Investment income of Co-Operative Banks eligible for deduction u/s. 80P(2)(a)(i)

IN THE ITAT JAIPUR BENCH ‘B’

ACIT V/s. Bundi Chittorgarh Kshetriya Gramin Bank

IT APPEAL NO. 859 (JP.) OF 2011

[ASSESSMENT YEAR 2004-05]

Date of Pronouncement – 15.03.2012

ORDER

Sanjay Arora, Accountant Member

This is an Appeal by the Revenue, arising out of the Order by the Commissioner of Income-tax (Appeals), Ajmer (‘CIT(A)’ for short) dated 01-07-2011, partly allowing assessee’s appeal contesting its assessment u/s. 143(3) of the Income Tax Act, 1961 (‘Act’ for short) dated 14-08-2006, and the assessment year (A.Y.) under reference is 2004-05.

2. The brief facts of the case are that the assessee is a Regional Rural Bank (‘RRB’ for short), with its principal constituents being the Government of India, Bank of Baroda and Government of Rajasthan, their respective share holding company at 50%, 35% and 15%. It returned its income for the year at nil, setting off the entire income of Rs. 214.91 lacs against brought forward business losses for the assessment year 1994-95. In the assessment proceedings, the Assessing Officer (AO) found inter alia that the assessee had claimed deduction u/s. 80P of the Act on the following incomes:

In his view the said incomes were not eligible for deduction u/s. 80P, and rejected the assessee’s claim there-under in respect on the said incomes. Though he made certain other disallowances as well, the taxable income was, in view of the brought forward losses, assessed at nil. In appeal, the ld. CIT(A) deleted the principal addition to the returned income of Rs. 56.81 lacs on account of provision for bad and doubtful debts u/s. 36(1)(viia) of the Act. As regards deduction u/s. 80P, the ld. CIT(A) was of the view that the assessee deserves to succeed in view of the settled position of law, as clarified in the case of CIT v. Ramanathapuram District Co-op. Central Bank Ltd. [2002] 255 ITR 423/123 Taxman 222 (SC) and CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194/118 Taxman 321 (SC). The claim u/s. 80P was accordingly upheld. Aggrieved, the Revenue is in appeal.

3.1 Before us, the ld. DR relied on the decision in the case of Totgars Co-operative Sale Society Ltd. v. ITO [2010] 322 ITR 283/188 Taxman 282 (SC), claiming that the hon’ble apex court has since clarified that deduction u/s. 80P is available only against the operational income of the assessee. In that case, the assessee was a cooperative society, carrying on the business of providing credit facilities to its members, as also marketing the agricultural produce of its members. The question of deductibility u/s. 80P(2)(a)(i) of the interest income on short term deposits on the investments out of surplus funds with the assessee in computing its taxable income arose. The apex court held that deduction u/s. 80P was available only on the operational income of the assessee-society. The income under reference could not be said to be attributable to the activities of the society, namely; carrying on the business of providing credit facilities to its members or the marketing of agricultural produce of its members. It was not the case that benefit of sec. 80P had been disallowed on interest received from the members. Only the income from activities as specified u/s. 80P(2) would qualify for deduction there-under, and the income under reference could neither be attributed to the activities mentioned in sec. 80P(2)(a)(i) nor sec. 80P(2)(a)(iii). The assessee’s argument/s that the investment was in specified securities, in satisfaction of the obligation cast on it under Regulations 23 to 28 read with sections 57 and 58 of the Karnataka Co-operative Societies Act, 1959, so that the same could only be considered as arising out of its business, or that deduction would be exigible even if the impugned interest income was considered as assessable as income from other sources; the source or the head of income being held as irrelevant for the purpose of deduction u/s. 80P by the different authorities, were found as of no moment. It is only the income from specified activities that was eligible for deduction u/s. 80P(2) and, accordingly, it was only the operational income that would qualify for deduction u/s. 80P(1) of the Act.

3.2 The ld. AR was equally vehement in his arguments. There is no question of considering the investment income under reference in the instant case as not arising out of its principal business by the assessee, a RRB. Sec. 18 of the Regional Rural Banks Act, 1976 (‘RRB Act’ for short) provides that every RRB shall carry on or transact the business of banking, as defined in clause (b) of sec. 5 of the Banking Regulation Act, 1949 (‘BRA Act’ for short), and engage in one or more forms of business as specified in sub-section (1) of section 6 of that Act. Their relevant extracts, viz. Section 18(1) of the RRB Act; sections 5(b) and 6 of the BRA Act, were adverted to (copy on record). Circular No. 319 dated 11-01-1982 by CBDT clarifies that the RRBs were, by virtue of section 22 of the RRB Act, deemed to be a cooperative society and, accordingly, section 80P is applicable to RRBs.

However, on the Bench drawing his attention to the fact of the absence of any gross total income; both the assessee’s returned and assessed income, in view of the adjustment of brought forward losses, being nil, so that there was no positive gross total income, a pre-requisite for allowance of deduction u/c. VI-A of the Act, including sec. 80P, he fairly conceded thereto.

4. We have heard the parties, and perused the material on record.

4.1 Without doubt section 80P is applicable to RRBs, and which position is undisputed in the instant case as well. The only question is the exigibility to deduction there-under of the impugned incomes; the apex court clarifying in Totgars Co-operative Sale Society Ltd. (supra) that it is only the income from specified activities that would be eligible for deduction u/s. 80P.

4.2 Section 5 (b) of the Banking Regulation Act, 1949 reads as under:

Interpretation

‘Section 5: In this Act, unless there is anything repugnant in the subject or context –

(a) …

(b)  ‘banking’ means the accepting, for the purpose of lending or investment, of deposits or money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise;’

Even as argued by the ld. AR, the word ‘investment’ occurring in the definition of ‘banking’ in section 5(b) of the BR Act is of importance. Section 6(1)(a) of the said Act provides that apart from the business of banking, a banking company may engage, inter alia, in acquiring, holding, issuing on commission, under-writing, dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds. Now, if investment of the deposits accepted from the public, or on its own, forms part of the banking business, it does not take much strain to see and thus to hold that selling or realizing those investments is also an integral part thereof. In fact, section 6(1)(a) specifically includes ‘dealing in, inter alia, securities and investments of all kinds’, and which would only imply, acquiring, holding, purchasing or selling or dealing in any other manner. This is even considering, and which may not perhaps be incorrect to say, that investment under reference forms part of the capital or reserve funds of the assessee. Surplus on the sale of investment would yet only be assessee-bank’s operational income which, in sum, is the ratio of the decision in the case of Totgars Co-operative Sale Society Ltd. (supra) It is a matter of common knowledge that investments yield regular income by way of interest, dividend, etc., as also irregular income on account of capital appreciation. The two are para materia as far as the person dealing in investments as part of his business, as the assessee-bank, is concerned. It is in fact a matter of business judgement whether to hold on to an investment or realize it, which could also be for reasons of liquidity or for further business purposes. We are therefore unable to see as to how the decision by the hon’ble apex court in the case of Totgars Co-operative Sale Society Ltd. (supra) would operate to disqualify the assessee’s claim for deduction u/s. 80P of the Act. In Karnataka State Co-op. Apex Bank (supra), it stood clarified by the apex court that there was nothing in the language of section 80P(2)(a)(i) to make it applicable only to income derived from working or circulating capital. Further, in Mehsana District Central Co-operative Bank Ltd. v. ITO [2001] 251 ITR 522  and Ramanathapuram District Co-op. Central Bank Ltd. (supra), it has been amply clarified that the income from the utilization of funds of statutory reserves; hiring of safe deposit vaults; subsidies from the Govt., etc., forming part of the banking business, qualify for deduction u/s. 80P(2)(a)(i) of the Act in the case of Co-operative Banks, to which also the provisions of the Banking Regulation Act are applicable. We, therefore, are of the clear view that impugned investment income is eligible for deduction u/s. 80P(2)(a)(i) of the Act, and hold accordingly, confirming the impugned order in its respect. The other incomes, aggregating to Rs. 26,000/-, under reference are too nominal to warrant any comment and, in any case, are only to be considered as receipts incidental to its banking business by the assessee-bank. We hold accordingly, approving the claim for deduction u/s. 80P thereon.

4.3 So however, as afore-stated, no claim for deduction u/s. 80P would be exigible in the admitted facts of the instant case, much less on the impugned incomes. This is as admittedly the assessee’s gross total income and, therefore, total income, is nil in view of set off of brought forward business losses, which stand both claimed as well as allowed in assessment. As afore-stated, the principal disallowance of Rs. 56.81 lacs stands deleted in appeal, reducing the business income as assessed further, implying that the unabsorbed business losses (i.e., which would stand to be carried forward) would stand to increase by the corresponding amount. The computation of assessed income in the assessment order leaves us in no manner of any doubt that there is no scope for deduction under Chapter VI-A of the Act, even as conceded to by the ld. counsel; the legal position in the matter being well settled, for which we may refer to the decision in the case of CIT v. Kotagiri Industrial Co-op. Tea Factory Ltd. [1997] 224 ITR 604/91 Taxman 214 (SC), with the terms ‘total income’ and ‘gross total income’ being clearly defined per sections 2(45) and 80B(5) of the Act respectively. It is rather surprising that the ld. CIT(A) did not take note of this fundamental aspect of the matter, immanent from the assessment order, while deciding assessee’s appeal. Further, again as apparent, while the assessee returns a nil income by setting off its brought forward losses for 1994-95, implying their being unabsorbed prior to this year, the AO sets off the brought forward losses, which are to be so done in a chronological manner, for AYs 1996-97 and 1997-98, without giving a finding as to the losses for AY 1994-95, as claimed by the assessee. The AO, while giving effect to this order, is therefore directed to verify this aspect of the matter as well. Also, we may clarify that our observations and findings are limited to the legal aspects of the matter, we being obliged to facilitate the determination of the correct taxable income, and do not impinge on any of the relevant figures per se, for correction in which, where incorrect, the parties are at liberty to adopt the course as permissible in law Kapurchand Shrimal v. CIT [1981] 131 ITR 451/7 Taxman 6 (SC).

4.4 In view of forgoing, though in agreement with the ld. CIT(A) that the impugned incomes, aggregating to Rs. 62.26 lacs, are eligible for deduction u/s. 80P of the Act, i.e. , in principle, so that the Revenue fails on its ground raised before us, no deduction u/s. 80P in the admitted absence of any positive gross total income for the current year is exigible to the assessee; a position conceded to by the ld. AR as well. We decide accordingly.

5. In the result, the Revenue’s appeal is allowed.