Co-operative Bank entitled to deduction U/s 80P(2)(a)(i) on amount of interest received U/s 244A on Income tax Refund

RELEVANT PARAGRAPH

8.4. We have heard the arguments put forth by both the sides along with the case law relied upon. Having held above that the interest on income-tax refund does not fall under the head `Profits and gains of business or profession’, it remains to be examined as to whether deduction u/s. 80P is restricted only to the income falling under this head.

The relevant part of section 80P(2)(a)(i) has been set out above, according to which “the whole of the amount of profits and gains of business attributable to any one or more of such activities” shall be deducted under sub-section (1) of section 80P. In this appeal we are concerned only with the activity of “carrying on the business of banking or providing credit facilities to its members”, being sub-clause (i) of clause (a). A casual look at this part of the provision indicates that the deduction is available in respect of a co-operative society which is engaged in (i) carrying on the business of banking o r (ii) providing credit facilities to its members. The word “or” has been used between “carrying on the business of banking” and “providing credit facilities to its members”. It is indicative of the intention of the legislature that income from either of these two activities qualifies for deduction u/s. 80P. Whereas the scope of the expression `providing credit facilities to its members’ is restricted and the narrow confined only to providing credit facilities to its members, the ambit of the expression “carrying on the business of banking” is much wider. The later expression includes not only providing credit facilities to its members but also doing other activities which are permissible as per the Banking Regulation Act. Such activities may include income arising from investment of funds in Government securities and also income from providing safe deposit vaults etc. All the activities mentioned in the Banking Regulation Act, which a bank is entitled to carry on, fall within the realm of the expression `carrying on the business of banking’. Coming back to the point in question it is seen that the benefit of deduction u/s.80P is thus eligible not only in respect of profits and gains from providing credit facilities to its members but on a much wider scale in respect of profits and gains from the business of banking.

8.5. It is further worth noticing that what is deductible u/s. 80P is the amount of `profits and gains’ of business attributable to carrying on the business of banking. The employment of the expression `profits and gains of business’ is to be seen in contradiction to the expression `income chargeable under the head `Profits and gains of business or profession'” . The later expression is used in several sections of the Act including 56, 71, 72, 80E, 80HHC(baa), 139, 145, 184, 185 etc. The scope of income under this expression is strictly confined to items, which fall under Chapter IV- D. If there is some income which , albeit, has some nexus with the business but is not covered u/s 28 to 44DB, that shall go out of reckoning for the purposes of that section. On the other hand, the expression “profits and gains of business” is wider in scope and encompasses not only the income chargeable under the head `Profits and gains of business or profession’ but also other incomes which have some relation with the business, though not directly from the carrying on of the business. So when the legislature has chosen to employ the later expression in section 80P, it is amply demonstrated that it did not intend to restrict the amount of deduction to income falling under the head `Profits and gains of business or profession’ but it intended to provide deduction on the profits and gains of business attributable to carrying on of the business of banking. When we refer to section 2(24) defining “income”, it can be seen that the very first clause of this sub-section is “profits and gains”. Clauses (v), (va) (vb), (vc), (vd), (ve) and (xii) are the items of income which specifically fall under the head `Profits and gains of business or profession’ but are separately included in the definition of income. From here it becomes evident that `profits and gains’ cannot be considered as synonymous with the income under the head `profits and gains of business or profession’. If it had been so then there was no need for separately including these items with in the scope of income u/s 2(24). From here it follows that clause (i) of section 2(24) referring to `profits and gains’ as used in section 80P(2) should not receive restrictive meaning as referring only to the income under the head `Profits and gains of business or profession’.

8.6. In the absence of any definition of the expression `profits and gains’ given in the Act, we have to go by its meaning as understood generally. At this juncture it will be relevant to consider the meaning of the two terms, `profits’ and `gains’, which are under consideration. The Law Lexicon by P. Ramanatha Aiyar defines the term `profit’ as under:-

“Profit is the acquisition beyond expenditure; excess of value received for producing, keeping or selling over cost; hence pecuniary gain in any transaction or occupation; emolument.”

The term “gain” has been defined in the same legal dictionary as under:-

“Gain means acquisition. It is not limited to pecuniary gain or commercial profits’.

8.7. From the meaning of these two separate terms, which make one composite phrase `profits and gains’ as used in section 80P, it is noted that the term `profit’ is that which accrues from the thing and which flows out of the trade or occupation, but the term `gain’ is of wider import than the word profit. “Gain” is a general term including pecuniary and non-pecuniary benefits but “profit” is specific. In other words the term `gain’ is genus of which the term `profit’ is its species. Thus it is explicitly clear that `gain’ is wider term and includes items other than `profits’ also. Coming back to the context, we find that the employment of expression `profits and gains’ in section 80P(2) demonstrates the intention of the legislature that the benefit of deduction is not confined to the income arising directly from the banking business (as covered by `profits’), which falls under the head `Profits and gains of business or profession’, but also includes other items of income (as covered by `gains’), which have some relation with the business of banking even though they do not fall under the head of business income. The instances of such income which fall within the territory of `gains’ may be anything which have some relation but do not directly emanate from the carrying on of the business of banking. The Honourable Supreme Court in Cocanada Radhaswami Bank Ltd. (supra) has held that the interest on securities even if separately classifiable under a different head, shall not cease to be a part of the income from business. Our view is fortified by the judgement of the Honourable Rajasthan High Court in the case of CIT Vs. Hycron India Ltd. [(2008) 308 ITR 251 (Raj.)]. In that case the assessee received interest from sister concern on advance against purchase of goods. The question was about eligibility of exemption u/s.10B in which the expression used is `profits and gains’. The Honourable High Court, after discussing the issue at length, came to the conclusion that the expression “profits and gains” as used in section 2(24) is not confined to the income under the head “profits and gains of business or profession”. It was held that the interest so received by the assessee from its sister concern was covered with in the expression `profits and gains’ and hence the exemption was available on it. In the case of Tamil Nadu Co-op. State land Development Bank Limited (supra), a co-operative bank purchased shares from a financial institutions. Dividend from those shares was held to be business income though asses sable under the head “Income from other sources”.

8.8. Now we will deal with the contention raised by the ld DR about the clause (viia) of section 2(24) covering the profits and gains of a business of banking. It is on the strength of this provision that the ld. DR came out with an argument that the clause (i) of section 2(24), being `profits and gains’ should be kept out of view while considering the scope of deduction u/s 80P. We are not inclined to accept this proposition for the reason that clause (viia) has been inserted to section 2(24) by the Finance Act, 2006 with effect from 1.4.2007. If the view point of the learned Departmental Representative is accepted then it would mean that in the absence of such clause in the definition of income, the profits and gains from the business of banking were not intended to be included in the total income in the period anterior to such insertion. Obviously it is not the case for the reason that deduction u/s. 80P is available with effect from 1.4.1968 and prior to that section 81, providing similar benefit, was there on the statute which was deleted by the Finance (No.2) Act, 1967. It, therefore, shows that the benefit of deduction in respect of income of co-operative societies is not a new provision but is coming over decades. The question of granting deduction under a particular section pre- supposes the otherwise inclusion of such income in the gross total income. It, therefore, transpires that the profits and gains of banking business carried on by co-operative society were includible in the total income de hors clause (viia) of section 2(24). In the absence of specific clause (viia) in the pre-insertion era, but from the using of the expression `profits and gains’ in section 80P(2) it is clearly indicated that the profits and gains of business of banking by the co-operative societies were very much includible in the total income even prior to the insertion of clause (viia). Here it is important to note that simultaneous with the insertion of clause (viia) to 2(24) by the Finance Act, 2006 with effect from 1.4.2007, the legislature also inserted sub-section (4) of section 80P to provide that the provisions of section 80P shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. When we view the insertion of clause (viia) to section 2(24) in juxtaposition to sub-section (4) of section 80P with effect from 1.4.2007 it becomes abundantly clear that the scope of the benefit of deduction u/s. 80P has been curtailed and restricted only to primary agricultural credit societies and primary co-operative agricultural and rural development banks. The instantaneous insertion of clause (viia) to section 2(24) is by way of abundant caution to ensure that the profits and gains of any business of banking carried on by the co-operative society with its members are otherwise includible in the total income but the benefit of section 80P is restricted only to the primary agricultural credit societies and primary co-operative agricultural rural development banks.

8.9. Going by the meaning of the two terms “profits” and “gains” as discussed above, we need to find out whether the interest on income-tax refund falls under any of these two words. In order to qualify for inclusion in the word “gains” of a banking business it is of paramount importance that there should be relation of the income with the banking business. We are dealing with a case in which the assessee was carrying on banking business over the years and tax was collected by the Revenue in relation to such banking business. Thus there is a nexus between the payment of income tax, its refund and interest on such refund with the business of banking. If it had been a case of parking of the funds of banking business in some non-banking activity, the resulting income would have relation only with the non-banking business and the nexus of income with the banking business had been lacking. But for the carrying on of the banking business, the assessee would not have paid the income tax which was refunded to it. Since income tax was paid in relation to the banking business, the interest on income-tax refund will be considered as `gain’ (not `profit’) of banking business covered within the expression `profits and gains’ of banking business. We, therefore, hold that interest on refund of income-tax would be covered within the expression “profits and gains of business” notwithstanding the fact that it falls under the head `Income from other sources’.

III. SCOPE OF PHRASE `ATTRIBUTABLE TO’ ELIGIBLE BUSINESS

9.1. The learned Sr. Counsel for the assessee submitted that the learned first appellate authority erred in holding that the interest on income-tax refund was not attributable to the banking business. He stated that the phrase “attributable to” has a wider connotation than the phrase “derived from”. For this submission he relied on the judgement of the Honourable Supreme Court in the case of Cam bay Electric

Supply Industrial Co. Ltd. Vs. CIT [(1978) 113 ITR 84 (SC)]. He submitted that the learned CIT(A) was not correct in interpreting the judgement of the Honourable Supreme Court in the case of India Leather Corporation Pvt. Ltd (supra) as laying down that the interest on income-tax refund was not attributable to the banking business. He contended that the Tribunal in assessee’s own case has taken view in its favour in the immediately succeeding assessment year on the reasoning that the interest on income-tax refund was profits and gains attributable to the banking business. He stated that even if it was held that the interest on income-tax refund did not fall under the head `Profits and gains of business or profession’, still the interest on income-tax refund shall qualify for deduction u/s. 80P on the ground that the phrase `attributable to’ has been used in sub-section (2) of section 80P which has much wider scope than the phrase “derived from”. He stated that any income having relation with the banking business, whether directly or indirectly would call for inclusion in the amount eligible for deduction. He relied on the order passed by Mumbai bench of the Tribunal in Abhyudaya Co-op. Bank Ltd. Vs. ITO in ITA No. 4252/Mum/ 2000 in which the assessee was allowed deduction u/s 80P on the amount of interest on income tax refund by holding that such interest was attributable to the banking business. He also relied on another order of the Chandigarh Bench of the Tribunal in Punjab State Co-operative Bank (supra).

9.2. In the oppugnation, the learned Departmental Representative stated that for an income to be attributable to a particular source it is relevant that the income must spring from such source. He contended that the judgement of the Honourable Supreme Court in the case of India Leather Corporation Pvt. Ltd. (supra) was directly applicable in this case as rightly held by the authorities below and resultantly the interest on income-tax refund could not be called as income attributable to banking business. He relied on the judgement of the Honourable Rajasthan High Court in Sirohi S.B.V.Bank Ltd. (supra) in which it was held that interest on loans extended to employees against provident fund were not part of the banking activity of the bank. He stated that the deduction u/s. 80P(2)(1) (i) was held to be not available on such interest income. He also relied on the judgement of the Honourable Patna High Court in Bihar Rajya Sahkari Bhoomi Vikas Co-operative Bank Ltd. (supra) in which again interest from investments of the employees provident fund was held to be not income earned from banking business. In the light of these two judgements it was contended that the view adopted by the learned CIT(A), be upheld.

9.3. We have held above that interest on income tax refund is gain of banking business. Now we need to decide the larger question as to whether or not such interest income is attributable to business of banking. At the very outset, it is relevant to note that under Chapter VI-A-C, being deductions in respect of certain incomes, contains sections 80HH to 80RRB. In some of the sections, such as 80HH, 80HHA, 80HHB, 80HHE etc, the legislature has employed the phrase `derived from’. At the same time in certain other sections, including section 80P, the phrase `attributable to’ has been used. Ordinarily the phrase “derived from” has a restricted meaning. In order to be covered within the ambit of this phrase there should be a direct nexus between the two ends preceded and succeeded by this phrase. In other words, the income should directly spring from such source and the relation between the source and the income should be that of the first degree and not incidental or remote. However, the other phrase `attributable to’ has a wider range and brings within its fold not only the items of income having direct nexus but also the items of income having some commercial or casual connection with the source. However it is essential that the income and source should not be alien to each other. In the case of CIT Vs. Sterling Foods [(1999) 237 ITR 579 (SC)] it has been held that the sale consideration of import entitlements would not constitute profits and gains `derived from’ the assessee’s industrial undertaking for the purposes of computing deduction u/s.80HH, as the source of import entitlements was the export promotion scheme of the Central Government and not the industrial undertaking. In this case the section before the Honourable Supreme court was 80HH in which the phrase “derived from” has been used. It is in this context that the Honourable Supreme Court held that the profit from sale of import entitlement was not derived from the industrial undertaking. The case of Ashok Leyland Ltd. Vs. CIT [(1997) 224 ITR 122 (SC)] was dealing with section 80E and 80-I which at the material time used the phrase `attributable to …….. priority industry’. In this case the assessee was engaged in the manufacturing of trucks and also spare-parts of those vehicles. It was also importing the spare parts from abroad and selling the same to the persons purchasing trucks from it. The assessee earned some profit on the sale of spare parts besides profits accruing from the sale of trucks. The ITO took the view that the import and sale of spare parts was not attributable to the industry carried on by the assessee and therefore, the income arising there from would not qualify for the benefit of deduction u/s. 80E / 80-I. The Honourable High Court upheld the view of the Assessing Officer. However when the matter travelled to the Honourable Supreme Court, it noted the distinction between the ambit of the phrase `derived from’ and `attributable to’. The Honourable Supreme court held that the profits and gains arising from import and sale of spare parts were attributable to the industry as it was integrally connected with the priority industry set up and run by the assessee. It is, therefore, observed that even though the income from import and sale of spare parts was not derived from priority industry, still the Honourable Supreme Court granted deduction u/s. 80E / 80-I on the ground that the phrase `attributable to’ was used in the language of section.

9.4. It will not be out of place to consider the judgement in Cam bay Electric Supply Industrial Co. Ltd. (supra). The Hon’ble Supreme Court appreciated the distinction between the phrase `attributable to’ and `derived from’ in the following words:-

“As regards the aspect emerging from the expression “attributable to” occurring in the phrase “profits and gains attributable to the business of” the specified industry (here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the legislature has deliberately used the expression “attributable to” and not the expression “derived from”.

It cannot be disputed that the expression “attributable to” is certainly wider in import than the expression “derived from”. Had the expression “derived from” been used, it could have with some force been contended that a balancing charge arising from the sale or old machinery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression “derived from”, as, for instance, in section 80J. In our view, since the expression of wider import, namely, “attributable to”, has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity. “

(Emphasis supplied by us)

9.5. On going through the ratio of the afore-noted judgement of the Honourable Summit Court it is manifest that the expression “attributable to” is of wider amplitude and covers “receipts from sources other than the actual conduct of the business”. Thus it is not necessary that an income must be the result of actual conduct of the business so as to be characterised as attributable to the business. If there is some commercial connection of the income with the business, the same would be held to be `attributable to’ the business.

9.6. Now we will examine the judgement of the Honourable Supreme Court in the case of India Leather Corporation Private Limited (supra) which is the backbone of the Departmental stand to the effect that there must be direct connection between the income and the source so as to be characterised as attributable to that. The facts of that case are that the assessee was carrying on the business of tanning hides and skins by chemical process and selling the resultant leather as well as purchase and sale of leather on commission basis. In the relevant year the total profit of the assessee was Rs. 5.05 lakhs which included a sum of Rs. 3.73 lakhs earned from the sale of chemicals imported on the strength of licenses granted on the basis of export of leather, hides and skins in earlier years. The assessee claimed that it was a company whose main business was manufacture of leather and processing of hides and skins with chemical process and the provisions of section 104 of the Income-tax Act, 1961 did not apply in view of sub- section (4) of section 104. The ITO held that profit of Rs. 3.73 lakhs earned from the sale of imported chemicals could not be said to be attributable to its activity of manufacture or processing of goods and consequently the assessee was not a company falling within the purview of section 104(4) since the income attributable to such activity was less than 51% of its total income. He, therefore, levied additional tax u/s. 104. When the matter finally came up before the Honourable Supreme Court it observed that even though the phrase “attributable to” was used in section 104, but the income must be directly connected with manufacture or processing of goods for the purposes of Explanation to section 104(4). It, therefore, held that the income from sale of chemicals was not attributable to the business of manufacture or processing and the levy of additional tax was justified. On the perusal of the facts of this case it can be easily noticed that the assessee had less than 10% of income from the goods manufactured by it. The remaining 90% was from trading of goods. The question for consideration before the Honourable Supreme court was whether or not the income from sale of chemicals was attributable to the business of manufacture or processing. Thus the source which was under consideration of the Honourable Supreme court was the `manufacture or processing of goods’ and not the `business of export’ as such. In order to avoid the payment of additional tax, it was necessary for the purpose of u/s. 104(4) that the assessee should have at least 51% of its income from `manufacture or processing of goods’. As the income from manufacture or processing in that case was only 10%, it was under those circumstances that the court held as not satisfying the bench mark condition of 51% from the `manufacture or processing of goods’. Undoubtedly the source from which eligible income was to be considered as `attributable to’ was the `manufacturing and processing’ and not the whole business as such. Obviously there was no relation between profit from sale of imported chemicals and the manufacturing and processing of goods in excess of 10% of total income. Neither there was direct nor some casual connection between the profit from sale of imported goods and the manufacture or processing of the goods. In the absence of any relation worth the name between the two, the Honourable Supreme Court held that the income was not attributable to manufacture or processing of goods. While holding so it further held : “it is no doubt true that the word `attributable to’ have a wider meaning than the words `derived from’. But at the same time it cannot be ignored that normally the word “attributable” employs that `for a result to be attributable to anything it must be wholly, or in material part, caused by that thing.… A casual connection is necessary.”

9.7. On the survey of afore-noted judgements rendered by the highest court of the country, it can be seen that the scope of the phrase “attributable to” is wider than “derived from”. Whereas in the case of later, the relation of the income with the source must be direct and that of the first degree, but in the former even some commercial or casual connection suffices the test. As every income of assessee falling under the head `Profits and gains of business or profession’ may not be necessarily `derived from’ the industrial undertaking, similarly it is not necessary that only the items of income falling under the head `Profits and gains of business or profession’ are `attributable to’ the profits and gains of business. We have noted above that the scope of the expression `carrying on banking business’ as used in section 80P(2)(a)(i) is wider than the later expression used in the same sub-clause of `providing credit facilities to its members’ and due to the using of the word “or” between the two, the benefit of section 80P(2)(a)(i) has to be granted in respect of profits and gains attributable to the business of banking as a whole and not merely providing credit facilities to its members. It was while carrying on the business of banking that the assessee claimed deduction u/s. 80P in earlier years which was not allowed by the assessing authority and the demand was created. When finally the order of the assessing authority was finally set aside, the assessee became entitled to the refund of income tax due to the grant of deduction u/s.n 80P from the business of banking. It is not as if the funds of the banking business were used for any other non business purpose or some other non banking activity. Rather the amount of income tax, on which interest was granted, was utilised to satisfy the demand raised in relation to the banking business. It is but for the banking business that the income tax was originally paid and subsequently the amount was refunded along with interest. The direct nexus of interest on income- tax refund is with the payment of income-tax but when we try to trace the relation between income tax and the income on which it was paid, it comes to light that the same was for the business of banking. Thus there exists a commercial and casual connection between the interest on income-tax refund and the banking business. It is still further imperative to note that the amount of income-tax collected by the authorities was for the denial of deduction u/s. 80P and not on any other count not related to any activity other than the banking activity. With the restoration of deduction u/s. 80P, which has commercial connection with the business of banking, the interest on income-tax refund can be rightly said to have casual connection with such banking activity. Before concluding on the above issue, we need to emphasise that in the present case, the assessee did no other activity except the one specified in section 80P(2)(a)(i) of the Act. But for the action of the Revenue in bringing to tax the interest income, the assessee would have not paid income tax, which was refunded later, consequent to the order of the tribunal holding that the interest income is income which is entitled to deduction u/s 80P(2)(a)(i) of the Act. We have also taken note of the fact that the assessee does not have any other taxable income except income from house property. In these circumstances, we are of the view that the purpose of allowing deduction u/s 80P(2)(a)(i) to a co-operative society would be frustrated, if in peculiar circumstances, such as the one prevailing in the present case, the assessee is compelled to pay tax on its income, due to circumstances beyond its control. The above factor has weighed heavily in our mind in the conclusion which we have reached in the present case. In view of the fact that the expression `attributable to’ has been used in section 80P vis-à-vis the `business of the banking’, we have absolutely no doubt in our mind that such interest is attributable to the banking business and there cannot be any question of denial of deduction u/s. 80P on such interest.

9.8. The cases of Sirohi S.B.V.Bank Ltd. (supra) and Bihar Rajya Sahkari Bhoomi Vikas Co-operative Bank Ltd.(supra) relied on by the ld. DR are not germane to the issue involved in the instant appeal. In those two cases loans were advanced to the employees not in the capacity of the banker but in the capacity of employer and such loans were in the form of loans against provident fund deposits. It was in that context that the deduction was denied on the ground that the interest was not received from employees who were not its members and hence not eligible for deduction u/s. 80P(2). In those cases the action of the assessee in providing loans to its employees against provident fund was found to be outside the ambit of the business activity of the assessee eligible for deduction u/s. 80P. On the other hand we are concerned with a case in which the interest has been awarded on the refund of income-tax which was paid in relation to income from banking business otherwise eligible for deduction u/s. 80P(2)(a) (i).

10. We, therefore, answer the question in affirmative and hold that the assessee is entitled to deduction u/s 80P(2)(a)(i) on the amount of interest received u/s 244A on the refund of tax.