PRIME CO OP BANK LTD. V. INCOME TAX OFFICER

SCA/1630/2004

AI Insights

The case revolves around the dispute concerning the taxability of interest income received by Prime Co Op Bank Ltd. from its investments. The Income Tax Officer had included this income as taxable, denying the exemption under Section 80P(2)(a)(i) of the Income-Tax Act, 1961, which the bank contested. The bank argued, supported by precedents from the Supreme Court and the Gujarat High Court, that such income should be exempt as it is derived from activities within the scope of banking business. The High Court, referencing decisions from higher courts, ruled in favor of the bank, granting the exemption and setting aside the taxability of the said income.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 695959 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 10-07-2014
• Assessment Year: misc
• Other Referred Cases: Mehsana District Co. Op. Bank Ltd. vs. Income Tax Officer, Commissioner of Income Tax vs. Baroda People's Cooperative Bank Ltd.
• Laws Referred To: Constitution of India, 1950, Income-Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S UDHIR M EHTA
• Assessee Lawyers: MANISH SHAH; J P SHAH
• Keywords: Banking Business; Cooperative Bank; Interest income; Tax Exemption; Voluntary Reserve
• Section: 264; 80P(2)(a)(i); 226

Judgement Text

"C/SCA/1630/2004 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 1630 of 2004 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ PRIME CO OP BANK LTD.....Petitioner(s) Versus INCOME TAX OFFICER & 1....Respondent(s) ================================================================ Appearance: MR MANISH J SHAH, MR JP SHAH, ADVOCATE for the Petitioner(s) No. 1 MR SUDHIR M MEHTA, ADVOCATE for the Respondent(s) No. 1 - 2 ================================================================ CORAM: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE K.J.THAKER Date : 10/07/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) 1. By way of this petition under Article 226 of the Constitution of India, the petitioner has prayed for an appropriate writ, direction or order, quashing and setting aside the order passed by Respondent No.2 (Annexure-D) and to quash that part Page 1 of 8 C/SCA/1630/2004 JUDGMENT of the assessment order of Respondent No.1(Annexure-B), by which it has been held that Rs.6,96,778/- received by it towards interest from investment of voluntary reserve is taxable income and it is also further prayed to direct Respondent No.1 to pass an order holding that the said income is income from banking business, and therefore, liable for exemption under Section 80P of the Income-Tax Act, 1961. 2. At the outset, it is required to be noted that the petitioner, a Cooperative Bank, filed return of income for A.Y. 1998-99 and claimed exemption under Section 80P(2)(a)(i) of the Act on the amount of interest, i.e. Rs.6,96,778/-, received by it through investment in (1) Karnataka Bank, Rs.1,71,301/-, (2) Sardar Sarovar Nigam Ltd. (Bonds)Rs.90,000/-, (3) Gujarat Small Scale Industrial Corporation, Rs.4,35,477/-. The AO held that interest received against the investment of the petitioner’s voluntary reserve will not come within the purview of Section 80P(2)(a)(i) of the Act and accordingly, the amount of Rs.6,96,788/- was held as taxable. 3. Feeling aggrieved and dissatisfied with the order passed by the AO, denying the exemption under Section 80P(2)(a)(i) of the Act and including the aforesaid amount of Rs.6,96,778/- as taxable income of the petitioner-assessee, the petitioner Page 2 of 8 C/SCA/1630/2004 JUDGMENT preferred the revision before the Respondent No.2 under Section 264 of the I.T. Act and by the impugned order, the Revisional Authority dismissed the Revision application, which has given rise to the present Special Civil Application. 4. Shri. Manish J. Shah, learned Advocate appearing on behalf of the petitioner, has submitted that, as such, the controversy / issue involved in the present petition is now not res integra in view of the decision of the Hon’ble Apex Court in the case of “MEHSANA DISTRICT CO. OP. BANK LTD. VS. INCOME TAX OFFICER”, [2001] 251 ITR 522 as well as another decision of the Division Bench of this Court in “COMMISSIONER OF INCOME TAX VS. BARODA PEOPLE’S COOPERATIVE BANK LTD.”, [2006] 280 ITR 282 (Gujarat). It is submitted that in the aforesaid decisions, the Hon’ble Apex Court as well as the Division Bench of this Court, in respect of the similar investment by the Banks, have held that on the interest or the similar investment, the assessee would be entitled to exemption under Section 80P (2)(a)(i) of the Act. Therefore, it is requested to allow the present petition. 5. Shri. Sudhir Mehta, learned Advocate appearing on behalf of the Respondent-Revenue, is not in a position to dispute the above aspect. He is not in a position to show any contrary decision to the decision of the Hon’ble Apex Court in the Page 3 of 8 C/SCA/1630/2004 JUDGMENT case of “MEHSANA DISTRICT CO. OP. BANK LTD.” (Supra) or of this Court in the case of “BARODA PEOPLE’S COOPERATIVE BANK LTD.”(Supra), therefore, he has requested to pass appropriate order. 6. Heard learned Advocates for the respective parties. At the outset, it is required to be noted that the question / issue involved in the present petition is now not res integra and is squarely covered in favour of the assessee in view of the decision of the Hon’ble Apex Court in the case of “MEHSANA DISTRICT CO. OP. BANK LTD.” and the decision of the Division Bench of this Court in “BARODA PEOPLE’S COOPERATIVE BANK LTD.”. In the aforesaid decisions, while considering somewhat similar investment and the interest earned on such investment, the Hon’ble Supreme Court as well as the Division Bench of this Court has held that the assessee shall be entitled to the exemption under Section 80P(2)(a)(i) of the Act. It is, further, held in the aforesaid decisions that, if, the investments are made in the security, which is permissible mode of investment, the assessee shall be entitled to the special deduction. In “BARODA PEOPLE’S COOPERATIVE BANK LTD.” (Supra), the Division Bench of this Court has held as under; “Section 80P(2)(a)(i) permits a Cooperative Society engaged in carrying on the business of banking or providing credit facilities to its members to claim deduction of the whole of the amount of Page 4 of 8 C/SCA/1630/2004 JUDGMENT profits and gains of business attributable to such activity viz., business of banking or providing credit facilities to its members. On a plain reading it becomes apparent that the two activities are distinct and separate activities. The first activity viz.,carrying on the business of banking connotes a larger activity than the activity of providing credit facilities to its members. The latter is restricted qua the members of the society while the former is wide enough to take within its sweep as its potential customers, both the members and non members. The interpretation canvassed by the Revenue that the latter phrase has a restrictive effect on the former expression 'business of banking' ignores the word 'or' which occurs between the two phrases. There is no warrant for reading the word 'or' as 'and'. Once legislature has used the term 'or', the logical consequence that flows from contextual setting is that it provides for an alternative, a different distinct activity. While examining a case wherein a Cooperative Society claims deduction under Section 80P(2)(a)(i) one has to bear in mind the object with which the provision is introduced viz., to encourage and promote growth of the Cooperative Sector in the economic life of the country and in pursuance of the declared policy of the Government. The Apex Court has also stated that if a question arises as to whether any particular category of income of a Co- operative Society is exempt from tax what has to be seen is whether the income falls within any of the several heads because each would be a separate and distinct head and merely because conditions for deduction under one head are not satisfied Page 5 of 8 C/SCA/1630/2004 JUDGMENT that does not necessarily mean that an assessee is not entitled to deduction under another head wherein conditions stand fulfilled. Hence the contention on behalf of the revenue that the first activity namely business of banking has to take colour from the second activity namely providing credit facilities to members does not merit acceptance. Section 80P requires that the profits and gains of business must be attributable to any one or more of the specified activities. On a plain reading of the Gujarat Co- operative Societies Act, 1961, the Scheme which unfolds is that in the case of a Society carrying on business of banking, it would be permissible to make investments or deposits in any of the specified investments as provided in Section 71 of the Gujarat Co-operative Societies Act including in any of the modes specified in Section 20 of the Indian Trusts Act without there being any upper limit as to the amount that can be invested, once the statutory requirement of reserve fund as stipulated in Section 67(2) of the Gujarat Co-operative Societies Act is satisfied. The provisions of the Banking Regulation Act, 1949, indicate that an entity carrying on the business of banking is not absolutely or wholly free; is amenable to supervision /regulation. In other words, its investments are subject to scrutiny; and any impermissible investment will not be permitted to continue, if made, by the regulator i.e. Reserve Bank of India. Bearing in mind that Section 80P(2)(a)(i) of the Act requires a Co-operative Society, and not a Co-operative Bank defined under the Gujarat Co-operative Societies Act, to be engaged in carrying on business of banking it is not possible to restrict the scope of the business to Page 6 of 8 C/SCA/1630/2004 JUDGMENT the definition of 'Banking' under section 5(b) of the Banking Regulation Act. Even otherwise, a banking company including a co-operative society, may accept deposits for the purpose of lending or investment. The definition does not stipulate that investment has to be only to the extent provided either by the Gujarat Co- operative Societies Act or the Banking Regulation Act. Hence when investments are made in securities, which are a permissible mode of investment, either under the Banking Regulation Act or the Gujarat Co-operative Societies Act read with the Indian Trusts Act income arising therefrom would be attributable to the business of banking and the assessee would be eligible for deduction in terms of section 80P(2)(a)(i).” 7. In view of the ratio laid down by the Hon’ble Apex Court as well as by this Court in the aforesaid decisions, present petition is ALLOWED. The impugned order of the assessment, to the extent it disallows the claim made by the petitioner for exemption of Rs.6,96,778/- under Section 80P of the Act, is quashed and set aside and it is held that the petitioner is entitled to the exemption under Section 80P (2)(a)(i) of the Act on the aforesaid amount of Rs.6,96,778/-, which is received by it through investment in (1) Karnataka Bank, Rs.1,71,301/-, (2) Sardar Sarovar Nigam Ltd. (Bonds)Rs.90,000/-, (3) Gujarat Small Scale Industrial Corporation, Rs.4,35,477/-. In view of the above, necessary consequence will follow. Rule is made absolute. (M.R.SHAH, J.) Page 7 of 8 C/SCA/1630/2004 JUDGMENT (K.J.THAKER, J) UMESH Page 8 of 8 "