COMMISSIONER OF INCOME TAX vs MADURAI DISTRICT CENTRAL CO-OPERATIVE BANK LTD.

Jayasimha Babu, J.

The question referred to us at the instance of the revenue is as follows:

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that (i) interest on securities, (ii) subsidies

received from the government, (iii) dividend from companies, and (iv) interest and dividend received from other co-operative institutions, were

business income entitled to deduction u/s 80P(2)(a)(i) of the Income Tax Act, 1961 ?

The assessment year is 1980-81.

The assessee is a co-operative society engaged in the business of banking and providing credit facilities to its members. The assessee received in

the assessment year in question, interest on securities, subsidies from the Government, dividend from companies and interest and dividend from

other co-operative institutions, all of which were treated as part of its business income and in respect of which it claimed deduction u/s 80P(2)(a)(i)

of the Income Tax Act, 1961 (hereinafter referred to as ''the Act''). The claim so made by the assessee was rejected by the Income Tax Officer

but was allowed in appeal by the Commissioner and the order of the Commissioner was upheld by the Tribunal.

Question similar to the one referred to us was considered by this court in the assessee''s own case in respect of another assessment year in the

case of COMMISSIONER OF Income Tax Vs. MADURAI DISTRICT CENTRAL CO-OPERATIVE BANK LTD., as also in the case of

Commissioner of Income Tax Vs. Madurai District Central Co-operative Bank Ltd., . The later decision followed the earlier one and upheld the

claim of the assessee that it is entitled to deduction in respect of these items u/s 80P(2)(a)(i). In Madurai District Central Co-operative Bank Ltd.''s

case (supra), the Court noticed that the interest on securities, in respect of which deduction had been claimed by the assessee, was on securities

which constituted the liquid assets which are to be maintained at a particular percentage as per the provisions of the Banking Regulation Act and

the directions given by the Reserve Bank of India. The court held that such investments form part of circulating capital as the investments were

realisable whenever there was need for additional funds.

Following the aforesaid decisions of this Court, the question referred to us is required to be answered in favour of the assessee.

The learned counsel for the revenue, however, contended that having regard to the later judgment of the Supreme Court in the case of M.P.

Cooperative Bank Ltd., Jabalpur Vs. Addl. Commissioner of Income Tax, M.P. Bhopal, , the assessee is not entitled to deduction on the interest

earned by it on securities as the decision of the Apex Court was rendered in the context of a claim made by a co-operative society for deduction

of the amount earned by it as interest on securities purchased by it from out of its reserve fund. The assessee under the Co-operative Societies

Act, 1912, was required to invest a part of its reserve fund, and investment so made was not to be withdrawn by it unless the money was required

to meet losses or the society had to be wound up and even then the withdrawal could only be with the permission of the Registrar. The court

negatived the claim of the assessee in those circumstances and held that such Government securities relating to reserve fund cannot be considered

as the bank''s stock-in-trade or circulating capital. The court observed, ''Government securities coming out of the reserve fund which cannot be

easily encashed and which can be utilised only when the contingencies mentioned therein arise, cannot be considered to be circulating capital or

stock-in-trade. It is more or less in the nature of a fixed asset of the society, being out of circulation for an indefinite period.''

The Apex Court, while so holding, also held that investments which permit withdrawal on short notice would be part of the requirement of the

banking business and the interest accruing on such investments would be outside the tax net. The court followed the earlier decision of the Apex

Court in the case of The Bihar State Co-operative Bank Ltd. Vs. The Commissioner of Income Tax, , a decision rendered by a three-Judge

Bench of the Apex Court. In that case, it was held by thecCourt that it was a normal mode of carrying on banking business to invest monies in such

a manner that they are readily available. The court also held that the interest earned by a bank from its deposits arises from business of banking.

The court also referred to the case of Commissioner of Income Tax, Bombay City II Vs. Bombay State Co-operative Bank Ltd., , wherein the

Apex Court held that the interest received from the Government securities held by a co-operative society as its stock-in-trade qualifies for

exemption under Notification issued u/s 60 of the Indian Income Tax Act, 1922, and that the exemption was inapplicable only to interest received

from the Government securities held by the society as investments.

These decisions of the Apex Court establish that a bank is not precluded from regarding the income earned by it by way of interest on deposits

in the Government securities, as being part of its business income and such interest would be part of the business income if it is derived from an

investment, which did not come out of or relate to its reserve fund, but from fund which could be regarded as its stock-in-trade or circulating

capital. The reason for not allowing the interest derived on investments from reserve fund to be treated as its income from banking business as

stated by the Apex Court in Madhya Pradesh Co-operative Bank Ltd.''s case (supra) at page 445 is: ''That is because the investment of the

reserve fund in securities is not to meet the probable eventuality to pay off the depositors should they demand the same. In this case, as already

noticed, the interest earned by the assessee-bank is on investment in securities, which form part of its liquid assets. Interest so earned has,

therefore, to be regarded as income earned from the business of banking and that interest is deductible u/s 80P(2)(a)(i).

The question referred to us is, therefore, answered in favour of the assessee and against the revenue. The parties to bear their respective costs.