RAJASTHAN RAJYA SAHAKARI BHOOMI VIKAS BANK LTD. v. INCOME TAX OFFICER
[Citation -1986-LL-0630-5]

Citation 1986-LL-0630-5
Appellant Name RAJASTHAN RAJYA SAHAKARI BHOOMI VIKAS BANK LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 30/06/1986
Assessment Year 1979-80, 1980-81
Judgment View Judgment
Keyword Tags interest earned on investment • co-operative societies act • opportunity of being heard • state co-operative bank • banking regulation act • government securities • co-operative society • business of banking • security deposit • draft assessment • land development • interest income • gratuity fund • doubtful debt • reserve bank • draft order
Bot Summary: The identical issue, he submitted, was considered in the case of Union Co-operative Bank which was heard by this Bench a few days back where it was expressed that the Bench has already taken a view on this matter in another assessee's case and held the activities to be relatable to the banking business. Earned on different securities, representing investment out of reserve and other funds as not relatable to the banking business would be going against the very basic and fundamentals of what is known as banking business and so specified and recognised by the RBI as well as by the Legislatures as comprising of the banking business. In view of these various facts, we have come to the conclusion that the interest on various securities is relatable to the banking business and would be exempt under section 80P. Since the situation of a case before us is identical, we follow the earlier decision in the case of Rajasthan State Co-operative Bank Ltd. and upheld the order of the Commissioner on this issue. The assessee having been formed with a view to enlarge co- operative movement and that too as bank, the staff could not be said to be members as such and the interest on loans given to staff as well as the sale of newspapers could not be said to be relatable to the banking business. The argument of the assessee was that this was part of the banking business while it was argued for the department that it is not relatable to the banking business at all. The interest earned on the deposits from staff as also on the gratuity to be paid by the employer would not be strictly banking business though it is protection of the bank's liability. The interest earned on the deposit of the pump set dealers would also stand in the same footing as certain deposit is taken by the bank from various pump set dealers, who had supplied pump sets to the various customers of the bank to whom monies have been advanced for purchase of such pump sets.


These are four appeals - two by assessee and two by department involving common issues in common years, and, therefore, they are disposed of by common order. 2. first common issue in assessee's appeals in respect of powers of IAC under section 144B of Income-tax Act, 1961 ('the Act') as to whether they are limited to various issues objected to pay assessee or would cover entire assessment as whole thereby giving powers of enhancement to IAC while giving of directions under section 144B. 3. On behalf of assessee Mr. R. C. Ghiya submitted that reading of section 144B (4) reveals that as consequence of draft order made by ITO, assessee has raise his objections, which objections will be forwarded to IAC along with draft assessment order for his directions. Thereby IAC' s jurisdiction is limited to examination of draft assessment order vis-a-vis objections raised by assessee and he is to give such directions as he deems fit in respect of matters, which are objected to by assessee. It is only by invoking of provisions of section 144A of Act that IAC could suo moto after giving assessee opportunity to issue such directions in respect of matters not considered under section 144B. In present case, IAC did not invoke section 144A and, therefore, his directions which are given under section 144B is clearly indicative that he has overstepped his jurisdiction and also enhanced addition proposed to be made by ITO which is invalid. 4. On this issue, learned senior departmental representative Mr. Koolwal referred to order of Delhi High Court in case of Sudhir sarin v. ITO [1981] 128 ITR 445. Referring to this ruling, he submitted that it was held that under section 144B , IAC has powers to enhance assessment but he can do so only after giving opportunity to assessee. In present case, IAC has complied with this, as assessee was given opportunity after which only he had given such directions as he thought fit. He, therefore, pleaded that in view of said ruling of Delhi High court, there is no merit in plea raised by assessee. 5. We have given considerable thought to issue raised by assessee as well as by department. Section 144B (4) reads as under: "(4) If any objections are received, Income-tax Officer shall for ward draft order together with objections to Inspection Assistant Commissioner and Inspecting Assistant Commissioner shall, after considering draft order and objections and after going through (wherever necessary) records relating to draft order, issue, in respect of matters covered by objections, such directions as he thinks fit for guidance of Income-tax Officer to enable him to complete assessment: Provided that no directions which are prejudicial to assessee shall be issued under this sub-section before opportunity is given to assessee to heard." Reading of above section, to our mind, indicates that IAC's jurisdiction under this section limited to issues covered by objections. later part of section says that IAC shall consider draft order, objections and examination of records relating to draft order in respect of such issues covered by objections and has to give directions as he thinks fit. proviso that has been added as indicative of fact that IAC shall not issue any direction without confronting assessee, i.e., he shall give directions only after hearing assessee. proviso, to our mind, is not at all indicative of allowing of looking into such matters which have not been objected to by assessee on ground that plea of assessee has been accepted by ITO. If these were intentions of Legislatures, to our mind, there was no necessity of section 144A in Act. It is only under that section that ITO of his own accord can call for records and after giving assessee opportunity give such directions which may not have been considered in draft assessment order proposed under section 144B. Our view on subject apart, there seems to be only one High Court ruling on this subject, which is Delhi High Court in Sudhir Sareen's case (supra), wherein their Lordships have held (this being Single Bench order) 'if after hearing objections of assessee to proposed assessment order, IAC wants to enhance assessment still further. He must give additional opportunity of being heard to assessee'. Their Lordships came to this conclusion after reading provisions of section 144B (4). In absence of any other contrary decision, this ruling would be law of land as ruled by Bombay High Court in case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589. We respectfully follow said ruling of Delhi High Court and dismiss this particular ground of assessee for both years. 6. In departmental appeals, common issue is in respect of Commissioner (Appeals) view that all income received from investments whether they are from shares, securities, properties or otherwise would be relatable to banking business and thereby investment of reserve funds/building funds, bad and doubtful debt funds, etc., are all in nature of banking business and, thus, they are exempt under section 80P (2) (a) (i) of Act. 7. On behalf of department, learned senior departmental representative Mr. Koolwal submitted that IAC had disallowed this issue extensively. He submitted that IAC had placed reliance on Madhya Pradesh High Court decision in case of M. P. State Co-operative Bank Ltd. v. Addl. CIT [1979] ITR 327. According to senior departmental representative, assessee, which is co-operative society carrying on business of land development bank has to comply with tax provisions as are contained in t h e Co-operative Societies Act, 1912. Co-operative Societies Act has prescribed manner of investment of reserve funds and other funds and all such investments have to be made in accordance with that Act and that too on t h e basis of direction of Registrar. In paragraph 3.1, manner of investments have been considered by IAC. Section 55(2) of Co-operative Societies Act provides that Registrar by general or special order permit investment of reserve fund or portion thereof in its own business. Section 63(1) of Co-operative Societies Act provides manner of investment of funds. In page 23 of his order, he has discussed about various other funds such as building funds, etc., that sanction of Registrar for investment of building funds having not been obtained, it is in nature of non-banking business. Similar was view taken in respect of agricultural credit fund, staff gratuity fund, staff security deposit, as also he security deposit of pump set dealers, etc. Commissioner (Appeals), however, had upheld that pump set dealers deposit staff gratuity fund, staff security deposit and investment is not related to banking business. Mr. Koolwal vehemently submitted that when related to banking business. Mr. Koolwal vehemently submitted that when assessee's society could not have made any investment of its reserve fund without sanction of Registrar of co-operative societies, then all actions which have done in contravention of provisions of Co-operative Societies Act, would only lead to conclusion that income earned by means of such non-compliance of Act would not be relatable to banking business. If they cannot be related to banking business, then income earned by means of such non-compliance of Act would not be relatable to banking business. If they cannot be related to banking business, then income thereon cannot be exempt under section 80P (2) (a) (i). Mr. Ghiya, learned counsel for assessee submitted that in MP Co-operative Societies Act, section 44(2) specifically provides that reserve fund can be utilised only as may be permitted by Registrar in that behalf. In Rajasthan State Co-operative Societies Act, there is no such similar provision. He referred to section 55(2) where it was provided that investments would have to be made i n models prescribed under section 63 of said Act. In that section also there is no provision which says that sanction of Registrar of societies either prior to or after sanction of Registrar of societies either prior to or after assessment is necessary. It was further argued that society is carrying on business of banking and has been granted licence for such business. identical issue, he submitted, was considered in case of Union Co-operative Bank which was heard by this Bench few days back where it was expressed that Bench has already taken view on this matter in another assessee's case and held activities to be relatable to banking business. He referred to Board's circular, which is on file for proposition that entire income earned by different sources from out of investments are all arising out of banking business and, therefore, exempt under section 80P (2) (a) (i). Referring to this circular, Mr. Ghiya submitted that identical objection was taken by department in case of UP Co-operative Bank Ltd. Allahabad High Court in that case following Supreme Court decision in case of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 had held that entire income would be covered by first proviso which ruling of Allahabad High Court has been accepted to value of land. He, therefore, again emphasised that breaking activities into compartment like, deposits, borrwals from customers and advances and lending to customers, as banking business and interest, etc., earned on different securities, representing investment out of reserve and other funds as not relatable to banking business would be going against very basic and fundamentals of what is known as banking business and so specified and recognised by RBI as well as by Legislatures as comprising of banking business. 8. We have given careful consideration to arguments of parties. This was considered at length in case of Rajasthan State Co-operative Bank Ltd. [IT Appeal Nos. 408 and 409 (Jp.) of 1985, dated 3-6-1986] for assessment years 1978-79 and 1981-82 and in that case it was held that co- operative society formed under Rajasthan State Co-operative Societies Act for purpose of carrying on business of banking would be predominantly covered by provisions that are contained in Banking Regulations Act, 1949 and Reserve Bank of India Act, 1934. In that case, what comprises of banking business has also been examined. It was held that section 6 of Banking Regulations Act defines banking business and such banking business also includes acquiring, holding and dealing in stock bonds, securities and in investments of all kinds. It was observed that banking business would also include as defined in clause (d) of section 6 even guaranteeing under writing, participating, in managing and carrying out any issue public or private or State, etc., of loan, shares, stocks, debentures, etc. Thereafter, investment made on various funds writ examiner. On this issue, it was considered view that since manner of investment is governed by Banking Regulation Act, all other provisions contained in any other law have to be given good-bye, i.e., to say that provisions contained in any other law including Co-operative Societies Act would be redundant. This conclusion was arrived at after referring to Banking Regulation Act, section 42 of Reserve Bank of India Act, 1934, which subscribed for investments in perticular manner in proporation to various liabilitites. It was further observed that he Banking Regulation Act requires investments in various securities as defined in section 20 of Indian Trusts Act, 1982 and various Government securities are treated as approved securities and investment in them is banking business as defined in section 6 of Banking Regulation Act. In view of these various facts, we have come to conclusion that interest on various securities is relatable to banking business and, therefore, would be exempt under section 80P (2) (a) (i). Since situation of case before us is identical, we follow earlier decision in case of Rajasthan State Co-operative Bank Ltd. (supra) and upheld order of Commissioner (Appeals) on this issue. This disposes of common issue of department, which is dismissed. 9. other common issue in assessee's appeal for two years is in respect of income from commission, interest on advances to staff, miscellaneous income of sale of newspapers. learned counsel Mr. Ghiya submitted that commission that is received by assessee is on account of discount of various bills, drafts, etc., which is business of bank as such. learned Commissioner (Appeals) had apparently gone wrong in coming to conclusion that such commission income is not attributable to banking business. Referring to order of IAC, he submitted that fact is not disputed by department. According to them, this is similar to under writing and underwriting is only provided in respect of issue of stocks or bonds of Government, income from commission on account of discount of bills or cheques is not banking business. Mr. Koolwal relied on orders of authorities below. On issue of commission, it is our considered view that both IAC as well as Commissioner (Appeals) have gone wrong in treating discounting of bills, whereby customers are provided credit immediately on presentation of bills or cheques for small commission on non-banking business. It this is not relatable to credit facilities to customers what else could not it be. We, therefore, are of view that assessee is entitled to exemption in respect of such commission under section 80P (2) (a) (i) . 10. In respect of interest on advances to staff and sale of old newspapers, it would be difficult to treat them at par with monies that are lent to customers. assessee having been formed with view to enlarge co- operative movement and that too as bank, staff could not be said to be members as such and, therefore, interest on loans given to staff as well as sale of newspapers could not be said to be relatable to banking business. Such income would have to be considered under section 80P (2) (c ) only. 11. In last of issue is in respect of interest income earned on investment of staff gratuity fund, staff security deposit and security deposit of pump set dealers. argument of assessee was that this was part of banking business while it was argued for department that it is not relatable to banking business at all. investment made on account of staff gratuity and staff security is with view to protect society bank in respect of its obligations towards its employees as well as business as such. However, to bring them within definition of banking business as such. However, to bring them within definition of banking would be difficult proposition. It is in everyone's knowledge that no bank can function without its officials. banking employer has to necessarily provide and take precautions as are necessary for proper carrying out its business activity. Expenses incurred in connection with all such prevention measures are no doubt allowable as business expenditure. However, interest earned on deposits from staff as also on gratuity to be paid by employer would not be strictly banking business though it is protection of bank's liability. interest earned would be covered only under section 80P (2) (d) , which exempts income by way of interest derived from co-operative society from its investments, whole of such income. interest earned on deposit of pump set dealers would also stand in same footing as certain deposit is taken by bank from various pump set dealers, who had supplied pump sets to various customers of bank to whom monies have been advanced for purchase of such pump sets. This, it was explained, was only to protect bank financing to various customers and also to ensure that pump sets function property. Though there is some distinct connection between advances provided to customers in respect of pump sets purchased, deposit made by customers. interest earned on investment of such deposits have to be categorised. On staff deposit along with income by way of interest and would be covered only by section 80P (2) (d). 12. In result, appeals of assessee are partly allowed and that of department dismissed. *** RAJASTHAN RAJYA SAHAKARI BHOOMI VIKAS BANK LTD. v. INCOME TAX OFFICER
Report Error