ORDER
Gopal Chowdhury, J.M.
The assessee-bank has filed this miscellaneous application under section 254 of the Income Tax Act, 1961 with a prayer to rectify/amend the order passed by the Tribunal in ITA No. 3796/Ahd/1995 dated 3-12-1997. The relevant portion of the application filed by the assessee is as under :
“3. In the course of assessment proceedings for assessment year 1991-92 the respondent raised an issue that the interest earned by the applicant from short-term deposits with banks other than co-operative banks was not exempt under section 80P(2)(a)(i) so far as the said interest was earned from investment of reserve funds. The applicant had statutory reserve funds which is required as per the provisions of the Gujarat Co-operative Societies Act and had also other reserve funds such as building fund, dividend equalisation fund, investment reserve, depreciation reserve and other funds which are reflected in the balance sheet. Hereto annexed are the details of the various reserve funds for assessment year 1991-92, corresponding accounting year being 1990-91. The respondent while raising this issue relied on a decision of the Madhya Pradesh High Court in the case of M.P. Co-operative Bank Ltd. v. Addl. CIT (1979) 119 ITR 327 (MP). The respondent did not accept the contention of the applicant that the provisions of the Madhya Pradesh Co-operative Societies Act were different from the provisions of the Gujarat Co-operative Societies Act as under the Gujarat Act the reserve funds could be used for purposes of business of the Co-operative Society. Further, the Madhya Pradesh judgment was only dealing with the statutory reserves required to be created under the Co-operative Societies Act being 25 per cent of the profits and, therefore, the said judgment could relate to the income earned from the investment of statutory reserves and not various other reserves which were voluntarily created and did not suffer from any such disability of being not available for business of the bank. The respondent, however, taxed on an estimate basis and by applying rule of three the interest earned by the applicant from the short-term deposits placed with the banks relatable to the totality of reserve funds.
4. The applicant preferred an appeal to the Commissioner (Appeals) contending that the Madhya Pradesh High Court judgment did not apply as the provisions of the Gujarat Act were materially different. The learned Commissioner (Appeals) accepted this contention and held that the interest was exempt under section 80P(2)(a)(i) as the reserve funds could be used for purposes of business as per the provisions of the Gujarat Co-operative Societies Act. The question of segregating the statutory reserve and the other reserves did not arise as the learned Commissioner (Appeals) treated the entire interest from investment of reserve funds as covered by section 80P(2)(a)(i).
5. The respondent being aggrieved by the order of the Commissioner (Appeals) filed an appeal before the Hon’ble Tribunal. In the meantime the decision of the Madhya Pradesh High Court came to be affirmed by the Supreme Court by its judgment Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT (1996) 218 ITR 438 (SC). The Supreme Court judgment primarily relied on the provisions of the Madhya Pradesh Act and the circular issued by the Registrar of Co-operative Societies Act for coming to the conclusion that the reserve could not be used for the business of the bank and, therefore, the interest earned by investment of such fund was not income from banking business and was, therefore, not exempt under section 80P(2)(a)(i). The Tribunal examined the provisions of the Gujarat Act as well as the Madhya Pradesh Act and also the Rajasthan Act which was by that time construed by the Rajasthan High Court in the case of CIT v. Rajasthan State Co-op. Bank Ltd. (1997) 223 ITR 55 (Raj). The Tribunal in paras 3 to 11 of its order examined the provisions of the Co-operative Societies Acts and the judgments above referred to and came to the conclusion that the interest earned by investment of reserve funds did not fall within the purview of banking business. In para 12, it, therefore, held as follows :
“In the light of the above discussion, we reverse the finding of the learned Commissioner (Appeals) and hold that the assessee is not entitled to deduction in respect of interest earned on deployment of funds out of reserve funds with banks other than co- operative banks under section 80P(2)(a)(i).”
6. It is submitted that the Hon’ble Tribunal has not clarified nor indicated in the above paragraph that the reserve fund in issue was only the statutory reserve required to be created under various sections of the different Co-operative Societies Acts by way of statutory reserve and the same principle was not applicable to other reserves which could be voluntarily created by the co-operative societies and which could be used for purposes of its business.
7. In absence of such a clarification or a specific decision by the Tribunal the respondent is bound to restore his original order where he has treated all the reserve funds as falling within the ratio of the Madhya Pradesh High Court judgment. It is submitted that the Madhya Pradesh High Court judgment affirmed by the Supreme Court as well as the Rajasthan High Court judgment were only concerned with the statutory reserve funds which were obligatory to be created by co-operative societies out of the net profit and which could only be used for specific purposes set out in the said Act or in the circulars issued thereunder. Such a restriction could not possibly attach to other voluntary reserves created by the co-operative societies for other purpose and, therefore, the ratio of those decisions could never be made applicable to other reserves.
8. In Gujarat also similar view has been taken by the Income Tax Department as well as by Commissioner (Appeals) wherein it has been held even after the Supreme Court judgment that the disallowance is to be restricted only to the statutory reserve funds created under section 67 of the Gujarat Co-operative Societies Act. Annexed herewith is a specimen order in the case of Mehsana District Central Co-operative Bank passed by the Commissioner (Appeals)-IV, Ahmedabad.
9. The applicant submits that in the interest of justice the Hon’ble Tribunal be pleased to rectify its order by clarifying that the decision regarding disallowance of interest is applicable only with regard to interest earned from investment of statutory reserve fund created under section 67 of the Gujarat Cooperative Societies Act and not to interest earned from investment of other reserves. In absence of this clarification or rectification great injustice unwittingly will be caused to the applicant without any fault of its own. As the respondent had come in appeal to the Tribunal, the applicant had no occasion to make it a specific ground of distinction between statutory reserve and other reserves as the Commissioner (Appeals) had wholly allowed the appeal in respect of all reserve funds.
2. The assessee has also filed the details of various reserve funds extracted from the balance sheet for the assessment year 1991-92. Further, a copy of the appellate order passed by the Commissioner (Appeals) in the case of Mehsana District Central Co-op. Bank Ltd. has been filed in support of its contention that the Hon’ble Supreme Court decision in the case of M.P. Co-op. Bank Ltd. v. Addl. (1996) 218 ITR 438 (SC) relates to interest income derived from the statutory reserve. K.H. Kaji, the learned counsel on behalf of the assessee, in support of the application, has filed before us the copies of the judgments passed by the Hon’ble High Court as well as the Hon’ble Supreme Court in the case of Madhya Pradesh Co-op. Bank Ltd. v. Addl. CIT (1979) 119 ITR 327 (MP) and Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT (1996) 218 ITR 438 (SC). The relevant portions of the judgments have been highlighted to show that the Hon’ble Supreme Court as well as Madhya Pradesh High Court has demarcated two types of reserve; one is statutory reserve and the other is general reserve created by the assessee-bank. It has been held by the Hon’ble Supreme Court that the deposits in the statutory reserves cannot be encashed easily. Therefore, it cannot be treated as circulating capital and the income therefrom is not exempted under section 80P of the Income Tax Act. The learned counsel on behalf of the assessee has further brought to our notice a recent judgment of the Hon’ble Supreme Court in the case of CIT v. Bangalore District Co-op. Central Bank Ltd (1998) 4 DTC 557 (SC) : (1998) 233 ITR 282 (SC) and in that decision, the Hon’ble Supreme Court did not follow the earlier decision of the Hon’ble Supreme Court regarding Madhya Pradesh Co-op. Bank Ltd. v. Addl. CIT (1996) 218 ITR 438 (SC), Having relied upon the aforesaid materials, it has been submitted on behalf of the assessee-bank that the Tribunal should clarify by way of rectification that the decision of the Tribunal is applicable in relation to the statutory reserve alone as held by the Hon’ble Madhya Pradesh High Court, which was upheld by the Hon’ble Supreme Court. The learned counsel on behalf of the assessee has filed written submissions with a number of decisions of different High Courts, in support of the contention that the Tribunal should exercise its powers in such circumstances. On the other hand, Yogendra Dube, the learned Departmental Representative opposed the prayer of the assessee and submitted that the decision of the Hon’ble Madhya Pradesh High Court covers all types of reserves and not only statutory reserves. These facts have already been considered by the Tribunal. Therefore, no rectification is required, which will amount to review of the order passed by the Tribunal.
3. We have heard both the sides and perused the material on record. In the decision of the Hon’ble Madhya Pradesh High Court in the case of Madhya Pradesh Co-op. Bank Ltd. v. Addl. CIT (1979) 119 ITR 327 (MP), we find that the Hon’ble High Court has noticed the fact under section 43(2) of the Act society is required to transfer 25 per cent of its profit to its reserve funds. Sub-section (2) of section 44 provides that reserve fund of society shall be invested or utilised only in such manner or such terms and conditions as may be laid down by the Registrar in this behalf. The circular of the Madhya Pradesh Government was also considered by the Honble High Court court to the effect that no part of the reserve fund shall be withdrawn without the previous sanction of the Registrar. Considering the aforesaid circumstances, it has been held by the Hon’ble Madhya Pradesh High Court at p. 333 of the report that (of 119 ITR) the reserve fund in the instant case is not a part of the circulating capital of the assessee. It can be utilised only when permitted by the Registrar in case of loss or winding up, etc. Hence, income from investment of reserve capital in securities is not a part of income from banking business and does not qualify for exemption. The Hon’ble Supreme Court in the case 218 ITR 441 (SC) (supra) noticed the aforesaid situation and clearly demarcated the income from the investment in reserve fund made in government securities, and the other income, i.e., from circulating capital or stock-in-trade. In relation to the income coming out of the statutory reserve fund, which has been described as more or less in the nature of fixed assets of the society and not circulating capital, no exemption is available to the assessee. In the subsequent decision of the Hon’ble Supreme Court in the case of Bangalore Co-op. Central Bank. Ltd. cited supra, the decision of the Hon’ble Madhya Pradesh High Court, which has been confirmed by the Hon’ble Supreme Court, has been referred. The relevant portion of the judgment is as follows :
“5. The learned counsel for the appellant places reliance on the decision of this court in Madhya Pradesh Co-op. Bank Ltd. v. Addl. CIT (1996) 218 ITR 438 (SC) (supra), where in the decision of the Madhya Pradesh High Court in M.P. State Co-op. Bank Ltd. v. Addl. CIT (1979) 119 ITR 327 (MP) was affirmed. The Bench held that circulating capital was that which was put into circulation or turned over to earn profits and the government securities coming out of the reserve fund which could not be easily encashed and which could be utilised only when contingencies arose could not be considered to be circulating capital or stock-in-trade. It was, therefore, held that interest on Govt. securities placed with the State Bank of India or the Reserve Bank of India could not qualify for exemption under section 81 (now section 80P) of the Act. The decision was rendered on the facts of that case and it is not applicable in the present case in view of this finding of the Tribunal that the income in question is attributable to the business of the assessee.”
4. On consideration of the aforesaid material on record, in our opinion, the contention raised on behalf of the assessee is correct to the effect that the Hon’ble Madhya Pradesh High Court decision is in relation to statutory reserve only where it has been held that the assessee was not entitled to any exemption. The income from other reserves/deposits were not the subject matter of dispute in that judgment. The present order has been passed by the Tribunal having relied on the Madhya Pradesh High Court decision, which has been confirmed by the Hon’ble Supreme Court as mentioned hereinabove. Therefore, it is clear that the present order of the Tribunal has been passed in relation to the statutory reserve only, i.e., the reserve created under the provision of the statute.
5. In the result, the miscelleaneous application is disposed of as indicated above.