The
Madhya Pradesh Co-Operative Bank Limited, Jabalpur Vs. Additional Commissioner of Income Tax Madhya Pradesh, Bhopal [1996] INSC 104 (19 January 1996)
Ahmadi
A.M. (Cj) Ahmadi A.M. (Cj) Hansaria B.L. (J) Ahmadi, Cji
CITATION:
1996 SCC (2) 541 JT 1996 (1) 487 1996 SCALE (1)511
ACT:
HEAD NOTE:
WITH CIVIL
APPEAL NO. 1196 (NT) OF 1992 Madhya Pradesh Rajya Sahkari Bank Maryadit, Bhopal V. Commissioner of Income Tax, Jabalpur
WITH
CIVIL APPEAL NOs. 2211-12 OF 1996 (Arising out of SLP (C) 5813 & 14 of
1982) (The Madhya Pradesh Co-operative Bank Limited V. The Additional
Commissioner of Income Tax
Special
leave granted in SLP (C) Nos. 5813-14 of 1982.
The assessee
in all these cases is a Co-operative Society registered under the Madhya
Pradesh Co-operative Society registered under the Madhya Pradesh Co-operative
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 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 assesee'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 read thus at all
material times:
"Income
of co-operative societies - Income Tax shall not be payable by a co- operative
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;
xxx xxx
xxx Provided that, in the case of a co- operative 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 a society carrying
on banking business is not exempt from the 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
ear-marked 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 arises in the backdrop of the following
facts.
The assessee
is an Apex Body controlling all District co-operative banks. It is registered
under the provisions of the co-operative 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 borrowers at a rate of interest higher
than what it pays on deposits. A part of these deposits are, however, invested
in the form of government securities with the State Bank of India or the Reserve Bank. Under Section
44 of the Co-operative Societies Act, the assessee is required to invest or
deposit its funds to maintain a cover to the extent necessary and further
provides that the Reserve 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 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's instructions No.CR 25/26 dated October 7, 1960 which, insofar 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 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
3% 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
exemption under Section 81 of the Income Tax Act.
Insofar
as interest on Provident Fund deposits are 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,
the 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 the co-operative
movement in the country by providing tax exemption to those co-operatives
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 co-operative society. The section, therefore, provides that
income-tax shall not be payable by a co-operative 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 activities for its members. However, if such a
co-operative 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 co-operative 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 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 co-operative bank
Ltd. vs. Commissioner of Income tax (1960) 39 ITR 114 (SC), 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 Commissioner of Income Tax vs. Bombay
State Co-operative bank, Ltd. vs. Commissioner of Income Tax, Kerala (1975) 101
ITR 87 (Kerala) and Commissioner of Income Tax, Orissa vs. Orissa State
Co-operative Housing Corpn. Ltd. (1976) 104 ITR 157 (Orissa). The Privy Council
in Punjab Co-operative Bank Ltd. vs. Commissioner of Income Tax (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 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 encased 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 a 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 co-operative 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 co-operative bank does not
have an absolute and unfettered right to withdraw the same whenever it liked?
We have noticed that the co-operative 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 with 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 Reserve Fund which cannot be easily encased 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 a p art
the funds in the form of 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. The learned
counsel for the revenue was, therefore, right in contending that the case law
cited at the Bar by the learned counsel for the assessee cannot come to the
rescue of the assessee.
We may
make a brief reference to two more cases to which our attention was drawn by
the learned counsel for the revenue. The first case is of Commissioner of
Income Tax, Lucknow vs. U.P. Cooperative Federation
Ltd. (1989) 176 ITR 435 (SC). In that case, the Apex Co-operative Society,
which was expected to regulate the supply of sugar, coal, cloth, etc., to its
members, had received two sums, namely (i) Rs.9,000/- as interest on cash
security deposit with a co- operative sugar factory for carrying on sugar
agency business; and (ii) Rs.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 security deposit and could not be mixed up with
other sums received in the course of business. Even the 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 the 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 Co-operative Apex Marketing
Society, Ltd. vs. 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 paise in a rupee and the remaining 62 paise went to the
primary society. The question was whether the appellant's share in the
commissioner could be brought to tax. The Tribunal as well as the High Court on
reference held that the assessee was not entitled to exemption and this Court
affirmed the finding on the following line of reasoning.
"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 implements, seeds, 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. it is not so understood, even a
co-operative 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 co-operative society, the assessee cannot
claim the benefit of the said exemption." The learned 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 f acts 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
government securities placed with the State Bank of India/Reserve bank of
India, cannot qualify for exemption under Section 81 (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 co-operative 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 of 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 co-operative 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.
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