CASE NO.: Appeal (civil) 4646-4648 of 2000 PETITIONER: COMMISSIONER OF INCOME TAX, KARNATAKA-III RESPONDENT: KARNATAKA STATE COOPERATIVE APEX BANK DATE OF JUDGMENT: 22/08/2001 BENCH: S.P. BHARUCHA & Y.K. SABHARWAL & ASHOK BHAN JUDGMENT:
JUDGMENT
2001 Supp(2) SCR 35
The Judgment of the Court was delivered by
BHARUCHA. J. These appeals have been referred to a Bench of three learned
Judges, in view of the apparent conflict between the two judgments (of
Benches of two learned Judges of this Court) in M.P. Cooperative Bank
Limited, Jabalpur v. Additional Commissioner of Income Tax, Madhya Pradesh,
Bhopal, [1996] 2 SCC 541 and Commissioner of Income Tax, Bangalore v.
Bangalore District Cooperative Central Bank Limited, [1998] 6 SCC 129.
The question in appeal relates to, what was Section 80(i) and is now
Section 80-P of the Income Tax Act, 1961, which reads thus :
“80-P. (i) Where, in the case of an assessee being a cooperative society,
the gross total income includes any income referred to in subsection (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)-(vii) the whole of the amount of profits and gains of business
attributable to any one or more of such activities :
The question in appeal reads :
“Whether, on the facts and in the circumstances of the case, the Appellate
Tribunal was right in law in holding that the interest income arising from
the investment made out of reserve fund is exempt under Sec.80-P (2) (a)
(i) of the Income Tax Act ?”
In the case of M.P. Cooperative Bank Limited, this court noted instructions
of the Madhya Pradesh Government which required the investment of the
reserve funds of apex banks and observed that, by reason thereof no part of
the Reserve Fund could be utilised as working capital nor could any part of
the Reserve Fund deposits be withdrawn except with the permission of the
Registrar to meet losses or at the time of winding up and not otherwise. In
the circumstances, the Revenue contended that the securities relating to
the Reserve Fund could never be considered to be the circulating or working
capital of the bank or its stock-in-trade to qualify for exemption under
Section 81 of the Income Tax Act. The court noted that a cooperative bank
was legally obliged to place certain Government securities with the State
Bank or the Reserve Bank of India and these securities could not be
withdrawn by the bank at its will and could only be withdrawn in certain
situations, as referred to hereinabove. It was, therefore, difficult, the
court said, to comprehend how such Government securities relating to the
reserve fund could be considered the bank’s stock-in-trade or circulating
capital. It was understood in banking parlance that circulating capital was
that which was put into circulation or turned over to earn profit.
Government securities coming out of the Reserve Fund, which could not be
easily encashed and which could be utilised only when the contingencies
mentioned arose, could not be considered circulating capital or stock-in-
trade. The court, therefore, came to the conclusion, of first principles,
that the interest on Government securities placed with the State Bank or
the Reserve Bank of India would not qualify for exemption under Section 81
(now, Section 80-P) of the Income Tax Act. Such investment could not be
regarded as an essential part of banking activity inasmuch as the same did
not form part of stock-in-trade or working or circulating capital.
This judgment was cited before the Bench of two learned Judges which
decided the case of the Bangalore District Cooperative Central Bank Limited
It was considered as having been rendered on its own facts and not
applicable to the case of Bangalore District Cooperative Central Bank
Limited in view of the finding of the Tribunal that the income in question
was attributable to the business of that assessee. The court referred to
the Banking Regulation Act, the Karnataka Cooperative Societies Act and the
Karnataka Cooperative Societies Rules, which showed that the investments
that had been made by the assessee were in compliance with the statutory
provisions and in order to carry on the business of banking. They were
necessary and, consequently, they were part of the business activities of
the assessee falling within the scope of Section 80-P(2)(a)(i).
We do not agree with the finding of the Bench which decided the Bangalore
District Cooperative Central Bank Limited case that the decision in the
case of M.P. Cooperative Bank Limited was rendered on its own facts. The
latter decision was clearly a reasoned decision.
The question is whether we agree with the reasoning in M.P. Cooperative
Bank Limited. 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 not, by reason of
Section 80-P(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 therefrom would be income from the assessee’s
business. We are unable (o lake view that found favour with the Bench that
decided the case of M.P. Cooperative Bank Limited that only income derived
from circulating or working capital would fall within Section 80-P(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.
In the premises, we take the view that the decision of this court in the
case M.P. Cooperative Bank Limited does not set down the correct law and
that the law is as we have put it above. The question, accordingly, is
answered in the affirmative and in favour of the assessee.
The civil appeals are dismissed. No order as to costs.