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By Mehul K. Patel & Manish J.
Shah
Advocates
Deduction U/s. 80P on Income of
Co-operative Banks - Controversy put to rest
There are conflicting views in respect of admissibility of deduction
u/s. 80P(2)(a)(i) of the I.T. Act with regard to the income of
Co-operative Banks. The views taken against the assessees are in the
cases of Madhya Pradesh Co-Operative Bank Ltd. 218 ITR 438 (SC) and in
the case of Gujarat State Co-Operative Bank Ltd., 250 ITR 229 (Guj). But
fortunately, later on a three judge Bench decision of the Supreme Court
in the case of CIT vs Karnataka State Co-Operative Apex Bank 251 ITR 194
(SC) overruled its earlier decision in the case of Madhya Pradesh
Co.Operative Bank Ltd. (Supra), and later another three judge Bench
decision of the Supreme Court in the case of Mehsana District Central
Co.op. Bank Ltd., 251 ITR 522 (SC) reversed the decision of the Gujarat
High Court in the case of Gujarat State Co.op. Bank Ltd. (Supra).
1. Mehsana District Central Co.op. Bank Ltd.
Gujarat State Co.Op.
Bank Ltd. vs ITO 251 ITR 522 (SC)
In this case, broadly
three principles of law have been laid down by the Supreme Court as
below :-
i)
The assessee is entitled to deduction u/s. 80O(2)(a)(i) of the
Income-tax Act, 1961 in respect of interest earned from funds utilised
from statutory reserves - CIT vs Karnataka Co.Op. Apex Bank 251 ITR 194
(SC) followed.
ii) The
provision of safe deposit vault is part of the ordinary banking business
of a bank as shown by Section 6(1)(a) of the Banking Regulation Act,
1949, and therefore, income derived by the assessee from the hiring out
of safe deposit vaults is income from the business of banking and
eligible for deduction u/s. 80P(2)(a)(i).
iii) In so far
as the interest on investments from non statutory reserves is concerned,
the matter is set aside to the Commissioner (Appeals) to be decided a
fresh after giving adequate opportunity to the assessee, in the interest
of justice, to lead evidence on the aspect whether the voluntary
reserves were utilised in the course of its ordinary banking business or
not.
2. 255 ITR 423 (SC) CIT vs Ramanathapuram
District Co.Op. Central
Bank Ltd.
In this case, again a
three judge Bench of the Supreme Court followed and re-confirmed its
earlier two decisions in the cases of Karnataka State Co.Op. Apex Bank
251 ITR 194 (SC) and Mehsana District Central Co.Op. Bank Ltd., 251 ITR
522 (SC), and held that interest on securities, subsidies from
Government, and dividend received by a Co.Op. Bank were business income
of the assessee and entitled to deduction u/s. 80P(2) (a)(i) of the Act.
In this case, when it was sought to be contended on behalf of the
Revenue that in the earlier two judgements rendered by the Apex Court,
the judgement in the case of United Commercial Bank Ltd., 31 ITR 688
(SC) was not considered, the Hon'ble Judges rejected this contention by
observing thus : "We do not think that it is open to the Revenue to
urge, through different counsel, the same thing again and again. We are
satisfied that the answer to the question have been correctly given in
the decisions aforementioned and in the order under appeal."
From the above, it will be
seen that the Supreme Court in the case of Mehsana District Central
Co.Op. Bank Ltd., has clearly held that the income from utilisation of
statutory reserves and locker rent are clearly entitled to deduction
u/s. 80O(2)(a)(i) of the Act. However, the only issue left open and
remanded to the Commissioner (Appeals) is with regard to the question
relating to interest income from investments out of non statutory
reserves. This controversy is also recently settled by an exhaustive and
elaborate order dated 20.11.2002 of the Income Tax Appellate Tribunal,
Special Bench - Ahmedabad, in the case of Surat District Co.Op. Bank
Ltd. and Others.
3. Surat District Co.Op. Bank Ltd. & Others
ITA No. 3675/AHD/97 & Others - Dt. 20-11-2002 ITAT - Special Bench,
Ahmedabad
In this elaborate order
running into 73 pages, the Special Bench has discussed thread-bare the
provisions of Section 80P of the Income Tax Act, 1961, Banking
Regulation Act, 1949, Gujarat Co.Op. Societies Act, 1961 and all the
relevant case law of various High Courts and Supreme Court which is
briefly summarised hereunder :-
Section 80P(2)(a)(i)
grants deduction in respect of whole of the profits and gains attributable
to business of banking or providing credit facilities to the members
of the society and thus the said provisions have obviously been enacted
with a view to encouraging and promoting the growth of Co.Operative
Sector in the economic life of the country and in pursuance of the
declared policy of the Government. This section should therefore be liberally
construed to effectuate the aforesaid legislative object. Since the
expression "banking activity" has not been defined in the
Income-tax Act, the Special Bench has referred to the relevant
provisions contained in the Banking Regulation Act, 1949, which have
been made applicable to Co.Op. Societies under Part-V (Section 56) of
the B.R. Act, 1949. The relevant Sections of the Banking Regulation Act,
1949, discussed are Section-5, Section-6, Section-18, Section-24 of the
Act. Thereafter, the Special Bench has further reproduced and analysed
the relevant provisions of the Gujarat Co.Op. Societies Act, 1961,
namely Section-2(24) defining 'working capital', Section-67 dealing with
'Reserve Fund', Section-71 dealing with 'Investment of Funds'. The
various case laws and in particular the cases cited in the opening
portion of this article, are thoroughly discussed by the Special Bench
and the question regarding the income from investments of voluntary
reserves, left open by the Apex Court in the case of Mehsana District
Central Co.Op. Bank Ltd. (supra), has been dealt with by the Special
Bench from Para. 29 onwards of the order. The Special Bench has also
considered other judgements namely Bihar State Co.Op. Bank Ltd. 39 ITR
114 (SC), Punjab State Co.Op. Bank Ltd. 8 ITR 635 (PC), Tuticorin Alkali
Chemicals and Fertilizers Ltd. 227 ITR 172 (SC) and ultimately laid down
the principle of law that the investments out of surplus and idle funds
available out of working capital including voluntary reserves made by
the Co.Op. Banks in easily realisable Government Securities, fixed
deposits, trustees securities or such other approved modes of
investments in consonance with sound banking practice are
regarded as investments forming integral part of main activities of
banking business and the income from such investments will be eligible
for grant of deduction u/s. 80P(2)(a)(i) of the Act.
The Special Bench has
further held that the locker rent and the excess collection of interest
tax made by a Co.Op. Bank are also entitled to deduction u/s. 80P(2)(a)(i)
of the Act, as the surplus amount of interest tax collected and retained
are integral part of income attributable to banking activities. In the
concluding portion, the Special Bench has also analysed the words "attributable
to" by referring to the decision of Cambay Electricity Supply
Industrial Co. Ltd. 113 ITR 83 (SC) wherein the expressions
"attributable to" and "derived from" have been
distinguished and analysed by the Apex Court.
Conclusion
Thus, a reading of the above Special Bench order makes it clear that
even income arising from investments made from voluntary reserves will
be eligible for deduction u/s. 80P(2)(a)(i) of the Act, provided the
investment is made in any of the approved modes of investment in
consonance with sound banking practice and forming an integral part of
the main activities of banking business. It seems, that the controversy
has finally been put to rest by the above order and will certainly is a
sign of relief and will prove to be a great booster to the development
of Co.Op. Banks, particularly in the State of Gujarat.
We may with respect add that the above interpretation of s.80P is in
line with the object the section wants to achieve and is only going to
give Philip thereto.
January 2003
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