(Appeals by special leave from the judgment and order, dated January 12, 2000, of the Karnataka High Court in I.T.R. C. Nos.876 to 878 of 1998).

Income-tax---

----Cooperative society---Special deduction---Scope of---Cooperative society engaged in banking business---Interest arising from investment made out of reserve fund to enable it to carry on banking business---Is income from banking business---Deduction not restricted to income derived from working or circulating capital---Indian Income Tax Act, 1961, S. 80P(2)(a)(i) (old S.81).---[Madhya Pradesh Cooperative Bank Ltd. v. Addl. CIT (1996) 218 ITR 438 (SC) overruled].

Interest arising from investment made, in compliance with statutory provisions to enable it to carry on banking business, out of reserve fund by a cooperative society engaged in banking business, is exempt under section 80P(2)(a)(i) of the Income Tax Act, 1961. The placement of such funds being imperative for the purpose of carrying on banking business the income there from would be income from the assessee's business.

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.

Madhya Pradesh Cooperative .Bank Ltd. v. Addl. CIT (1996) 218 ITR 438 (SC) overruled.

CIT v. Bangalore District Cooperative Central Bank Ltd. (1998) 233 ITR 282 (SC) approved.

Harish N: Salve, Solicitor-General of India (Sanjiv Sen. B. V. Balaram Das and Ms. Sushma Suri, Advocates with him) for Appellant.

Ms. Asha Gopalan Nair, Advocate for Respondent.

JUDGMENT

S.P. BHARUCHA, J.---These appeals have been referred to a Bench of three learned Judges, in view of the apparent conflict between the two judgments (of Benches of two learned Judges of this Court) in Madhya Pradesh Cooperative Bank Ltd. v. Addl. CIT (1996) 218 ITR 438 (SC) and CIT v. Bangalore District Cooperative Central Bank Ltd. (1998) 233 ITR 282 (SC).

The question in appeal relates to what was section 81 and is now section 80P of the Income Tax Act, 1961, which reads thus:

"80P. (1) Where, in the case of an assessee being a cooperative 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 subsection (2), in computing the total income of the assessee.

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

(a) in the case of a cooperative 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 question in appeal reads (see (2001) 251 ITR at p. 13):

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the interest income arising from the investment made out of reserve fund is exempt under section 88OP(2)(a)(i) of the Income Tax Act?"

In the case of Madhya Pradesh Cooperative Bank Ltd. (1996) 218 ITR 438, this Court noted instructions of the Madhya Pradesh Government which required the investment of the reserve funds of apex banks and observed that, by reason thereof no part of the reserve fund could be utilised .as working capital nor could 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 contended that the securities relating to the reserve fund could never be considered to be the circulating or working capital of the bank, or its stock-in-trade to qualify for exemption under section 81 of the Income-tax Act. The Court noted that a cooperative bank was legally obliged to place certain Government securities with the State Bank or the Reserve Bank of India and these securities could not be withdrawn by the Bank at its will and could only be withdrawn in certain situations, as referred to hereinabove. It was, therefore, difficult, the Court said, to comprehend how such Government securities relating to the reserve fund could be considered the bank's stock-in-trade or circulating capital. It was understood in banking parlance that circulating capital was that which put into circulation or turned over to earn profit. Government securities coming out of the reserve fund, which could not ,Government easily encashed and which could be utilised only when the contingencies mentioned rose, could not be considered circulating capital or stock-in-trade. The Court, therefore came to the conclusion, on first principles, that the interest on the Government securities placed with the State Bank or the Reserve Bank of India would not qualify for, exemption under section 81 (now, section 80P) of the Income-tax Act. Such investment could not be regarded as an essential part of banking activity inasmuch as the same did not form part of stock-in-trade or working or circulating capital.

This judgment was cited before the Bench of two learned Judges which decided the case of Bangalore District Cooperative Central Bank Ltd. (1998) 233 ITR 282 (SC). It was considered as having been rendered on its own facts and not applicable to the case of Bangalore District Cooperative Central Bank Ltd. (1998) 233 ITR 282 (SC) in view, of the finding of the Tribunal that the income in question was attributable to the business of that assessee. The Court referred to the Banking Regulation, Act, the Karnataka Cooperative Societies Act and the Karnataka Cooperative Societies Rules, which showed that the investments that had been made by the assessee were in compliance with the statutory provisions and in order to carry on the business of banking. They were necessary and, consequently, they were part of the business activities of the assessee falling within the scope of section 80P(2)(a)(i).

We do not agree with the finding of the Bench which decided the Bangalore District Cooperative Central Bank Ltd:'s case (1998) 233 ITR 282 (SC) that the decision in the case of Madhya Pradesh Cooperative Bank Ltd. (1996) 218 ITR 438 (SC) was rendered on its own facts. The latter decision was clearly a reasoned decision.

The question is whether we agree with the reasoning in Madhya Pradesh Cooperative Bank Ltd. (4996) 218 ITR 438 (SC). There is no doubt, and it is not disputed, that the assessee-cooperative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived there from would be income from the assessee's business. We are unable to take the view that found favour with the Bench that decided the case of Madhya Pradesh Cooperative Bank Ltd. (1996) 218 ITR 438 (SC) that only income derived from circulating or working capital would fall within section 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital.

In the premises, we take the view that the decision of this Court in the case of Madhya Pradesh Cooperative Bank Ltd. (1996) 218 ITR 438 (SC) does not set down the correct, law and that the law is as we have put it above. The question, accordingly, is answered in the affirmative and hi favour of the assessee.

The civil appeals are dismissed.

No order as to costs.

M. B. A /1074/FC ????????????????????????????????????????????????????????????????????????????? Appeals dismissed.