Vildirect: IncomeTax-caselaws-1997-VIL-100-ITAT-AHM

1997-VIL-100-ITAT-AHM

Equivalent Citation: ITD 066, 386, TTJ 060, 780,

Income Tax Appellate Tribunal AHMEDABAD

Date: 03.12.1997

DEPUTY COMMISSIONER OF INCOME-TAX.

GUJARAT STATE CO-OPERATIVE BANK LTD.

BENCH

Member(s) : B. L. CHHIBBER., GOPAL CHOWDHURY.

JUDGMENT

Per Shri B.L. Chhibber, A.M.-This appeal by the Revenue and the Cross Objection by the assessee arise out of the order of the CIT(A)-XI, Ahmedabad.

2. The assessee is a Co-operative Bank registered under the Co-operative Societies Act, 1961. The business of the assessee bank includes various activities to help other Co-operative Credit Institutions in the State of Gujarat; to render service in the nature of a Banker's Bank and to serve as an Apex Body.

3. The first grievance of the Revenue is that the learned CIT(A) is not justified in holding that the assessee bank is

entitled to deduction under section 80P(2)(a)(i) amounting to Rs. 1,85,60,195 being the interest earned from banks other than Co-operative Banks. During the course of assessment proceedings, the learned A.O. noted that the assessee bank had taken fixed deposits from banks other than co-operative banks and it was further clarified by the assessee that these fixed deposits were kept from the surplus reserves after meeting all the obligations of maintaining SLR plus CRR as per RBI guidelines and on minimum involvement fixed by NABARD. On the basis of the above clarification from the assessee, the A.O. issued a detailed show-cause notice on 11-3-1994 to the assessee bank which is reproduced on page 5 of the assessment order. In this show-cause notice, the A.O., inter alia, pointed out that as per the Madhya Pradesh High Court decision in the case of M.P. State Co-operative Bank Ltd v. Addl. CIT [1979] 119 ITR 327 the co-operative banks would not be entitled to exemption under section 80P(2) of the Act in respect of certain income earned by them, because the entire income of such co-operative banks would not constitute income from banking operations. The A.O. particularly mentioned income derived from the deployment of funds segregated or identified as reserves, being not liable to be qualified as stock-in-trade or circulating capital of the company, in particular, building fund, dividend equalisation fund, investment reserve, depreciation reserve and other training deposits funds as reflected in the balance sheet and asked the assessee to explain why such income should not be treated as income not qualifying for exemption under section 80P(2)(a) of the Act. Not satisfied by the explanation furnished by the assessee that the provisions of the Co-operative Societies Act of the two States, viz,, M.P. and Gujarat were different, the A.O. denied exemption in respect of the interest amount of Rs. 1,85,60,195 claimed by the assessee under section 80P(2)(a)(i) of the Act. Besides relying upon the above M.P. High Court decision, the A.O. also relied upon the following decisions in which according to the A.O. similar view was taken:

1. Madhya Pradesh Rajya Sahakari Bank v. CIT [1988] 174 ITR 150 (MP),

2. A.P. Co-operative Central Land Mortgage Bank Ltd v. CIT [1975] 100 ITR 472 (AP).

4. On appeal the CIT(A) reversed the finding of the A.O. and held that the

assessee was entitled to deduction under section 80P(2)(a)(i) on income earned from investment of reserve funds, etc. He held that the provision of M.P. Co-operative Societies Act, 1960 dealing with creation and investment of Reserve Fund, etc., are materially different and in particular provisions in sec. 44(2) of the said Act are materially different from the provision of Gujarat Co-operative Societies Act dealing with creation of the reserve fund and utilisation and investment thereof. The learned CIT(A) further accepted the assessee's submission that the entire investment against various reserve funds was by way of short term deposit for a period ranging from 46 days to 6 months and 9 months or 12 months and the funds were temporarily surplus and not required for immediate lending or repayment of deposits. The learned CIT(A) further came to the conclusion (vide para 10, pages 33 & 34 of the order) that provision of sec. 80P(2)(a)(i) are materially different from provisions of sec. 81(1)(i)(a) as earlier applicable in view of the proviso to sec. 80P(2)(a) as later added with effect from 1-4-68. The ld. CIT(A) in support of his finding has choosen to rely on the following decisions in preference to the decision of the Hon'ble M.P. High Court :-

1. CIT v. Co-operative Cane Development Union Ltd. [1979] 118 ITR 770 (All.).

2. Bihar State Co-operative Bank Ltd. v. CIT [1960] 39 ITR 114 (SC).

3. Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC).

4. Hon'ble Gujarat High Court decisions in Addl. CIT v. Ahmedabad District Co-operative Bank Ltd. [1975] 101 ITR 733 and CIT v. Gujarat Mineral Development Corpn. [1981] 132 ITR 377.

5. ITO v. Karnataka State Co.-operative Apex Bank Ltd. [1983] 86 ITD 763 (Bang.).

6. Parsik Janata Sahakari Bank Ltd. v. ITO [1994] 50 ITD 318 (Bom.).

5. Shri R.K. Chowdhury, the learned D.R. submitted that the issue squarely stands covered in favour of the revenue and against the assessee by the decision of the M.P. High Court in the case of M.P. State Co-operative Bank Ltd. which has since been affirmed by the Hon'ble Supreme Court in Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT [1996] 218 ITR 438/84 Taxman 640. He further relied upon a recent decision of the Hon'ble Rajasthan High Court in the case of CIT v. Rajasthan State Co-operative Bank [1997] 223 ITR 55 wherein the Hon'ble Rajasthan High Court has followed the decision of the Hon'ble Supreme Court in the case of Madhya Pradesh Co-operative Bank Ltd. . The learned D.R. then drew our attention to Bye Laws 43 to 45,49 and 56 of the assessee bank dealing with preparation of Profit and Loss Account, appropriation of Profits Reserve Fund & other funds and utilisation of funds of the bank in the event of dissolution of the assessee co-operative bank, which have a direct bearing in the matter and are extracted as under:-

"43. After providing for bonus to the staff, the annual net profits of the bank as certified by Auditors, who shall audit the accounts of the Bank, shall be disposed of in the following manner:-

(i) Not less than 25 per cent of the net profits shall be carried to Reserve Fund and 15 per cent of the Agricultural Credit (Stabilisation) Fund.

(ii) Out of the remainder, a dividend may be paid not exceeding 12% per annum on shares held by members proportionately to the period during the year, after providing for education fund as per rules;

(iii) any balance remaining may be allotted to any or all of the following as the Board of Directors may think fit:-

(a) Bad Debts Reserve

(b) Dividend Equalisation Fund.

(a) Building Fund.

(e) -

(f) Investment Depreciation Fund.

(g) Staff Benefit Fund.

(h) Honorarium.

(i) Insurance Fund.

(J) Contingency Fund.

(k) Education Fund.

Unappropriated balance, if any, shall be carried forward for the next year.

44. The funds of the Bank shall be utilised primarily as mentioned in the objects of the Bank in granting loans cash credits and overdrafts to Central Co-operative Banks, Co-operative banking unions and other co-operative societies affiliated to it.

45.(1) The Bank shall prepare annually in such forms as may be prescribed by the Registrar.

(a) Profit and Loss Account,

(b) A Balance Sheet, and

(2) The Annual Accounts of the Bank shall be closed on 30th June every year. The Auditor or auditors as provided in Bye-law No. 13(4) shall audit the accounts of the Bank. After the accounts are audited, the Report shall be submitted to the Registrar.

49. The Reserve Fund shall belong to the Bank as whole. No member can claim a share in it. It may be used in the business of the Bank or may be deposited or invested as provided in section 71 of the Act." [Emphasis supplied]

56. (a) In the event of the dissolution of the Bank, the Reserve and other funds belonging to the Bank shall be applied first to discharging of the liabilities of the Bank and to the repayment of the share capital paid up.

(b) Such portion of these Funds, as may remain in hand after the payment mentioned in sub-clause (a) shall be applied to such objects of public utility as may be selected by the General Body, and approved by the Registrar. If-within three months of the final closing up of the Bank, the General Body fail to make any selection that it is approved by the Registrar, the latter may use the above-mentioned portion of the Fund in supporting co-operative societies or in encouraging the Organisation and development of the co-operative movement. [Emphasis supplied]

65. Fund not to be divided - (1) No part of the funds or assets of a society other than the dividend equalisation fund, if any, and the net profits thereof, shall be paid by way of rebate or dividend or otherwise distributed, to its members:

Provided that in the case of a member, who is also a salaried servant of the society payment on such scale as may be laid down by the bye laws may be made to him for work done as such servant.

(2) No honorarium shall be paid out of the funds and assets of a society, other than the net profits and such honorarium shall not exceed the prescribed limit.

66. Appropriation of Profits - (1) A society earning profit, shall calculate its annual net profits by deducting from the gross profits for the year, all accrued interest which is overdue for more than six months, establishment charges, contributions, if any, towards the provident fund and gratuity fund of its employees, interest payable on loan and deposits, audit fees, working expenses including repairs, rents, taxes and depreciation, and after providing for or writing off bad debts and losses not adjusted against any fund created out of profits, a society may, however, add to the net profits for the year, interest accrued in the preceding year, but actually recovered during the year. The net profits thus arrived at, together with the amount of profits brought forward from the previous year shall be available for appropriation.

(2) A society may appropriate its profits to its reserve fund or any other fund created by it to payment of dividends to members on their shares, to contribution to the educational fund of such federal cooperative society as the State Government may be notification in the Official Gazette specify as 'the Gujarat State Co-operative Union' to the payment of rebate on the basis of support received from members and person who are not members to its business and subject to the prescribed conditions to payment of honorarium, and to any other purpose which may be specified in the rules or bye-laws:

Provided that, no part of the profits shall be appropriated except with the approval of annual general meeting and in conformity with the Act, rules and bye-laws.

67. Reserve Funds: (1) Every society which does, or can, derive a profit from its transactions, shall maintain a reserve fund.

(2) At least one fourth of the net profits of the society each year, shall be carried to the reserve fund; and such reserve fund may be used in the business of the society or may, subject to the provisions of section 71, be invested, as the State Government may be general or special order direct, or may, with the previous sanction of the State Government, be used in part for some public purpose likely to promote the objects of this Act, or for some such purpose of the State, or of local interest.

71. Investment of funds: (1) A society may invest, or deposit its fund-

(a) in a Central Bank, or the State Co-operative Bank,

(b) in the State Bank of India,

(d) in any of the securities specified in section 20 of the Indian Trust Act, 1882 (11 of 1882),

(e) in shares, or security bonds, or debentures, issued by any other society with limited liability, or in any Co-operative bank or in any banking company approved for this purpose by the Registrar, and on such conditions as the Registrar may from time to time impose,

(g) in any other mode permitted by the rules, or by general or special order of the State Government.

(2) Notwithstanding anything contained in sub-section (1), the Registrar may, with the approval of the State Co-operative Council, order a society or a class of societies to invest any funds in a particular manner, or may impose conditions regarding the mode of investment of such funds. [Emphasis supplied]

115. Disposal of Surplus Asset: Any surplus assets, as shown in the final report of the liquidator of a society which has been wound up, shall not be divided, amongst its members but shall be devoted to any object or objects provided in the bye-laws of the society, it they specify that such a surplus shall be utilised for the particular purpose. Where the society has no such bye-Laws, the surplus shall vest in the-Registrar, who shall hold it in trust and shall transfer it to the reserve fund of a new society registered with a similar object, and serving more or less an area which the society to which the surplus belonged was serving:

Provided that, where no such society exists or is registered with three years of the cancellation of the registration of the society whose surplus is vested in the Registrar, the Registrar, may distribute the surplus in the manner he thinks best, among any or all of the following:-

(a) an object of public utility and of local interest as may be recommended by the members in general meeting held under section 114 or where the society has ceased to function and its record is not available or none of its members is forthcoming, as the Registrar thinks proper;

(b) a federal society with similar objects to which the cancelled society was eligible for affiliation or, where no federal society exists, the Gujarat State Federal Society, and

(c) any charitable purpose as defined in section 2 of the Charitable Endowments Act, 1890 (VI of 1980)." [Emphasis supplied].

The learned D.R. further submitted that notifications have been issued from time to time by the Government of Gujarat according to permission to Co-operative Societies for investment of their funds. He drew our attention to one such notification which specifically includes the name of the assessee co-operative bank, i.e., Notification No. GHKH 37/82/CBB-1081-S-2 dated 12-2-1982. Thereafter the learned D.R. drew our attention to the provisions of M.P. State Co-operative Societies Act, 1960 dealing with funds and profits and appropriation of profits, investment of funds, disposal of surplus assets of liquidated societies and power of State Government to exempt Co-operative societies from the provisions of the M.P. Co-operative Societies Act as contained in sections 43, 43A, 44, 72 and 91 are extracted hereunder:-

"Sec. 43. Funds and Profits:-(1) No part of the funds of a society other than the net profits shall be paid by way of bonus or dividend or otherwise distributed among its members:

Provided that a member may be paid remuneration on such scale as may be laid down by the bye-laws for any services rendered by him to the society.

(2) A society shall, out of its net profits in any Year-

(a) transfer, an amount not being less than twenty five per cent of such profits to the reserve funds unless such society has been, by general or special order, partially or wholly exempted in this behalf by the Registrar, and

(b) pay to the Madhya Pradesh Co-operative Union Ltd. and to such other institutions or unions as may be specified by the Registrar In this behalf, such contribution as may be prescribed;

(c) transfer at least twenty per cent to an equity redemption fund by such societies which have Government equity participation.

(3) No society shall pay dividend to its members at the rate exceeding twenty five per cent except with the prior approval of the Registrar.

(4) A society may, with the sanction of the Registrar, after one-fourth of the net profit in any year has been carried to the reserve fund, contribute not exceeding five per cent of the remaining net profits to any purpose connected with the development of co-operative movement or charitable purpose as defined in section 2 of the Charitable Endowment Act, 1890 (No. 6 of 1890).

Sec. 43-A. Appropriation of Profits:-(1) A society earning profit shall calculate the net profit by deducting from the gross profits for the year the following:-

1[(a) all overdue interest accrued on loan accounts.]

(b) management charges;

(a) audit fee;

(e) working expenses, including repairs, rent, taxes;

(f) depreciation;

(g) bonus payable to employees under the Payment of Bonus Act, 1965 (No. 21 of 1965);

(h) provision for payment of income-tax;

(t) provision for payment of subscription to the State/District Co-operative Union as may be notified;

(j) provision for development fund, bad debt fund, price fluctuation fund, dividend equalisation fund, investment fluctuation fund and such other funds as may be specified by the Registrar in this behalf;

(k) provision for retirement benefits to employees and in the case of societies engaged in consumer goods business, provision for purchase rebate to be paid to the members; and

(l) provision for writing off bad debts and losses not adjusted against any fund created out of profits;

(2) A society may, however, add to the net profits of the year, interest accrued in the preceding years but actually recovered during the year, the net profits thus arrived at, together with the amount of the profits brought forward from the previous year, shall be available for appropriation for the purpose of section 43.

Sec. 44. Investment of funds:-(1) Subject to the provisions of sub-sections (2) and (3), a society may invest or deposit its funds-

(a) in Government Savings Bank; or

2[(aa) in a Co-operative Bank; or]

(b) in any of the securities specified in section 20 of the Indian Trusts Act, 1882 (11 of 1882), or

(d) with the approval of the Registrar, with any other society with limited liability or in the purchase of the shares or securities or debentures thereof; or

3[(e) with any bank approved for this purpose by the Registrar and on such terms and conditions, if any, as may be laid down by him in this behalf]; or

4 ** ** **

Provided that the approval of the Registrar shall not be necessary under clause (a) if shares are to be purchased to become a member thereof according to the bye-laws of such society.

(2) The reserve fund of a society shall be invested or utilised only in such manner and on such terms and conditions as may be laid down by Registrar in this behalf.

1[(3) No investment of any of its funds in immovable property, other than funds created for specified purposes, shall be made by a society other than a housing society without the approval of the Registrar].

A society accepting deposits shall maintain, as a cover against such deposits, fluid resources to such extent and in such manner as may be specified by the Registrar from time to time.

Sec. 72. Disposal of surplus assets of liquidated societies.-After all the liabilities including the paid-up share capital of a wound up society have been met, the surplus assets shall not be divided amongst its members but they shall be applied to any object described in the bye laws of the society and when no object is so described, to any object of public utility determined, by the general meeting of the society and approved by the Registrar or they may, in consultation with them either be assigned by the Registrar in whole or in part to any or all of the following:-

(a) an object of public utility or local or civic interest; or

(b) the Madhya Pradesh Co-operative Union Ltd., or any other institution or Union; or

(c) may be placed on deposit with a Central Co-operative Bank until such time as a new society with similar conditions is registered when with the consent of the Registrar such surplus may be credited to the Reserve Fund of such new society; or

(d) a charitable purpose as defined in sec. 2 of the Charitable Endowments Act, 1890 (VI of 1890).

Sec. 91. Power to exempt co-operative societies from provisions of this Act and rules.-Notwithstanding anything contained in this Act or the rules made thereunder, the State Government may, on its own motion or on the application of committee of the society, or of the society to which the society is affiliated, by general or special order, in each case and subject to such conditions, if any, as it may impose, exempt any society or class of societies from any of the provisions of this Act or of the related rules made thereunder."

According to the learned D.R. a mere comparison of the provisions of the two Co-operative Society Acts as extracted above clearly bring out that there is very close similarity between the provisions of the two Co-operative Societies Acts and the object of both the enactments has been the encouragement of the Co-operative Movement and hence the provisions are by and large bound to be similar. He therefore concluded that the CIT(A) erred in brushing aside the ratio laid down by the Hon'ble M.P. High Court in the case of M.P. State Co-operative Bank Ltd. which was directly applicable to the facts of the present case and which ratio has since been affirmed by the Apex Court.

6. Shri K.H. Kaji, the learned counsel for the assessee strongly supported the order of the CIT(A). His main contention was that in view of the specific language of sec. 67 of the Gujarat Co-operative Societies Act, 1961, the reserve funds are as much a part of the working or circulating capital of the assessee and they are permitted to be used for the business of the bank and in fact were so used and in the course of the business of the bank, funds including reserve funds which were surplus were invested by way of short-term deposits as stated above. According to the learned counsel the business of banking is not merely acceptance of deposits and lending the same to borrowers. Section 5(b) of the Banking Regulations Act, 1949 defines banking as follows:-

"Banking means accepting for the purpose of lending or investment all deposits of money from the public...."

The learned counsel submitted that section 6 permits allied and ancillary business to be carried on by a banking company (which includes cooperative Banks) and one of such ancillary businesses mentioned is renting of safe deposit vaults. In this connection he drew our attention to sections 5 & 6 of the Banking Regulation Act, 1949 reproduced at page 88 of the assessee's paper book. The learned counsel submitted before us a comparative chart of the corresponding sections of the Rajasthan Cooperative Societies Act, Madhya Pradesh Co-operative Societies Act and Gujarat Co-operative Societies Act and submitted that from the said chart it will be found that while sec. 63 of the Rajasthan Act and sec. 71 of the Gujarat Act provide various modes of investment for all the funds of the co-operative societies, the M.P. Act in sec. 44(2) contains a restrictive clause as follows:

"Section 44(2): The reserve funds of the society shall be invested or utilised only in such manner and on such terms and conditions as may be laid down by the Registrar in this behalf."

He therefore submitted that in view of the above restrictive clause the ratio laid down by the M.P. High Court in the case of Madhya Pradesh State Co-operative Bank Ltd and later affirmed by the Apex Court does not apply to the facts of the present case and that the learned CIT(A) rightly distinguished the case of the assessee from that of the MP. State Co-operative Bank Ltd.'s case . He therefore submitted that the assessee is entitled to deduction of Rs. 1,85,60,195 under section 80P(2)(a)(i) of the Act. The learned counsel alternatively argued that even if the said interest become taxable, proportionate expenses pertaining to the said investment by way of interest paid by the bank on the deposits of the customers from which the reserve fund arises is required to be allowed as deductible expenses. Similarly, the A.O. has wrongly and without any evidence taken the yield from the investment of reserve funds at 11% as observed by him in para 4(xxiii) of his order at page 18. According to the learned counsel it is known that short term deposits in banks did not yield interest of 11% and therefore, the estimate is exaggerated and not justified.

7. As a rejoinder, Shri R.K. Chowdhury, the learned D.R. submitted that once the funds are earmarked for the specific purposes and are invested in outside securities, they clearly cease-to be working/ circulating capital. Coming to the further contention of the learned counsel adopting higher rate of 11%, the learned D.R. submitted that it must be noted that the learned counsel of the assessee was fair enough to admit that since the assessee did not submit any bifurcation and details the A.O. had no option but to take recourse to estimation and the rate adopted at 11% on the basis of bank fixed deposit rate is very fair and reasonable-being an accepted basis of the determination of the income in the absence of details. According to the learned D.R. in any case the investment in other securities will normally not result yield at lower percentage. In case some part of the investment was made in FDs for meeting certain urgent needs of business the interest earned on such fixed deposits cannot be said to be applicable to the deployment of reserve funds and other earmarked funds and the rate has been clearly adopted looking to the facts, more so when admittedly the assessee failed to come up with details and bifurcation.

8. We have considered the rival submissions and perused the facts on record. It is a well settled proposition that in order to earn exemption under section 80P, a co-operative society must prove that it had engaged itself in carrying on any of the several businesses refer-red to in sub-clause (2) thereof. The business of the assessee society must have a direct or proximate connection with or nexus to the earning in order that the latter may enjoy the exemption Andhra Pradesh Co-operative Central & Mortgage Bank Ltd.'s case . In other words, 100 per cent deduction can be availed only where the income is from the activities specified. Activity which is not so specified shall not enjoy the full exemption. Addl. CIT v. UP. Co-operative Cane Union [1978] 114 ITR 70 (All.); CIT v. UP. Co-operative Cane Union Federation Ltd. [1980] 122 ITR 913 (All.); Vidarbha Cooperative Marketing Society Ltd. v. CIT [1985] 156 ITR 422 (Bom.). This view is later reiterated in the case of CIT v. Co-operative Supply & Commission Shop Ltd. [1993] 204 ITR 713 (Raj.) and CIT v. Co-operative Supply & Commission Shop Ltd. [1996] 220 ITR 352 (Raj.). Further in the matter of granting 100% exemption under section 80P(2)(a) a strict construction of the provision is necessary as has been held by the Hon'ble Gujarat High Court in the case of Surat Vankar Sahakari Sangh Ltd. v. CIT [1971] 79 ITR 722 (Guj.). Various available judgments on the issue i.e. availability of exemption under section 80P(2)(a)(i) have repeatedly emphasised and have upheld the preposition that once the circulating capital or stock-in-trade is invested by a bank in the course of its banking business in readily reliable securities, then income from such investments shall be liable to be treated as income from banking business and thus exempt under section 80P(2)(a)(i), will be available, but if this condition is not fully satisfied and income is earned by deployment of surplus fund on long term or short term basis, separately identified as 'Reserves' out of the appropriation of profits, the same cannot be said to be income earned by deployment of funds which are in the nature of circulating capital or stock-in-trade and hence the same shall not be entitled to exemption under section 80P(2)(a).

To this effect is the ratio of the judgment of Hon'ble M.P. High Court in the case of MP. State Co-operative Bank Ltd. and the judgment of the Andhra Pradesh High Court referred to supra which have since been affirmed by the Hon'ble Apex Court.

9. Coming to the contention of the learned counsel that the provisions of the M.P. Co-operative Societies Act, 1960 and the Gujarat Co-operative Societies Act, 1961 are materially different, we do not find any merit in the same. A mere comparison of the provisions of the two co-operative societies Acts as extracted above in para 5 clearly brings out that there is a very close similarity between the provisions of two Co-operative Societies Acts and the object of both the enactments are the encouragement of co-operative movement. It may be highlighted here that the argument of the learned counsel of the assessee is that there was absolute restriction under the M.P. Co-operative Societies Act on utilisation of funds in the business of the co-operative society, whereas the Gujarat Co-operative Societies Act permitted utilisation of such funds in the business. This argument on the face of it does not carry any force as under the M.P. State Co-operative Societies also the State Govt. under the provisions of sec. 91 was empowered to exempt any co-operative society from any of the provision of the Act and Rules. Further still there is a very close similarity regarding the utilisation of reserve funds not only while the co-operative society continues to carry on business but even after winding up the same, as surplus assets of the co-operative societies under both the enactments is not available for distribution among the members of the co-operative society as far as the provisions as stood at the relevant point of time. So also sub-section (2) of section 71 of the Gujarat Co-operative Societies Act, 1961 as over riding provisions whereby the Registrar of Co-operative Societies may order a society or a class of societies to invest any fund in a particular manner or may impose condition regarding the mode of investment or such funds. In fact as pointed out by the learned D.R. various notifications have been issued by the Registrar of Co-operative Societies of Gujarat for approving the investment of funds in particular manner and one such notification where the name of the assessee bank prominently appears has been referred to in para 5 at page 9 .

10. As stated above the Hon'ble Supreme Court has since affirmed the judgment of the Hon'ble M.P. High Court in the case of M.P. Co-operative Bank Ltd. . In its decision reported at Madhya Pradesh Co-operative Bank Ltd.'s case the Hon'ble Apex Court has clearly and categorically held as under:-

"The object of section 81 of the I.T. Act, 1961 is to encourage Cooperative 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 facilities 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 derives from such business shall not be exempt from tax if it exceeds Rs. 15,000. 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 earned profit there from, 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 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 investment would be outside the tax nat. [Emphasis supplied]

Held, dismissing the appeal that it was clearly understood in banking parlance that circulating capital was that which was put into circulation or turned over to earn profit. Government securities coming out of the reserve fund which could not be easily encashed and which could be utilised only when certain contingencies arose could not be considered to be circulating capital or stock-in-trade. The income derived from the investment in Government securities placed with the State Bank of India or the Reserve Bank of India could not be regarded as an essential part of the assessees banking activity inasmuch as the same did not form part of its stock-in-trade or working circulating capital. Hence, the interest on Govt. Securities placed with the State Bank of India or the Reserve Bank of India could not qualify for exemption under section 81 (now section 80P) of the I.T. Act." [Emphasis supplied]

The above decision of the Hon'ble Supreme Court in our considered opinion clearly takes the issue beyond any argument as in reaching the aforesaid decision the Hon'ble Apex Court has clearly analysed what amounted to the normal banking activity and the nature of funds invested in outside Govt. securities and fixed deposits with other banks against funds specifically earmarked as Reserve Fund. The Hon'ble Supreme Court has clearly and categorically held that such investment coming out of reserve fund which could not be easily encashed and which could be utilised only when certain contingencies arose could not be considered to be the circulating capital or stock-in-trade of the bank and the income derived from such investment could not be regarded as essential part of assessee's banking activity inasmuch as the same did not form part of its stock-in-trade or working/circulating capital. Thus, in our considered opinion, any attempt on the part of the assessee to contend that there are minor differences between the co-operative societies Acts of the two States viz., M.P. and Gujarat cannot be of any avail, as the ratio laid down by the Apex Court is clearly applicable once there were restrictions on utilisation of funds earmarked as Reserve Funds and investments were made in outside securities for the funds earmarked as Reserve Funds. in our view it is futile to contend on behalf of the assessee that the Hon'ble Supreme Court was largely concerned with the provisions of M.P. State Co-operative Societies Act.

11. The Hon'ble Rajasthan High Court in its recent judgment in Rajasthan State Co-operative Bank's case had occasion to examine the same issue after the judgment of Hon'ble Supreme Court in the case of Madhya Pradesh State Co-operative Bank Ltd. wherein the earlier judgment of the Hon'ble Rajasthan High Court in the case of the same assessee as Addl. CIT v. Rajasthan State Co-operative Bank Ltd. [1987] 163 ITR 213/19 Taxman 189 (Raj.) was held to be no longer good law. The Hon'ble Rajasthan High Court clearly and categorically has held as under:-

"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 Co-operative Act and the Rules make 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 co-operative 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 co-operative society. The income from investment of reserve funds was not entitled to special deduction under sec. 80P of the income-tax Act, 1961."

The Hon'ble Rajasthan High Court reached the aforesaid conclusion after examining the provisions of Rajasthan Co-operative Societies Act regarding investment of funds as contended in sec. 63 which is reproduced on page 61 of the report and is extracted hereunder:-

"Sec. 63(1) Except as otherwise provided in sub-section (2), a Co-operative Society shall invest its funds in one or more of the following:-

(a) Central Co-operative Bank;

(b) apex bank;

(d) in any other mode permitted by the rules general or special order of the Government.

(e) A co-operative society may deposit its funds for temporary period in such manner as may be prescribed."

Examination of the provision of sec. 63, in particular clause (d) of sub-sec. (1) clearly brings out the fact that under Rajasthan Co-operative Societies Act there was no absolute restriction on deployment of reserve funds within the business and bank could have been permitted to invest in any other way by general or special order of the Government. It is noted that what has ultimately weighed with the Hon'ble Rajasthan High Court is that the interest earned on securities/investment by the bank is not a banking business as the said investment is neither of circulating capital or stock-in-trade of the Co-operative bank, as it has no absolute or unfettered right to withdraw the same whenever it likes as the same can be withdrawn only in the proceedings of the winding up of the co-operative society.

12. In the fight of above discussion we reverse the finding of the learned CIT(A) and hold that the assessee is not entitled to deduction in respect of the interest earned on deployment of funds out of reserve funds with banks other than co-operative banks under section 80P(2)(a)(i). However we find merit in the alternative contention of the learned counsel that proportionate expenses pertaining to the said investment be-allowed as deduction and only the net interest should be subjected to tax. We direct the assessee to furnish details before the A.O. of the expenses incurred and the A.O. after verifying the same will allow proportionate expenses strictly incidental to the said investment. Similarly the assessee should furnish details about the exact interest earned on such investments as against 11% estimated by the A.O. and the A.O. after giving an opportunity of being heard to the assessee may calculate the interest to be taxed as per the actual rate on which the assessee lent the amounts to the banks. Accordingly the ground raised before us is allowed in part.

13. The next grievance of the revenue is that the learned CIT(A) is not justified in allowing deduction under section 80P(2) amounting to Rs. 1,10,950-being locker rent.

14. The assessee during the year under appeal earned an income of Rs. 1,10,950 by renting out of bank lockers. The A.O., vide discussion in para 6 of the assessment order held that the assessee was not entitled to the exemption under section 80P(2) of the Act in view of the decision of the M.P. High Court in the case of Bhopal Co-operative Central Bank v. CIT [1988] 169 ITR-73/35 Taxman 114.

15. On appeal the CIT(A) deleted the addition following the judgment of the M.P. High Court in the case of CIT v. Bhopal Co-operative Central Bank Ltd. [1988] 172 ITR 423 in preference to the earlier case Bhopal Co-operative Central Bank 169 ITR 573 because according to the CIT(A) in the later case, the M.P. High Court upheld the Tribunal's decision granting exemption under section 80P in respect of locker rent etc.

16. Shri R.K.. Chowdhury, the learned D.R. submitted that the CIT(A) has clearly gone wrong in following the judgment in Bhopal Co-operative Central Bank Ltd.'s case 172 ITR 423 in preference to the judgment at Bhopal Co-operative Central Bank Ltd.'s case 169 ITR 573 where the Hon'ble M.P. High Court has given clear finding at pages 576-577'that income from locker rent in our opinion however does not appear to be corelated to any of the activities which may fall within the definition of banking and consequently the view taken by the Tribunal in its appellate order, insofar as the income from locker rent is concerned, seems to be correct, namely that this income shall not full under clause (a) of sec. 80P(2) of the Act but shall fall under clause (c) thereof."

17. Shri Kaji, the learned counsel for the assessee submitted that though the earlier decision of the M.P. High Court in Bhopal Co-operative Central Bank Ltd.'s case 169 ITR 573 on this issue was against the assessee the CIT(A) relied on the subsequent decision of the same High Court in Bhopal Co-operative Central Bank Ltd.'s case 172 ITR 423 while rejecting the reference application of the department and holding that the issue regarding bank locker was covered by the earlier decision of the M.P. High Court in CIT v. Dhar Central Co-operative Bank [1984] 149 ITR 438/[1985] 20 Taxman 258. However Shri Kaji was fair enough to admit that there is once again a recent decision of the M.P. High Court reported in CIT v. Jila Sahakari Kendriya Bank Maryadit [1997] 225 ITR 421/90 Taxman 426 holding that rent from bank lockers cannot be said to be income from banking business. He submitted that the aforesaid decision of the M.P. High Court is erroneous on two counts:-

1. The High Court has not considered section 6 of Banking Regulation Act, 1949 which refers to various other ancillary activities which can be carried out by banking companies including providing for safe deposit vault. Thus providing of such facility is clearly ancillary and subsidiary to the banking business and, in fact, all safe deposit vaults in the country are being provided by banks only.

2 . The Court has ignored the true implication of the words contained in sec. 80P that the income which is exempt is one which is attributable to the banking business and need not be 'income' derived from banking business. It has been now well settled as laid down by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd.'s case that the expression 'attributable to' is much wider than the expression 'derived from'. The decisions on this point regarding the wider connotation of expression ,attributable to' is to be found in CIT v. Madhurai District Central Co-operative Bank Ltd [1984] 148 ITR 196/17 Taxman 247 (Mad.), Co-operative Cane Development Union Ltd.'s case and Cambay Electric Supply Industrial Co. Ltd.'s case .

The learned counsel therefore submitted that the judgment of the M.P. High Court need not be followed by the Tribunal on the foresaid grounds.

18. We have considered the rival submissions, and perused the facts on record. The Hon'ble M.P. High Court in the earlier decision Bhopal Co-operative Central Bank's case has clearly held that income from locker rent shall not fall under clause (a) of sec. 80P(2) of the Act but shall fall under clause (c) thereof. The Hon'ble M.P. High Court in the later judgment in Bhopal Co-operative Central Bank Ltd.'s case 172 ITR 423 simply rejected Revenue's application under section 256(2) for directing the ITAT to state the case holding that no referable question of law arises and has given no specific finding or judgment on the issue of legallity or otherwise of income from locker rent. The issue in the decision reported at Dhar Central Co-operative Central Bank Ltd.'s case was not related to locker rent. In the recent judgment ie. Jila Sahakari Kendriya Bank Maryadit's case the Hon'ble M.P. High Court following its earlier decision reported at Bhopal Co-operative Central Bank Ltd.'s case 169 ITR 573 has held that the income derived from locker rent could not be co-related to any of the activities which may fall within the definition 'banking' and hence, the same was not entitled to exemption under section 80P(2)(a)(i) of the I.T. Act, 1961. Further the Tribunal, Pune Bench in the decision in the case of Mahalaxmi Co-operative Bank Ltd. v. ITO [1987] 27 TTJ (Pune) 49 has clearly held that the locker hiring activity is only on account of permissible clause of Banking Act and therefore action of the A.O. not considering the income of locker rent for exemption under section 80P was justified. In view of the above legal position, we reverse the finding of the CIT(A) and hold that locker rent amounting to Rs. 1,10,950 is not eligible for deduction under section 80P(2). This ground of the revenue accordingly succeeds.

19. Ground No. 3 raised by the Revenue reads as under:

"The ld. CIT(A) has erred in allowing deduction on account of commission of Rs. 5,27,990".

During the course of assessment proceedings, the A.O. noted that the assessee in the profit and loss account had shown an amount of Rs. 5,29,990 being commission, exchange and brokerage. In the computation of income filed along with the return of income the assessee claimed this amount as exempt under section 80P(2)(i)(a). According to the A.O. the exemption under section 80P was available only on income derived by the assessee on carrying on the business of banking or providing credit facilities to its members and therefore, the exemption provided under section 80P(2) would not be available to the assessee bank on the commission income more so when the assessee had not filed any satisfactory explanation before the A.O. On appeal the CIT(A) held that the assessee was entitled to exemption in view of the judgment of the M.P. High Court in the case of Bhopal Co-operative Central Bank 172 ITR 423.

20. Shri R.K. Chowdhury, the learned D.R. submitted that the A.O. disallowed exemption under section 80P(2)(a)(i) in on commission, exchange etc. for want of details and clarification and the onus as discussed was on the assessee to establish the claim by establishing the nexus with business of banking and in the absence of specific details and nature of such income being brought on records, the learned CIT(A) should not have allowed exemption merely following the judicial decision, unless facts were clearly established. Shri Kaji the learned counsel for the assessee submitted that it is obviously that commission, brokerage as well as actual commission earned by the bank while issuing drafts, discounting cheques, issuing foreign currency etc. is all part of banking business and it is exempt under section 80P(2)(a)(i). In support of his submission he relied upon Madhya Pradesh Rajya Sahakari Bank's case , Dhar Central Co-operative Bank's case , Jila Sahakari Kendriya Bank Maryadit's case , Ahmednagar District Central Co-op. Bank Ltd. [1990] 33 ITD 683 (Pune) and ITO v. Raipur Co-operative Central Bank Ltd. [1986] 26 TTJ (Nag.) 514.

21. We have considered the rival submissions. From the perusal of the assessment order it is noted that the A.O. vide show-cause notice dated 11-3-94 asked the assessee to furnish the details but the assessee failed to furnish the same. We accordingly hold that for want of details and clarifications and by not establishing the nexus viz, business of the banking and in the absence of specific details and nature of such income being brought on record it will be futile to apply the judicial decisions relief upon by the learned counsel of the assessee. Accordingly we deem it fit to set aside this issue and restore the issue to the file of the A.O. The assessee will furnish the necessary details before the A.O. to establish the nexus of this income with the business of banking and the A.O. will readjudicate upon the issue after giving an opportunity of being heard to the assessee. This ground is allowed for statistical purposes.

22. Now we take up the cross objections filed by the Assessee.

22.1 The first objection raised by the assessee reads as under:-

"The ld. CIT(A) erred in not deciding alternative claim of the respondent for allowance of proportionate expenses for earning the interest income, in case the interest income was held taxable by higher appellate authority."

23. In the revenue's appeal we have given the necessary directions to the A.O. to consider the assessee's alternative contention for allowance of proportionate expenses for earning the interest income. The issue has been restored to the file of the A.O. This objection is accordingly allowed for statistical purposes.

24. The second objection raised by the assessee reads as under:-

"The ld. CIT(A) erred in remanding the issue of exemption claimed under section 80P(2)(a) in respect of dividend income, when all facts were before him and there was no dispute before him on the facts, particularly when Allahabad High Court (being the only High Court which had decided this point) had held such dividend income exempt and he ought to have decided the same."

During the course of assessment proceedings the A.O. found that the assessee had shown total dividend receipt from various Institutions at Rs. 53,25,529. The A.O. called upon the assessee to give details of the investments and dividend earned on such investments made with Institutions other than co-operative societies and to show cause why this dividend should not be treated as not qualifying for exemption under section 80P(2)(a) of the Act. The assessee submitted in its written submission dated 8-3-94 the break up of these investments and the dividend receipts. The A.O. noted from these details that the assessee bank had received dividend of Rs. 30,92,138 on SLP deposits and the balance amount of Rs. 22,33,391 was received from Institutions other than co-operative societies and hence this dividend of Rs. 22,33,391 was not eligible for exemption under section 80P(2)(a) of the Act. Since the assessee could not adduce any satisfactory explanation the A.O. disallowed the claim of exemption under section 80P(2)(d) to the extent of Rs. 22,33,391 as worked out by him for the A.Y. under appeal.

25. On appeal the CIT(A) set aside the assessment on this issue as certain facts had been brought before him which were not before the A.O. at the time of completing the assessment and directed the A.O. to examine the facts and the claim of the assessee for exemption of dividend etc. under the provisions of sec. 80P(2)(a)(i) of the Act and decide the issue afresh after giving reasonable opportunity to the assessee to submit its case for exemption.

26. Shri Kaji, the learned counsel for the assessee submitted that the CIT(A) should have decided the main legal issue whether the dividend income falls within the business income of the assessee covered by subclause (a) or only falls in sub-clause (a) and then for ascertaining the actual amounts he could have remanded the matter to the A.O. He submitted that there is a direct decision of the Tribunal Ahmedabad Bench in the case of ITO III-B v. Gujarat State Co-operative Bank Ltd. [IT Appeal No. 1427 (Ahd.)] of 74 relating to the A.Y. 1972-73 and placed at page 100 of the paper book. The learned counsel also relied upon the decision of the Allahabad High Court in CIT v. Sahakari Bhumi Vikas Bank Ltd. [1994] 123 Taxation 386.

27. Shri R.K. Chowdhury, the learned D.R. strongly supported the order of the CIT(A).

28. We have considered the rival submissions. We do not find any infirmity in the finding of the CIT(A) in setting aside the issue and restoring it to the file of the A.O. It is noted that the Tribunal's decision relied upon by the learned counsel was not cited before the A.O. or even before the learned CIT(A). The assessee pressed its claim for deduction under section 80P(2)(d) whereunder exemption is available for dividend and interest income from other co-operative societies and admittedly such income was not earned from other co-operative societies. Hence the A.O. rejected assessee's claim as no other alternative claim was pressed before the A.O. The learned CIT(A), in our opinion, has rightly set aside the issue as the assessee has come up with an altogether new claim.-In any case no substantive grievance is caused by this direction of the CIT(A) to the assessee as the assessee can press its claim of deduction under section 80P(2)(a)(i) before the A.O. which shall be liable to be examined by the A.O. on merits. We accordingly decline to interfere and uphold the finding of the CIT(A).

29. The third objection raised by the assessee reads as under:-

"The ld. CIT(A) further erred in not deciding the alternative claim of the respondent for allowance of proportionate expenses for earning dividend income, in case the dividend income was held taxable by higher appellate authorities".

This objection is consequential to the objection No. 2 raised above. Since we have upheld the decision of the CIT(A) setting aside this issue and restoring it to the file of the A.O. and the whole issue is open for examination before the A.O. This objection has become infructuous. The same is accordingly filed.

0. In the result the appeal of the revenue as well as the cross objection of the assessee are allowed in part.

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