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TMI Blog2016 (12) TMI 560X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be entitled to the same only in the event of it being found that it is also engaged in carrying on the business of banking. It does not arise under Section 80P(2)(a)(i) on account of the business of providing credit facilities to the assessee's members. Question is, therefore, answered against the assessee insofar as the claim is based only on the assessee being engaged in carrying on the business of providing credit facilities to its members. - Income Tax Appeal No. 638-2009 - - - Dated:- 11-11-2016 - MR. S.J. VAZIFDAR AND MR. DEEPAK SIBAL, JJ. For The Appellant : Ms.Urvashi Dhugga, Advocate For The Respondent : Mr.Sanjay Bansal, Senior Advocate, with Mr.Brij Mohan Monga, Advocate, Mr.Rohit Kaura, Advocate, and Mr.Amit Parsad, Advocate S.J.VAZIFDAR, CHIEF JUSTICE This is an appeal against the order of the Income Tax Appellate Tribunal, partly allowing the appellant's appeal against the order of the Commissioner of Income Tax (Appeals) pertaining to the assessment year 2003-04. 2. By an order dated 12.07.2010 the Division Bench admitted the appeal on the following substantial questions of law: - 1.Whether the Tribunal is right in law in holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facilities to its members. The Tribunal has not considered whether the assessee is also carrying on the business of banking. We have not accepted the assessee's case based on it being engaged in carrying on the business of providing credit facilities to its members. The assessee must, therefore, have an opportunity of establishing its case that it is also engaged in carrying on the business of banking as well. We intend permitting the assessee to raise this contention before the Tribunal upon remand. 5. It is necessary, therefore, to deal with this appeal in two parts. The first is whether it is open to the assessee to contend in this appeal which is filed by the Revenue that it is carrying on the business of banking. The second is a consideration of the appeal on the basis of the Tribunal's order which as we mentioned is only based on the assessee's business of providing credit facilities to its members. 6. Ms.Urvashi Dhugga, learned counsel appearing on behalf of the Revenue contends that the assessee is not entitled to raise this contention as it had given up the same before the Tribunal. It is submitted that before the Tribunal even the assessee did not pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of banking. Since the assessee has accepted the stand of the Department, this ground of the assessee becomes infructuous. (B). Paragraph 3 of the order of the CIT(A) quoted above does not state that the assessee had abandoned its plea that it carried on the business of banking. It appears to us that having succeeded before the CIT(A) in respect of the assessment year 2003-04 the assessee sought to have the appeals pending before the CIT(A) disposed of in terms of the order of the CIT(A) for the assessment year 2003-04 as in respect of the issues in question the assessee had even succeeded on the ground that it carried on the business of providing credit facilities to its members. (C). What is stated in paragraph 9 is only an inference drawn by the CIT(A) on the basis of what is stated in paragraph 3. It is not a reference to a fact. It is in any event not clear if it is on the basis of the record. What is stated in paragraph 3 does not, at least unequivocally, indicate that the assessee had abandoned its case that it carries on the business of banking. The letter dated 20.01.2008 referred to in paragraph 3 is not available. Nor is the amended memorandum of appeal filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-, (ii) Interest on reserve funds = ₹ 3,98,94,432/-, (iii) Interest on loans to non-members = ₹ 25,07,307/-, (iv) Interest on call deposit account = ₹ 5,84,41,396/- (iv) Disallowance on provision of non-performing assets (NPA) = ₹ 16,75,070/-...... 5. The stand of the Revenue is that the assessee is not eligible for the exemption u/s 80P(2)(a)(i) because the assessee is not doing the business of banking. The learned DR pointed out that the Assessing Officer has concluded that the Banking Regulation Act,1949 does not cover the assessee and therefor, it could not be said that the assessee was in the business of banking as defined in the Banking Regulation Act, 1949. According to the learned CIT DR, the objects of the assessee are merely to provide credit facility to its members and it is only on this basis that it can be considered that Section 80P(2)(a)(i) is admissible to the assessee. So, however, in so far as the afore-stated incomes are concerned, namely interest on loans given to employees, non-members, on call deposits and reserve funds, the same cannot be said to be as an activity of providing credit facilities to its members and, therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as may be, apply in the case of appeals under this section.] Order XLI : Appeals from Original Decrees. ....... ...... ..... ...... Rule 22. Upon hearing, respondent may object to decree as if he had preferred separate appeal.- (1) Any respondent, though he may not have appealed from any part of the decree, may not only support the decree but may also state that the finding against him in the court below in respect of any issue ought to have been In his favour; and may also take any cross objection] to the decree which he could have taken by way of appeal, provided he has filed such objection in the Appellate Court within one months from the date of service on him or his pleader of notice of the day fixed for hearing the appeal, or within such further time as the Appellate Court may see fit to allow: Explanation: A respondent aggrieved by a finding of the court in the judgment on which the decree appealed against is based may, under this rule, file cross objection in respect of the decree in so far as it is based on that finding, notwithstanding that by reason of the decision of the court on any other finding which is sufficient for the decision of the suit, the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation is also being added to Rule 22 empowering the respondent to file cross-objection in respect to a finding adverse to him notwithstanding that the ultimate decision is wholly or partly in his favour. (emphasis supplied) Mookerjee, J. observed in Nishambhu Jana case [(1984-85) 86 CWN 685] (see p. 689) that the amended Rule 22 of Order 41 of the Code has not brought any substantial change in the settled principles of law (i.e. as accepted in Venkata Rao case [AIR 1943 Mad 698 : ILR 1944 Mad 147 (FB)] ) and clarified (p. 691) that it would be incorrect to hold that the explanation now inserted by Act 104 of 1976 has made it obligatory to file cross-objections even when the respondent supports the decree by stating that the findings against him in the court below in respect of any issue ought to have been in his favour . 22. A similar view was expressed by U.N. Bachawat, J. in Tej Kumar Jain v. Purshottam [AIR 1981 MP 55] that after the 1976 Amendment, it was not obligatory to file cross-objection against an adverse finding. The explanation merely empowered the respondent to file cross-objections. 23. In our view, the opinion expressed by Mookerjee, J. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies to its members. 18. The four questions of law indicate the four sources of income namely interest from the amounts advanced to the assessee's employees, interest on reserve funds invested by the assessee, interest on the loans advanced by the assessee to non-members and interest on call deposits made by the assessee. There is also the issue of disallowance on the provision of non-performing assets (NPA). 19. It would be convenient to deal with question No.1 last. Re: Question No.2 : - 20. As far as the disallowance on provision of non-performing assets (NPA) is concerned, it is admitted that the assessee would be entitled to the same only in the event of it being found that it is also engaged in carrying on the business of banking. It does not arise under Section 80P(2)(a)(i) on account of the business of providing credit facilities to the assessee's members. 21. Question No.2 is, therefore, answered against the assessee insofar as the claim is based only on the assessee being engaged in carrying on the business of providing credit facilities to its members. Re: questions No.3 and 4 : - 22. Ms.Dhugga's submissions in support of her c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurities on interest. The question before the Supreme Court was whether such interest income would qualify for deduction as business income under section 80P(2)(a)(i) of the Act. The Court was only concerned with interest income on short term bank deposits and securities. Paragraphs 15, 16, 17, 18, 20 and 21 of the judgment read as under:- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent . 18. Further, as stated above, the assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this retained amount which was payable to its members, from whom 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. 20. A number of judgments were cited on behalf of the assessee(s) in support of its contention that the source was irrelevant while construing the provisions of Section 80-P of the Act. We find no merit because all the judgments cited were cases relating to cooperative banks and the assessee Society is not carrying on banking business . We are confining this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies Ltd. , (ITA-643-2010) supports this view. In that case also, the assessee was a Cooperative Federation and claimed a deduction under the same section. The Tribunal held that the interest income was incidental to the business of the assessee of providing credit facilities to its members. In that appeal, the following question of law were raised and the Division Bench answered the same as follows: - Whether on the facts and in the circumstances of the case and in law the order of the Hon'ble Tribunal is perverse in holding that interest income from commercial banks being attributable to the business activity of the assessee, qualifies for deduction u/s 80P(2) (a)(i) of the Act, ignoring the facts that direct source of income is not the loans advanced to the members of the society and it is only the interest income from commercial banks in the form of fixed deposits and saving banks accounts? 4. Plea on behalf of the revenue is that interest received by the assessee from commercial banks was not covered by Section 80P(2) (a)(i). It has nothing to do with the interest income on the loan advanced to the members. Reliance has been placed on the judgment of the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its object the acceptance of deposits from salaried persons of the State Bank of India with a view to encourage thrift of providing credit facilities. The appellant earned interest income from the State Bank of India. It contended that interest income was business income and was exempt under Section 80P(2)(a)(i). The CIT in proceedings under Section 263 rejected the contention. The Tribunal was of the view that both the deposits were made in banks so that the funds are not kept idle. The motive for making the deposit cannot change the character of the interest income earned on deposits made to one arising from the business of providing credit facilities to the assessee's members. The Division Bench of the Gujarat High Court referred inter-alia to the judgments referred to by Mr.Bansal before us. The Division Bench dealt with Section 80P(2)(a)(i) and the judgment of the Supreme Court in Totgar's case (supra) and held as follows: - 12. ...Thus, in the case of a co-operative society engaged in carrying on the business of banking or providing credit facilities to its members, what is deductible under section 80P of the Act is the whole of the amount of profits and gains of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... embers and therefore, the appellant-society being an assessee engaged in providing credit facilities to its members, the interest received on deposits in business and securities is attributable to the business of the assessee as its job is to provide credit facilities to its members and marketing the agricultural products of its members. This court is, therefore, of the view that the above decision is not restricted only to the investments made by the assessee therein from the retained amount which was payable to its members but also in respect of funds not immediately required for business purposes. The Supreme Court has held that interest on such investments, cannot fall within the meaning of the expression profits and gains of business and 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 agricultural produce of its members. The court has held that when the assessee society provides credit facilities to its members, it earns interest income. The interest which accrues on funds not immediately required by the assessee for its business purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt admittedly does not carry on any banking business, the said decisions would not be applicable in the facts of the present case . (emphasis supplied) 30. We are entirely in agreement with the judgment of the Gujarat High Court especially the observation that the judgment of the Supreme Court is not restricted only to the investments made by the assessee from the amounts retained by it which were payable to its members and that the judgment also applies in respect of other funds not immediately required for business purposes. We reproduced paragraph 15 of the judgment only to indicate that we uphold the appellant's case only on the ground that the assessee is not entitled to the said deduction on the basis that it is engaged in carrying on the business of providing credit facilities to its members. We do not express any opinion as to whether the appellant would be entitled to the said benefit in the event of it being held that the assessee is also engaged in carrying on the business of banking. That is an issue that the Tribunal would decide upon remand pursuant to this order. 31. Mr.Bansal relied upon the judgment of the Andhra Pradesh High Court in Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o derived is the amount of profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to its members by a co-operative society and is liable to be deducted from the gross total income under Section 80P of the Act. 9. In this context when we look at the judgment of the Apex Court in the case of M/s. Totgars Cooperative Sale Society Ltd., on which reliance is placed, the Supreme Court was dealing with a case where the assessee-Cooperative Society, apart from providing credit facilities to the members, was also in the business of marketing of agricultural produce grown by its members. The sale consideration received from marketing agricultural produce of its members was retained in many cases. The said retained amount which was payable to its members from whom produce was brought, was invested in a short-term deposit/security. 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 80P(2)(a)(i) of the Act or und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Totgar's case (supra) did not lay down any law. 33. For the same reason, the judgment of the Karnataka High Court in Guttigedarara Credit Co-operative Society Ltd. vs. Income-tax Officer, Ward 2(2), Mysore , [2015] 60 taxmann.com 215 (Karnataka) is of no assistance to the respondent-assessee. 34. In these circumstances, questions No.3 and 4 are answered in favour of the Revenue and against the assessee. The judgment of the Tribunal in that regard is set aside. Re: question No. 1 : - 35. The assessee would be entitled to the benefit of Section 80P (2)(a)(i) in respect of the interest earned on advances to its employees only if employees fall within the ambit of the term members in that section. We reiterate that in the event of it being held that the assessee carries on the business of banking it may be a different matter even if the employees are not members as we have in fact held. 36. The assessee's employees cannot be said to be members. The term members is not defined in the Income Tax Act, 1961. In U.P. Cooperative Cane Union Federation Ltd. vs. Commissioner of Income Tax [1999] 237 SC 574, the Supreme Court considering the claim again und ..... X X X X Extracts X X X X X X X X Extracts X X X X
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