High Court Of Karnataka
CIT & Anr. vs. The Grain Merchants Cooperative Bank Ltd.
Sections 80P(2)(a)(i)
Asst. Year 1989-90, 1991-92
P. Vishwanatha Shetty & Ajit J. Gunjal, JJ.
IT Appeal Nos. 149 to 151 of 2001
22nd October, 2003
Counsel Appeared
M.V. Sesachala, for the Appellants : K.R. Prasad, for the Respondent
JUDGMENT
P. Vishwanatha Shetty, J. :
In these appeals, the appellants have called in question the correctness of the order dt. 15th Jan., 2001, made in ITA Nos. 761, 762 and 763/Bang/1993 by the Income-tax Appellate Tribunal, Bangalore Bench (hereinafter referred to as ‘the Tribunal’) holding that—(1) the income received by the respondent by letting out the premises belonging to it; and (2) the interest received out of the funds deposited in Reserve Bank and other banks are exempted from payment of tax in terms of s. 80P(2)(a)(i) of the IT Act, 1961 (hereinafter referred to as ‘the Act’). The assessments relate to the years 1989-90, 1990-91 and 1991-92.
2. Facts in brief, which may be relevant for disposal of these appeals, may be stated as follows : The respondent is the Grain Merchant Co-operative Bank (hereinafter referred to as ‘the assessee’), engaged in banking activity. The assessee filed its return for the asst. yrs. 1989-90, 1990-91 and 1991-92. The AO, while completing the assessment, took the view that the rental income received by the assessee in letting out the portion of the building partly occupied by it; and the interest received from setting apart certain funds as reserved fund, does not come within the purview of s. 80P(2)(a)(i) of the Act and as such are not deductible while computing the income of the assessee. Aggrieved by the said assessment order, the assessee preferred an appeal to the CIT (A)-II (hereinafter referred to as ‘the Appellate Commissioner’). The Appellate Commissioner, by means of his order dt. 16th March, 1993, allowed the appeals accepting the contention of the assessee that the rental income received by it as well as the interest received on reserve fund are exempted from payment of tax under s. 80P(2)(a)(i) of the Act. Aggrieved by the said order of the Appellate Commissioner, the Revenue took up the matter in appeal to the Tribunal. The Tribunal, as noticed by us earlier, in the impugned order affirmed the order passed by the Appellate Commissioner.
3. Sri M.V. Sesachala, learned counsel appearing for the Revenue, challenging the correctness of the orders impugned, made two submissions. Firstly, he submitted that the Tribunal as well as the Appellate Commissioner have seriously erred in law in taking the view that the interest derived out of the income from funds maintained as reserve funds is also an income derived by the assessee on account of the banking activities carried on by the assessee and as such the same is deductible under s. 80P(2)(a)(i) of the Act while computing the income of the assessee. Elaborating this submission, the learned counsel pointed out that the Tribunal as well as the Appellate Commissioner have failed to consider that the funds maintained as reserve funds have not been utilised by the assessee for its business activities. Secondly, he submitted that the Tribunal as well as the Appellate Commissioner have also seriously erred in law in taking the view that the rental income received by the assessee is an income received by it carrying on business of banking and as such is entitled for exemption under s. 80P(2)(a)(i) of the Act. It is also his submission that the letting out of premises by the assessee and receiving rent out of it cannot be considered as carrying on business of banking activity or providing credit facilities by the assessee to its members; and hence the income received by the assessee by way of rent in respect of the premises let out must be treated as an income which is liable for payment of tax under s. 22 of the Act. In support of this submission, he referred to us cls. (a) to (f) of sub-s. (2) of s. 80P of the Act. It is also pointed out by him that cl. (f) of sub-s. (2) of s. 80P of the Act clearly spells out that in the case of a co-operative society, not being a housing society or an urban consumers society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, wherein the gross total income does not exceed Rs. 20,000, the amount earned by way of interest on securities on any income from certain property is chargeable under s. 22 of the Act. He pointed out that cl. (f) of sub-s. (2) of s. 80P of the Act should be understood as making an exception to cl. (a)(i) of sub-s. (2) of s. 80P of the Act wherein it is provided that if a co-operative society carrying on banking business receives income from the house property, such an income is liable to be taxed under s. 22 of the Act. It is his submission that when the Parliament had made a distinction between the income received from banking business and the income received from non-banking business by way of rental income on account of letting out of premises belonging to the assessee, it is not permissible for the assessee to claim exemption relying upon cl. (a)(i) of sub-s. (2) of s. 80P of the Act. It is also his submission that the assessee cannot derive any assistance from cls. (k) and (l) of sub-s. (1) of s. 6 of the Banking Regulation Act, 1949 (hereinafter referred to as ‘the Regulation Act’), as according to the learned counsel the said provision only empowers the banking institution to carry on certain activities which are not considered as a banking business. In this connection he referred to us the language employed in s. 6 of the Regulation Act wherein it is referred that in addition to the business of banking, a banking company may engage in any of the businesses referred to in the said section.
4. However, Sri K.R. Prasad, learned senior counsel appearing for the assessee in this appeal, and Sri G. Sarangan, learned senior counsel appearing for assessee in other connected matters strongly supported the impugned orders. So far as the first contention of Sri Sesachala is concerned, they pointed out that the contention urged by Sri Sesachala is covered against the Revenue by our earlier decision rendered in the case of ITO vs. Karnataka Central Co-operative Bank Ltd., in ITA No. 183 of 2003 disposed of on 7th Aug., 2003. Therefore, they pointed out that for the very reason assigned by us in the said decision, the first contention urged by Sri Sesachala is required to be held against the Revenue. Further, Sri Prasad also relied upon the decision of the Hon’ble Supreme Court in the case of Gujarat State Co-operative Bank Ltd. vs. CIT (2001) 170 CTR (SC) 169 : (2001) 251 ITR 522 (SC). With regard to the second contention of Sri Sesachala, they pointed out that in view of cls. (k) and of sub-s. (1) of s. 6 of the Regulation Act, 1949 which provides that the acquisition, construction of a building and leasing of building belonging to a banking company as a banking business, the income received by the assessee by way of rent in respect of premises let out by it must be treated as an income received by the assessee by way of profit and gains and the business attributable to the banking activities of the assessee. It is their further submission that cls. (a) to (f) of sub-s. (2) of s. 80P of the Act are mutually exclusive and independent of each other. It is also their submission that so far as cl. (a)(i) of sub-s. (2) of s. 80P is concerned, it is only controlled by cl. of sub-s. (2) of s. 80P of the Act. In support of their submission that cl. (l) of sub-s. (1) of s. 6 of the Regulation Act must be understood as banking business, they referred to us the decision of the Hon’ble Supreme Court in the case of Gujarat State Co-operative Bank Ltd. vs. CIT (supra) and referred to us the observation made at p. 524 of the judgment; and the judgment of the Hon’ble Supreme Court in the case of Kerala State Co-operative Marketing Federation Ltd. & Ors. vs. CIT (1998) 147 CTR (SC) 29 : (1998) 231 ITR 814 (SC) and referred to us the observation made at p. 819 of the judgment. They also relied upon the judgment of the Hon’ble Supreme Court in the case of CIT vs. Ramanathapuram District Co-operative Central Bank Ltd. (2002) 175 CTR (SC) 297 : (2002) 255 ITR 423 (SC) and drew our attention to pp. 424 and 425 of the judgment.
5. Now, we will proceed to consider each one of the contentions advanced by Sri Sesachala. So far as the first contention is concerned, the same is covered against the Revenue by our earlier decision rendered in the case of Karnataka Central Co-operative Bank Ltd. (supra). In the said decision, we have taken the view that the income received out of the reserve fund is exempted from payment of tax. The said decision was rendered by us following the decision of this Court rendered in the case of the CIT vs. Sri Ram Sahakari Bank Ltd. made in ITA No. 137 of 2002 disposed of on 5th Sept., 2002, wherein the Division Bench of this Court following the decision of the Hon’ble Supreme Court in the case of Bihar State Co-operative Bank Ltd. vs. CIT (1960) 39 ITR 114 (SC), has taken the view that the income received out of reserve fund is exempted from payment of tax. In the case of Bihar State Co-operative Bank Ltd. (supra) the Hon’ble Supreme Court has observed as follows : “…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 funds of the bank which were not lent to borrorwers but were laid out in the form of deposits in another bank to add to the profit instead of lying idle necessarily ceased to be a part of the stock-in-trade of the bank, or that the interest arising therefrom did not form part of its business profits.” Therefore, there is no merit in the first contention advanced by Sri Sesachala. In the light of the above discussion, we find it unnecessary to refer to the decision of Gujarat State Co-operative Bank Ltd. (supra) relied upon by Sri Prasad.
6. To examine the correctness of the second contention of Sri Sesachala, it is useful to refer to cls. (k) and (l) of sub-s. (1) of s. 6 of the Regulation Act, which reads as hereunder : “6. Forms of business in which banking companies may engage : (a) to (j) xxx xxx xxx (k) the acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company; (l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account of otherwise dealing with all or any part of the property and rights of the company;” The reading of cls. (k) and (l) of s. 6 of the Regulation Act, to our mind, appears that in addition to the business of banking set out in cl. (b) of s. 5 of the Regulation Act, acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purpose of the banking company and also selling/improving or leasing or otherwise dealing with all or any part of the property and rights of the company, also should be treated as a banking business. No doubt, it is true, as contended by Sri Sesachala that the businesses referred to in cls. (a) to (o) of sub-s. (1) of s. 6 of the Regulation Act cannot be treated as a banking business within the meaning of cl. (b) of s. 5 of the Regulation Act. But as noticed by us earlier, s. 6 of the Regulation Act intends to make several businesses referred to in cls. (a) to (o) of sub-s. (1) of the Act as ‘banking business’ in addition to the definition of “banking” provided under cl. (b) of s. 5 of the Regulation Act. In support of our view, we derive support from the observation made by the Hon’ble Supreme Court in the case of Gujarat State Co-operative Bank Ltd. (supra). In the said decision, while considering the question whether locker rent received by the banking company is not deductible under s. 80P(2)(a)(i) of the Act, the Hon’ble Supreme Court has taken the view that the safe-deposit vault is part of the ordinary banking business of the bank in terms of s. 6(1)(a) of the Regulation Act. It is useful to refer to the observation made by the Hon’ble Supreme Court at p. 524 of the judgment, which reads as follows : “…it is clear that the provision of safe deposit vaults is part of the ordinary banking business of a bank; this is shown by s. 6(1)(a) of the Banking Regulation Act, 1949. Therefore, the income derived by the assessee from the hiring out of safe deposit vaults is income from the business of banking and, therefore, deductible under s. 80P(2)(a)(i) of the IT Act, 1961…” Clause 6(1)(a) is one of the items of businesses referred to in s. 6(1) of the Regulation Act. Further, in the case of Kerala State Co-operative Marketing Federation Ltd. & Ors. (supra) the Hon’ble Supreme Court has observed that whenever a question arises as to whether any particular category of income of a co-operative society is exempt from tax, what has to be considered is, as to whether the income falls within one of the several heads of the exemption and if it falls within any one of the heads of the exemption, it would be free from taxes notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption. The Hon’ble Supreme Court has observed that the correct way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. In this connection, it is useful to refer to the observation made by the Court at p. 819 of the judgment, which reads as hereunder : “We may notice that the provision is introduced with a view to encouraging and promoting the growth of the co-operative sector in the economic life of the country and in pursuance of the declared policy of the Government, the correct way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a co-operative society is exempt from tax what has to be seen is whether the income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption. The expression “marketing” is an expression of wide import. It involves exchange functions such as buying and selling, physical functions such as storage, transportation, processing and other commercial activities such as standardisation, financing, marketing intelligence, etc. Such activities can be carried on by an apex society rather than a primary society.”
10. In our view, the provisions contained in cl. (f) of sub-s. (2) of s. 80P of the Act strongly relied upon by Sri Sesachala, is of no assistance to him. The said clause provides that the income derived by the housing society is chargeable under s. 22 of the IT Act. The housing society referred to in cl. (f) of the said section must be understood as the society which is not carrying on banking business or providing credit facilities which is included under s. 80P(2)(a)(i) of the Act. So far as the assessee is concerned, as noticed by us earlier, it is not in dispute that the assessee is carrying on business of banking. Under these circumstances, the provisions of cl. (f) of the section cannot control the benefit of exemption extended to the assessee from payment of tax. In the light of the discussion made above, the second contention advanced by Sri Sesachala is also liable to be rejected. Accordingly it is rejected.
11. In the light of the conclusion reached above, we are of the view that these appeals are liable to be rejected as one devoid of any merit. Accordingly, they are rejected. However, no order is made as to costs.
[Citation : 267 ITR 742]
