Madhya Pradesh Rajya Sahakari Bank vs Commissioner of Income Tax

G.G. Sohani, Actg., C.J.—By this reference u/s 256(1) of the income tax Act, 1961, (hereinafter referred to as "the Act"), the income tax Appellate Tribunal, Indore Bench, Indore, has referred the following questions of law to this court for its opinion: (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest on securities earmarked against reserve and provident funds is not income from business and, as such, is not exempt u/s 81(i)(a) of the income tax Act, 1961?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenses like commission and exchange were not in the nature of banking business?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income from commission, exchange and miscellaneous income in the hands of the assessee-co-operative bank was not exempt u/s 81(i)(a) of the income tax Act, 1961, particularly when the Banking Regulation Act was not in force and applicable during the relevant period to the assessee-co-operative bank?

The material facts giving rise to this reference, briefly, are as follows: The assessee is a co-operative society registered under the Madhya Pradesh Co-operative Societies Act, 1957, and is an apex body of the District Co-operative Banks in the State of Madhya Pradesh. The assessment years in question are 1962-63 to 1967-68: While framing the assessment of the assessee for the assessment years in question, the income tax Officer included in the taxable income of the assessee interest on securities earmarked against reserve and provident fund, income from commission and exchange and miscellaneous income. The income tax Officer rejected the claim of the assessee that it was entitled to the benefit of the provisions of section 81 of the Act which was in force at the material time. Aggrieved by the order passed by the income tax Officer, the assessee preferred appeals before the Commissioner of income tax (Appeals), Jabalpur. The Commissioner held that the income tax Officer was justified in not allowing deduction in respect of the assessee''s contribution to the unrecognised provident fund, but as the provisions of the Employees'' Provident Funds Act, 1952, applied to the case of the assessee with effect from January 31, 1966, the Commissioner directed the income tax Officer to reduce the total income of the assessee by Rs. 26,577 for the assessment year 1967-68 only. The contention advanced on behalf of the assessee that it was a co-operative society and that its income from banking business was exempt, was rejected by the Commissioner of income tax (Appeals). Aggrieved by the order passed by the Commissioner, the assessee preferred appeals before the Tribunal. The Tribunal dismissed these appeals. The assessee, therefore, sought a reference and it is at the instance of the assessee that the aforesaid questions of law have been referred to this court for its opinion.

Now, as regards question No. (1) referred to us, learned counsel for the assessee conceded that the matter was covered by a decision of this court in M.P. State Co-operative Bank Ltd. Vs. Addl. Commissioner of Income Tax, . In view of that decision, it must be held that the Tribunal was right in holding that the interest on securities earmarked against reserve and provident funds was not income of the assessee from business and was, therefore, not exempt u/s 81 of the Act.

As regards questions Nos. (2) and (3), the Tribunal held that income from commission, exchange and miscellaneous income in the hands of the assessee-co-operative bank was not income from banking business in view of the provisions of the Banking Regulation Act and hence was not exempt u/s 81 of the Act. While dealing with a similar question arising out of the provisions of section 80P of the Act, corresponding to the provisions of section 81 of the Act which were omitted by the Finance (No. 2) Act, 1967, a Division Bench of this court observed in Commissioner of Income Tax Vs. Dhar Central Co-operative Bank, , as follows:

The answer to the first question depends upon the question as to whether the income from commission, brokerage, subsidy from Government, admission fee and incidental charges can be held to be income attributable to the business of banking carried on by the assessee. The Tribunal has referred to the provisions of section 5 of the Banking Regulation Act, 1949, and held that the aforesaid income was derived from activities which were outside the scope of ''banking'' as defined by section 5(b) of that Act. In our opinion, what is material for the purpose of section 80P of the Act is whether the income, in respect of which deduction is claimed, is attributable to an activity which is normally a part of the business of banking or business of providing credit facilities to its members by a co-operative society. Judged by this test, income earned by the assessee from commission and brokerage by dealing in bills of exchange, subsidy from Government, admission fee from members, incidental charges and financial penalties, is all attributable to the business of banking or providing credit facilities to its members and, hence, deductible u/s 80P of the Act.

We respectfully agree with the aforesaid observations. In view of the decision in Commissioner of Income Tax Vs. Dhar Central Co-operative Bank, , our answers to questions Nos. (2) and (3) are in the negative and against the Revenue. For all these reasons, our answer to question No. (1) is in the affirmative and against the assessee, while our answers to questions Nos. (2) and (3) are in the negative and against the Revenue.