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TMI Blog2000 (6) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... e activities of borrowing and lending, invested moneys in Government securities, development bonds, shares and debentures, etc. The investments of funds of the assessee-society are governed by ss. 66 to 71 of the Gujarat Co-operative Societies Act, 1961. Sec. 66 provides that a society earning profit, shall calculate its annual net profits by deducting from the gross profits for the year, all accrued interest which is overdue for more than six months, establishment charges contributions, if any, towards the provident fund and gratuity fund of its employees. Sec. 67 which is material for our purpose reads as under: "67. Reserve fund—(1) Every society which does, or can derive a profit from its transactions, shall maintain a reserve fund. (2) Atleast one-fourth of the net profits of the society each year shall be carried to the reserve fund and such reserve fund may be used in the business of the society or may, subject to the provisions of s. 71, be invested, as the State Government may by general or special order direct, or may, with the previous sanction of the State Government, be used in part for some public purpose likely to promote the objects of this Act, or for some su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 70 relate to dividend, contribution to education fund as well as contribution to public charity. Sec. 71 relates to investments of funds and reads as under. "71. Investments of funds—(1) A society may invest, or deposit its fund: (a) in a Central Bank, or the State Co-operative Bank, (b) in the State Bank of India, (c) in the Postal Savings Bank, (d) in any of the securities specified in s. 20 of the Indian Trusts Act, 1882 (II of 1882), (e) in shares, or security bonds, or debentures, issued by any other society with limited liability, or (f) in any co-operative bank or in any banking company approved for this purpose by the Registrar, and on such conditions as the Registrar may from time to time impose, (g) in any other mode permitted by the rules, or by general or special order of the State Government. (2) Notwithstanding anything contained in sub-s. (1), the Registrar may, with the approval of the State Co-operative Council, order a society or a class of societies to invest any funds in a particular manner, or may impose conditions regarding the mode of investment of such funds." 5. The position with regard to the reserve funds and the investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the decision of Hon'ble Supreme Court in the case of M.P. Co-op. Bank Ltd. vs. Addl. CIT has been cited as locus classicus on the subject of exemption under s. 80P by the Revenue. In this decision rendered in the context of s. 81 of the IT Act which stands omitted and substituted by s. 80P, explains the scope and ambit of banking business. The Hon'ble Supreme Court held that the Government securities coming out of the reserve funds which could not be easily encashed and which could be utilised only when certain contingencies arose and could not be considered as relating to capital or stock-in-trade to the banking business. According to the Supreme Court the income derived from the investments of Government securities could not be regarded as an essential part of assessee's banking activities inasmuch as the same did not form part of its stock-in-trade or working/circulating capital. At p. 445 of the report their Lordships have observed : "However, can the investment in securities of the reserve fund be said to be investment of circulating capital or stock-in-trade, moreso when it is noticed that the co-op. bank does not have an absolute and unfetterred right to withdraw th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. The learned counsel, in support of the assessee's claim for exemption under s. 80P, took us through the various provisions of the Gujarat Co-op. Societies Act and Rules framed thereunder and argued that the reserve funds including the statutory reserves formed part of circulating capital of the banking activities of the assessee. Referring to the definition of working capital given in s. 2(24) of the Gujarat Co-op. Societies Act the learned counsel submitted that reserve funds built out of profits are covered under the expression 'working capital'. The learned counsel further submitted that s. 67(2) allows the society to utilise the reserve funds in the banking business at the discretion of the assessee. The learned counsel further referred to s. 71 of the Act as well as the r. 29 of Gujarat Co-op. Societies Rules, 1965 and argued that the reserve funds are to be utilised by the assessee for the purpose of banking business and there is no provision under the Act or Rules restraining the assessee in any manner. The learned counsel further argued that the corresponding provisions in the M.P. Co-op. Societies Act, namely, s. 43 and s. 44 clearly stipulate that the reserve funds und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of ss. 67 and 71 are invested by the assessee in long-term investments and Government securities and shown on the assets side and such investments have shown progressive increase from year to year. Referring to broad break up of fixed deposits as shown in Annexures B1 and B2, the learned Departmental Representative submitted that the assessee did not furnish during the assessment proceedings information with regard to the particulars of investments, duration thereof, yet it would be noticed from the annexures that the funds invested in fixed deposits are growing from year to year which indicate that substantial amounts have been taken out by the assessee out of the business profits and blocked in the investments outside the banking business of the assessee. Referring to broad break up investments in Government securities, as indicated in Annexures C1 to C5 to the written submissions, the learned Departmental Representative contended that the funds blocked in Government securities withdrawn from the circulating capital of the assessee are increasing from year to year and interest earned thereon could not be construed as income from banking business of the assessee. 11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed modes with the approval of the Registrar. Thus, the scheme of investment of reserve funds as contained under the Gujarat State Co-op. Societies Act and Rules clearly give a dominant role to the Registrar insofar as the creation of the reserve funds and investment of the funds are concerned. We find that provisions contained under the M.P. State Co-op. Societies Act are substantially similar and envisage approval of the Registrar in the matter of creation of reserve funds as well as investment in the specified modes like Government securities, etc. The corresponding provisions in the M.P State Co-op. Societies Act are being extracted hereunder: "Sec. 43 Funds and Profits: (1) No part of the funds of a society other than the net profits shall be paid by way of bonus or dividend or otherwise distributed among its members: Provided that member may be paid remuneration on such scale as may be laid down by the bye-laws for any services rendered by him to the society. (2) A society shall out of its net profits in any year— (a) transfer an amount not being less than twenty five per cent of such profits to the reserve funds unless such society has been, by general or speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to the provisions of sub-ss. (2) and (3), a society may invest or deposit its funds: (a) in Government Saving Banks; or (aa) in a Co-operative Bank; or (b) in any of the securities specified in s. 20 of the Indian Trusts Act, 1882 (11 of 1882); or (c) with the federal society of which it is a member or in the purchase of the share thereof; or (d) with the approval of the Registrar, with any other society with limited liability or in the purchase of shares or securities or debentures thereof; or (e) with any bank approved for the purpose by the Registrar and on such terms and conditions, if any, as may be laid down by him in this behalf; or provided that the approval of the Registrar shall not be necessary under cl. (d) if shares are to be purchased to become a member thereof according to the bye-laws of such society. (2) The reserve fund of a society shall be invested or utilised only in such manner and on such terms and conditions as may be laid down by the Registrar in this behalf; (3) No investment of any of its funds in immovable property, other than funds created for specified purpose, shall be made by a society other than a housing society without t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two Acts. We do not see any material distinction in the provisions governing the investment of reserve funds as contained under the M.P. Act as well as the Gujarat Act. In this view of the matter, the principles laid down by the Hon'ble Supreme Court in the case of M.P. Co-op. Bank Ltd. would apply in the instant case and the decision is a binding authority on us. 13. The entire capital of a bank cannot always be said to be employed in banking business. In fact income arising from investment of that part of the capital which is not needed for banking business cannot be said to be income arising from banking business. Where the funds of a bank are utilised for long-term investments like Government securities, development bonds or debentures, etc., such funds will not be part of its trade assets. From the facts on record it is clear that the investments made by the assessee in Government securities and other securities like development bonds, debentures, etc. are fixed and stagnant investments outside the circulating capital and such non-trading assets have not been turned over or dealt with on a regular basis. Income from these non-trading assets kept by the assessee outside the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been permitted to invest in any other way by general of special order of the Government. It is noted that what has ultimately weighed with the Hon'ble Rajasthan High Court is that the interest earned on securities/investments by the bank is not a banking business as the said investment is neither of circulating capital nor stock-in-trade of the co-operative bank, as it has no absolute or unfettered right to withdraw the same whenever it likes as the same can be withdrawn only in the proceedings of the winding up of the co-operative society. 15. Coming now to the decision of the Supreme Court in Bangalore District Co-op. Bank Ltd., heavily relied upon by the learned counsel, it is to be noted that in the said decision a categorical finding of facts had been recorded by the Tribunal that the interest income was attributable to the banking business of the assessee and that finding had not been challenged on factual basis by the Revenue. It was in view of this categorical finding of the Tribunal that the Hon'ble Supreme Court came to the conclusion that the interest income was entitled to exemption under s. 80P(2)(a)(i). This foundational fact which turned the entire issue in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulation Act and whether the investments in the present case have been made in compliance with the said provisions. From the details of reserve as well as investments for asst. yrs. 1994-95 and 1995-96, which are the subject-matter of the present appeals, as reflected in the balance sheet and extracted hereinbefore, it appears that total reserve including the reserve as per s. 67(2) of the Guajrat State Co-op. Societies Act are Rs. 37.90 crores for asst. yr. 1994-95 and Rs. 43.27 crores for asst. yr. 1995-96. As against this, total long-term investments for the two assessment years are Rs. 190.99 crores for asst. yr. 1994-95 and Rs. 247.49 crores for asst. yr. 1995-96. These figures are inclusive of investments in Government securities, development bonds, debentures, etc. being Rs. 8.50 crores for asst. yr. 1994-95 and Rs. 11.52 crores for asst. yr. 1995-96. From this factual position it appears to us that the investments made by the assessee are in any case much above the statutory limits as per s. 24(1) of the Banking Regulation Act. In any case no such claim has been made before the tax authorities below and no facts have been brought on record by the assessee to support its c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate administrative expenses and the balance net interest income should be adopted for the purpose of disallowing exemption under s. 80P(2)(a)(i). 21. Insofar as the asst. yr. 1994-95 is concerned the AO has denied the claim of exemption on the interest income of Rs. 3,50,91,800 which has been worked out @ 11 per cent on the reserve funds as on 1st April, 1993, at Rs.31,90,16,582. For this assessment year also we hold that on a similar basis as per asst. yr. 1995-96 held by us as above, the AO would allow proportionate administrative expenses and work out the net interest income by deducting such expenses from the interest income of Rs. 3,50,91,800 and on this net figure claim of exemption under s. 80P(2)(a)(i) would be disallowed. We hold accordingly. 22. Before parting with these appeals, we may observe that various decisions of the Supreme Court and High Courts cited by the learned representatives of both the sides have been considered by us, even though some of these decisions could not be specifically mentioned by us. 23. The AO is directed to give effect to this order. 24. In the result, the appeal of the assessee for asst. yr. 1995-96 and the Revenue's appeal for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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