The Commissioner of Income Tax-IV vs The Solapur Nagari Audyogic Sahakari Bank Ltd.

J.P. Devadhar, J.—The common question of law raised in all these appeals is,

Whether the interest income received by a Cooperative Bank from investments made in Kisan Vikas Patra (''KVP'' for short) and Indira Vikas Patra (''IVP'' for short) out of voluntary reserves is income from banking business exempt u/s 80P(2)(a)(i) of the Income Tax Act, 1961 ?

Mr. Gupta, learned Counsel appearing on behalf of the revenue fairly stated that, the interest income earned by a co-operative bank from KVP / IVP, where investments in KVP / IVP are made from statutory reserves in compliance of any statutory provision would be income from banking business exempt u/s 80P(2)(a)(i), in the light of the decision of this Court in the case of Commissioner of Income Tax, Kolhapur Vs. Ratnagiri Dist. Central Co-operative Bank Ltd., Ratnagiri, and several decisions of the Apex Court including the decision in the case of Commissioner of Income Tax Vs. KARNATAKA STATE CO-OPERATIVE APEX BANK, .

Mr. Gupta, however submits that the aforesaid decisions would not apply to the facts of the present case, because in the present case, the investments in KVP / IVP are made out of voluntary reserves and the investments are not made out of statutory reserves in compliance of any statutory provision.

The basic argument of Mr. Gupta is that the Tribunal committed an error in relying upon the decision of the Apex Court in the case of C.I.T. v. Nawanshahar Central Coop. Bank Limited 289 ITR 6 , Commissioner of Income Tax Vs. Ramanathapuram Distt. Co-op. Central Bank Ltd., and Commissioner of Income Tax Vs. KARNATAKA STATE CO-OPERATIVE APEX BANK, , because in all those cases, the Apex Court was concerned with the income arising from investments made by co-operative banks in Government approved securities from the statutory reserves and the investments were made in compliance with the statutory provisions. Facts in the present case being altogether different, the Tribunal committed an error in upholding the contention of the assessee by relying upon the aforesaid decisions of the Apex Court which are wholly distinguishable on facts.

Relying upon the decision of the Apex Court in the case of Mehsana District Central Co-operative Bank Ltd. Vs. Income Tax Officer, , Mr. Gupta submitted that since the Tribunal has not considered the question as to whether the voluntary reserves were utilized in the course of the ordinary banking business, it is just and proper to set aside the decisions of the Tribunal and remand the matter for denovo consideration.

We see no merit in the above contentions. This Court in the case of Ratnagiri District Central Cooperative Bank Limited (supra) after considering various provisions of the Maharashtra Cooperative Societies Act, 1960 and the Banking Regulation Act, 1949 has held that the investments made by a Cooperative Bank in IVP out of the funds generated from the banking business would have direct and proximate connection with or nexus with the earning from banking business and attract the provisions of Section 80P(2)(a)(i) of the Act. In other words, this Court in the above case has held that the interest income earned by a Cooperative Bank from IVP would be income from banking business, if the investment in IVP represented the funds generated from the banking business. The said decision has been upheld by the Apex Court by dismissing the SLP filed by the revenue [see 256 ITR 48 (S.C.) and 260 ITR 272 (S.C.)].

Thus, it is clear that investment in KVP / IVP by a co-operative bank is a permissible banking business and for availing deduction u/s 80P(2)(a)(i) of the Act, the co-operative bank has only to show that the investment in KVP / IVP have been made from the funds generated from the banking business. Whether the investments in KVP / IVP have been made out of statutory reserves or non statutory reserves is wholly irrelevant, so long as the funds in the statutory reserves or the non-statutory reserves are the funds generated from the banking business.

In all these cases, it is not the case of the revenue that the amounts in the non statutory reserves of the co-operative banks were not the amounts generated from the banking business. In fact, the specific case of the revenue is that in all these cases, the surplus funds available with the bank which were not immediately needed for the banking activity were set apart in the voluntary reserves. Thus, in all these cases, deduction u/s 80P(2)(a)(i) is sought to be denied not on the ground that the funds for investment in KVP / IVP were not generated from the banking business, but the deduction is being denied solely on the ground that the investment in KVP / IVP have been made from the funds lying in the voluntary reserves.

As rightly contended by Mr. Inamdar, learned Counsel for the assessee, the ratio laid down by this Court in the case of Ratnagiri Dist. Central Co-op. Bank Ltd. (supra) as well as the Apex Court in the cases relied upon by the Tribunal is that making investments by a bank is part of the business of banking. Therefore, to avail deduction on income from investments in KVP / IVP u/s 80P(2)(a)(i) of the Act, what is relevant is that the investments in KVP / IVP are made by the co-operative banks from the funds generated from the banking business. In all the cases in hand, it is not the case of the revenue that the amounts in the voluntary reserves did not represent the funds generated from the banking business. In these circumstances, the decision of the the Tribunal in holding that the interest income from KVP / IVP was from the business of banking eligible for deduction u/s 80P(2)(a)(i) of the Act cannot be faulted.

Strong reliance was placed by the counsel for the revenue on the decision of the Apex Court in the case of Mehsana District Central Co-op. Bank Ltd. (supra). That decision has no relevance to the facts of the present case. In that case, there was dispute as to whether the voluntary reserves were utlised in the course of the ordinary banking business and, therefore, the matter was remanded back to ascertain as to whether the voluntary reserves were utilised in the course of its ordinary banking business. In the present case, there is no dispute that the voluntary reserves have been utilised to purchase KVP / IVP and this Court in the case of Ratnagiri District Central Co-op. Bank Ltd. (supra) has held that the investment in KVP / IVP by a bank is attributable to banking business. Therefore, the decision of the Apex Court in the case of Mehsana Dist. Central Co-op. Bank Ltd. (supra) does not support the case of the revenue.

It was contended that where the co-operative banks withdraw the surplus amount from the circulating or working capital and keep them in voluntary reserves, then it would mean that these surplus amounts are not immediately needed for the banking business. In such a case, it is contended that investing the surplus amounts in the voluntary reserves in KVP / IVP for a long period of 5 years cannot be said to be during the course of banking business. There is no merit in the above argument, because, the very same argument advanced by the revenue in the case of Karnataka State Co-operative Apex Bank (supra) have been rejected by the Apex Court by holding that there is nothing in the phraseology of Section 80P(2)(a)(i) which makes it applicable only to income derived from working or circulating capital.

Therefore, in all these cases, where the surplus funds not immediately required for day to day banking were kept in voluntary reserves and invested in KVP / IVP, the interest income received from KVP / IVP would be income from banking business eligible for deduction u/s 80P(2)(a)(i) of the Act.

In the result, there being no dispute that the funds in the voluntary reserves which were utilised for investment in KVP / IVP by the co-operative banks were the funds generated from the banking business, we hold that in all these cases the Tribunal was justified in holding that the interest income received by the cooperative banks from the investments in KVP / IVP made out of the funds in the voluntary reserves were eligible for deduction u/s 80P(2)(a)(i) of the Act.

All the appeals are disposed of accordingly with order as to costs.