MADHYA PRADESH COOPERATIVE BANK LTD. VS ADDITIONAL COMMISSIONER OF INCOME-TAX
1997 P T D 889
[218 I T R 438]
[Supreme Court of India]
Present: A.M. Ahmadi, CJ.1 and B.L. Hansaria, J
(C.A. Nos. 1116(NT) of 1979 and 2211-12 of 1996)
MADHYA PRADESH COOPERATIVE BANK LTD
Versus
ADDITIONAL COMMISSIONER OF INCOME-TAX
C. A. No. 1196(NT) of 1992)
MADHYA PRADESH RAJYA SAHKARI BANK MARYADIT
Versus
COMMISSIONER OF INCOME-TAX
Civil Appeals Nos. 1116(NT) of 1979, 1196(NT) OF 1992, 2211 and 2212 of 1996, decided on 19/01/1996.
(Civil Appeal No. 1116 of 1979 was by special leave from the judgment and osier, dated October 9, 1978, of the Madhya Pradesh High Court in MCC No. 228 of 1972.
(Civil Appeals Nos. 2211 and 2212 of 1996 (Madhya Pradesh State Cooperative Bank Ltd. v. Addl. CIT were by special leave from the judgment and order, dated March 29, 1982 of the Madhya Pradesh High Court in MCC No. 233 of 1977).
Income-tax---
----Cooperative society---Special deduction---Scope of S. 81---Apex body controlling District Cooperative Banks---Reserve fund of Apex bank invested in Government securities under instructions of the State Government---State Government instructions stating that reserve fund could not be utilised as working capital---Interest on Government securities forming part of reserve fund---Not entitled to special deduction---Indian Income Tax Act, 1961, S.81---Madhya Pradesh Cooperative Societies Act, 1960, S.44---Madhya Pradesh Government Instructions No. CR 25/26, dated 7-10-1960.
The object of section 81 of the Income Tax Act, 1961, is to encourage cooperative movement in the country by providing tax exemption to those cooperatives engaged in activities set out in clauses (a) to (f) thereof. One such activity is the carrying on of the business of banking or providing credit facilities to its members by a cooperative society. The section, therefore, provides that income-tax shall not be payable by a cooperative society in respect of the profits and gains of business carried on by it, if it arises from the business of banking or providing credit facilities for its members. However, if such a cooperative society also engages itself in activities other than the business of banking or providing credit facilities the profits derived from such business shall not be exempt from tax if it exceeds rupees fifteen thousand. It is, therefore, obvious that the entire income derived by a cooperative society from the business of banking or providing credit facilities to its members is exempt from income-tax, but if that society also engages itself in any other activity and earns profit therefrom, the income so derived becomes liable to assessment and payment of income-tax or if it exceeds the ceiling amount. The normal banking activity is to receive deposits and utilise such deposits by advancing loans, etc., to borrowers. Since the rate at which interest is paid to depositors is lower than the rate charged from borrowers, the difference in the rates generates income for the banks. The banks may have to maintain certain reserves to meet emergencies, e.g., a spurt in withdrawals by depositors for diverse reasons. Investments which permit withdrawals at short notice would, therefore, be a part of the requirement of banking business and interest accruing on such investments would be outside the tax net.
The assessee was an apex body controlling all district cooperative banks. Under section 44 of the Madhya Pradesh Cooperative Societies Act, 1960, the assessee was required to invest or deposit its funds to maintain a cover to the extent necessary. Under the Madhya Pradesh Government Instructions No. C.R. 25/26, dated October 7, 1960, no part of the reserve fund of apex banks can be utilised as working capital nor can any part of the reserve fund deposits be withdrawn except with the permission of the Registrar to meet lossess or at the time of winding up and not otherwise. While framing the assessments for the assessment years in question, the Income Tax Officer included in the taxable income of the assessee, inter alia, interest earned on securities earmarked against reserves. The assessee contended that it was entitled to the benefit of section 81 of the Income Tax Act, 1961. The Income-tax Officer rejected this claim. The Tribunal and, on a reference, the High Court, held against the assessee. On appeal to the Supreme Court by special leave:
Held, dismissing the appeal, that it was clearly understood in being parlance that circulating capital was that which was put into circulation or turned over to earn profits. Government securities coming out of the reserve fund which could not be easily encashed and which could be utilised only when certain contingencies arose could not be considered to be circulating capital or stock-in-trade. The income derived from the investment in Government securities placed with the State Bank of India or the Reserve Bank of India could not be regarded as an essential part of the assessee's banking activity inasmuch as the same did not form part of its stock-in-trade or working/circulating capital. Hence, the interest on Government securities placed with the State Bank of India or the Reserve Bank of India, could not qualify for exemption under section 81 (now section 80-P) of the Income Tax Act.
M P. State Cooperative Bank Ltd. v. Addl. CIT (1979) 19 ITR 327 affirmed.
Assam Cooperative Apex Marketing Society v. CIT (Addl.) (1993) 201 ITR 338 (SC); Bihar State Cooperative Bank Ltd. v. CIT (1960) 39 ITR 114 (SC); CIT v. Bombay State Cooperative Bank Ltd. (1968) 70 ITR 86 (SC); CIT v. Orissa State Cooperative Housing Corporation Ltd. (1976) 104 ITR 157 (Orissa); CIT v. U. P. Cooperative Federation Ltd. (1989) 176 ITR 435 (SC); Malabar Cooperative Central Bank Ltd. v. CIT (1975) 101 ITR 87 (Ker.) and Punjab Cooperative Bank Ltd. v. CIT (1940) 8 ITR 635 (PC) ref.
Harish N. Slave and A. K. Chitale, Senior Advocates (D. M. Mishra, Advocate for Messrs J. B. D. & Co. with them) for Appellants.
K.N. Shukla, Senior Advocate (Manoj Arora and S. N.Terdol, Advocates with him) for Respondents.
JUDGMENT
A.M. AHMADI, C.J.-I.---Special leave granted in S.L.P.(C) Nos.5813-14 of 1982.
The assessee in all these cases is a cooperative society registered under the Madhya Pradesh Cooperative Societies (Amalgamation) Act, 1957 (hereinafter called "The Act"). While framing assessment for the relevant assessment years in question, the Income-tax Officer included in the taxable income of the assessee, interest earned on securities earmarked against reserves and interest earned on provident fund deposits. The assessee contended that it was entitled to the benefit of section 81 of the Income Tax Act, 1961, as in force at all material times. The Income Tax Officer rejected this claim of exemption from tax put forward by the assessee. Since the assessee's contention did not find favour at the higher levels also, including the reference to the High Court, the assessee has approached this Court.
Section 81 of the Income Tax Act on which the assessee's case is based B read thus at all material times:
"Income of Cooperative Societies.---Income-tax shall not be payable by a cooperative society,--
(i) in respect of the profits and gains of business carried on by it, if it is---
(a) a society engaged in carrying on the business of banking or providing credit facilities to its members; or ???????
Provided that, in the case of a cooperative society which is also engaged in activities other than those mentioned in this clause, nothing contained herein shall apply to that part of its profits and gains as is attributable to such activities and as exceeds fifteen thousand rupees. "
On a plain reading of this provision it becomes clear that every income of society carrying on banking business is not exempt from payment of tax: Only the income from banking business is exempt from tax. The question which we are required to answer is whether the income from interest accruing on Government securities earmarked for reserve fund/provident fund can be said to be income derived by the assessee from the business of banking within the meaning of section 81 to qualify for exemption. This question raised in the backdrop of the following facts:
The assessee is an apex body controlling all District Cooperative Banks. It is registered under the provisions of the Cooperative Societies Act, 1912, read with section 6 of the Act. The assessee filed returns for the relevant years claiming that the entire income was from banking business and, therefore, exempt from tax under section 81 of the Income-tax Act. The Income Tax Officer rejected the claim in regard to interest being exempt under the said provision. There is no dispute, and indeed there can be none, that the assessee is engaged in carrying on the business of banking which, inter alia, includes the activity of providing credit facilities to its members. In the course of its business, it receives deposits and makes advances to the borrowers at a rate of interest higher than what it pays on deposits. A part of these deposits are, however, invested in form of Government securities with the State Bank of India or the Reserve Bank. Under section 44 of the Cooperative Societies Act, the assessee is required to invest or deposit its funds to maintain a cover to the extent necessary and further provides that fund of the society shall be invested and utilised as may be laid down by the Registrar, which it does by investing in Government securities purchased with the bank's funds. The question is whether the interest earned by the assessee from the Government securities placed with the State Bank or the Reserve Bank can qualify for exemption under section 81 of the Income-tax Act?
Before we proceed to answer this question, we may refer to the M.P. Government No. CR 25/26, dated October 7, 1960, which in so far as it concerns apex banks, reads as under:
"(C) Apex Bank.---The reserve fund of the apex bank shall be fully invested outside its business in the Government securities. No part of its reserve fund should be utilised as its working capital.
3. All investments of reserve fund shall be specially marked as 'reserve fund investment' and shall be shown separately in the annual balance sheets. The reserve fund deposits at every level shall carry the maximum rate of interest which a Central Bank or apex bank pays on fixed deposits for longest period or three per cent., whichever is higher. No part of the reserve fund deposits shall be drawn without the previous sanction of the Registrar, in the case of apex bank, Central Banks and large-sized societies and in the case of other primary societies without the permission of the Deputy Registrars. Such approval can be given when the amount is either required to meet losses, or when the society is to be wound up. These eventualities will, however, be very rare".
Obviously, as per the above instructions, no part of the reserve fund can be utilised as working capital nor can any part of the reserve fund deposits be withdrawn except with the permission of the Registrar to meet losses or at the time of winding up and not otherwise. In the circumstances, the revenue contends that the securities relating to the reserve fund can never be considered to be the circulating or working capital of the bank or its stock-in-trade to qualify for exception under section 81 or the Income-tax Act.
In so far as interest on provident fund deposits is concerned, admittedly, the same was included in the profit and loss account of the bank. It appears from the observations in paragraph 11 of the appellate order of the Tribunal that even the assessee's counsel found it difficult to justify the claim and said that it ought not to have been included in the profit and loss account of the bank since it belonged to the provident fund as the bank was merely holding those deposits as trustees. The Tribunal did not examine this contention, and in our opinion rightly, since the same was not agitated before the authorities below and no foundation was laid for the same. The tribunal held that since the interest earned therefrom was included in the profit and loss account of the assessee and was shown as earnings, it was liable to tax since it did not form part of the assessee's stock-in-trade or circulating capital and could not, therefore, be described as income from the business of banking to qualify for exemption. The Tribunal, therefore, held that this income was liable to tax. Mr. Salve, learned senior counsel for the assessee with his usual fairness stated that in the absence of the foundational facts the Tribunal was justified in refusing to examine the contention of the assessee's counsel and he was not in a position to assail the Tribunal's approach. He, therefore, did not press the contention under this head. We are, therefore, left with the first contention only, namely, whether interest on Government securities earned by the assessee is exempt from tax under section 81 of the Income-tax Act.
There can be no doubt that the object of section 81 was to encourage cooperative movement in the country by providing tax exception to those cooperatives engaged in activities set out in clauses (a) to (t) thereof. One such activity is the crying on of the business of banking or providing credit facilities to its members by a cooperative society. The section, therefore provides that income-tax shall not be payable by a cooperative society in respect of the profits and gains of business carried on by it, if it arises from the business of banking or providing credit facilities for its members. However, if such a cooperative society also engages itself in activities other than the business of banking or providing credit facilities the profits derived from such business shall not be exempt from tax if it exceeds rupees fifteen thousand. It is, therefore, obvious that the entire income derived by a cooperative society from the business the business of banking or providing credit facilities to its members is exempt from income-tax, but if that society also engages itself in any other activity and earns profit therefrom, the income so derived becomes liable to assessment and payment of income-tax, if it exceeds the ceiling amount. The normal banking activity is to receive deposits and utilise such deposits by advancing loans, etc., to borrowers. Since the rate at which interest is paid to depositors is lower than the rate charged from borrowers, the difference in the rates generates income for the banks. The banks may have to maintain certain reserves to meet with emergencies, e.g, a spurt in withdrawals by depositors for diverse reasons. Investments which permit withdrawals at short notice would, therefore, be a part of the requirement of banking business and interest accruing on such investments would be outside the tax net. That is why this Court in Bihar State Cooperative Bank Ltd. v. CIT (1960) 39 ITR 114, while dealing with income derived by way of interest on short-term deposits by the bank, held that it was income from normal banking business and was, therefore, exempt from the liability to pay income-tax. This Court held that since the society was engaged in banking activity, its normal business was to deal in money and credit and, therefore, the money laid out in the form of short-term deposit did not cease to be a circulating capital and interest earned thereon cannot be other than income generated from the business of banking and was, therefore, exempt from tax. The same view was reiterated in CIT v. Bombay State Cooperative Bank Ltd. (1968) 70 ITR 86 (SC); Malabar Cooperative Central Bank Ltd. v. CIT (1975) 101 ITR 87 (Ker.) and CIT v. Orissa State Cooperative Housing Corporation Ltd. (1976) 104 ITR 157 (Orissa). The privy Council in Punjab Cooperative Bank Ltd. v. CIT (1940) 8 ITR 635 also held that bankers have always to keep sufficient cash or readily realisable securities to meet with any probable demand of depositors in the normal course of banking business and such funds, counsel argued, would really form part of the bank's circulating capital and, therefore, interest earned thereon would be exempt from tax.
Placing strong reliance on the aforesaid line of reasoning, counsel for the assessee argued, that interest earned on Government securities placed with the State Bank or the Reserve Bank would be income earned by the bank from its circulating capital and in any case in the normal course of banking business and cannot, therefore, be brought to tax. It was said that the Government securities form part of the bank's stock-in-trade and any income earned thereon would be outside the tax net. Counsel for the Revenue, however, distinguished the decisions relied on by the assessee mainly on the ground that the bank's funds were utilised in short-term deposits or in Government securities which could be easily encashed to meet with a probable sudden rush of depositors and, therefore, the fund employed for the purpose never went out of circulation, but was kept apart to meet a probable eventuality and, therefore, a business obligation. He pointed out that in the case of reserve fund investments no part of the deposits was permitted to be withdrawn unless the money was required to meet losses or the society had to be wound up and that too with the Registrar's permission only. Therefore, he submitted, these securities could not be utilised as working capital nor did they form part of the circulating capital or stock-in?trade of the bank and, hence, the interest earned thereon and shown as forming part of the income of the society cannot qualify for exemption.
Counsel for the Revenue did not join issue on the proposition that if circulating capital or stock-in-trade of a cooperative bank is invested in securities, interest earned thereon would be income from banking business and would, therefore, qualify for exemption. However, can the investment in securities of the reserve fund be said to be investment of circulating capital or stock-in-trade, moreso when it is noticed that the cooperative bank does not have an absolute and unfettered right to withdraw the same whenever it liked We have noticed that the cooperative bank is legally obliged to place certain Government securities with the State Bank/Reserve Bank and these securities cannot be withdrawn by the said bank at its sweet-will and can only be withdrawn in certain situations referred to earlier. 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. It is, therefore, difficult to comprehend how such Government securities relating to reserve fund can be considered the bank's stock-in-trade or circulating capital. It is clearly understood in banking parlance that circulating capital is that which is put into circulation or turned over to earn profits. 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 fixed asset of the society, being out of circulation for an indefinite period. It is, so to say, at arm's length from the normal banking business, to be utilised on happening of certain events, which may virtually bring a cessation of the business. If that be the purpose and object of setting apart the funds in the form of the Government securities and the like, it cannot be reasonably contended that the funds placed in cold storage continue to constitute the bank's stock-in-trade or circulating capital. Learned counsel for the Revenue was, therefore, right in contending that the case-law cited at the Bar by learned counsel for the assessee cannot come to the rescue of the assessee.
We make a brief reference to two more cases to which our attention was drawn by learned counsel for the Revenue. The first case is of CIT v. U. P. Cooperative Federation Ltd. (1989) 176 ITR 435 (SC). In that case, the apex cooperative society, which was expected to regulate the supply of sugar, cloth, etc., to its members, had received two sums, namely, (i) Rs.9,000 as interest on cash security deposit with a cooperative sugar factory for carrying on sugar agency business; and (ii) RF. 51.295 as interest on amounts which it had advanced to its members since they were not able to arrange for the entire finance needed to lift the stocks. This Court held that the first amount did not qualify for exemption because it represented only interest on deposit and could not be mixed up with the other sums received in the course of business. Even learned counsel for the assessee did not press for exemption so far as that claim is concerned. The second claim was allowed on the ground that the money had to be provided to run the business and generate profit and the funding was, therefore, in the nature of "investment" within the meaning of the relevant provision, in that, the money was ultimately to be utilised by member society for the purchase of stocks. The distinction is obvious, namely, where the money is ultimately to be used for business purpose, either directly or through the member-bank, the interest thereon would qualify for exemption and not otherwise The second case to which our attention was drawn is of Assam Cooperative Apex Marketing Society Ltd. v. CIT (Addl.) (1993) 201 ITR 338 (SC). In that case, the appellant was appointed as the procuring agent for paddy by the Assam Government. The members of the appellant were primary marketing societies and societies at the village level, with membership of agriculturists, being the members of the former. Thus, no agriculturist was the direct member of the appellant. So, the produce was received by the village level societies from its agriculturist-members and was then passed on to the primary societies which in turn made it over to the appellant. A commission was charged for the procuring activity which was divided between the three, the appellant and the village society each taking 19 paisa in rupee and the remaining 62 paisa went to the primary society. The question was whether the appellant's share in the commission could be brought to tax. The tribunal as well as the High Court on reference held that assessee was not entitled to exemption and this Court affirmed the finding on the following line of reasoning (at page 342):
"A reading of clause (i) of section 81 shows that the idea and intention behind the said clause was to encourage basic level societies engaged in cottage industries, marketing agricultural produce of its members and those engaged in purchasing and supplying agricultural impelements, needs, etc., to their members and so on. The words 'agricultural produce of its members' must be understood consistent with this object and if so understood, the words mean the agricultural produce produced by the members. If it is not so understood, even a cooperative society comprising traders dealing in agricultural produce would also become entitled to exemption which could never have been the intention of Parliament. The agricultural produce produced by the agriculturist can legitimately be called agricultural produce in his hands but in the hands of traders, it would be appropriate to call it agricultural commodities; it would not be his agricultural produce. Accordingly, it must be held in this case that since the agricultural produce marketed by the assessee was not the agricultural produce produced by its members, namely, the primary cooperative society, the assessee cannot claim the benefit of the said exemption. "
Lend counsel for the assessee tried to distinguish both these cases but in our opinion, the purport of the decisions is obvious. However, even if we were to agree with learned counsel for the assessee that both these cases had no application to the facts of these appeals, it would make no difference because we have on first principles come to the conclusion, for reasons set out hereinbefore that the interest on the Government securities placed with the State Bank of India/Reserve Bank of India, cannot qualify for exemption under section 8 (now section 80-P) of the Income-tax Act.
Before we part, we must take note of Shri Salve's contention that the proviso to section 81 would apply in the case of that cooperative society alone which is engaged in an activity other than those mentioned in clauses (a) to (f) which not being so as regards the appellants, the proviso has no application; and so, no part of its profit or gain can attract income-tax. We do not think this to be the correct reading of the proviso, notwithstanding the use of the word "also". According to us, what the proviso seeks to convey is that even if a cooperative society is engaged only in the business of banking, but part of its activity is not attributable to engagement in such activity, income derived from that part of activity would become taxable. And as held above, the income derived from the investment in Government securities placed with the State Bank of India/Reserve Bank of India cannot be regarded as an essential part of its banking activity inasmuch as the same does not form part of its stock-in-trade or working/circulating capital. Therefore, we see no force in Mr. Salve's premises.
For the above reasons, we see no merit in these appeals and dismiss the same with costs.
M.B.A./1123/FC ??????????????????????????????????????????????????????? Appeals dismissed.