ORDER
D. Manmohan, J.M.
July, 1998
1. All these appeals relate to one assessee and as the issues involved herein are common, we propose to dispose of the appeals by a common order for the sake of convenience.
2. The appeals filed by the assessee relate to the asst. yrs. 1989-90 to 1992-93 whereas the appeals of the Revenue relate to the asst. yrs. 1990-91 to 1992-93.
3. The assessee is a co-operative society constituted with the main object of lending the money to its members out of membership funds and the deposits collected by the assessee. The society made fixed deposit of a portion of the sum which was not immediately required with the CESC Ltd. The members of the assessee-society are employees of CESC. The interest earned on the fixed deposit made with the CESC was claimed by the assessee as an amount eligible for deduction under s. 80P of the Act on the ground that the interest constituted income from banking business. Moreover, it is the case of the assessee that the interest earned on the aforesaid fixed deposit was never brought to tax in the past; the disallowance was made for the first time in 1989-90 in an order passed under s. 154 of the Act followed by disallowance made in the subsequent years. In the regular assessment proceedings, in respect of asst. yr.1989-90, the AO observed that in the course of audit, an objection was raised as to the treatment of the interest amounting to Rs. 14,49,278 received from fixed deposit with CESC Ltd. on the ground that such deposit was not readily available as and when required by the depositors and hence interest cannot be considered as an income from banking business. In response to notice under s. 154, assessee filed a written submission. After considering the same, the AO observed that the assessee failed to establish that interest on fixed deposit with CESC Ltd. should be treated as income from banking business.
4. Aggrieved by the order under s. 154 of the Act for the asst. yr. 1989-90, it was contended before the CIT(A) that the AO is not correct in treating the interest as income from ‘other sources’. It was submitted that the investment with CESC Ltd. represents judicious investment of surplus fund. In support of the submission that the issue is debatable and hence out of purview of rectification, the decision of the Hon’ble Supreme Court in the case of T. S. Balram, ITO vs. Volkart Bros. (1971) 82 ITR 50 (SC) was relied upon. However, the CIT(A) observed that the mistake in accepting the claim of the assessee in original assessment was a patent mistake which can be rectified under s. 154 of the Act even though there is some complexity involved as regards the appreciation of facts. He observed that the assessment record makes it clear that the amount invested with CESC Ltd. was not readily available as and when required by the depositors.
5. In respect of asst. yrs. 1990-91 to 1992-93, AO has elaborately considered the matter and made the following observations in order to conclude that the interest earned on the fixed deposit with CESC Ltd. is liable to be assessed under the head ‘other sources’ :
(a) that the assessee invested money with CESC Ltd. as fixed deposit for a period of three years;
(b) that the said deposit has no connection with the business carried on by the assessee. There is no obligation on the part of the assessee to invest its surplus money in fixed deposit with CESC Ltd;
(c) that the investment with CESC Ltd. is not trading activity within the meaning of s. 2(13) of the IT Act and thus does not have any proximate connection with the business of the society;
(d) that the intention behind the introduction of s. 80P was to boost the co-operative movement in this country, and the purpose of framing such section shall certainly be defeated if the income from the investment in other than the co-operative societies is exempted;
(e) that in the case of Bihar Co-operative Bank Ltd., vs. CIT (1960) 39 ITR 114 (SC), the Hon’ble Supreme Court observed that it had not been shown that the moneys which were deposited with other bank were “surplus within that buy-law so as to take it out of banking business”. AO, therefore, inferred that had it been shown that moneys were surplus, it would have been held by the apex Court that the income therefrom was not a part of banking business;
(f) that cl. 30 of bye-law of the society deals with investment of funds which states that fund of the society not used in the business may be invested or deposited in the manner prescribed thereunder. Since the assessee itself admitted that it has invested its surplus funds by way of fixed deposit for three years, and since the records show that there has never been any occasion for withdrawal of fixed deposit prematuredly, it indicates that the moneys invested with CESC Ltd. is not at all required for the business of the society, apart from the fact that the investment so made is not easily realisable as the premature repayment is at the absolute discretion of the company as per terms and conditions as discussed earlier and hence it is not part of circulating capital
6. The terms of repayment, as given in p. 2 of assessment order for the asst. yr. 1990-91, is extracted hereunder for the sake of convenience :
“Deposit will be repaid only on maturity but the company reserves the right to allow repayment before maturity at its absolute discretion in which event the rate of interest payment on such deposit shall be in accordance with the Provisions of Companies (Acceptance of Deposit) Rules, 1975, as amended.”
7. Aggrieved, assessee carried the matter in appeal before the CIT(A)-IX, Calcutta. It was contended before him that similar issue was considered by the AAC, in respect of asst. yrs. 1966-67 to 1968-69, in favour of the assessee and thereafter, in the assessments for the asst. yrs. 1969-70 to 1989-90 (original assessment) the AO has made no attempt to charge to tax the income earned by way of interest. It was further submitted that the Tribunal in the case of West Bengal State Co-operative Housing Federation Ltd. [ITA No. 630 (Cal) of 1980] in relation to the asst. yr. 1977-78 held that certain items of income i.e., interest on bank deposit, etc. constituted income exempt under s. 80P(2)(a)(i) of the IT Act. The decisions of the Madhya Pradesh High Court and the Supreme Court i.e., Bhopal Co-operative Central Bank vs. CIT (1988) 169 ITR 573 (MP) and Bihar State Co-operative Bank Ltd. vs. CIT (1960) 39 ITR 114 (SC) were also cited to submit that similar issues were decided in favour of the assessee. It was also submitted that merely on account of the fact that the deposits were made with CESC Ltd., an organisation in which all the members of the assessee-society were employees, the income which is otherwise taxable as income from banking business, does not change its character. It was also submitted that under cl. 30 of the bye-laws of the society, the assessee is entitled to make investment in any manner permitted by the registrar and hence, the investment made in the form of fixed deposit with CESC Ltd. according to the regulation, cannot be treated differently and thus the interest income ought to have been allowed as deduction under s. 80P of the Act.
8. The CIT(A) observed that the order of the AAC cited before him deals with the interest earned on bank deposit whereas, in the instant case, the issue pertains to the character of interest income earned on fixed deposit with CSEC Ltd. He, therefore, distinguished the case on facts. Similarly, the decisions reported in (1988) 169 ITR 573 (MP) (supra) and (1960) 39 ITR 114 (SC) (supra) and also the decision of the Tribunal in the case of West Bengal State Co-operative Housing Federation Ltd. were found to have been concerned with the issues different from the one which was impugned before him. Learned CIT(A), therefore, proceeded to examine the issue on its own merits and recorded his finding that the investment made with CESC Ltd. where all the members of the assessee-society were employees, was not easily realisable as the premature repayment is only at the absolute discretion of the CESC Ltd. as per the terms and conditions of the Investment Agreement and further observed that the amount invested with CESC Ltd. cannot be made readily available as and when required by the depositors and thus it could not be treated as part of circulating capital of the assessee-society. Relying upon the following decisions, learned CIT(A) has come to the conclusion that the investment with CESC Ltd. was not made in the normal course of business of banking and thus the interest income earned thereon will not be covered by the provisions of s. 80P(2)(a)(i) of the Act. The addition was, therefore, confirmed :
(a) Madhya Pradesh Co-operative Bank Ltd. vs. Addl. CIT (1979) 119 ITR 327 (MP); and
(b) Madhya Pradesh Rajya Sahakari Bank vs. CIT (1988) 174 ITR 150 (MP).
9. Further aggrieved, assessee is in appeal before us. Learned counsel for the assessee submits that the issue as to whether the interest income is liable to be treated as income from banking business or not, is debatable issue and hence, it falls outside the purview of s. 154 of the Act and in this regard he relied upon the decision of the Hon’ble Supreme Court in the case of T. S. Balram, ITO vs. Volkart Bros. (1971) 82 ITR 50 (SC). Even on merits, learned counsel submits that the funds invested by the assessee were the free funds and they can be liquidated at any time subject to the only condition of reduction of interest rate and thus, the investment was necessary in the case of banking business so as to meet the requirement of paying to the depositors as and when required. Relying upon the decisions in the cases of CIT vs. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC) and United Commercial Bank Ltd. vs. CIT (1957) 32 ITR 688 (SC), learned counsel submitted that such income has to be treated as income from banking business. Learned counsel further submitted that investment was made since past about 50 years and the AO has not made any disallowance in the past and this itself makes the issue debatable. He further submitted that the AO cannot seek to rectify the issue on the basis of audit objection.
10. As regards the other four assessment years, learned counsel for the assessee reiterated the same submissions as were made in the aforesaid paragraphs.
11. On the other hand, learned Departmental Representative submitted that the AO is justified in rectifying the assessment for the mistake that can be found out on a perusal of the facts and in this regard he relied upon the following decisions :
(a) ITO vs. Ashok Textiles Ltd. (1961) 41 ITR 732 (SC);
(b) Maharana Mills (P) Ltd. vs. ITO (1959) 36 ITR 350 (SC); and
(c) Sirsa Industries vs. CIT 15 Taxman 306 (P&H).
12. On merits, learned Departmental Representative submitted that the funds utilised for the investment made with CESC Ltd. do not partake the character of circulating capital/trading asset and thus supported the order of the tax authorities on the strength of the following decisions :
(a) Madhya Pradesh Co-operative Bank Ltd. vs. Addl. CIT (1996) 218 ITR 438 (SC);
(b) M.P. State Co-operative Bank Ltd. vs. Addl. CIT (supra);
(c) CIT vs. Rajasthan State Co-operative Bank (1997) 223 ITR 55 (Raj);
(d) Kerala Co-operative Consumers’ Federation Ltd. vs. CIT (1988) 170 ITR 455 (Ker);
(e) Madhya Pradesh Rajya Sahakari Bank vs. CIT (supra); and
(f) CIT vs. Co-operative Supply & Commission Shop Ltd. (1993) 204 ITR 713 (Raj).
13. We have carefully considered the rival submissions and also perused the record. The issue centres round the question as to whether the impugned amount invested by the assessee is part of the circulating capital/trading asset or not. The learned counsel for the assessee relied upon two decisions of the Hon’ble Supreme Court which are, in our opinion, distinguishable on facts. In the case of Cocanada Radhaswami Bank Ltd. (supra) the Hon’ble Supreme Court had not independently decided the question as to whether the securities were trading assets of the assessee. In the said case, the Tribunal and the High Court found that they were assessee’s trading assets and the Hon’ble Supreme Court based its decision on the facts as found by the Tribunal. Similarly, in the case of United Commercial Bank Ltd. (supra), the Hon’ble Supreme Court observed at p. 93 of the report that securities are accepted by the Department as part of the trading assets of that assessee and proceeded to consider the question posed before them on the admitted fact that the securities are part of its trading assets. However, in the case before us, the Revenue challenges the claim of the assessee that the surplus funds utilised by the assessee for making a fixed deposit with CESC Ltd. cannot be considered as part of its circulating capital and the Revenue also highlighted the fact that the terms of the deposit indicate that the assessee cannot withdraw the money as and when it is required. The latest decision of the Hon’ble Supreme Court in the case of Madhya Pradesh Co-operative Bank Ltd. (supra) is a case which dealt with s. 81 (now s. 80P of the Act). The Hon’ble Supreme Court elaborately discussed the issue as to whether in the case of a co-operative society, securities are to be considered as the circulating or working capital of the bank or stock-in-trade in order to qualify for exemption under s. 81 of the Act. The relevant observations of the Hon’ble Supreme Court are extracted hereunder for the sake of convenience :
“The normal banking activity is to receive deposits and utilise such deposits by advancing loans, etc., to borrowers. Since the rate at which interest is paid to depositors is lower than the rate charged from borrowers, the difference in the rates generates income for the banks. The bank may have to maintain certain reserves to meet with emergencies, e.g. a spurt in withdrawals by depositors for diverse reasons. Investments which permit withdrawals at short notice would, therefore, be a part of the requirement of banking business and interest accruing on such investments would be outside the tax net.”
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“Government securities coming out of the reserve fund which cannot be easily encashed and which can be utilised only when the contingencies mentioned therein arise cannot be considered to the circulating capital or stock-in-trade. It is more or less in the nature of a fixed asset of the society, being out of circulation for an indefinite period. It is, so to say, at arm’s length from the normal banking business, to be utilised on the happening of certain events, events which may virtually being a cessation of the business. If that be the purpose and object of setting apart the funds in the form of the Government securities and the like, it cannot be reasonably contended that the funds placed in cold storage continue to constitute the bank’s stock-in-trade or circulating capital.”
14. The aforecited decision of the Hon’ble Supreme Court dealt with an exactly similar issue. Reverting to the facts of the case before us, undisputedly, the members of the society are employees of CESC Ltd. and the aforesaid deposits made with the CESC Ltd. were renewed from time to time. The deposits made during the years under consideration were for a fixed term of three years. The case of the learned counsel for the assessee is that funds invested with CESC Ltd. can be withdrawn as and when it requires if only the assessee is prepared to accept lesser rate of interest. However, the submission of the learned counsel of the assessee is not substantiated by placing any material before us.
15. On the contrary, the AO as well as the first appellate authority examined the terms of the deposit wherein it was categorically mentioned that only CESC Ltd. has the right to allow repayment before maturity at its absolute discretion, which implies that the assessee-society has no say in the matter. Thus, it cannot be said that the surplus funds were invested in the short-term deposits so as to encash the same at any time to meet with a spurt in withdrawals by depositors and consequently the amount of deposit cannot be considered as part of circulating capital of the assessee, inasmuch as, the same went out of circulation for a fixed period. Further, the fact that the company, in which the deposit was made, was the employer of the members of the society and the further fact that the investments were made since past several years indicate that the funds utilised for the purpose of investment/were never treated by the assessee as part of circulating capital. No single instance was shown by the learned counsel for the assessee that the fixed deposit made with CESC Ltd. was ever withdrawn prematurely, as a matter of right. Under these circumstances, we are of the opinion that the observation of the Hon’ble Supreme Court in the case of M.P. Co-operative Bank Ltd. (supra) squarely applies to the facts of the case. We, therefore, hold that the assessee is not entitled to the deduction under s. 80P of the Act in respect of the interest earned on fixed deposit made with CESC Ltd.
16. In view of the undisputed facts and also the said legal position, we are of the opinion that the decision on this issue calls for no debate and, therefore, the AO is justified in invoking the provisions of s. 154 of the Act in respect of asst. yr. 1989-90.
17. As regards the submission of the assessee that the completed assessment cannot be reopened under s. 154 of the Act, on the basis of audit objection, learned counsel has not relied upon any precedent. The Hon’ble Supreme Court in the case of Indian and Eastern Newspaper Society vs. CIT (1979) 119 ITR 996 (SC) observed that audit report cannot constitute ‘information’ for the purpose of reopening the assessment under s. 147 of the Act whereas, there is no such bar for rectification of mistake under s. 154 of the Act.
18. This disposes of the assessee’s appeal for asst. yrs. 1989-90, 1991-92 and 1992-93.
19. Now coming to the appeal of the assessee for the asst. yr.1990-91, Ground No. 1 is general. Ground No. 2 pertains to the claim of deduction under s. 80P of the Act in respect of interest income earned by the assessee in respect of investment made with CESC Ltd. For the reasons given in paras. 12 and 13 above, we uphold the order of the first appellate authority.
20. Ground No. 3 pertains to the claim of deduction under s. 80P of the Act in respect of interest of Rs. 29,020 on investment with unapproved gratuity fund. AO observed that the fund is not approved and hence interest on such investment should be assessed under the head ‘other sources’.
21. Assessee challenged the issue before the CIT(A). Relying upon the decision of the Hon’ble, Madhya Pradesh High Court in the case of Madhya Pradesh Rajya Sahakari Bank vs. CIT (supra), learned CIT(A) observed that interest on security earmarked against reserve and provident fund do not constitute income from banking business. He, therefore, confirmed the action of the AO.
22. Further aggrieved, assessee is in appeal before us. Learned counsel for the assessee submitted that there is difference between recognised gratuity fund and unrecognised gratuity fund. In other words, his submission is that the funds invested were free funds and since the fund is not recognised, the assessee can withdraw the fund as and when it requires. Both the learned counsel as well as the learned Departmental Representative reiterated the submissions made before us in respect of the issue considered by us above.
23. We have carefully considered the rival submissions. In our opinion, the issue is squarely covered against the assessee and in favour of the Revenue vide decision of the Hon’ble Madhya Pradesh High Court in the case reported in (1988) 174 ITR 150 (MP) (supra). In the aforecited decision, assessee earned interest on securities earmarked against reserve and provident fund, CIT(A) held that the AO was justified in not allowing deduction in respect of assessee’s contribution towards unrecognised provident fund. The order of the CIT(A) was affirmed by the Tribunal. The Hon’ble High Court upheld the order of the Tribunal by following the earlier decision of the same High Court reported in (1979) 119 ITR 327 (MP) (supra). The mere fact that the assessee has earmarked towards provident fund indicates that the same is not meant to be utilised as its circulating capital. Under these circumstances, we hold that the interest on investment of unapproved gratuity fund does not qualify for deduction under s. 80P of the Act.
24. Ground Nos. 4 to 8 are repetitive in nature and, therefore, not pressed by the learned counsel of the assessee.
25. In the result, all the appeals filed by the assessee are dismissed.
26. Let us now take up the appeals filed by the Revenue. There is delay of 3 days in filing the appeal for the asst. yr. 1991-92. We have considered the condonation petition filed by the assessee. Learned counsel for the assessee has no objection for condoning the delay. Considering the facts and circumstances, we condone the delay of 3 days and admit the appeal.
27. The only issue in all these three appeals pertains to the claim of deduction under s. 80P of the Act in respect of income from Unit Trust of India (UTI). AO observed that income earned on investment in UTI does not qualify for deduction under s. 80P of the Act, inasmuch as, interest income earned is not attributable to banking business or provision of providing credit facility to the members. AO further observed that the income received in respect of unit of UTI is dividend received from an Indian company by virtue of provisions of s. 32(3) of the U.T.I. Act, 1963 and, therefore, taxable under the head ‘Other sources’. The CIT(A) allowed the claim on the ground that the investment is in the normal course of carrying on the business. Further aggrieved, Revenue is in appeal before us.
28. We have heard learned Departmental Representative as well as the learned counsel for the assessee in this regard. It is well settled that any deposit made by the assessee out of its surplus funds can be considered as a trading asset to the assessee if the assessee can withdraw the investment at a short notice so as to meet the emergency such as spurt in withdrawals by depositors, etc. It is not the case of the Revenue that the investment made in UTI cannot be withdrawn at short notice. It is also not the case of the Revenue that such deposits are made out of the reserve fund. In such an event of the matter, we are of the opinion that the interest payment on such investment qualifies for deduction under s. 80P of the Act. By respectfully following the observations made by the Hon’ble Supreme Court in the case of M.P. Co-operative Bank Ltd. (supra), we uphold the order of the first appellate authority.
29. In the result, the appeals filed by the Revenue are dismissed.
K. K. Gupta, A.M.
20th July, 1998
30. I beg to disagree with my learned brother in the case of the assessee’s appeals in ITA Nos. 1168 & 1169/Cal/94, 746/Cal/95 and 816/Cal/96 for the asst. yrs. 1989-90 to 1992-93 but in respect of ITA Nos. 994/Cal/94, 417/Cal/95 & 162/Cal/96 (appeals filed by the Revenue) for the asst. yrs. 1990-91 to 1992-93 which have been dealt with by my learned brother in his order in paras. 24, 25 & 26, I agree with the decision reached by my learned brother in the case of the Departmental appeals which have been dismissed. Because by bringing out the main observation by my learned brother that it is not the case of the Revenue that the investment made in Unit Trust of India (UTI) cannot be withdrawn at short notice and also excess deposit made out of the reserve fund but however the reason for dismissing the Department’s appeal will, be given in my observation hereinafter to be submitted in the appeals filed by the assessee for the years 1989-90 to 1992-93.
31. The brief facts of the case are that the assessee is a co-operative society duly registered under the Co-operative Credit Society Act, 1904, whose main objects inter alia are for creating funds to be lent to its members. The society had been rendering banking services to its members for the past 50 years and filing its returns claiming deduction under s. 80P(2)(a)(i) of the IT Act, 1961. In the asst. yr. 1989-90 the AO under s. 154 sought to rectify a mistake occurred in assessment under s. 143(1)(a) inasmuch as interest received on fixed deposit with Calcutta Electricity Supply Corporation Ltd. (CESC) was sought to be taxed as income from other sources not qualifying the deduction under s. 80P. An amount of Rs. 14,49,238 was, therefore, taxed and demand raised against which the society went in appeal before the CIT(A) who dismissed the society’s submissions. They have come in appeal before us. In respect of asst. yrs. 1990-91, 1991-92 and 1992-93 the assessments had been framed under s. 143(3) wherein the amount of interest earned from fixed deposit with CESC were brought to tax as income from other sources which again were appealed against before the CIT(A) and were confirmed. The amounts of interest on fixed deposit are different in the remaining three years but the same have been disallowed by the AO and confirmed by the CIT(A) on the basis of the observations made in the asst. yr. 1989-90, under s. 154. As the assessment for asst. yr. 1989-90 was framed under s. 143(1)(a) the assessment under s. 143(3) was framed for asst. yr.1990-91 wherein the AO had made efforts to elaborate on the reason of disallowing interest on fixed deposit held as investment by the society in CESC. The main objection raised by the AO in his order for not including the interest earned on fixed deposit can be submitted as follows :
32. First, the AO has relied on the fact that this earning of interest is not income from trading activity of the society. He held that the investment is not a trading asset as claimed by the assessee. Secondly, he has observed that the funds offered for investment in the fixed deposit were surplus and, therefore, were not the circulating capital involved in the banking activity calling for deduction under s. 80P(2). The third contention of the AO is regarding the liquidity of fixed deposits which are term deposits and were with CESC for a period of three years and hence, were not easily realisable due to dependence on absolute discretion of the company for their premature repayment.
33. The Department has learned heavily on the apex Court decision in the case of Madhya Pradesh Co-operative Bank Ltd. vs. Addl. CIT (1996) 218 ITR 438 (SC). The Hon’ble Supreme Court in that case was on the scope of s. 81 as it stood at that time now as s. 80P. There the reserve funds of the bank were invested in Government securities under instructions of the State Government who also had contributed. The State Government instructed the bank that the reserve funds could not be utilised for working capital. Therefore, interest on Government securities which formed part of the reserve funds were not entitled to special deductions under s. 81. The Hon’ble apex Court observed that investments which permits withdrawals at short notice would, therefore, be part of the requirements of the banking business and interest accruing on such investment would be outside the tax liability. This had been reached on the finding to the fact whether the Government securities coming out of the reserve fund which could not be easily encashed or which could be utilised only when the contingencies arise cannot be considered to be circulating capital or stock-in-trade. It was held, therefore, that being out of circulation for an indefinite period it totally loses its identity as circulating capital and, therefore, on a mishappening may virtually bring cessation to the banking business for which object the co-operative societies had been formed.
34. My main reason for dissent is on account of following the decision of the Hon’ble Supreme Court scrupulously and not on merits. The merits in the instant case are totally different which can be observed by perusing the detailed order of the AO for asst. yr. 1990-91. The AO in his order for asst. yr. 1990-91 tried to bring out the fineness of his observation regarding the three reasons stated above but somehow or the other contradicted himself in the same breath.
35. First, he observed that earning interest on fixed deposits was outside the scope of the trading activity or from trading asset or from banking business but he went ahead in not including the interest on fixed deposit with various other banks and co-operative societies. In fact, the CIT(A) for asst. yr. 1990-91 allowed the dividend income received on units held by the society with UTI against which the Department has come in appeal in the above-mentioned appeals which were fairly dismissed by my learned brother as the Revenue could not justify the reason of disallowance on the basis of which the AO had disallowed the interest together with the fixed deposits from CESC. Therefore, if interest on fixed deposits amounting to more than Rs. 36 lakhs were earned by the society in asst. yr. 1990-91 why interest on only Rs. 10,99,000 had been isolated not to come under the ambit of trading activity or profit or gain of the banking business of society. In my view trading activity is best left to the trader who according to the best of his acumen and business prudency, transacts business to earn profit for paying taxes thereon holding the investment as a trading activity. In fact, on perusal of the balance sheet of the society holding of investments shows healthy picture of the society inasmuch as the current ratio of 1 : 2 and the acid test ratio or quick liquid asset ratio shows as healthy ratio of 1 : 1. For a bank the circulating capital can be worked out on the basis of a healthy current ratio. The long-term asset and the long-term liabilities should also have a healthy ratio of 1 : 1 which in the instant case is borne by the fact that in the totality of the balance sheet the society depicts a very healthy picture of providing banking facilities to its members and totally indulge in the banking business. Moreover, the investments are from ploughing back the business of banking profits over a number of years.
36. The brings us to the second objection/observation by the AO regarding the surplus funds invested for earning interest on fixed deposit. The AO has cited cl. (30) of the society’s bye-laws which deals with investment of funds. The bye-law says that the funds not utilised in the business may be invested or deposited in any way given therein or as permitted by the Registrar. He has relied heavily on the fact that the deposit with CESC Ltd. which stood at Rs. 15,59,860 has become Rs. 78,50 lakhs in the year under assessment. This indicated whether the money invested with CESC was at all required for the business of the society. The AO has, therefore, led to believe that these funds were not part of the banking activity carried on by the society but he did not comment about the other funds totalling Rs. 3.2 crores as remaining surplus or out of trading activity which were also held in term deposit rendering from 2 to 5 years.
37. In my opinion, the investments held by the society were very much part of the business funds of the society and were circulating. In my opinion also, the banking activity entails mainly on earning interest and paying interest resulting in a difference to meet its establishment costs, funds to be invested and fixed assets such as building, land, etc. could have been subjected to the AO’s observation regarding funds remaining blocked and not easily realisable but as per the claims, ratio of fixed assets to fixed liabilities resulting in healthy ratio of 1 : 1 would exclude term deposits which do form part of the circulating capital as can be encashed on the specified time or can be pledged to obtain any fund for any contingency or meeting a run on the bank by the savings bank account-holders and fixed deposit account-holders. A perusal of the society’s P&L a/c clearly indicates that the main income is on account of interest on loans granted by the society to its members and the main outgoing is on account of interest paid to the account-holders of retirement benefit fund. If the outgoing on account of interest on retirement benefit fund is considered as banking activity for providing credit facility to the co-operative societies members then the interest earned on the investments which are sought to be disallowed on the basis of not pertaining to business activity and pertaining to surplus funds of the society will result in a loss on account of incoming on account of total interest earned and outgoings on funds held by the society. All these cannot be isolated as they are deeply interconnected. May be, the members who have taken part in retirement benefit are the members who have obtained loans from the society. The primary objective of the society is to be fulfilled in toto by providing services of banking for the members, by the members and of the members. In fact, in my opinion, if at all the AO would have sought to disallow interest on account on non-banking activity, he should have considered the activity of providing holiday house facility to the society’s members which may be incidental to the main object of the society but nonetheless is a different activity than banking/trading activity governed by s. 80P(2)(a)(i). On perusal of the balance sheet, a profit or loss could be easily ascertained on this activity and isolated for disallowance, if any. The funds are being created for the benefit of the members, loans are being granted to the members, interest is earned on the loans to the members and interest is paid on the deposit to the members. These funds are circulating and as per the healthy current ratio and healthy quick asset ratio the investments become totally part of the circulation which if excluded would tilt the banking business towards keeping the bank to private “Sahukari”. In other words, holding investments is very much part of the banking activity of the society inasmuch as the circulation of loans and advances with the funds that are apportioned for investments, rendering the society too judiciously and with the acute business acumen and prudency avail of a goodwill which hitherto have to be fought for by tall claims, advertising and raising glorious window dressing balance sheet. On perusal of the P&L a/c for asst. yr. 1989-90 the doubt raised by the AO regarding quick liquidity of the term deposit is also placed at rest as an amount of Rs. 8 lakhs was received as advance from the CESC and refunded during the very previous year relevant to the asst. yr. 1989-90.
38. On this issue another observation has been brought before us regarding the members of the assessee-society being employees with CESC and, therefore, the investment made with it would not easily be realisable as a premature repayment as it was only at the absolute discretion of the company. The action of obtaining advances and refunding it within the same year clearly indicates the wrong stand taken by the AO in both the grounds. The funds were easily realisable and they were circulated. The assessee had also submitted that the funds invested by them were their funds and they could be liquidated at any time subject to lowering of interest rate and, therefore, the investment was necessary in the case of banking business to meet the requirement of paying to the depositors as and when required. Obviously, the society was earning 14 per cent and paying only 8.1; on the funds held by them. In my view, this action of earning higher rate of interest on investments and paying low rate of interest on deposits and funds held by the society is purely banking business. The credit facility provided to the members wherein interest has been earned is to the same members for whom these funds have been formed. The banking activity which may have been considered by the Revenue authorities is in a very microscopic manner that of accepting savings bank accounts and fixed deposit bank accounts and advancing loans to others thereby earning higher rate of interest resulting in a profit from the banking business. In the instant case the society in the total paid-up capital and reserve fund amounting to Rs. 11.02 crores hardly has the liability on account of such banking activity at Rs. 0.90 crores. As against this, loans have been granted to members amounting to Rs. 7.8 crores which gives the surplus of Rs. 3.22 crores remaining from the banking activity on which interest outgoing and interest incoming has been accounted for and accepted as part of the trading business activity of the society with the circulating funds.
39. Therefore, isolating fixed deposit with CESC for non-banking activity and assigning reason thereof in view of the citations as reported in (1996) 218 ITR 438 (SC) (supra); (1979) 119 ITR 327 (MP) (supra), (1997) 223 ITR 55 (Raj) and (1993) 204 ITR 713 (Raj) (supra) which are totally distinguishable on the mere fact that the amounts were not available due to directions otherwise or due to contingencies not provided for.
40. The society had been established for providing credit facilities and over the years had been claiming deduction under the provisions of s. 80P. In fact, it may be attributed to this fact that the funds of the society are judiciously employed to turn it into a healthy co-operative society which generally is not the case. In fact, the society should not be condemned for doing an excellent job for its members in winning their faith and earning profit after providing for bad debts and other contingencies. The business prudency of the society cannot be doubted in earning more income and providing a deep caution to its members who may fear the closure of the society which will be able to pay them much more than what is due to them as the owners and beneficiaries are the members of the society only which is not the case of other nationalised banks and private banks. My attention is also drawn to the fact that the UTI wherefrom the society had earned interest has been accepted to be a unit wherefrom liquidity is easier so as to not forming part of the contention held by the AO of its easy liquidity. In fact, my learned brother on the basis of it being not a case of the Revenue that the investment made in UTI cannot be made in a short notice has not further elaborated the fact that the units are only tradeable in the stock exchange which may have a value different from the face value or may have a value lower than the face value on account of their not being purchased by the UTI throughout the year.
41. To sum up in my contention, therefore, I would state that the facts in this case are of the co-operative society wholly and exclusively deal in banking activity (trading activity). The funds are circulating and they are easily available. Instead of picking up the little meaning of circulating capital realisability, the banking should be considered in its mundane form. The members collected funds to earn interest to the members and advanced loans to earn interest. The funds were ploughed back and apportioned to the reserve funds. The funds were invested to earn further interest. The society continued circulating thereafter. There was no reason for it to be punished for funds invested in the deposits bringing in more income. Reliance by the CIT(A) and the AO for the subsequent three years without giving a second thought to the grievance of the assessee-society tantamounts to injustice. Moreover, this depicts to the finding that only one side of the coin has been seen to reach a decision. The other side of the coin would have shown the depth of the assessee-society which has been confronted to prove the banking activity, the realisability of the deposit and to prove the nexus between the circulating capital and the capital together with reserves created after running handsome profit over a period of so many earlier years.
42. In my opinion, therefore, the contention of the assessee in all these appeals for the four years is correct and is to be allowed. Regarding Departmental appeals, as stated earlier, I agree with my learned brother in dismissing the Department’s appeals but in reaching that decision neither do I hold the fact that it is not the Revenue’s case that such deposits were made out of the reserve fund or were not easily realisable but the fact that they were part of the investments invested from the circulating capital of the banking business judiciously, prudently and with a sharp business acumen.
REFERENCE UNDER SECTION 255(4) OF THE IT ACT. 1961
21st July, 1998
43. In view of difference of opinion, the following common point is framed by the Bench which requires to be adjudicated by a Third Member :
“Whether the interest received by the assessee on the fixed deposit made with CESC Ltd. is eligible for deduction under s. 80P of IT Act, 1961 ?”
44. Therefore, the Hon’ble President, Tribunal may please constitute a Bench in terms of s. 255(4) of the IT Act, 1961, to resolve the issue.
S. Bandyopadhyay, A.M. (As Third Member)
26th September, 2000
45. As a result of a point of difference arising between the two Members constituting the Bench, the issue involved has been referred to me by the Hon’ble President, ITAT, in the form of the question, as below, for being decided by a Third Member :
“Whether, the interest received by the assessee on the fixed deposit made with CESC Ltd. is eligible for deduction under s. 80P of the IT Act, 1961 ?”
46. The assessee is a co-operative society constituted by the employees of the Calcutta Electric Supply Corporation (hereinafter called “CESC”). The main object of the assessee-society is to lend money to its members out of the membership funds and also the deposits collected by the assessee-society from such members. A part of this fund was utilised by the assessee-society by way of loans/advances given to the members on interest. Out of the balance funds, the assessee-society made investments of substantial amounts in different manner. A part of the investment was, however, in fixed deposits with CESC. The assessee-society claimed the interest earned on the fixed deposits with CESC also to be eligible for deduction under s. 80P of the IT Act, 1961, on the ground that the said interest income constituted a part and parcel of its regular income from banking business. It was also brought to the notice of the AO that the aforesaid interest income on fixed deposits with CESC had never been subjected to tax in past and that even in the assessment made for the asst. yr. 1989-90 also the claim of the assessee towards exemptibility of such interest income under s. 80P was allowed by the AO. However, in an order passed under s. 154, the AO, for the first time, held that the interest income under consideration should not be eligible for deduction under s. 80P. For the other three years again, at the assessment stage itself, the AO disallowed similar claims of the assessee. In the first appeals, the CIT(A), upheld the orders of the AO for all the years under consideration.
47. The assessee came up in further appeals against the aforesaid order of the CIT(A) upholding the disallowance of claims of the assessee, before the Tribunal. In the order, brother JM discussed the Departmental contentions in detail. He ultimately agreed with the findings of the lower authorities by pin-pointing the facts of the case and taking into consideration certain decisions of different Courts. The reasons, on which he decided the issue against the assessee, may be summarised as below :
(1) The earning of income on fixed deposits with CESC cannot be considered as income from regular trading activity of the assessee-society, “investments” not being a trading asset, as claimed by the assessee;
(2) The funds offered for investments with CESC by way of fixed deposits were the surplus funds of the assessee and did not constitute its circulating capital or stock-in-trade in the business activity. In this connection a reference has been made to cl. 30 of bye-laws of the assessee-society dealing with investment of funds, which states that the funds of the society not used in the business may be invested or deposited in the manner prescribed thereunder. Special emphasis has been made in this connection on the admission made by the assessee about investment of the surplus funds of the assessee-society by way of fixed deposits under consideration;
(3) There was no easy liquidity with regard to the funds invested with CESC by way of fixed deposits inasmuch as the fixed deposits were for a period of 3 years and the terms of repayment of the fixed deposits clearly mentioned that the deposits will be repaid only on maturity, whereas the company (CESC) reserved the right to allow repayment before maturity at its absolute discretion in which event the rate of interest payable on such deposit shall be in accordance with the provisions of Companies (Acceptance of Deposit) Rules, 1975, as amended;
(4) There is no obligation on the part of the assessee to invest its surplus money in fixed deposits with CESC;
(5) The intention behind the introduction of s. 80P was to boost the co-operative movement in the country and the purpose of enactment of such a section will certainly be defeated if the income from investment with organisations other than co-operative societies be also considered as exempted.
48. The brother JM has also taken into consideration certain decisions, to which I shall make a reference at a later stage. However, special emphasis has been laid by him on a judgment of the Supreme Court in the case of Madhya Pradesh Co-operative Bank Ltd. (1996) 218 ITR 438 (SC). Ultimately, by following the ratio decidendi of the said judgment, he has come to the conclusion that since by making the fixed deposits with CESC the funds in that regard went out of circulation of the normal business activities of the assessee-society for a fixed period, the income derived from such fixed deposits, cannot be considered as income from regular business of banking or allowing credit to its members, as is being conducted by the assessee-society. Brother JM has thus come to the ultimate conclusion that the assessee is not entitled to deduction under s. 80P in respect of interest earned on the fixed deposits made with CESC.
49. So far as the asst. yr. 1989-90 is concerned, he has been of the opinion that in view of the judgment of the Supreme Court in the case of Madhya Pradesh Co-operative Bank Ltd. (supra) it has got to be held that there is no debate involved in disallowing the claim of the assessee and hence rectification under s. 154 would actually lie to correct the earlier order of the AO which was against the decision of the Supreme Court. In that view, he has upheld the orders of the lower authorities for that year also.
50. On the other hand, brother AM has also made elaborate discussions in support of his conclusion that the investments held by the assessee-society, in whatever manner, were very much part of the business funds of the assessee-society and were also circulating in nature. He has further discussed in this connection that from a perusal of the balance sheet of the assessee-society it can be seen that holding of investments by it shows healthy picture by way of maintaining a proper ratio between the liquid funds of the assessee and that invested in a more or less long-term manner. He had also discussed in this connection that the AO himself has allowed the benefit of deduction under s. 80P on interest and other income derived from various other investments. He thus argues that hence it would not be proper to say that only the interest income derived from fixed deposits with CESC should not be entitled to the statutory benefit of exemption. Ultimately, he has come to the conclusion that the impugned interest income should also be considered as exempt under s. 80P.
51. However, for deciding the issue in conflict, it would first of all be necessary to study the provisions of s. 80P. In accordance with this particular section, in the case of an assessee, being a co-operative society, if the gross total income includes any income attributable to carrying on the business of banking or providing credit facilities to its members, the whole of the amount of profits and gains of such business shall be exempt under s. 80P. There is no doubt about the fact that the assessee-society is engaged in collecting membership fees as well as deposits from its members and in rendering credit facilities to the said members on payment of interest basis. In that way, it can be said to carry on a banking business on limited basis. If the availability of total funds with the assessee-society exceeds the demand for credit from the members, naturally, the assessee will have to find out avenues for investing its surplus funds in various ways. Moreover, out of the process of deriving income therefrom, there would be an augmentation of its fund availability. Even banks also carry on similar operations during the course of their regular business. Funds which are not immediately required by the banks for disbursement to the customers or towards withdrawal by the depositors are invested in various securities and even in long-term loans. Operations in these regards cannot be considered to constitute activities outside the purview of normal banking activities.
52. So far as the present case is concerned, out of total availability of funds to the extent of between 13 to 17 crores of rupees during the four years under consideration outlay of such funds in general investments are found to have been made in terms of figures ranging between 3 to 7 crores of rupees. The percentage of general investments to the total availability of funds is thus found to be between 26 and 40. As against the same, the investment in fixed deposits with CESC was Rs. 78.40 lakhs during the first three years under consideration which came down to Rs. 63 lakhs in the asst. yr. 1992-93. On the other hand, the figure of loans given to the members is found to have stood at almost a static figure ranging Rs. 9 lakhs to 10 lakhs only. The percentage of this figure to the availability of funds is found to have declined gratually from 70.29 per cent in the asst. yr. 1989-90 to 57.31 per cent in the asst. yr. 1992-93.
53. It is thus amply clear that the assessee was beset with the problem of existence of huge surplus fund arising out of membership fees, deposits from members and reserves and surplus of the business over the years, on account of, most probably, lack of demand from the side of the members for credit availability. In the interest of normal activities of the assessee-society, it is necessary for the assessee to make best utilisation of this surplus funds by putting the same in various investments. It cannot be said that the income arising out of such investments does not form part of the regular income of the assessee-society. Even, the AO himself has accepted the claim of the assessee in this regard in respect of major portion of the investments including even the investments in Units of UTI, excepting with regard to the investments by way of fixed deposits with CESC. There is absolutely no reason to make a distinction between other general investments and the investments in fixed deposits with CESC excepting that the fixed deposits were for a period of three years and furthermore that the fixed deposits were made with a company, the employees of which constitute membership of the assessee-co-operative.
54. It is furthermore to be noted in this connection that the expression “attributable to” has been used in the relevant section. The Supreme Court has held in various cases including the one in the case of India Leather Corpn. (P) Ltd. vs. CIT (1997) 227 ITR 552 (SC) than the expression “attributable to” has a wider meaning that the expression “derived from”. Hence, there should not be any difficulty in considering the income derived from fixed deposits with CESC also as “attributable to” the business of banking and allowing credit facilities to the members of the assessee-society, as is being carried on by it.
55. During the course of his argument, the learned Departmental Representative has harped on the point that the amount of fixed deposits with CESC went on increasing from Rs. 15.59 lakhs to Rs. 78.50 lakhs. He contended that if the amount was a part of the circulating capital required for the purpose of banking, i.e., issuing loans to the members of the assessee-society, then, it should not have remained stationery and kept immobilised with CESC. He argues in this connection that inasmuch as the fixed deposits were not readily realisable by way of premature repayment, which, again, rested solely with the discretion of CESC, it would be difficult to say that the amount was available for regular business of the assessee.
56. In this connection, we may have a look at s. 5(2) of the Banking Regulations Act, 1949, which defines “banking” as accepting for the purpose of lending or investment, or deposit of money from the public repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise. These activities should constitute the main object of the concern. However, it cannot be said that these are the only activities which should be considered to be covered by the expression “carrying on the business of banking or providing credit facilities”. That would be too narrow a construction of the definition of banking activities. In fact, the expression used in s. 80P(2)(a)(i) is again “carrying on the business of banking” and not “carrying on the banking activities”. “Business of banking” would have a larger sphere to revolve around and all other activities which may not be directly covered by the definition of “Banking” as mentioned above; but at the same time, which are intimately connected with such activities and are also instrumental to carrying on such activities, would also come under the wider expression “business of banking”. Thus, in modern days, even maintaining safe deposit lockers by banks for use of its customers, should also be considered to be a part of the banking business. Making profit by investments of surplus funds of the bank is intimately connected with its regular business operations and hence the income arising out of such investments is also required to be considered as a part of income from banking business.
57. A query was put to the representatives of both the sides as to whether under the Banking Regulations Act and connected rules and guidelines issued by the Reserve Bank of India, the banks are permitted to make investments of their surplus funds and especially in the form of fixed deposits with companies. The representatives from both the sides admitted that there is no bar to keeping money of banks in fixed deposits with companies under any Banking Act, rules and regulations, guidelines, etc. It is again nowhere specified that such activities of making investments in fixed deposits with companies shall not be considered as a part of banking business. Here, one problem arises on account of the fact that the company with whom the fixed deposits were made was again the company whose employees are the members of the assessee-society. I tried to know from the representative of both the sides as to whether there was any pressure from the side of the CESC on the assessee-society to keep the fixed deposits with CESC or whether the assessee suffered, in anyway, e.g., in the matter of interest rate, etc. for keeping its money in the form of fixed deposits with CESC. It has been replied that there was neither such obligation on the part of the assessee-society nor are there any financial detriments to maintaining fixed deposits with CESC. In other words, the assessee, on its free will has maintained the fixed deposits with CESC and has got nothing to lose on that account and is also not placed in a worse position than in what it would have been had the fixed deposits been made with any other company. The very nature of the fixed deposits is that it is required to be made for a definite period and cannot be withdrawn very easily before the maturity of the same. Even investments of money in various Government Bonds and in the form of long-term investments also impose similar restrictions relating to easy liquidity of the funds. The period of three years is not at all a very long time so as to consider the money to be getting tied-down for an unreasonale span of time. In this connection, the fact may be that the fixed deposits were maintained with CESC for a very long-time (most probably with intermittent renewals). But it is nowhere argued by the Revenue that on account of such fixed deposits the normal activities of the assessee suffered from crunch of funds. On the other hand, the fixed deposits generated income which are regularly being utilised by the assessee in its normal activities of granting loans to its members.
58. It is now required of me to have an examination of the different judgments as cited by the learned Departmental Representative :
59. Firstly, the judgment of the Madhya Pradesh High Court in the case of M.P. State Co-operative Bank Ltd. vs. Addl CIT (1979) 119 ITR 327 (MP) has been relied upon. Further reliance has also been placed on the subsequent judgment of the Supreme Court in the same case (supra) approving the aforesaid judgment of the Madhya Pradesh High Court. In that particular case, that assessee was also a co-operative bank engaged in almost similar activities as that of our present assessee. The reserve fund of that assessee was invested in Government securities under instructions of the State Government. There was instructions from the State Government to the effect that the reserve fund could not be utilised as working capital of that bank. It was held that the interests on the Government securities which were towards the reserve fund were not entitled to special deduction under s. 81(1)(a) [now s. 80P]. It can easily be seen that in that particular case, the investments in Government securities were earmarked towards the reserve fund which was not to be utilised for the normal purpose of the business of the assessee and, on the other hand, was to be used in case of special contingencies like winding up of the bank, etc. That is why, both the Madhya Pradesh High Court as well as the Supreme Court held that the interest on such Government securities could not be considered to form part of regular banking income of that assessee. So far as the present case is concerned, there is no question of any reserve fund not to be utilised for the regular activities of the assessee-society, nor had the fixed deposits with CESC been earmarked towards any such special fund. The fixed deposits, in the instant case, are just like other investments made by the assessee-society in the normal course of its business. Hence, the judgment of the Madhya Pradesh High Court and the Supreme Court, as cited above, would not at all be applicable to the facts of the present case and no guidance can therefore be sought from those judgments.
60. Another judgment of the Madhya Pradesh High Court in the case of Madhya Pradesh Rajya Sahakari Bank (supra) is also based on similar facts of securities having been earmarked against reserve and provident funds. The earlier judgment of the M.P. High Court in the case of Madhya Pradesh Co-operative Bank Ltd. (supra) was applied to the facts of that case and a decision was given by the M.P. High Court in the same line.
61. Exactly same are the facts in the case of Rajasthan State Co-operative Bank (supra) as decided by the Rajasthan High Court. For the same reasons, as in the case of Supreme Court decision in M.P. Co-operative Bank Ltd. (supra), as discussed above, this judgment will also not be applicable to the facts of the present case.
62. The other two judgments viz. that of Kerala High Court in the case of Kerala Co-operative Consumer’s Federation Ltd. (supra) and the Rajasthan High Court in the case of Co-operative Supply & Commission Shop Ltd. (supra)have also been relied upon by the learned Departmental Representative. These two were the cases where the issue under dispute was the question of exemptability of interest on outstanding balances in respect of supply of goods on credit basis. Both the High Courts, in the above cases, held that the activities of the nature of supply of goods cannot be considered to be banking activities and hence the issues were decided against these assessees.
63. So far as the present case before me is concerned, the interest income has arisen out of the fixed deposits. It is a part of the normal business activities of the assessee-society to make investments of its surplus funds in various forms including fixed deposit with companies. Making such investments is very much connected with the business of banking or providing credit facilities to the members of the assessee-society. The AO himself has accepted the income from major portion of such investments to be falling within the ambit of s. 80P. I find no reason as to why simply because some of the investments were in the form of fixed deposits with CESC, the same benefit should be denied on interest from such investments. Hence, ultimately, I agree with the views expressed by the brother AM that the income by way of receipt as interest by the assessee on the fixed deposits made with CESC would be eligible for deduction under s. 80P of the IT Act, 1961. The issue is thus decided in favour of the assessee.
64. The matter should, therefore, go back to the regular Bench for re-deciding the appeals in accordance with the majority view.
