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TMI Blog2016 (7) TMI 516X X X X Extracts X X X X X X X X Extracts X X X X ..... with the business of providing credit facilities for it to be held that it is attributable to the business of the assessee. In the present case there is no obligation upon the appellant to invest its surplus funds with the State Bank of India. Investing surplus funds in a bank is no part of the business of the assessee of providing credit facilities to its members. Therefore, it is only the interest derived from the credit provided to its members which is deductible under section 80P(2)(a)(i) of the Act and the interest derived by depositing surplus funds with the State Bank of India not being attributable to the business carried on by the appellant, cannot be deducted under section 80P(2)(a) (i) of the Act. If the appellant wants to avail of the benefit of deduction of such interest income, it is always open for it to deposit the surplus funds with a co-operative bank and avail of deduction under section 80P(2)(d) of the Act. It is one of the activities of the Society engaged in carrying on the business of banking or providing credit facilities to its members as provided in section 80P(2)(a) of the Act and gains of business attributable to such activity is exempt from taxabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 263 of the Income Tax Act, 1961 by the Commissioner of Income Tax? (2) Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in holding that interest income of ₹ 16,14,579/- on deposits placed with State Bank of India was not exempt under section 80P(2)(a)(i) of the Income Tax Act, 1961? In Tax Appeal No.487/2015, in the second question, the figure 16,14,579 shall stand substituted by the figure 32,83,410 . 1.1 Since, the learned counsel for the respective parties had addressed the court at length on the merits of the case, the appeals were taken up for final hearing at the admission stage itself. 2. Both these appeals at the instance of the assessee arise out of the common order dated 26th March, 2015 passed by the Income Tax Appellate Tribunal, D Bench, Ahmedabad (hereinafter referred to as the Tribunal ) in ITA Nos.492/AHD/2014 and 900/AHD/2014 and hence, the same were taken up for hearing together and are decided by this common judgment. 3. The assessment years are 2009-10 and 2010-11. The appellant is a co-operative society registered under the Gujarat Co-operative Societies Act, 1961. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 80P(2)(d) of the Act. In response to the above show-cause, the appellant contended that the interest income was business income and was exempt under section 80P(2)(a)(i) of the Act. The Commissioner of Income Tax did not find the explanation satisfactory on the ground that interest income had not been received from a co-operative bank so as to be exempt under section 80P(2)(d) of the Act and that it was not business income so as to be exempt under section 80P(2)(a)(i) of the Act and hence, the assessment order was held to be erroneous and prejudicial to the revenue. Being aggrieved, the appellant carried the matters in appeal before the Income Tax Appellate Tribunal. The Tribunal held that interest income earned on extending credit facilities by the assessee to its members will be business income as there exists nexus between the income and the business of the society, which is extending credit facility to its members but it cannot be said that there is such nexus between the interest earned on deposits made with SBI. The Tribunal was of the view that it may be true that the deposits were made in banks so that funds are not kept idle but the motive for making deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision would be applicable. 4.1 Reliance was placed upon the decision of the Karnataka High Court in Tumkur Merchants Souharda Credit Cooperative Limited v. Income Tax Officer, Ward V, Tumkur, (2015) 55 taxmann.com 447 (Karnataka), wherein the court has held that the word attributable to is certainly wider in import than the expression derived from . Whenever the legislature wanted to give a restricted meaning, they have used the expression derived from . The expression attributable to being of wider import, the expression is used by the legislature whenever they intended to gather receipts from sources other than the actual conduct of business. A cooperative society which is carrying on the business of providing credit facilities to its members, earns profits and gains from business by providing credit facilities to its members. The interest income so derived or the capital, if not immediately required to be lent to the members, cannot be kept idle. If they deposit this amount in a bank so as to earn interest, the said interest income is attributable to profits or gains of the business of providing credit facilities to its members only. The court observed that the society ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and in the circumstances of that case, the Tribunal was correct in holding that the sum of ₹ 15,98,590/- received by way of interest on bank deposit is not ancillary and incidental to carrying on the business of providing credit facilities to its members and as such, exempt under section 80P(2)(a)(i) of the Income Tax Act, 1961. The court held that the interest earned on the deposits does not arise out of one or more of the activities specified in section 80P(2)(a)(i) of the Act, but the interest received by the assessee on the bank deposit is ancillary and incidental to carrying on the business of providing credit facilities to its members and as such, exempt under the provisions of section 80P(2)(a)(i) of the Act. The court observed that the assessee deposits surplus funds available with it and earns interest thereon. The nature of activity in which the assessee is involved clearly creates a situation where surplus fund is available to it which it deposits in the bank and earns interest thereon. The placement of such funds being incidental and ancillary for carrying on business of providing credit facilities to its members by reason of section 80P(2)(a)(i) of the Act, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Bihar Act (Cl. 4 III (I) of the Bye- Laws). Whether funds invested as provided in S. 19 of the Bihar Act would be surplus or not does not arise for decision in this case, but it has not been shown that the moneys which were in deposit with other banks were surplus within that bye-law so as to take it our of banking business. As we have pointed out above, it is a normal mode of carrying on banking business to invest moneys in a manner that they are readily available and that is just as much a part of the mode of conducting a Bank s business as receiving deposits or lending moneys or discounting hundies or issuing demand drafts. That is how the circulating capital is employed and that is the normal course of business of a Bank. The moneys laid out in the form of deposits as in the instant case would not cease to be a part of the circulating capital of the appellant nor would they cease to form part of its banking business. The returns flowing from them would form part of its profits from its business. In a commercial sense the directors of the company owe it to the bank to make investments which earn them interest instead of letting moneys lie idle. It cannot be said that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 80P(2)(a)(i) of the Act. Reliance was placed upon the decision of this court in the case of Commissioner of Income Tax v. D.N. Dosani, (2006) 280 ITR 275, for the proposition that before the CIT can pass any order, he has to give the assessee an opportunity of being heard and thereafter record, at least prima facie, that the order of the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the Revenue. The requirement of giving the assessee an opportunity of hearing is for the simple reason that the assessee may be able to refute the belief of the CIT which might be formed on an examination of the record of the proceedings under the Act, that is to say, the assessee may be in a position to point out that the assessment order is neither erroneous nor prejudicial to the interests of the Revenue, or even if it is erroneous, it is not prejudicial to the interests of the Revenue, or it may not be erroneous, even if it is prejudicial to the interests of the Revenue. Therefore, the moment the Revenue s contention is accepted that in the fresh assessment, the Assessing Officer is entitled to examine items which did not form part of section 263 proceedings, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, the decision of the Supreme Court in the case of Totgars Co-operative Sales Society Ltd. (supra) would not be applicable. It was submitted that the interest income is incidental to the main activity of the appellant of providing credit facility and that in the above decision of the Supreme Court, the word incidental had not come up for consideration. Reliance was placed upon the decision of this court in the case of Commissioner of Income-Tax v. Jafari Momin Vikas Co-op. Credit Society Ltd. (2014) 362 ITR 331, wherein the court was called upon to answer the question as to whether the Tribunal was correct in allowing deduction under section 80P(2)(a)(i) to the assessee s society even though the same was covered under section 80P(4) read with section 2(24) (viia) being income by a cooperative society with its member? The court, in view of the clarification issued by the CBDT by virtue of circular No.133 of 2007 dated 9.5.2007, held that subsection (4) of section 80P will not apply to an assessee which is not a co-operative bank. The court accordingly did not accept the contention of the revenue that section 80P(4) would exclude not only the co-operative banks other than those fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of money, to and fro, was maintained within the closed circuit formed by banks and clubs and to that extent, nobody who was not privy to this mutuality, benefited from the arrangement. However, as soon as these funds were placed in fixed deposits with banks, the closed flow of funds between the banks and the club suffered from deflections due to exposure to commercial banking operations. During the course of their banking business, the member banks used such deposits to advance loans to their clients. Hence, in that case, with the funds of mutuality, member banks engaged in commercial operations with third parties outside the mutuality, rupturing the privity of mutuality and consequently, violating the one to one identity between the contributors and participators as mandated by the first condition. The court was accordingly of the view that the first condition for a claim of mutuality was not satisfied. The court observed that the second condition demanded that to claim an exemption from tax on the principle of mutuality, treatment of the excess funds must be in furtherance of the object of the club which was not the case there. The court observed that in that case, surplus fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to banking business. According to the learned counsel, the decision of the Karnataka High Court in the case of Tumkur Merchants Souharda Credit Cooperative Ltd. (supra) is based upon an incorrect reading of the above decision of the Supreme Court. It was submitted that in the case of Bangalore Club (supra) even in case where the principle of mutuality was applicable, such interest income has not been allowed. 5.3 As regards the contention raised on behalf of the appellant that the Commissioner of Income-tax has gone beyond the scope of the notice issued under section 263 of the Act, reference was made to the submissions made on behalf of the appellant before the Tribunal, to submit that the submissions are on merits and no contention has been raised that the Commissioner of Income Tax has gone beyond the scope of the notice issued under section 263 of the Act. Reliance was placed upon the decision of the Supreme Court in the case of Malabar Industrial Co. Ltd. v. Commissioner of Income-tax, Kerala, 2000 (243) ITR 83, wherein the court has held that an incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tribution from the members from their salaries to be received from SBI on monthly basis. The members are to subscribe to the share capital of the society by payment of fixed amount and they have been allotted the shares. Out of the corpus so received, by way of share capital and contribution from the members by way of monthly deductions from their salaries, the society is giving loans to the members as per their requirements. The entire activity is conducted by Board of Directors elected by the members themselves at the Annual General Meeting. All the members of the Board are honorary members and they do not draw any remuneration perquisities from the fund of the society. The income generated by the society is mainly on account of differential rate of amount of deposits received from the members and the amount of loans given to the members. Thus the income generated is only from contribution of members. The society does not deal in any way with any person other than members. The society has track record of 32 years and had accumulated sufficient fund by way of share capital reserves and deposits from members. Out of the said fund, society is giving various kind of loans to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 20th July, 2012 under section 142(1) of the Act calling upon the appellant to justify various deductions claimed under section 80P of the Act amounting to ₹ 43,64,828/- along with necessary supporting evidences and to explain why the deduction should not be disallowed in view of the provisions of section 80P(4) of the Act. In response thereto, the appellant submitted that it was engaged in activities of providing credit facilities and encouragement for savings to its members, that is, employees of State Bank of India serving with the Gujarat circle. It was also stated that the assessee is not engaged in any activity other than giving credit facility to its members who have been employees of the State Bank of India and classified as Employees Co-operative Credit Society, and that the assessee society is eligible for deduction under section 80P(2)(a)(i) at the rate of 100% from its income and accordingly, has claimed deduction in its return of income for assessment year 2010-11. A perusal of the computation of total income shows that the assessee has shown the gross amount of deduction claimed under section 80P of the Act at ₹ 43,64,828/- and has claimed the entire amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ategory of income from other sources , hence such interest income would be taxable under section 56 of the Act. The court further held thus: 15. At the outset, an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under Section 80-P(2)(a)(i) of the Act is not the interest received from the members for providing credit facilities to them. What is sought to be taxed under Section 56 of the Act is the interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes. The assessee(s) markets the produce of its members and wholesale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question before us is-whether interest on such deposits/securities, which strictly speaking accrues to the members account, could be taxed as business income under Section 28 of the Act? In our view, such interest income would come in the category of Income from other sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om produce was bought, which was invested in short-term deposits/ securities. Such an amount, which was retained by the assessee Society, was a liability and it was shown in the balance sheet on the liability side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80-P(2)(a)(i) of the Act or in Section 80-P(2)(a)(iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the assessing officer was right in taxing the interest income, indicated above, under Section 56 of the Act. (Emphasis supplied) 11. On behalf of the appellant, it has been contended that the above decision would not be applicable to the facts of the present case, inasmuch as, the Supreme Court was concerned with the sale proceeds belonging to the members, which the assessee therein had retained. It was this retained amount which was payable to its members, from whom produce was bought which was invested in short-term deposits/securities and such an amount which was retained by the assessee society, was a liability and it was shown in the Balance Sheet on the liability side. It was pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot fall within the meaning of the expression profits and gains of business . It was held that such interest income cannot be said to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce to its members. The court further held that the words the whole of the amount of profits and gains of business emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the society. The court observed that in that particular case, the evidence showed that the assessee-society earned interest on funds which were not required for business purpose at the given point of time. Therefore, in the facts and circumstances of the case, the court was of the view that, such interest income falls in the category of Other income which had rightly been taxed by the Department under section 56 of the Act. 13. In the opinion of this court, in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall in any of the categories mentioned und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s restricted to the sale consideration received from marketing agricultural produce of its members which was retained in many cases and invested in short term deposit/security and that the said decision was confined to the facts of the said case and did not lay down any law. 14. Thus, in the light of the principles enunciated by the Supreme Court in Totgars Co-operative Sale Society (supra), in case of a society engaged in providing credit facilities to its members, income from investments made in banks does not fall within any of the categories mentioned in section 80P(2)(a) of the Act. However, section 80P(2)(d) of the Act specifically exempts interest earned from funds invested in co-operative societies. Therefore, to the extent of the interest earned from investments made by it with any co-operative society, a co-operative society is entitled to deduction of the whole of such income under section 80P(2)(d) of the Act. However, interest earned from investments made in any bank, not being a co-operative society, is not deductible under section 80P(2)(d) of the Act. 15. On behalf of the appellant, reliance has been placed upon bye-law 7 of its Bye-laws, which as translated i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be said that the interest income derived from depositing surplus funds with the State Bank of India is profits and gains of business attributable to the activities of the appellant society. The character of the interest is different from the income attributable to the business of the society of providing credit facilities to its members. The interest income derived from investing surplus funds with the State Bank of India must be closely linked with the business of providing credit facilities for it to be held that it is attributable to the business of the assessee. Therefore, the profits and gains can be said to be directly attributable to the business of providing credit facilities to its members if there is a direct and proximate connection between the profits gains and the business of the appellant. In the present case there is no obligation upon the appellant to invest its surplus funds with the State Bank of India. Investing surplus funds in a bank is no part of the business of the assessee of providing credit facilities to its members. Therefore, it is only the interest derived from the credit provided to its members which is deductible under section 80P(2)(a)(i) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members and that the assessee society has not earned any income from dealing with other outside party or any other activity and hence, the society had claimed the whole income as exempted under section 80P of the Act. In this background, the Commissioner of Income-tax, in the notice issued under section 263 of the Act, has sought to revise the order passed by the Assessing Officer on the ground that the petitioner had claimed deduction of the interest income from State Bank of India under section 80P(2) in contravention of the provisions of section 80P(2)(d) of the Act, wherein only interest income from a co-operative society qualifies for deduction under section 80P. In response to the notice under section 263 of the Act, the appellant, inter alia, contended that the reason for treating the interest income received from Fixed Deposit account as business income is that the fund of the business was kept in interest earning account with facility to withdraw the fund as and when necessary to earn interest for and on behalf of the members. It is one of the activities of the Society engaged in carrying on the business of banking or providing credit facilities to its members as provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in mind that section 80P(2)(a)(i) of the Act requires a co-operative society and not a co-operative bank defined under the Gujarat Co-operative Societies Act, to be engaged in carrying on the business of banking it is not possible to restrict the scope of business to the definition of banking under section 5(b) of the Banking Regulation Act. The court observed that clause (n) of sub-section (1) of section 6 of the Banking Regulation Act is an inherent pointer to the interpretation one is required to place on section 6(1) of the Banking Regulation Act. The said clause permits a bank of doing all such things as are incidental or conducive to the promotion or advancement of the business of banking company . Thus, there is a live link, a proximate nexus between clauses (a) to (o) of section 6(1) and the business of banking under section 5(b) of Banking Regulation Act. To say that investment of funds (so called surplus) is not conducive to the promotion or advancement of the business of banking, would not only be derogatory of and contrary to the provisions but pedantic. 21. Thus, the court in the above decision has distinguished between the two activities namely, the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unning through the entire case law commencing from the Privy Council decision is that such funds must be invested in easily realizable securities. The twin objective as laid down by this Court is not to lose interest by keeping the funds idle and invested in securities so as to encash them readily in case of need. This is in consonance with the definition of the term 'Banking'. The deposits are accepted as payable on demand or otherwise, and also permitting withdrawal by cheques and other prescribed modes. On a plain reading of the above paragraphs of the decision of this court in CIT v. Baroda Peoples Co-operative Bank Ltd. (supra), it is clear that the court has held that investing funds to earn further profit is in consonance with the term banking. The court has further held that the business of banking is primarily a business of trust, a business of putting trust in a banker. How does a bank ensure that the customer places trust. It has to offer not only good returns but also safety and liquidity. In other words, the depositor must be ensured that the depositor will get good returns on its deposit, the deposits would be safe and deposits would be available for with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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