has come up in second appeal before us, as view taken by CIT(A), is not acceptable to it. It has raised following common question in both years : "Whether investment of reserve and other funds in various securities did not require sanction of Registrar of Co-operative societies under s. 63 of Co-operative societies Act? Where such investment can be said to be of banking nature? Whether income from such investment could be said to be from banking business and exempt under s. 80P 2(a)(i) of IT Act, 19 61". 5 . assessee is Co-operative societies formed under Rajasthan Co-operative societies Act, 19 53 for purpose of carrying on business of Banking and is recognised as co-operative Bank by RBI and is covered by Banking Regulation Act, 19 49. objects of Bank as contained in cl. 3 of its bye-laws are : (a) to promote economic interest of members of Bank in accordance with Co-operative principles ; (b) to receive money on current, saving, fixed deposit or other accounts and to raise or borrow form time to time such sums of money as may be required for purposes of bank ; (c) to grant loans to co-operative institutions registered or deemed to be registered under Act and members enrolled as per provisions of bye laws ; (d) to lend money or grant overdrafts to, or to open cash credit for, depositors and members of bank's staff on security of (i) Fixed deposits : (ii) Gover. Securities, and (iii) Other Securities approved by Registrar, and also to grant clean overdrafts to depositors, who are atleast nominal members, according to rules framed by Board ; (e) to serve as balancing centre for all co-operative banks and securities in state ; (f) to undertake inland exchange business by collecting or discounting bills of exchange and hundies or to issue demand drafts. discounting of bills shall be for those who are at least nominal members, according to rules framed by board ; (g) to receive for safe custody securities, ornaments and valuables ; (h) to buy and sell, for legitimate investment of surplus funds, securities of Govt. of India or of Govt. of Rajasthan or other securities specified in clauses (a), (b)(c) and (d) do section 20 of Indian Trust Act, 19 82 and to set as agents for Co-op. Institutions for purchase and sale of such securities. (i) to open branches wherever necessary in its area of operation with previous approval of Registrar and : (j) generally undertake such activities as may be conducive to attaining of above objects. 6 . In two years under consideration, reserve and other funds and investments stood as under : Reserve and other Funds Asst. yr. Asst. yr. (Rs. in (Rs. in . lacs) lacs) . 19 78-79 19 81-82 Statutory Reserve 51.69 83.39 Agr. Stabilisation Fund own) 33.11 106.04 -do- (Loan from Govt.) 47.62 127.80 -do-(Grant on Aid) 159.61 390.10 Building Fund 3.44 6.16 -do- (Subsidy from Govt.) 1.00 1.00 Dividend Equalisation Fund 3.70 Reserve for Bad & Doubtful 9.33 27.21 Debts Investment Depreciation 3.41 6.25 Fund Staff Gratuity 1.53 3.63 Common Good Fund 1.08 1.02 . 311.82 756.30 Investments . . Central and State Govt. 189.78 823.82 Securities Other Trustee Securities 307.26 338.59 Shares in Co-op. Institutions 6.78 8.78 Other Investments . 503.79 1171. 19 7 . argument put forth by ld. Departmental Representative Mrs. Saroj Bala was that assessee Bank is primarily veered by Cooperative societies Act and as regards investment of it reserve and funds, they are specifically covered by s. 55(2) and s. 63 of Cooperative Societies Act, and since investment have not been so made, it has to be held that investments are not banking assets for Limited purpose of exempting income therefrom under s. 80-P(a)(i). She referred to s. 55(2) and submitted that it castled obligation on Cooperative society to invest such reserve funds in modes, presented under s. 63 of Cooperative Societies act and modes are: (a) Central Cooperative Bank ; (b) Apex Bank ; (c) in shares or securities or debentures issued by any other Cooperative Societies with limited liability; (d) in any other mode permitted by rules or by general or special order of Govt. 8 . Government securities do not fall in above modes and, therefore, is out of purview of s. 63, consequential effect being they cannot be treated as Bank's stock-in-trade. Further assessee could not even bring out specific manner of investment of reserve Funds. general or special order can only be given by Register r. 55(2), which was never sought for by assessee. Similarly assessee bank should have sought permission under r. 54 of investment of building fund and other refunds which was never carried out. Since Cooperative Societies Act governed assessee, which ha been not so compile with investment had to be treated as of non- banking nature. 9 . According to ld. Departmental representative, registration of bye- laws cannot be equated to general section by Register at all, as even in certification, it has only been mentioned that it is certified true copy. However, she conceded that since assessee is bank, and as per banking law 20 per cent of its time and demand liabilities have to be invested in Government securities, assessee can be allowed relief to extent investment represented 20 per cent of time and demand liabilities. She placed reliance onUnited Commercial Bank Ltd. vs. CIT ( 19 57) 32 ITR 688 (SC)andCIT vs. Narandas & Sons( 19 78) 115 ITR 587 (Bom). 10. Mr. B. Khosla, ld. Counsel for assessee submitted that though assessee ha been formed under Cooperative Societies Act, it would have to be governed any by Banking Regulation Act, 19 49, as it is formed with sole purpose of carrying of carrying on business of Banking and Act specifically provides that Cooperative Bank would have to strictly conform with Act and any provisions which Governed or was applicable under any law would no longer apply to its, which would only mean that even Co- operative Societies Act would not apply. He drew our attention to provisions relating to Banking business as contained in Act and also to provisions in bye-laws regarding investment. He further added that every bank requires share capital and minimum statutory percentage had been any fixed for investment which is only indicating or safe level of liquidity, or bank and that each bank has to ensure that it has adequate resources which are readily encashable. Banking Business is only related to lending and borrowing is too narrowed view. Further s. 80P has sued two terms "attributable to" and derived narrowed view. Further s. 80P has sued two terms "attributable to" and derived from and their meaning should therefore be given as on Supreme Court judgment inCambay Electric Supply Industrial Co. Ltd. vs. CIT 19 78 CTR (SC) 5 0 : ( 19 78) 113 ITR 84 SC. Reliance was also placed onITO vs. Karnataka State Cooperative Apex Bank Ltd.( 19 83) 6 ITD 763 (Bang) andCIT, Meerut vs. Coooperative Cane Development Union Ltd.( 19 79) 10 CTR (All) 282 : ( 19 79) 118 ITR 770 (All). 11. We have given very careful considerations to materials that are on record and also extensive arguments of parties. 12. At out-set, it needs to be brought that there bamking business having not been defined under IT Act and, therefore, it has only to be given same meaning as is contained in Banking Regulation Act, 19 49 which is law in India which governs all banks in India. This is clearly and specifically so provided for under Act, in s. 3 which reads "Act to apply to Cooperative Societies in certain cases nothing in this Act shall apply to-(c) any other Co- operative Society, except in manner and to extent specified in part V. In s. 56, Act as would be applicable to Cooperative Banks have been specified and contains modification of various sections for that purpose. Sec. 54 has been added which reads " provisions of this Act shall have effect, notwithstanding anything to contrary contained in bye-laws of Cooperative Society or in any agreement executed by it or in any resolution passed by it in general meeting or by its Board of Directors or any other body entrusted with management of its affairs Whether same be registered, executed or passed the case may be (2) any provision contained in bye-laws, agreement or resolution aforesaid shall to extent to which it is repugnant to provisions of this Act, become or be void, as case may be." Thus, it becomes clear that Act overrides any other law or it can be said that Cooperative Bank shall be governed only by that Act only. Therefore, Cooperative Bank has to necessarily conform to provisions of act if it has to carry on business of banking. meaning of term banking and business of banking is given in that Act, has to be applied to assessee Bank and only if it is found to carry on activities not specified to be banking business, that activity can be said to be as not reliable to or attributable to banking business. 13. Banking has been defined in s. 5(6) of Act reads "Banking means accepting, for purpose or lending or investment, of deposits of money form public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise". Sec. 5(C), defines banking company as any company which transacts business of banking in India. Sec. 6 gives forms of business in which banking companies may engage which has been detailed out in cls. (a) to (o). broad category of form of business has been spelt out in cl. (a) which is reproduced below : "the borrowing, raising, or taking up of money, lending or advancing of money either upon or without security; drawing, making accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hundis, promissory notes coupons, drafts, bills of landing, railway receipts, warrants, debentures, certificates, scrips and other instruments, and other securities whether transferable negotiable or not, granting and issuing of letters of credit, traveller's cheques and circular notes, buying, selling and dealing in bullion and specie, buying and selling of foreign exchange including foreign bank notes, acquiring, holding,issuing on commission, underwritingand dealingin stock, bonds, obligations,securities and investments of all kinds ; etc." Clause (d) reads "The effecting, insuring, guaranteeing, underwriting or participating in managing and carrying out any issue, public or private, of state ' municipal or other loans or of shares, stocks, debentures, or debenture stock of any company, corporation or association and lending of money for purpose of any such issue;" 14. reading of above indicates that one of activities r business of bank is to acquire, hold and deal in securities and investments of all kinds. Approved securities have been defined in s. 5(a) to mean securities in which trustee may invest money under cls. (a),(b), (bb), (c) or (d) of sec. 20 of Indian Trust Act, 19 82, Cl. 3(h) of bye-laws provide for investment of its funds in securities specified in cls. (a),(b), (c) and (d) of Indian Trust act, 19 82. Putting all above together, it can very well be seen that investment made in Govt. securities which is security within meaning of s 20 f Indian Trust act, 19 82, is therefore activity or business of assessee bank and income earned therefrom or derived therefrom is attributable banking business only. 15. On issue of investment of reserve funds which according to Revenue is governed by r. 55(2) of Cooperative Societies Act and has to vest in four modes specified in s. 63 of Societies Act and for purpose of utilization in own business, sanction of Registrar is necessary, can be answered squarely by referring to Act only as that act as already observed in earlier paras, overrides any contrary provision contained in any bye-laws and that assessee being bank, has only GTO be governed by that Act in so far as it relates to banking business. rule is general rule which shall govern all Cooperative Societies excepting one which has been formed to carry on banking business, as only on that basis it has been allowed to be bank and also recognised as scheduled bank. 1 6 . This gets further clarified when s. 24 of that Act, and s. 42 of Reserve Bank of India Act, 19 34 and Sch. II is reviewed. Sec. 24 of Act talks of maintenance in cash, gold, or unencumbered approved securities to extent of 20 per cent of time and demand liabilities. Sub-cl. 2A of s. 24 of Act further specifies that scheduled bank in addition to average daily balance as required by s. 42 of RBI Act 19 34 shall maintain in cash, gold or unencumbered approved securities atleast to tune of 25 per cent of its total demand and time liabilities in India. Sec. 42 of RBI Act says that average daily cash balance to be kept with RBI would not be less then 3 per cent of its demand and time liabilities, to which effect return had to be filed by all banks it has been added further that RBI by means of notification can increase cash reserve upto 15 per cent of demand time liabilities and for failure to maintaining reserves, penalty has been provided in sub-cl. 4 of s. 24 of RBI Act. It mentions specifically that he provisions apply to al scheduled banks as so listed in second schedule reference to which clearly confirms fact assessee bank is scheduled bank. Thus bank's entire business is not only governed by Act but also is regulated by RBI Act, 19 34. 1 7 . conclusion therefore, is that he investment in Government securities which are securities as defined in s. 20 of Indian Trusts, Act 19 82, are approved securities and such investment is banking business and income derived therefrom or tributable to is relatabel to Banking business and would clearly be covered by s. 80(P)2(a)(i). sanction of Register of Cooperative is not at all called for as his powers societies are taken over by Act of RBI. 18. In case ofUnited Commercial Bank Ltd. vs. CIT( 19 75) 32 ITR 688 (SC). Their Lordships were considering issue of taxing of income from securities as to whether it constitutes profits and gains in relation to heads of income under 19 22 Act. Their Lordships were of view that Act having provided specific head of income for taxing purposes, income from securities has to be treated separately and not as part of its profits from business. In case ofCIT vs. Narandas & Sons( 19 78) 115 ITR 587 (Bom) Bombay High Court was again faced with situation of securities held as stock-in-trade and taxability of its income. It was held : "In view of Departmental Representative of Supreme Court inU. Co. bank vs. CIT( 19 57) 32 ITR 688 (SC) income from interest on securities falls under s. 8 and is not business income falling under s. 10, even though securities are held as his stock in trade." Their Lordships made reference to Privy Council's ruling inPunjab Cooperative Bank Ltd. vs. CIT( 19 40) 8 ITR 635 (PC) and observed that "In Punjab Cooperative Bank's case finding had been given that purchases n d sale of securities was as much assessee's business as receiving deposits from clients and withdrawals by them". No opinion as to whether sale and purchase of securities and interest derived therefrom formed part of same business or not was given as there was no such finding by courts below. In case ofPunjab Cooperative Bank(supra). Their Lordships of Privy Council were of view of purchase/sale of securities are integral part of banking business. 1 9 . Thus, case law as relied on by Department also goes to establish that making investment in Govt. Securities is integral part of business, which is also evidenced by s. 6 of Act which defines banking business and include acquiring, holding and dealing in securities and investments of all kinds. 20. In result, income from interest on securities are attributable to and also derived from banking business and as such representative wholly exempt under s. 80P 2(a)(i). departmental appeals fail. H.S. AHULWALIA, J.M .: Personally speaking, I am of opinion that contrary view on subject would be more appropriate and in accordance with spirit of relevant provisions of law. Normally banks would not be entitled to exemption contained in s. 80-P(2)(i). idea behind giving exemption to Cooperative Societies seems to relate to such part of business of banking which is conducted to provide credit facilities to members of Society. If entire business of banking carried on by Co-operative Society were to be exempt, then any bank could claim exemption by being registered as Co-operative society. There would be no need of cl. (c) in s. 80-P(2) at all because entire banking business of Co-operative society which would involve any kind of deposit or investment would be exempt. However point involved in these matters is pure question of law in any case matter has to go to High Court. I, therefore, do not want to make it Third Member case and agree with ultimate conclusion arrived at by my ld. Brother. *** INCOME TAX OFFICER v. RAJASTHAN STATE CO-OP. BANK LTD.
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