Commissioner of Income Tax vs Kamalambika Co-Operative Urban bank Ltd.

D. Murugesan, J.—The revenue has filed this tax case appeal questioning the order of the Tribunal, Madras C Bench made in ITA No. 1318/Mad/2008, dated 27-3-2009. The Respondent is M/s Kamalambika Co-operative Urban Bank Ltd. The primary business of the Assessee is banking. For the assessment year 2004-05, the Assessee filed its return of income admitting an income of Rs. 26,14,953 and claimed exemption u/s 80P of the Income Tax Act. The Assessee relied upon Section 80P(2)(a)(i) for deduction in respect of income derived from purely banking activities. Holding that the Assessee is engaged in the activity of purchasing and selling securities which does not partake the character of banking activities, the assessing officer did not allow the deduction u/s 80P(2)(a)(i), but has allowed the deduction upto Rs. 50,000 in terms of Section 80P(2)(c) of the Income Tax Act. That order was taken on appeal before the Commissioner (Appeals), Tiruchirappalli by the Assessee. The Commissioner (Appeals) dismissed the said appeal, which was again taken on appeal by the Assessee to the Tribunal. The Tribunal, following the decision in Mayavaram Co-operative Union bank Ltd. in ITA No. 2d8/Mad/2007 dated 7-9-2007, allowed the appeal on the ground that the activities of the Assessee-bank would amount to the business activity and therefore the Assessee is entitled to deduction on the whole amount of profits and gains of business as per Section 80P(2)(a)(i) of the Income Tax Act. This order is put in issue by the revenue in this appeal.

We have heard Mr. J. Narayanaswamy, learned Counsel for the revenue and Mr. S. Sridharan, learned Counsel for the Assessee.

Even before we consider the rival submissions, our attention is drawn to the judgment of the Supreme Court in CIT v. Nawanshahar Central Co-operative Bank Ltd. (2007) 289 ITR 6 (SC). In that case, the Supreme Court has held that where a co-operative bank carrying on business of banking is statutorily required to place a part of its funds in approved securities, and the income attributable thereto is deductible u/s 80P(2)(a)(i) of the Income Tax Act. In fact the Supreme Court had relied upon the earlier judgments in The Bihar State Co-operative Bank Ltd. Vs. The Commissioner of Income Tax, , Commissioner of Income Tax Vs. KARNATAKA STATE CO-OPERATIVE APEX BANK, and Commissioner of Income Tax Vs. Ramanathapuram Distt. Co-op. Central Bank Ltd., . The contention of the learned Counsel for the Respondent-Assessee is that in view of the above judgments of the Supreme Court, the issue is covered in favour of the Assessee and therefore the appeal of the revenue should be dismissed.

However, Mr. J. Narayanaswamy, learned Counsel for the revenue would submit that on the facts of the present case, the judgments of the Supreme court referred to above cannot be made applicable. According to the learned Counsel, in order to satisfy the provisions of Section 80P(2)(a)(i), it must be first established that the Assessee should primarily engage in banking activities. In case the banking activities are incidental, those judgments are not applicable. Secondly, the investments should be only with the members of the society and not with outsiders. If the investments are with outsiders, the provisions cannot be made applicable. Lastly, the learned Counsel would submit that as per the norms of the RBI, the Assessee can hold ten per cent in approved securities and whatever the amount over and above ten per cent is taxable. Hence for all the above reasons, the appeal should be allowed.

We have carefully considered the above submissions. So far as the first contention of the learned Counsel for the revenue is concerned, factually, the Respondent-Assessee is primarily involved in banking activities and the transactions of investments by way of sale and purchase are not incidental and therefore the first contention must fail. As far as the second contention as to whether such sale and purchase should be only with the members of the society is concerned, we are not inclined to go into the said question, as this question has not been either considered by the assessing officer or by the Commissioner (Appeals) and for that matter, the Tribunal. In fact the said ground has not even been urged in the grounds of appeal. Hence the second contention also must fail.

So far as the last contention that the Assessee is entitled to deduction only upto ten per cent as per the norms of the RBI is concerned, we may point out that from the judgments of the Supreme Court, we are not able to find out any such distinction being made with reference to the limit as per the norms. Even assuming that the Assessee should maintain the basic norm of holding only upto ten per cent and not above and in case the amount exceeds ten per cent, the Assessee is not entitled to deduction u/s 80P(2)(a)(i), this point has not at all been considered by the assessing officer, as it was not a ground on which the claim of deduction under the said section was rejected. Even while the appeal was heard by the Commissioner (Appeals), this was not at all put as an issue for consideration. When the Tribunal also heard this matter, strangely, the revenue had not taken this point before the Tribunal. This point is taken for the first time before this Court. Mr. J. Narayanaswamy, learned Counsel for the revenue brought to our notice grounds D and E of the appeal grounds. So far as ground D is concerned, it is pleaded that the Tribunal erred in holding that the Assessee had purchased/held/sold and made profit from said securities only to the extent of abiding the RBI guidelines. This being a factual finding by the Tribunal that the Assessee had made profit from securities only abiding the RBI guidelines, we are not inclined to go into this ground. In fact the Tribunal had relied upon the decision in Mayavaram Co-operative Urban bank Ltd. case in ITA No. 208/Mad/2007 dated 7-9-2007, wherein the submission of the learned Counsel for the Assessee that the Assessee was eligible for deduction on the whole amount of profits and gains of business attributable to any one or more than such activities was accepted for deduction. So far as ground E is concerned, the revenue has now taken the stand that the Assessee had held securities to the extent of 34.56 per cent if face value is adopted and 36.75 per cent if book value is adopted. This also being a factual position and is taken for the first time and having regard to the consistent view of the Supreme Court on the said issue in more than one case, particularly the recent decision in Nawanshahar Central Co-operative Bank Ltd.s case (supra), we are not inclined to consider the said question relating to the factual issue which is raised for the first time before this Court.

For all the above reasons, we find no merit in the tax case appeal and accordingly, the tax case appeal is dismissed. No costs.