1996 (4) TMI 83 - HC - Income Tax

Summary

Issues Involved:
1. Exemption of income from investment of reserve funds u/s 80P of the Income-tax Act, 1961.
2. Nature of investment of reserve and other funds under section 63 of the Co-operative Societies Act.
3. Requirement of sanction from the Registrar of Co-operative Societies for such investments.

Summary:

Issue 1: Exemption of income from investment of reserve funds u/s 80P of the Income-tax Act, 1961

The Tribunal initially held that the income of Rs. 35,69,868 from investment of reserve funds is exempt u/s 80P(2)(a)(i) of the Income-tax Act, 1961. The Department contested this, arguing that the investment was made without the Registrar's permission, thus not related to banking business. The Tribunal, referencing a prior court decision, concluded that such investments in Government securities are exempt. However, the High Court, referencing the Supreme Court's ruling in Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT [1996] 218 ITR 438, determined that the income from such investments is not banking business income and thus not exempt under section 80P(2)(a)(i).

Issue 2: Nature of investment of reserve and other funds under section 63 of the Co-operative Societies Act

The Tribunal found that the investment of reserve and other funds in various securities did not require the Registrar's sanction under section 63 of the Co-operative Societies Act. The High Court noted that the assessee's investments were governed by the Banking Regulation Act and the Reserve Bank of India Act, not the Co-operative Societies Act. The court highlighted that the investment in Government securities was considered stock-in-trade in prior assessments, thus part of banking business. However, the Supreme Court's interpretation in a related case negated this view, emphasizing that such investments are not circulating capital or stock-in-trade.

Issue 3: Requirement of sanction from the Registrar of Co-operative Societies for such investments

The Tribunal held that the investments did not require the Registrar's sanction. The High Court acknowledged this but emphasized that the absence of the Registrar's permission does not alter the nature of the income derived from such investments. The court concluded that the income from reserve fund investments is not attributable to banking business due to the lack of absolute withdrawal rights, as outlined in the Rajasthan Co-operative Societies Act and Rules.

Conclusion:

The High Court ruled in favor of the Revenue, stating that the income from the investment of reserve funds is not exempt under section 80P of the Income-tax Act. The court allowed the assessee to present evidence to the Tribunal regarding the nature of other funds' investments to determine if they qualify as stock-in-trade or circulating capital for potential exemption.