Vildirect: IncomeTax-caselaws-1986-VIL-72-ITAT-JAI

1986-VIL-72-ITAT-JAI

Equivalent Citation: ITD 019, 674,

Income Tax Appellate Tribunal JAIPUR

Date: 30.06.1986

RAJASTHAN RAJYA SAHKARI UPBHOKTA VIKAS BANK LTD.

INCOME TAX OFFICER.

BENCH

Member(s) : H. S. AHLUWALIA., A. KALYANASUNDHARAM.

JUDGMENT

Per Shri A. Kalyanasundharam, Accountant Member---These are four appeals---two by the assessee and two by the department involving common issues in common years, and, therefore, they are disposed of by a common order.

2. The first common issue in the assessee's appeals is in respect of the powers of the IAC under section 144B of the Income-tax Act, 1961 ('the Act') as to whether they are limited to the various issues objected to by the assessee or would cover the entire assessment as a whole thereby giving powers of enhancement to the IAC while giving of directions under section 144B.

3. On behalf of the assessee Mr. R.C. Ghiya submitted that reading of section 144B(4) reveals that as a consequence of a draft order made by the ITO, the assessee has to raise his objections, which objections will be forwarded to the IAC along with the draft assessment order for his directions. Thereby the IAC's jurisdiction is limited to examination of the draft assessment order vis-a-vis the objections raised by the assessee and he is to give such directions as he deems fit in respect of matters, which are objected to by the assessee. It is only by invoking of provisions of section 144A of the Act that the IAC could suo motu after giving an assessee an opportunity to issue such directions in respect of matters not considered under section 144B. In the present case, the IAC did not invoke section 144A and, therefore, his directions which are given under section 144B is clearly indicative that he has overstepped his jurisdiction and also enhanced the addition proposed to be made by the ITO which is invalid.

4. On this issue, the learned senior departmental representative Mr. Koolwal referred to the order of the Delhi High Court in the case of Sudhir Sarin v. ITO [1981] 128 ITR 445. Referring to this ruling, he submitted that it was held that under section 144B, the IAC has powers to enhance the assessment but he can do so only after giving an opportunity to the assessee. In the present case, the IAC has complied with this, as the assessee was given the opportunity after which only he had given such directions as he thought fit. He, therefore, pleaded that in view of the said ruling of the Delhi High Court, there is no merit in the plea raised by the assessee.

5. We have given considerable thought to the issue raised by the assessee as well as by the department. Section 144B(4) reads as under :

"(4) If any objections are received, the Income-tax Officer shall forward the draft order together with the objections to the Inspecting Assistant Commissioner and the Inspecting Assistant Commissioner shall, after considering the draft order and the objections and after going through (wherever necessary) the records relating to the draft order, issue, in respect of the matters covered by the objections, such directions as he thinks fit for the guidance of the Income-tax Officer to enable him to complete the assessment :

Provided that no directions which are prejudicial to the assessee shall be issued under this sub-section before an opportunity is given to the assessee to be heard."

Reading of the above section, to our mind, indicates that IAC's jurisdiction under this section is limited to the issues covered by the objections. The later part of the section says that the IAC shall consider the draft order, the objections and examination of the records relating to the draft order in respect of such issues covered by the objections and has to give the directions as he thinks fit. The proviso that has been added is indicative of the fact that the IAC shall not issue any direction without confronting the assessee, i.e., he shall give directions only after hearing the assessee. The proviso, to our mind, is not at all indicative of allowing of looking into such matters which have not been objected to by the assessee on the ground that the plea of the assessee has been accepted by the ITO. If these were the intentions of the Legislatures, to our mind, there was no necessity of section 144A in the Act. It is only under that section that the ITO of his own accord can call for the records and after giving the assessee an opportunity give such directions which may not have been considered in the draft assessment order proposed under section 144B. Our view on the subject apart, there seems to be only one High Court ruling on this subject, which is the Delhi High Court in Sudhir Sareen's case, wherein their Lordships have held (this being a Single Bench order) 'if after hearing the objections of an assessee to the proposed assessment order, the IAC wants to enhance the assessment still further. He must give an additional opportunity of being heard to the assessee'. Their Lordships came to this conclusion after reading the provisions of section 144B(4). In the absence of any other contrary decision, this ruling would be the law of land as ruled by the Bombay High Court in the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589. We respectfully follow the said ruling of the Delhi High Court and dismiss this particular ground of the assessee for both the years.

6. In the departmental appeals, the common issue is in respect of the Commissioner (Appeals) view that all income received from investments whether they are from shares, securities, properties or otherwise would be relatable to the banking business and thereby the investment of the reserve funds/building funds, bad and doubtful debt funds, etc., are all in the nature of banking business and, thus, they are exempt under section 80P(2)(a)(i) of the Act.

7. On behalf of the department, the learned senior departmental representative Mr. Koolwal submitted that the IAC had disallowed this issue extensively. He submitted that the IAC had placed reliance on the Madhya Pradesh High Court decision in the case of M.P. State Co-operative Bank Ltd. v. Addl. CIT [1979] 119 ITR 327. According to the senior departmental representative, the assessee, which is a co-operative society carrying on the business of the land development bank has to comply with the tax provisions as are contained in the Co-operative Societies Act, 1912. The Co-operative Societies Act has prescribed the manner of investment of the reserve funds and other funds and all such investments have to be made in accordance with that Act and that too on the basis of direction of the Registrar. In paragraph 3.1, the manner of investments have been considered by the IAC. Section 55(2) of the Co-operative Societies Act provides that the Registrar by general or special order permit investment of the reserve fund or portion thereof in its own business. Section 63(1) of the Co-operative Societies Act provides the manner of investment of funds. In page 23 of his order, he has discussed about the various other funds such as building funds, etc., that the sanction of the Registrar for investment of the building funds having not been obtained, it is in the nature of non-banking business. Similar was the view taken in respect of agricultural credit fund, staff gratuity fund, staff security deposit, as also the security deposit of pump set dealers, etc. The Commissioner (Appeals), however, had upheld that pump set dealers deposit staff gratuity fund, staff security deposit in investment is not related to the banking business. Mr. Koolwal vehemently submitted that when the assessee's society could not have made any investment of its reserve fund without the sanction of the Registrar of the co-operative societies, then all actions which have done in contravention of the provisions of the Co-operative Societies Act, would only lead to a conclusion that the income earned by means of such non-compliance of the Act would not be relatable to the banking business. If they cannot be related to the banking business, then the income thereon cannot be exempt under section 80P(2)(a)(i). Mr. Ghiya, the learned counsel for the assessee submitted that in the MP Co-operative Societies Act, section 44(2) specifically provides that the reserve fund can be utilised only as may be permitted by the Registrar in that behalf. In the Rajasthan State Co-operative Societies Act, there is no such similar provision. He referred to section 55(2) where it was provided that investments would have to be made in the modes prescribed under section 63 of the said Act. In that section also where is no provision which says that the sanction of the Registrar of the societies either prior to or after the assessment is necessary. It was further argued that the society is carrying on the business of banking and has been granted a licence for such business. The identical issue, he submitted, was considered in the case of Union Co-operative Bank which was heard by this Bench a few days back where it was expressed that the Bench has already taken a view on this matter in another assessee's case and held the activities to be relatable to the banking business. He referred to the Board's circular, which is on file for the proposition that the entire income earned by different sources from out of investments are all arising out of the banking business and, therefore, exempt under section 80P(2)(a)(i). Referring to this circular, Mr. Ghiya submitted that the identical objection was taken by the department in the case of UP Co-operative Bank Ltd. The Allahabad High Court in that case following the Supreme Court decision in the case of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 had held that the entire income would be covered by the first proviso which ruling of the Allahabad High Court has been accepted to be the value of the land. He, therefore, again emphasised that breaking the activities into compartment like, deposits, borrowals from customers and advances and lending to customers, as banking business and interest, etc., earned on different securities, representing investment out of reserve and other funds as not relatable to the banking business would be going against the very basic and fundamentals of what is known as banking business and as so specified and recognised by the RBI as well as by the Legislatures as comprising of the banking business.

8. We have given very careful consideration to the arguments of the parties. This issue was considered at length in the case of Rajasthan State Co-operative Bank Ltd. [IT Appeal Nos. 408 and 409 (Jp.) of 1985, dated 3-6-1986] for the assessment years 1978-79 and 1981-82 and in that case it was held that a co-operative society formed under the Rajasthan State Co-operative Societies Act for the purpose of carrying on the business of the banking would be predominantly covered by the provisions that are contained in the Banking Regulations Act, 1949 and the Reserve Bank of India Act, 1934. In that case, what comprises of the banking business has also been examined. It was held that section 6 of the Banking Regulations Act defines the banking business and such banking business also includes the acquiring, holding and dealing in stock bonds, securities and in investments of all kinds. It was observed that banking business would also include as defined in clause (d) of section 6 even guaranteeing under writing, participating, in managing and carrying out any issue public or private or State, etc., of loans, shares, stocks, the debentures, etc. Thereafter, the investment made on the various funds writ examiner. On this issue, it was the considered view that since the manner of investment is governed by the Banking Regulation Act, all other provisions contained in any other law have to be given a good-bye, i.e., to say that provisions contained in any other law including the Co-operative Societies Act would be redundant. This conclusion was arrived at after referring to the Banking Regulation Act, section 42 of the Reserve Bank of India Act, 1934, which subscribed for investments in a particular manner in proportion to the various liabilities. It was further observed that the Banking Regulation Act requires investments in various securities as defined in section 20 of the Indian Trusts Act, 1982 and the various Government securities are treated as approved securities and investment in them is a banking business as defined in section 6 of the Banking Regulation Act. In view of these various facts, we have come to the conclusion that the interest on various securities is relatable to the banking business and, therefore, would be exempt under section 80P(2)(a)(i). Since the situation of a case before us is identical, we follow the earlier decision in the case of Rajasthan State Co-operative Bank Ltd. and upheld the order of the Commissioner (Appeals) on this issue. This disposes of the common issue of the department, which is dismissed.

9. The other common issue in the assessee's appeal for the two years is in respect of income from commission, interest on advances to staff, miscellaneous income on sale of newspapers. The learned counsel Mr. Ghiya submitted that the commission that is received by the assessee is on account of discount of various bills, drafts, etc., which is the business of the bank as such. The learned Commissioner (Appeals) had apparently gone wrong in coming to the conclusion that such commission income is not attributable to the banking business. Referring to the order of the IAC, he submitted that the fact is not disputed by the department. According to them, this is similar to underwriting and the underwriting is only provided in respect of issue of stocks or bonds of the Government, the income from commission on account of discount of bills or cheques is not banking business. Mr. Koolwal relied on the orders of the authorities below. On the issue of commission, it is our considered view that both the IAC as well as the Commissioner (Appeals) have gone wrong in treating the discounting of bills, whereby the customers are provided credit immediately on presentation of bills or cheques for a small commission on non-banking business. If this is not relatable to the credit facilities to the customers what else could not it be. We, therefore, are of the view that the assessee is entitled to exemption in respect of such commission under section 80P(2)(a)(i).

10. In respect of interest on advances to staff and sale of old newspapers, it would be difficult to treat them at par with monies that are lent to the customers. The assessee having been formed with a view to enlarge co-operative movement and that too as a bank, the staff could not be said to be members as such and, therefore, the interest on loans given to staff as well as the sale of newspapers could not be said to be relatable to the banking business. Such income would have to be considered under section 80P(2)(c) only.

11. The last of the issue is in respect of interest income earned on investment of staff gratuity fund, staff security deposit and security deposit of pump set dealers. The argument of the assessee was that this was part of the banking business while it was argued for the department that it is not relatable to the banking business at all. The investment made on account of staff gratuity and staff security is with a view to protect the society bank in respect of its obligations towards its employees as well as the business as such. However, to bring them within the definition of the banking business would be a difficult proposition. It is in everyone's knowledge that no bank can function without its officials. The bank being the employer has to necessarily provide and take precautions as are necessary for the proper carrying out of its business activity. Expenses incurred in connection with all such prevention measures are no doubt allowable as business expenditure. However, the interest earned on the deposits from staff as also on the gratuity to be paid by the employer would not be strictly banking business though it is protection of the bank's liability. The interest earned would be covered only under section 80P(2)(d), which exempts income by way of interest derived from the co-operative society from its investments, the whole of such income. The interest earned on the deposit of the pump set dealers would also stand in the same footing as certain deposit is taken by the bank from various pump set dealers, who had supplied pump sets to the various customers of the bank to whom monies have been advanced for purchase of such pump sets. This, it was explained, was only to protect the banks financing to the various customers and also to ensure that the pump sets function properly. Though there is some distinct connection between the advances provided to the customers in respect of pump sets purchased, the deposit made by the pump set dealers cannot be equated as deposit made by the customers. The interest earned on investment of such deposits have to be categorised. On staff deposit along with the income by way of interest and would be covered only by section 80P(2)(d).

12. In the result, the appeals of the assessee are partly allowed and that of the department dismissed.

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