COMMISSIONER OF Income Tax vs MADURAI DISTRICT CENTRAL CO-OPERATIVE BANK LTD.

RAMANUJAM J. - The assessee, in this case, is a co-operative bank. For the assessment years 1970-71, 1971-72 and 1973-74, the assessee

claimed deduction under s. 80P of the I.T. Act, 1961, in respect of interest income from securities and in respect of amounts received as subsidy

from the Government. That claim was rejected by the ITO for all the three years on the ground that interest from securities which are to be treated

as investments, cannot be treated as income from banking business and that it has to be treated as income from other sources. In respect of

subsidies also, the ITO held that they cannot be treated as business income of the assessee. On appeal, the AAC agreed with the view of the ITO

and rejected the claim of the assessee for deduction. The assessee thereafter took the matter to the Income Tax Appellate Tribunal. The Tribunal,

following rulings of the Supreme Court in The Bihar State Co-operative Bank Ltd. Vs. The Commissioner of Income Tax, and Commissioner of

Income Tax, Andhra Pradesh Vs. Cocanada Radhaswami Bank Ltd., , has taken the view that the claim of the assessee that the interest on

securities is exempt under s. 80P for all the three years should be upheld. With regard to the claim of exemption in respect of subsidy amounts

also, the Tribunal has held that the assessee is entitled to the relief claimed by it, as they are payments of a revenue nature, and, therefore, the

assessee will be entitled to claim exemption in respect of those receipts. Aggrieved by the order of the Tribunal, the Revenue sought and obtained

a reference to this court on the following two questions :

(1) Whether, on the facts and in the circumstances of the case, the assessee-bank is entitled to exemption u/s 80P of the Income Tax Act, 1961,

in respect of the interest from securities for the assessment years 1970-71, 1971-72 and 1973-74 ?

(2) Whether, on the facts and in the circumstances of the case, the assessee-bank is entitled to exemption in respect of subsidies received from the

Government for the assessment years 1970-71, 1971-72 and 1973-74, ?

From the above two questions it will be clear that the first question relates to the deductibility or otherwise under s. 80P in relation to interest

income from securities for all the three assessment years and the second question relates to the assessees claim for exemption in respect of

subsidies received from the Government for the three assessment years referred to above. For the purpose of appreciating the respective

contentions urged by the parties, it is necessary to scan through the provisions of s. 80P under which the assessee has claimed exemption in

respect of interest received from securities.

Section 80P, so far as it is relevant for the purpose of the present discussion, is extracted below :

Section 80P. (1) Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in

subsection (2), there shall be deducted, in accordance with and subject to the provisions, of this section, the sums specified in sub-section (2), in

computing the total income of the assessee.

(2) The sums referred to in sub-section (1) shall be the following, namely :

(a) in the case of a co-operative society engaged in -

(i) carrying on the business of banking or providing credit facilities to its members, or...

the whole of the amount of profits and gains of business attributable to any one or more of such activities.

The above provision enables co-operative societies carrying on banking business to get deduction in respect of the whole of the amount of profits

and gains of business attributable to any one or more of the activities, that is, carrying on the business of banking or providing credit facilities to its

members. There is no dispute in the present case that there assessee is a co-operative bank carrying on the business of banking. Therefore, for

claiming exemption the assessee has to establish that the deduction claimed was in respect of profits and gains of its business attributable to the

business of banking. Under s. 24 of the Banking Regulation Act, 1949, every banking company has to maintain in cash, gold or unencumbered

approved securities valued at a price not exceeding the current market price, an amount which shall not be less than 20% of the total of its time and

demanded liabilities. In pursuance of the said s. 24 of the Banking Regulation Act, the Reserve Bank of India has issued directions to banking

institution to keep the prescribed amount in liquid assets like securities. It is because of the above statutory provision and the directions given by

the Reserve Bank of India, the assessee which is carrying on the business of banking has necessarily to keep certain liquid assets like securities, as

a condition precedent of carrying on the banking business. In that view, the liquid assets like securities which the banks are to maintain cannot be

taken as investments. Therefore, the interest from such securities should normally be taken as income from banking business and it cannot be taken

as income from sources. Even assuming that the interest from such securities cannot be taken as income from banking business, still it will come

within the scope of s. 80P for the reason that the provisions in s. 80P(2)(a)(i) refer to profit and gains attributable to the banking business of the

assessee. The interest received from securities in the present case is clearly attributable to the banking business carried on by the assessee. The

expression ""attributable to"" occurring in s. 80P(2)(a)(i) has to be understood in a broad sense and it cannot be equated to the expression ""derived

from"". We are, therefor, of the view that the Tribunal, in this case, is right in holding that the interest income received from securities by the

assessee should be taken to fall within the scope of s. 80P(2)(a)(i) and the assessee is entitled to claim exemption thereunder.

As already state, the Tribunal has relied on two decisions of the Supreme Court in The Bihar State Co-operative Bank Ltd. Vs. The

Commissioner of Income Tax, and Commissioner of Income Tax, Andhra Pradesh Vs. Cocanada Radhaswami Bank Ltd., . The principles laid

down in those decisions have been followed by the Kerala High Court in Malabar Co-operative Central Bank Ltd. Vs. Commissioner of Income

Tax, , by the Gujarat High Court in Addl. Commissioner of Income Tax, Gujarat Vs. Ahmedabad District Co-operative Bank Ltd., , and by the

Gauhati High Court in ASSAM CO-OPERATIVE APEX BANK LTD. Vs. COMMISSIONER OF Income Tax, ASSAM, AND ANOTHER.,

. The scope of the expression ""attributable to"" occurring in s. 80E of the Act came up for consideration before the Supreme Court in Cambay

Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, . The Supreme Court has clearly ruled that the

expression ""attributable to"" has a wider import than the expression ""derived from"" and the said expression is intended to cover receipts from

sources other than the actual conduct of the business of the specified industry and that, therefore, in computing the profits of the assessee for the

purpose of special deduction provided in s. 80E (prior to its amendment by the Finance No. 2 Act of 1967), items of unabsorbed depreciation

and unabsorbed development rebate carried forward from earlier years will have to be deducted before arriving at the figure from which the 8%

contemplated by s. 80E is to be deducted. The meaning given to the expression, ""attributable to"" by the Supreme Court in that case is to govern

the same expression occurring in s. 80P(2)(a)(i). We are upholding the view of the Tribunal that the interest income from securities should be

treated as income from its banking business, for liquid assets like securities should be maintained at a particular percentage under the Banking

Regulation Act and also as per the directions of the Reserve Bank of India and the interest income from such securities should naturally be treated

as income from banking business. Even if the contention of the Revenue that the interest on securities cannot be treated as income from banking

business is to be accepted, still the said income is attributable to the banking business carried on by the assessee and will attract s. 80P(2)(a)(i).

Thus, even on the basis of the alternative ground, the assessee is entitled to the exemption claimed by it.

The learned counsel for the Revenue, however, placed strong reliance on a decision of the Madhya Pradesh High Court in M.P. State Co-

operative Bank Ltd. Vs. Addl. Commissioner of Income Tax, . But we are of the view that the said decision is not applicable to the case on hand.

In that case, the Madhya Pradesh High Court was concerned with the scope of s. 81(i)(a) of the I.T. Act, which has now been replaced by s.

80P. Section 81 dealing with the deduction of income of co-operative societies was differently worded and that section provided that Income Tax

shall not be payable by a co-operative society in respect of profits and gains of business carried on by it if it is a society engaged in the carrying on

of the business of banking or of providing credit facilities to its members. The learned judges in that case after holding that a banker has always to

keep enough cash or easily realisable securities to meet any probable demand by the depositors and that investments in easily realisable securities

to meet withdrawals by depositors is the normal step in carrying on banking business, proceeded to hold that it is only its income from banking

business that is exempt and not the income arising from any other activity of the society and that if circulating capital or stock-in-trade of a co-

operative bank is invested in securities, the interest earned on the securities would be a part of the income from banking business and would be

exempt under s. 81(i)(a) of the Act. But the learned judges in that case held that the investments in securities were neither circulating capital nor

stock-in-trade, but, on the other hand, they were reserve funds which were not intended to meet the withdrawal by depositors or other

transactions, as was the case with the circulating capital or stock-in-trade, that such reserve funds kept in the form of securities cannot be taken to

be circulating capital or stock in trade of the assessee, that the income from such investments of reserve funds in securities was not, however, a

part of the income from the banking business and that, therefore, it did not qualify for exemption under s. 81(i)(a) of the Act. We are of the view

that the decision in that case should be confined to the special facts of that case, where it has been specifically found that the securities were not

liquid assets but investments of reserve funds in securities which are not normally taken to be a business of banking and, therefore, the income from

such securities was not taken to be a part of income from banking business. In the present case, it is not in dispute that the securities constituted the

liquid asset 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. But for such maintenance of liquid assets, the assessee would not have been allowed to carry on the banking business.

Therefore, the maintenance of liquid assets in the form of securities is a must for the carrying on of the banking activities of the assessee and,

therefore, the income from such securities should be taken to be income from banking business. Further, s. 81(i)(a) does not use the expression

attributable to"" as s. 80P(2)(a)(i). Therefore, we are not in a position to apply the decision of the Madhya Pradesh High Court in M.P. State Co-

operative Bank Ltd. Vs. Addl. Commissioner of Income Tax, , to the facts of this case.

Hence, we answer the first question in the affirmative and against the Revenue.

Coming to the second question we find that subsidies have been given by the Government to the assessee as inducement for opening branches and

for compensating it in the matter of grant of loans to the poorer sections of the people, at a lower rate of interest. Though the learned counsel for

the Revenue contends that the receipt of such subsidies cannot be taken to be income from banking business, we are of the view that it will clearly

be income from banking business. This has been so held by the Allahabad High Court in H.R. Sugar Factory (P.) Ltd. Vs. Commissioner of

Income Tax, , and by the Bombay High Court in Dhrangadhra Chemical Works Ltd. Vs. Commissioner of Income Tax, Bombay City II, . Even

otherwise, the subsidy amounts received by the assessee are definitely attributable to the banking business carried on by the assessee. Thus, on the

working of s. 80P(2)(a)(i), the assessee will be entitled to claim exemption in relation to subsidy amounts which are clearly attributable to the

assessees business of banking. In this view of the matter, we answer the second question also in the affirmative and against the Revenue.

The assessee is entitled to costs from the Revenue. Counsels fee Rs. 500 (Rs. Five hundred only). One set.