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TMI Blog1982 (4) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... gaged in the business of providing long-term finance to its members. The activities of the assessee-bank are governed through its bye-laws and instructions issued by the RBI as also the State Government from time to time. In order to meet the resources of finance for the business, the assessee-company had resorted to floating of debentures, borrowings from banks and deposits from public at interest. The bye-laws also permit the assessee to buy and sell securities. The assessee-bank submitted its return of income on 1-6-1976, declaring a taxable income of Rs. 8,085 being income from property. It also furnished the audited profit and loss account and balance sheet. In the return of income and in the statement accompanying it, the assessee had shown business income of Rs. 15,10,632, which was claimed as exempt under section 80P of the Income-tax Act, 1961 ('the Act'). It, however, submitted a revised statement disclosing therein income from property at Rs. 17,322. The balance income of Rs. 2,74,20,362, which was shown as business income, was claimed as exempt from tax under section 80P. In the course of the assessment proceedings the assessee-bank made various submissions in support o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d decision. According to the said decision, the income from investment other than those from debenture redemption fund was not exempt. The investment of other funds in the Government securities was not necessary for carrying on business by the assessee. Thus, according to the ITO, the assessee was entitled to the following deductions : (a) Income from providing credit facility to its members. (b) Income derived from investment of debenture redemption (sinking) fund in Government securities. (c) Interest or dividend derived by the assessee from its investment with any other co-operative society. The income derived from other investments or funds other than what is stated above, i.e., general reserve, statutory reserve, staff benefit fund and staff provident fund was liable to tax. The ITO thereafter referred to the provisions contained in section 80P(2)(a)(i) and pointed out that the said section exempted income of a co-operative society engaged in carrying on business of banking or providing credit facilities to its members. The expression 'banking' was not defined under the Act. Therefore, according to the ITO, the definition of the said expression has to be construed having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it facilities to its customers. In the instant case, the advances were only made to the members of the society. It was next pointed out that the investment made by the bank, which is a dealer in cash, must be treated as its stock-in-trade. In this connection reliance was placed on the decision of Co-operative Cane Development Union Ltd. It was next pointed out that the approach of the ITO to determine the banking functions only with reference to the definition expressed for banking under the Banking Regulations Act was not the correct approach. The fact that the land mortgage banks were excluded from the purview of the said Act would not disentitle the assessee from being treated as a bank. It was next submitted that the assessee's activities were also controlled by the RBI inasmuch as it was required to submit periodical returns, its books were subject to inspection by the RBI and its activities were under the constant vigil of the RBI. It was further pointed out that the decision in Andhra Pradesh Co-operative Land Mortgage Bank Ltd.'s case was not applicable in the instant case inasmuch as the said decision should be confined to the facts which obtained in that case. The other H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to tax. Inasmuch as the exemption stipulated under section 80P(2) did not extend to such income, the learned departmental representative pointed out that the Commissioner (Appeals) had erred in not considering the decision of the Andhra Pradesh High Court in Andhra Pradesh, Co-operative Central Land Mortgage Bank Ltd.'s case which clearly governed the controversy. The other decisions referred to before the Commissioner (Appeals) related to the cases of co-operative banks carrying on banking business and, therefore, the said decisions were not applicable. It was next pointed out that interest received from the provident fund balances kept in the bank at the behest of the Provident Fund Commissioner had nothing to do with the business activity of the assessee which related to grant of long-term advances on mortgage of land. Similarly the interest derived from the loans granted to the staff could not be said to be a part of the business activity of the assessee. The activity of the assessee has to be considered with reference to the objects of the assessee-bank and if these were kept in view, the income derived by it from various sources other than out of investment kept for redempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd.'s case, the business of banking included the providing of credit facilities and there was no distinction as sought to be made by the revenue. Unless it was shown that the investments made by the assessee were in regard to its idle funds, the normal presumption should be that such investments which were made in order to fulfil certain statutory requirements as also to meet the needs of the business must be held to be of business account. As regards the balances kept by the Provident Fund Commissioner, Shri Shah pointed out that the Provident Fund Commissioner had authorised retention of these balances with the bank and in fact in subsequent year the ITO has accepted the assessee's claim in this regard. Similarly the interest received on loans granted to the staff must be held to be a part and parcel of the assessee's activity of lending money and could not be treated as investment de hors its business activities. Shri Shah then referred to written submissions which were placed before the Commissioner (Appeals) which have been dealt with by him at length in his order. 4. We have carefully considered the rival submissions. The short point which arises in this appeal relates to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f staff loans 1,20,763 With a view to consider the revenue's submission in this regard, we may first look to the object clause as well as other relevant by-laws of the assessee-bank : " 3. Objects : The objects of the bank shall be : (i) To advance loans for the purposes enumerated in section 116 of the Act. (ii) To grant loans to any person or persons, corporate body established under any law for the time being in force, on such terms and conditions including nature of security as the Board may decide from time to time. It shall be competent for the bank to make advances to borrowing contractors including co-operative societies and Panchayats at such rate of interest, and on such terms and conditions as the Board may decide, provided such contractors are members of the Bank. (iii) To grant loans to tenants under the various Land Reforms and Tenancy Acts in force in the area of operation of the bank. (iv) To grant loans to the co-operative farming societies. (v) To grant financial assistance to societies functioning mainly for the purposes of promoting schemes of land improvement. (vi) To organise and finance such societies, associations or unions from amongst the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ody corporate established under any law for the time being in force : Provided further that their admission shall be subject to the provisions of the Act and rules. (b) The nominal membership of the bank shall be open to : All persons who are co-applicants for loans, coparceners, lineal ascendants or descendants of the applicant and members of the family and all other persons who have a right, title or interest in or upon in the property of the applicant or any person who enters into any transaction with the bank provided that such persons : (i) are of the age of majority ; (ii) are competent to contract and (iii) have not been convicted of any offence involving moral turpitude or if convicted, a period of four years should have elapsed since his release. Such nominal members shall pay nominal membership fee of Rupee one each. No share certificate will be issued and the bank's usual receipt issued for the payment of entrance fee and membership fee will be considered as proper evidence for such nominal membership. The fees should be non-refundable and will be carried to reserve fund. Such nominal members shall have no right to vote at any meeting of the Members whose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lus fund in such securities and debentures as will be easily realisable for the purpose of its main business of banking, namely, to giving credit to its customers. Thus, according to the above decision, the main business of banking in general sense is to give credit facilities to the customers. In the instant case, the assessee whose activity is governed by its by-laws provides for granting credit facilities to the members inasmuch as the borrower has to become a member of the bank and the advances are regulated in accordance with the shareholding held by the bank. It is, therefore, difficult to appreciate the contention of the revenue that the activity of banking and the activity of providing credit facilities are two distinct activities which could be said to be mutualy exclusive. As pointed out earlier, the banking business includes providing credit facilities to the customers. Even a co-operative society which is not carrying on banking business but only provides 'credit facilities to the members would be governed by the said clause, e.g., of Co-operative Housing Society. Therefore, it is not correct to say that the co-operative society like the assessee which provides credit f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal, therefore, was justified in bifurcating the amounts pertaining to the income earned from the investment of the debenture redemption (sinking) fund and the other funds in Government securities while applying the provisions of section 81(i)(a). We are, therefore, in entire agreement with the finding of the Tribunal that the amounts in dispute are income from securities pure and simple, chargeable to tax under section 18 and not entitled to be exempted under section 81(i)(a) of the Income-tax Act ". Again : " ...In the instant case, the specific question, though raised by the assessee, was not referred for our opinion by the Tribunal. However, the assessee should have preferred an application under section 256(2) requiring the Tribunal to submit a statement of case on that question if it had considered it to be a mixed question of fact and law, as the Tribunal thought that the only question that arises for the opinion of this Court is the one now referred to us. Even assuming that it is open to the assessee to argue that aspect of the case, we are satisfied on the facts and in the circumstances that the Tribunal was perfectly justified in upholding the finding of the App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure and simple. In view of the finding of fact by the Tribunal that the instant Government securities and municipal debentures held by the assessee-bank were easily realisable securities, the Tribunal was justified in holding that they were stock-in-trade and not in the nature of investments. It follows that the interest on the securities was exempt from tax by virtue of section 81 or section 80P of the Income-tax Act, 1961. " The object-clause of the assessee as set out earlier not only covers the activity of advancing loans to various person or persons as specified therein but also includes the purchase and sale of securities of the Government of India as also the Government of Gujarat and other securities as laid down in section 20 (clauses a, b, c and d, of the Indian Trust Act, 1882) and also to act as an agent for buyers and sellers subsequently. One of the objects, therefore, is to purchase and sale Government securities. Therefore, it cannot be said that the investment made in securities was not a part of the business activity of the assessee. Since the main business of the assessee is to advance loans either to persons specified or for the objects specified, the floating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as engaged in banking business, inter alia, claimed exemption from interest under section 80P(2)(a)(i). The claim for said exemption was rejected and a general deduction of Rs. 20,000 was granted on the ground that the income from interest was assessable under section 18. The AAC in appeal upheld the contention of the assessee that it had made investment of certain percentage of its liquid funds in prescribed securities as per instructions of the RBI and those instructions were binding on the assessee carrying on banking business. The purpose of making investment on securities was primarily not to earn cash but to make available the amount for payment to the creditors as and when demanded. The appeal was, accordingly, allowed by the AAC and the decision of the AAC was upheld in appeal by the Tribunal on appeal by revenue. A reference under section 256(1) was moved which was rejected by the Tribunal and the further application under section 256(2) was also rejected by their Lordships by holding that investment in Government securities, etc., is a part of stock-in-trade or circulating capital and that the issue was conclusively determined by the decision of the Supreme Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic loan 4,750 4.75 per cent B.M.C. loan 4,750 4.75 per cent G.S.F.C. loan 4,750 14,250 Interest from staff loan 61,103 Assessment year 1974-75 Interest (5.75 per cent) from Gujarat State Development loan of Rs. 50 lakhs 1,43,750 Interest from 4.75 per cent B.S.U. loan 2,375 1,46,125 Add interest from fixed deposit with nationalised banks as per statement 8,78,921 Interest from trustee securities comprised of 4.75 per cent loans of Rs. 3,00,000 14,250 Interest from staff provident fund investments 19,774 Interest from loan to staff 1,04,708 11,17,653 7. The matter was carried in appeal before the Commissioner (Appeals) and it was contended firstly, that this was a case of mere change of opinion which did not clothe the ITO with the power to reopen the completed assessments. Secondly, it was contended that provisions of section 144B of the Act did not apply to the assessment proceedings. Lastly, it was contended on merits that there was no justification for bringing to tax in reassessment proceedings the income as set out in the above table. The Commissioner (Appeals) agreed with the assessee's contention that this was merely a change of opinion and, therefore, the ITO had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income was exempt under section 80P and, therefore, no income has escaped assessment within the meaning of section 147(b). 9. We have carefully considered the rival submissions. The provisions of section 147(b) fall into two parts. Firstly, the ITO should have reason to believe that income has escaped assessment. Secondly, it should be in consequence of information received after the original assessment that he should have reason to so believe. If either of the conditions is not satisfied, the action of the ITO would be without jurisdiction. In other words, both the conditions are cumulative and if there is failure on the part of the ITO to satisfy either of the conditions, the proceedings under section 147(b) would fail. To put it differently, both the conditions must be satisfied by the ITO when he assumes jurisdiction. So far as the first condition, viz., that the income has escaped assessment on the basis of the reasons recorded by him is concerned, in the view which we have taken in connection with the appeal relating to the assessment year 1976-77 and following the reasons recorded therein, we hold that the assessee was entitled to exemption under section 80P(2)(a)(i) as c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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