Madras H.C : The activities of borrowing money and lending money to the members of the petitioner is similar to the one that is carried on by bankers, which accepts deposits from the depositors and lends money to various borrowers

High Court Of Madras

Syndicate Bank Employees’ Co-Operative Thrift & Credit Society Ltd. vs. ITO

Section INT 2(5A)(i)

Asst. Year 1992-93

K. Raviraja Pandian & P.P.S. Janarthana Raja, JJ.

Tax Case (Appeal) No. 44 of 2002 & TCMP No. 8 of 2003

23rd December, 2005

Counsel Appeared

Ms. Anita Sumanth, for the Appellant : Mrs. Pushya Sitharaman, for the Respondent

JUDGMENT

P.P.S. Janarthana Raja, J. :

The following substantial question of law are raised by the appellant-assessee under the Act :

“1. Whether, on the facts and circumstances of the case, the Tribunal is right in law in holding that the Interest-tax Act would be applicable to the petitioner herein ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the activities of borrowing money and lending money to the members of the petitioner is similar to the one that is carried on by bankers, which accepts deposits from the depositors and lends money to various borrowers ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the judgment of the Madras High Court reported in State Bank of India Staff Co-operative Society Ltd. & Ors. vs. ITO & Ors. (1998) 144 CTR (Mad) 240 : (1998) 233 ITR 104 (Mad), is applicable to the facts of the case ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in not considering the application of s. 3, s. 22 and s. 56 of the Banking Regulation Act, 1949 to the facts of the case with reference to the petitioner co-operative society ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that “there is a law of parallel between the banking business and the activities of the assessee” ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in not considering the observation of the Division Bench of Madras High Court which specifically held that no authority is to be influenced by the order passed by the single Judge of the Madras High Court and should pass an order independently after application of mind ?

7. Whether, on the facts and in the circumstances of the case, the Tribunal is right in confirming the demand without considering whether the appellant carries on the business of banking after satisfying the various norms laid down in the Banking Regulation Act ?”

2. The facts needed to the above questions of law are as under : The appellant is a co-operative thrift and credit society registered under the provisions of the Multi State Co-operative Societies Act. The relevant assessment year is 1992-93 and the corresponding accounting year ended on 31st March, 1992. It did not file a return of chargeable interest under the Interest-tax Act of 1974. The AO issued a notice under s. 10 of the said Act which was served on the appellant-assessee on 1st March, 1997. The appellant filed a writ petition before this Court challenging the said notice and the same was dismissed on 20th Nov., 1997. The High Court directed the appellant to prefer objection to the respondent’s notice. Accordingly, the appellant filed his objection before the respondent herein raising several grounds that the interest-tax could not apply to it, as it being the co-operative society, and not carrying on the business of banking. Later, the appellant-assessee filed a Writ Appeal No. 581 of 1998 wherein a Division Bench of this Court was pleased to observe that the respondent herein would decide the issues before him without reference to and without being influenced by the observation of this Hon’ble single Judge dt. 28th Nov., 1997 of this Court, reported in State Bank of India Staff Co-operative Society Ltd. & Ors. vs. ITO & Ors. (1998) 144 CTR (Mad) 240 : (1998) 233 ITR 104 (Mad). Later, the AO issued a notice to the petitioner calling upon to file his return of chargeable interest and nil return was filed, since the appellant did not come in the purview of the Interest-tax Act. The AO held that the interest accruing to the appellant-assessee for the period from 1st Oct., 1991 to 31st March, 1992 should be brought to tax under the provisions of interest-tax by holding that the appellant- society is a credit institution within the meaning of s. 2(5A) of the Interest-tax Act and holding that the appellant- society is engaged in banking within the purview of the said section. The AO also computed chargeable interest at Rs. 8,00,000 as against Rs. 6,96,159 found by the appellant for the period from October, 1991 to March, 1992.

3. Aggrieved by the order, the appellant filed an appeal to the CIT(A) and raised the issue of jurisdiction as well as assessment of interest-tax. The first appellate authority dismissed the appeal but reduced the chargeable interest from Rs. 8,00,000 to Rs. 6,96,159, on verification by the AO of the same. Against the aforesaid order of the CIT(A), the first appellate authority, the appellant filed an appeal before the Tribunal, contending that : (i) the petitioner was not an assessee under the Interest-tax Act and was not liable for levy of interest under the Interest- tax Act being a co-operative society not engaged in the business of banking; (ii) that the first appellate authority’s conclusion that the processing for the assessment was not barred by limitation, was not tenable on facts and in law; (iii) that the first appellate authority erred in assuming that there was an escapement of assessment in the petitioner’s case; and (iv) that notwithstanding his statement that the assessment should have been under s. 10 and not under s. 6, his conclusion that it was an inadvertent error which does not vitiate the assessment, is untenable; (v) that the conclusions of both the assessing authority as well as the first appellate authority are based totally on the observations of the learned single Judge in the writ petition, even though there was a specific direction of the Division Bench of Madras High Court that the matter should be independently considered, without either of the officers being influenced by the observations in the writ petition by the Hon’ble single Judge; (vi) that the first appellate authority has lost sight of the fact that only co-operative societies engaged in banking business, would come under the purview of the Interest-tax Act. Since the petitioner in the instant case does not carry on the business of banking either under the provisions of Interest-tax Act or under the Banking Regulation Act, it would not be liable; (vii) that the crucial and material issue as to whether the appellant carries on the business of banking after satisfying the various norms laid down by the Banking Regulation Act, has not been considered.

Hearing the above arguments advanced by the learned counsel for the appellant, the Tribunal held that the interest- tax shall be attracted to the appellant-assessee and affirmed the order of the authorities below.

The counsel appearing for the appellant-society submitted that the business of advancing money by way of loan to the members is not equivalent to the business of banking. The business of banking commercially and legally is not synonymous with the money-lending or accepting of deposits. The banking is legally and commercially, a specific class of business, which the appellant-society does not carry on. The crucial and material issue as to whether the appellant-society carried on the business of banking has not been considered and the Tribunal had unjustly assumed that the business of taking deposit and advancing loan is a business of banking. Further, it was stated that the Tribunal has not considered the application under s. 3, s. 22 and s. 56 of the Banking Regulation Act, 1949 to the facts of the case with reference to the appellant co-operative society. Further, it was stated that from 1st April, 1993, reference to co-operative society was excluded and even upto 1st April, 1993 only a co-operative society engaged in the business of banking, is included within the definition of credit institution. Such aspect had been ignored by the authorities. Sec. 2(5A)(i) of the Interest-tax Act which existed upto 1st April, 1993 reads as under : “”Credit institution” means— (i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in s. 51 of that Act (or a co-operative society engaged in carrying on the business of banking not being a co-operative society providing credit facilities to farmers or village artisans).” This sub-s. (5A) was inserted by the Finance (No. 2) Act, 1991 w.e.f. 1st Oct., 1991 and by the Finance Act, 1992, the words in a square brackets in the above sub-section, namely “or a cooperative society engaged in carrying on the business of banking nor being a co-operative society providing credit facilities to farmers or village artisans” were omitted w.e.f. 1st April, 1993. Accordingly these words were part of sub-s. (5A) of s. 2 of the Act from 1st Oct., 1991 to 31st March, 1992.

7. Thus, going by the relevant provisions, it may be seen that under the charging section in respect of credit institution other than scheduled banks, interest-tax is charged on every credit institution for every assessment year. The term “co-operative society” preceding the words “carrying on the business of banking” refers to a co-operative society which need not necessarily be a banking company or a company to which the provision of Banking Regulation Act, 1949 are made applicable. A co-operative society which is lending money to its members or accepting deposits or raising loans from financial or banking institution and advancing the same to its members, amounts to doing the business of banking. The fact that it is only a thrift society or its activities are limited to its members only, could not any way affect the issue whether the appellant-society is a credit institution for the purpose of levy of interest-tax. The bye-law of the appellant-society has been placed before us. The cl. 2(b) of the object clause reads as follows : “The objects of the society shall be : (a) generally to encourage thrift, self-help and co-operation among the members. (b) to borrow funds from members or others to be utilised for granting loans to members for useful purposes.”

From a reading of the above bye-laws, it is clear that the assessee is carrying on the business of banking and because its activities are limited only to its members, could not in any way affect the issue whether the appellant- assessee is credit institution for the purpose of levy of interest-tax. Since the appellant-assessee is engaged in the business of banking, providing credit to its members, it is a credit institution for the purpose of levy of interest-tax under Interest-tax Act, 1974. The other argument of the counsel for the appellant was that the assessee not being a banking company and the provisions of Banking Regulation Act not being made applicable, cannot be taken as a credit institution. We feel that the term “a co-operative society engaged in carrying on the business of banking” refers to a particular kind of co-operative society and it need not necessarily be a banking company or a company to which the provisions of Banking Regulation Act are made applicable.

In view of the above, we are of the opinion that the interest-tax is attracted to the appellant-society and the Revenue rightly initiated interest-tax proceeding and accordingly levied interest-tax. In view of the matter, we answer the above questions of law in favour of the Revenue and hence dismiss the above tax case (appeal) filed by the appellant-assessee. Consequently, the connected TCMP is also dismissed. No order as to costs.

[Citation : 287 ITR 40]

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