COMMISSIONER OF INCOME-TAX VS RAJASTHAN STATE COOPERATIVE BANK
1998 P T D 3816
[223 I T R 55]
[Rajasthan High Court (India)
Before V. K. Singhal and M.A.A. Khan, JJ
COMMISSIONER OF INCOME-TAX
Versus
RAJASTHAN STATE COOPERATIVE BANK
D.B. Income-tax References Nos.80 of 1986 and 49 of 1987, decided on 22/04/1996.
Income-tax---
----Cooperative Society---Special deduction---Cooperative Bank ---Vestment of reserve fund in Government securities is not part of Banking business-- Interest from Government securities not entitled to special deduction---Indian Income Tax Act, 1961, S.80-P.
Held, that simply because the permission was not taken from the Registrar, Cooperative Societies, for investment in a particular mode, the income derived will not change its character. However, a perusal of the Rajasthan Cooperative Act and the Rules makes it clear that the interest earned on investments in Government securities by the Bank is not a Banking business as the said investment is neither of circulating capital or stock-in trade of the cooperative Bank as it has no absolute or unfettered right to withdraw the same whenever it likes. It can be withdrawn only in the proceedings of winding up of the cooperative society. The income from investment of reserve funds was not entitled to special deduction under section 80-P of the Income Tax Act, 1961.
Madhya Pradesh Cooperative Bank Ltd. v. Addl. CIT (1996) 218 ITR 438 (SC) fol.
CIT (Add.) v. Rajasthan State Cooperative Bank Ltd. (1987) 163 ITR 213 (Raj.) held no longer good law.
G.S. Bapna for the Commissioner.
S.M. Mehta, Senior Advocate with Miss Sonal Mehta for the Assessee.
JUDGMENT
V.K. SINGHAL, J.---In Income-tax Reference No.80 of 1986, the income-tax Appellate Tribunal has referred the following questions of law arising out of its order, dated August 13, `1985,.in respect of the assessment year 1980-81, under section 256(1) of the Income Tax Act, 1961:
"(1)Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income of Rs.35,69,868 from investment of reserve funds is exempt under section 80-P of the Income Tax Act 1961?
(2)Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not holding that the reserve and other funds invested in the modes prescribed under section 63 of the Cooperative Societies Act, was investment non-banking nature, particularly when no permission of the Registrar to utilise the same for banking business has been obtained by the assessee and that income arising therefrom was income from non-banking assets not liable for deduction under section 80-P(2)(a)(i) of the Income Tax Act, 1961?"
The assessee is a cooperative bank and was formed as a cooperative society under the Rajasthan Cooperative Societies Act for carrying on the business of the activity of borrowing and lending money and it had invested money in Government securities both in Central as well as State. According to the Department, the investment of the reserve and the other funds would have to be governed by the provisions contained in section 63 of the Rajasthan Cooperative Societies Act. The total investment, which was made by the assessee was to the tune of Rs.4.83 crores.
According to the Department, this investment was considered to have been made in contravention of the provisions of section 63 of the Rajasthan Cooperative Societies Act without permission of the Registrar, Cooperative societies, and, therefore, it was considered that the income earned on such investments cannot be said to be related to the banking business and, therefore, cannot be exempt under section 80-P(2)(a)(i) of the Income Tax Act. The income of Rs.35.70 lakhs was accordingly taxed.
The appeal was preferred to the Commissioner of Income-tax (Appeals) who has considered that the investment of the bank's funds is also a banking business and, therefore, the income from such investment is attributable to the banking business and, therefore, exempt under section 80-P(2)Ta)(i). It was considered that merely because the permission was not taken from the Registrar of Cooperative Societies the investment would not have the character of non-banking assessee.
The Revenue challenged the matter before the Tribunal where a decision given by this Court was also taken into consideration and it was considered that the investment made in government securities or stock-in trade is income, which is exempt under section 80-P.
In Income-tax Reference No.49 of 1987, the Income-tax Appellate Tribunal has referred the following three questions of law arising out of its order, dated June 3, 1986, in respect of the assessment years 1978-79 and 1981-82 under section 256(1) of the Income Tax Act, 1961:
"(1)Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the investment of the reserve and other funds in various securities did not require the sanction of the Registrar of the Cooperative Societies under section 63 of the Cooperative Societies Act?
(2)Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that such investment could be said to be of banking nature?
(3)Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income from such investment could be said to be from banking business and exempt under section 80-P(2)(a)(i) of the Income Tax Act, 1961?"
In this case, the brief facts are that the assessee is a cooperative bank, which is formed as a cooperative society under the Rajasthan Cooperative Societies Act for the only purpose of carrying on the business of banking as cooperative society. The assessee-society apart from carrying on the activity of borrowing and lending had invested moneys in Government securities both in Central as well as of the State and also with other cooperative banks. The investments of the reserve and the other funds would have to be governed by the provisions contained in section 63 of the Rajasthan Cooperative Societies Act. It was found by the assessing authority that necessary permission as contemplated under section 63 of the Rajasthan Cooperative Societies Act has not been obtained and on that basis the income was held taxable and not exempt under section 80-P(2)(a)(i). The Tribunal found that the term "banking business" has not been defined under the Act and the term has to be given its meaning as given by the Banking Regulation Act, 1949, and by the Reserve Bank of India Act, 1934. Under section 3 of the Banking Regulation Act specific provision is made regarding the said Act applying to the cooperative societies formed for the purpose of carrying on the business of banking. The objects of the bank as contained in clause 3 of its bye-laws are as under:
(a) To promote the economic interest of the members of the bank in accordance with the cooperative principles;
(b)to receive money on current savings, fixed deposit or other accounts and to raise or borrow from time to time such sums of money as may be required for the purpose of the bank
(c)to grant loans to cooperative institutions registered or deemed to be registered under the Act and other members enrolled as per the provisions of the bye-law;
(d)to lend money or grant overdrafts to, or to open cash credit for, depositors and members of the bank's staff on the security of: (i) fixed deposits; (ii) Government securities; and (iii) other securities approved by the Registrar and also to grant clean overdrafts to depositors who are as least nominal members, according to rules framed by the board;
(e)to serve as a balancing centre for all cooperative banks and securities in the State;
(f)to undertake in land exchange business by collecting or discounting bills of exchange and hundies or to issue demand drafts. The discounting of bills shall be for those who are at least nominal members according to rules framed by the board;
(g)to receive for safe custody securities, ornaments and valuables;
(h)to buy and sell for legitimate investment of surplus funds, securities of the Government of India or of the Government of Rajasthan or other securities specified in clauses (a), (b), (c) and (d) of section 20 of the Indian Trust Act, 1882, and to act as agents for cooperative institution for purchase and sale of such securities;
(i)to open branches wherever necessary in its area of operation with the previousapproval of the Registrar; and
(j)generally undertake such activities as may be conducive to the attaining of theabove objects.
Under section 3 which reads "Act to apply to cooperative societies in certain cases. ---Nothing in this Act shall apply to ...(c) any other cooperative society exempt in the manner and to the extent specified in Part-V,
In section 5(b) banking has been defined- and banking means the accepting for the purpose of lending or investment or deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.
Section 5(c)- defines "banking company" as any company which transacts the business of banking in India. Section 6 gives the forms of business to which banking companies may engage which has been detailed out m clauses 6(a) to (a). The relevant clause (a) is as under:
"(a)the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing making, accepting, discounting, buying, selling collecting and dealing in bills of exchange, hundies, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and circular notes; the buying, selling and dealing in bullion and species; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing in stocks ...bonds, obligations, securities and investments of all kinds, etc ....
Clause (d); the effecting insuring, guaranteeing, underwriting participating in managing and carrying out any issue, public or private, of State, municipal or other loans or of shares, stock, debentures or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue. "
"Approved securities" have been defined in section 5(a) to mean securities in which a trustee may invest money under clauses (a), (b), (c) or (d) of section 20 of the Indian Trust Act, 1882. Clause 3(h) of the bye-laws provide for investment of its funds in the securities specified in clauses (a), (b), (c) and (d) of the Indian Trusts Act, 1882. The provisions of section 24 speak of maintenance in cash, gold or unencumbered approved securities to the extent of 20 per cent. of the time and demand liabilities. Subsection (2-A) of section 24 further specified that a scheduled bank in addition to the average-daily balance as required by section 42 of the Reserve Bank of India Act, 1934, shall maintain in cash, gold or unencumbered approved securities at least to the tune of 25 per cent. of its total demand and item liabilities in India.
Section 42 says that the average daily cash, balance to be kept with the Reserve Bank of India would not be less than three per cent of its demand and time liabilities to which effect a return had to be filed by all banks. It has been added further that the Reserve Bank of India by means of a notification can increase the cash reserve up to 15 per cent. of the demand and time liabilities and for failure to maintain the reserves, penalty has been provided in subsection (4) of section 42 of the Reserve Bank of India Act. The assessee-bank was found to be a scheduled bank specified in the Second Schedule. Taking into consideration, these provisions it was found that the business of the bank is not governed by the Cooperative Societies Act, but it is regulated by the Reserve Bank of India Act and the investment and Government securities are approved securities and as such the investment is banking business entitled for exemption under section 80-P(2)(a)(i).
Learned counsel for the assessee had relied on the decision of this Court in the case of Add]. CIT v. Rajasthan State Cooperative Bank Ltd.(1987) 163 ITR 213 which was in respect of the matters pertaining to the assessment years 1962-63, 963-64, 1964-65 and 1965-66. The provisions of section 81(v) were considered pari materia to section 14(3)(v) of the Indian Income-tax Act, 1922, and those of section 81(i)(a) of the Income Tax Act 1961, were considered as pari materia to section 14(3)(i) of the Indian Income-tax Act, 1922, and it was held that the income by way of interest earned by Government securities by the cooperative bank is exempt from Income-tax under section 81(i)(a) of the Income Tax Act, 1961, if the said securities are held as stock-in-trade and section 81(v) of the Act is not applicable to it.
The provisions of section 18(i)(a) are also in respect of a society for carrying on the business of banking or providing credit facilities to its members. The provisions of section 80-P(2)(a)(i), therefore, are similar to them. In respect of the provisions of section 81(i)(a) it was observed by this Court that the income by way of interest earned on-Government securities held by a cooperative banking institution is exempt from income-tax under section 81(i)(a) of the Act of 1961, if the said securities are held by the bank as its stock-in-trade and section 81(v) of the Act is not applicable. The principle, which has been laid down in the above case are stated to be fully applicable to this reference.
The case of the assessee before the assessing authority was that under clause 4 of the bye-laws of the banks, the reserve fund will belong to the bank and is to be invested in any of the securities specified in section 20 of the Indian Trusts Act, 1882, or in any manner directed by the Registrar. Section 63 of the Cooperative Societies Act, 1965, also prescribes the manner under which the societies could invest the funds. Rule 54(4) contemplates that the reserve fund of the society could be utilised with the sanction of the Registrar to meet unforeseen losses, specific claims of creditors and to tide over other financial needs, at the time of exigency. The Income-tax Officer found that the transfer of the prescribed percentage of profit to reserve fund is required under section 62 and rule 55 of the Cooperative Societies Rules, 1956, contemplates that such fund will be invested in any of the modes prescribed under section 63. Under the provisions of rule 55(2), the Registrar may by general or special order permit a cooperative society to invest reserve fund or portion thereof for its own business. Since, no permission was taken from the Registrar, it was considered that the investments of reserve funds was not banking business. In respect of building fund, it was found that the provision of rule 54(4) contemplates that the society may with the previous sanction of the Registrar invest the whole or part of the funds, for the purchase, for lease of land or in acquisition, construction or renewal of the building that may be necessary to conduct the business. For this fund also, no sanction of the Registrar was taken and, therefore, it was considered as non-banking in nature. In respect of other funds, no specific arguments, was raised and the funds were of mandatory nature. Since there were no instructions of the Reserve Bank of India- or permission it was considered that it is also for non-banking purposes and the income is not exempt. Section 63 of the Rajasthan Cooperative Societies Act is as under:
"63. Investment of funds.---(1) Except as otherwise provided in subsection (2), a cooperative society shall invest its funds in one or more of the following--- ,
(a)Central Cooperative Bank;
(b)apex bank;
(c)in the shares or securities or debentures issued by any other cooperative society with limited liability;
(d)in any other mode permitted by ,the, rules or by general or special order of the Government.
(2)A cooperative society may deposit its funds for temporary period in such manner as may be prescribed. "
In appeal before the Commissioner of Income-tax provisions of section 80-P were also taken into consideration and it was found that the fact that the appellant is a cooperative society is not denied nor is it denied that the banking business is being carried on and the investments of reserve funds have been made without the permission of the Registrar or the Chairman of the Reserve Bank. Mere permission of the Registrar as required under the Cooperative Society Act and Rules made there under would not result in a situation that income which is otherwise attributable to the banking business would not be considered as attributable to banking business. In the appeal before the Income-tax Appellate Tribunal, the Revenue contended that since the action has been, taken by the assessee contrary to the provision of the Cooperative Societies Act itself, therefore, it would be outside the ambit of the banking business carried on by the, assessee. The Tribunal has taken into consideration the provision of section 5-A of the Banking Regulation Act, 1949, and section 24, which are as under:
"Section 5-A. Act to override bye-laws etc ---(1) The provisions of this part shall have effect notwithstanding anything to the contrary contained in the bye-laws of a cooperative society, or in any agreement executed by it, or in any resolution passed by it in general meeting, or by its board of directors or other body entrusted with the management of its affairs whether, the same be registered, executed or passed, as the case may be, before or after the commencement of the Banking Laws (Application to Cooperative Societies) Act, 1965.
(2)Any provision contained in the bye-laws. agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this part, become or be void as the case may be.
Section 5(a). Interpretation.---In this Act, unless there is anything repugnant in the subject or context,---
' approved securities' means securities in which a trustee may invest money under clause (a), clause (b),. clause (bb), clause (c) or clause (d) of section 20 of the Indian Trust Act, 1882.
Section 24, Maintenance of a percentage of assets.----
(1) Every cooperative bank shall maintain in India in cash, gold or unencumbered approved securities, valued at a price not exceeding the current market price, an amount which shall not at the close of business on any day be less than 20 per cent. of the total of its time and demand liabilities in India. "
It was the admitted position before the Tribunal that the provisions of the Banking Regulation Act have been complied with and the investments made are in accordance with the Banking Regulation Act and are stock-in trade which has so been considered in the years 1962-63, 1963-64, 196.4-65 and 1965-66. ,
The apex Court in the case of Madhya Pradesh Cooperative Bank Ltd. v. Addl. CIT (1996) 218 ITR 438, was interpreting the provisions of section 81 which is now equivalent to section 80-P of the Income Tax Act, 1961, and considered whether the investment and securities of the reserve funds can be said to be circulating capital or stock-in-trade. It was found that in accordance with the instructions of the Madhya Pradesh Government, the cooperative bank does not have an absolute and unfettered right to withdraw the same whenever it likes. It was held that the interest earned from the securities cannot be considered to be stock-in-trade and the income of interest on the Government securities placed with the State Bank of India/ Reserve Bank of India cannot qualify for the exemption under section 81 (at page 445):
"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, more so 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 encahsed 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. It is, so to say, at arm s length from the normal banking business, to be utilised on the happening of certain events, 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."
In the light of the law laid down by the apex Court it has to be seen as to whether the income is from banking business so as to entitle for exemption. The apex Court has made distinction between the investment for securities of reserve funds and considered it to be not an investment by circulating capital or stock-in-trade when the bank does not have an absolute and unfettered right to withdraw the same whenever it likes. The provisions of rules 55 and 56 of the Rajasthan Cooperative Bank Rules, 1966, are as under:
"55. Object and investment of reserve fund.---(1) A reserve fund maintained by a cooperative society shall belong to the society and is intended to meet unforeseen losses. It shall be indivisible and no member shall have any claim to a share in it.
(2)A cooperative society shall not invest or deposit in reserve fund except in one or more of the modes mentioned in clauses (a) to (d) of section 63 of the Act;
Provided that the Registrar may, by general or special order, permit any cooperative society or any class of cooperative societies to invest the reserve fund or a portion thereof in its own business:
Provided further that in the case of a society constituted with the object of cooperative housing on a co-partnership basis, the reserve fund may be utilised for expenditure on the maintenance, repairs and renewal of the buildings of the society and in the case of processing society the reserve fund may be utilised in the acquisition, purchase or construction of land, building and machinery.
(3)No cooperative society whose reserve fund has been separately invested or deposited shall draw upon, pledge or otherwise employ such fund, except with the sanction of the Registrar previously obtained in writing.
(4)The reserve fund of a society shall be available, with the sanction of the Registrar, for being utilised for any of the following purposes, subject to conditions that the amount drawn shall be reimbursed as directed by the Registrar unless the Registrar dispenses with such reimbursement in special:
(i)to meet unforeseen losses incurred by the society;
(ii)to meet such claims of the creditors of the society as cannot otherwise be met; and
(iii)to provide for other financial needs in times of' special scarcity.
56 Disposal of reserve fund on winding up of a cooperative society.---(1). On the winding up of a cooperative society, the reserve fund together with the other funds constituted by the society in accordance with its bye-laws, shall be applied by the liquidator to the discharge of such liabilities of the society as may remain undischarged out of the assets of the society in the order:
(a)the debts of the society; (b) the paid-up share capital; and (c) for dividend upon paid up share capital at rates not exceeding six per cent or any period or periods for which dividend has not been paid; or such dividend upon paid-up share capital as will bring the dividend to the maximum rate for any period for which the dividend at a rate lower than the maximum specified has been paid. No dividend shall, however, be paid on share capital if the bye-laws of the society do not provide for payment of dividend.
(2)Any surplus funds remaining after the payments mentioned in sub- rule (1) shall be utilised in the following manner and subject to the following conditions, namely:
(a)in the case of a cooperative society, other than a financing bank: (i) the surplus funds shall be applied to such object of public utility as may be selected by the general body of the dissolved society at a meeting and approved by the Registrar; (ii) it' within thirty days after the issue of notice by the liquidator appointed to wind up the affairs of the society, the general body fails to make any selection that is approved by the Registrar, the Registrar may place the surplus funds at the disposal of the State cooperative union, to be utilised in the manner as may be directed by the Registrar.
(b)in the case, of a financing bank, the surplus funds shall be assigned by the Registrar to the reserve funds of any other financing bank or banks to which the societies working in the area in which the financing bank which is being wound up carried on its operations, are affiliated. If there is no financing bank working in such area, the Registrar shall invest, the amount in the State Government bank, until a new financing bank is formed in such area in which case, the funds shall be credited to the reserve fund of such financing bank."
The above provisions can be compared with the Madhya Pradesh Government Instruction, dated October 7, 1960, which was considered by the apex Court in case of Madhya Pradesh Cooperative Bank (1996) 218 ITR 438 and on the basis of which it was considered that investment of reserve funds and securities is not to meet the probable eventuality to pay off the depositors and was not considered to be a circulating capital or stock- in-trade. The language of instruction, dated October 7, 1960, is as under (at page 442 of 218 ITR):
"(C) Apex Bank:
The reserve fund of the apex bank shall fully invested outside its business in the Government securities. No part of its reserve fund should be utilised as its working capital.
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 deposit 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. "
The decision relied by learned counsel for the assessee cannot be considered to be good law in view of the judgment of the apex Court referred to above and the provisions of the Rajasthan Cooperative Societies Act and Rules, referred to above, from which it is evident that the interest earned on securities investments by the bank is not a banking business as the said investment is neither of circulating capital or stock-in-trade of the cooperative bank as it has no absolute or unfettered right to withdraw the same whenever it likes. It can be withdrawn only in the proceedings of winding up of the cooperative society. In these circumstances, we are of the view that the Income-tax Appellate Tribunal was not justified in holding that the income of Rs.35,69,868 from investment of reserve funds is exempt under section 80-P of the Income Tax Act.
So far as the second question in Reference No. 80 of 1986 and the first question in Reference No.49 of 1987 is concerned, though it remains only .of an academic interest because the income derived from the investment of the reserve funds was not considered to be the income from banking business. It is, however, observed that simply because the permission was not taken from the Registrar, Cooperative Societies, for investment in a particular mode, the income derived will not change its character.
In Reference No.49 of 1987, a question has been referred on the basis of reserve fund and other funds. While in Reference No.80 of 1986 the reference is on the basis that it is income from investment of reserve fund. The findings with regard to investment of reserve funds have already been given. The details of other funds were not stated either in the order of the Income-tax Appellate Tribunal or in the statement of case and, therefore, it would be open to the assessee to satisfy the Tribunal as to whether the said investment was in accordance with the provisions of section 63 read with rule 54 or in accordance with rules 55 and 56 and whether. the investment should be considered as stock-in-trade or circulating capital. If it is found that the said investment is of stock-in-trade or circulating capital, then the exemption to that extent would be given.
The references are answered in favour of the Revenue and against the assessee with no order as to costs.
M.B.A./1598/FCReference answered.