ORDER
R. V. Easwar, JM.
All the appeals were heard together and since they involve certain common issues, they are disposed of by a single order.
2. The assessee-appellant is a co-operative apex bank incorporated on ll-10-1911. Its shareholders are co-operative societies, and various district/ primary co-operative societies. The activities of the assessee-bank are governed by the Maharashtra Co-operative Societies Act, 1960, and the Maharashtra Cooperative Societies' Rules, 1961, framed thereunder. The Banking Regulation Act, 1949 also applies to some extent.
3. The major dispute in the appeals is about the applicability of s. 8OP(2)(a)(i) of the Income Tax Act in respect of the interest earned by the bank from certain investments. It arises this way. By s. 6 of the Maharashtra Co-operative Societies Act ('MCS Act,' for short), the bank is required to transfer 25 per cent of its net profits to a fund called the 'reserve fund'. The bank, for the years under appeal, complied with this requirement. The section also permits, subject to certain rules, the bank to utilise the reserve fund in its business or to invest the same in such manner as the State Government may direct. This is subject to the provisions of s. 70 which prescribes certain modes of investment. The bank made huge investments in the securities specified in s. 20 of the Indian Trusts Act, 1882, as per s. 70(b) of the MCS Act and such investments were much more than the required percentage of the profits. Out of the total investments thus made, 25 per cent was earmarked as 'reserve fund investments'. There were other funds for which a portion of the investments was earmarked. The annual accounts of the bank duly exhibited the statutory reserve fund as well as the investments. Information recording the earmarking of the investments was also duly given in them.
4. The bank earned interest on the investments. It also bought and sold some of investments during some of the years under appeal. In the returns, it claimed that the interest earned on the investments was exempt from income-tax under s. 8OP(2)(a)(i) of the Income Tax Act. The claim was negatived on the following main grounds:
In Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT : [1996]218ITR438(SC) it has been held by the Supreme Court that interest earned by a bank on government securities could not be regarded as income from banking activities inasmuch as such investments do not constitute part of the bank's stock-in-trade or working or circulating capital and hence the interest is not entitled to exemption.
No part of the reserved fund can be utilised by the bank as its working capital.
No part of the reserve fund can be withdrawn or utilised by the bank except with the specific permission of the Registrar of Co-operative Societies and that too, only in special circumstances.
In the case of reserve fund investments, no part of the deposits are permitted to be withdrawn unless money is required to (i) meet losses, or (ii) when the society is to be wound-up, and that too only with the permission of the Registrar.
As per RBI's guidelines, the securities placed with SBI/RBI cannot be withdrawn by the bank at its sweet will and can be withdrawn only with the permission of the Registrar and that too only under the circumstances indicated in. (d) above and, therefore, the Government securities earmarked against the reserve fund cannot be regarded as circulating capital and have to be regarded as circulating capital and have to be regarded as fixed assets only.
The reserve fund which is invested in Government securities is at arm's length from the normal banking activities.
Such investment of the fund in Government securities is like funds placed in cold storage which cannot be used in day-to-day banking business.
For these reasons, the assessing officer brought the interest to tax under the head 'other sources' (and not under 'Business') and consequently negatived the claim for exemption under s. 80P(2)(a)(i).
5. The assessee-bank appealed to the Commissioner (Appeals) against the assessments. One of the contentions raised in appeal was against the jurisdiction of the assessing officer to reopen the assessments for the asst. yrs. 1986-87, to 1988-89. This contention was rejected by the Commissioner (Appeals). The assessee also took up various contentions on the merits of the action of the assessing officer in denying the exemption under s. 8OP(2)(a)(i) in respect of the interest. All of them were rejected.
6. The main contention persuasively put forth before us by Mr. Dastur on behalf of the assessee was that the assessee-bank's case stood on a totally different footing from the Supreme Court decision in M. P. Co-op. Bank's case (supra), on which rests the case of the assessing officer. He said that the following features on the basis of which the decision was rendered are not present in the assessee's case.
Firstly, in the Supreme Court decision, the reserve fund was invested outside the business which is not the case before us. Secondly, in the Supreme Court decision, the securities were put in some sort of 'cold storage' in the sense that the M.P. bank could not deal with them as it liked and it required the permission of the Registrar to deal with them as if they were part of its normal business activities whereas in the present case, the Maharashtra bank did not require any such permission from the Registrar and could deal with the securities, and had in fact dealt with them, as part of its normal banking business, whenever the situation demanded. Thirdly, in the Supreme Court decision, the Registrar could authorise the M.P. bank to withdraw the securities only in two contingencies : (1) for meeting losses and (ii) when the bank was to be wound up, whereas in the case before us the Maharashtra Act contained no such provisions and the question whether the bank could withdraw the securities only under such contingencies did not and could not arise. Fourthly, there was a specific circular issued by the M. P. Government in the case before the Supreme Court containing the above instructions whereas in the case before us, admittedly there are no such instructions. In support of the contention, Mr. Duster drew our attention to the relevant provisions of the Madhya Pradesh Act on which the Supreme Court decision turned and those of the Maharashtra Act and pointed out that though the subject-matter of both the places of legislation was the same, there were certain material differences with respect to some provisions, such as reserve fund and its investments and the powers of the Registrar with regard to them and this took the present case out of the purview of the Supreme Court decision. He also took us through the accounts of the bank wherever necessary and the relevant pages of the compilation containing 334 pages.
7. Mr. Dastur relied on several authorities and these were compiled in a separate paper book. We will refer to some of them at the appropriate place.
8. In an equally persuasive argument, Mr. Tralshawala, the learned senior departmental Representative, contended that the assessee-bank was rightly denied exemption from income-tax in respect of interest earned on the Government securities. Besides broadly supporting the orders of the departmental authorities, he put forth his case like this. Both the M.P. Act and the MCS Act were passed in the year 1960 and this is not without significance, which was that the object behind both the laws must have been the same, having regard to the state of the co-operative movement in India at that time. The Supreme Court in the decision cited supra had taken note of the same and held that the object of the relevant provision in the Income Tax Act was to encourage the co-operative movement in the country, but was still unable to hold that the income by way of interest on investment in Government securities kept apart as reserve fund securities cannot enjoy exemption because investment in securities is a part of commercial banking activity and not part of co-operative banking. Therefore, whatever has been decided under the M.P. law holds good for the MCS Act also, both the laws having been brought into force at the same time. The difference between the M.P. Act and the Maharashtra Act were merely cosmetic, but the laws were substantially the same and, therefore, both should receive the same construction. The MCS Act and the rules framed thereunder contained provisions similar to the circular issued by the Registrar in the Supreme Court case. It cannot be postulated that an enactment passed by one State should receive an interpretation totally different from an enactment on same subject passed by another State in India, especially when the provisions have been subjected to scrutiny by the Supreme Court. In such matters, there should be uniformity of construction, having regard to the position that co-operative movement cannot be equated to commercial banking.
9. In his bid to show that both the M.P. Act and the Maharashtra Act were the same, Mr. Tralshawala drew our attention to the relevant provisions of both the enactments. He also relied on several authorities in support of his case.
10. The basic question is whether the Supreme Court judgment applies to the facts of the case before us. In our opinion it does not. Before we examine this aspect further, a few facts have to be noticed. In the course of the assessment proceedings, the assessee was asked to explain why the exemption in respect of the interest from the Government securities could not be denied. By various letters, copies of which have been furnished in the assessee's compilation, certain facts have been brought to the notice of the assessing officer. These facts may be summarised as below:
(1) The statutory reserve fund has been entirely utilised by the bank for the purpose of its business.
(2) The entire funds of the bank are invested in securities prescribed by s. 20 of the Indian Trusts Act, 1882, as permitted by s. 70(b) of the MCS Act.
(3) No restrictions have been placed upon the bank in respect of the use of its statutory reserve fund for the purposes of its business by the bye-laws of the bank or the MCS Act or the rules framed thereunder or by the State Government.
(4) The assessee is required to comply with s. 17 of the Banking Regulation Act, 1949, according to which 20 per cent of the bank's annual profits have to be taken to a statutory reserve. Under s. 24 of the said Act, the assessee-bank is required to maintain certain percentage of its assets in liquid and unencumbered approved securities as 'statutory liquidity ratio' (known as SLR). The assessee bank has been utilising the statutory reserve fund and the investments for maintaining the SLR and the statutory declaration in this behalf, as required by the BR Act and the rules framed thereunder has been made by the assessee periodically to the Reserve Bank of India. A copy of the fortnightly return filed by the assessee with the RBI has been furnished to the assessing officer under cover of letter dt. 10th Dec., 1996, which is placed at p. 54 of the paper-book. In this letter the attention of the assessing officer has been drawn to the fact that from the fortnightly return to the RBI it would be clear that the entire funds owned by the assessee, namely, share capital and reserve fund have been considered as the bank's total lend able resources for carrying on the banking business. In this letter is was further affirmed by the assessee that 'we have not utilised or invested our funds for any non-banking purposes and the entire fund including the statutory reserve is being utilised by us for the purpose of our banking business only.'
(5) By letter dt. 12th Dec., 1996, the position was further affirmed, namely, that the statutory fund was in fact a part of the capital of the bank used by it wholly and exclusively for the purpose of its banking business.
(6) In a note appended to the assessee's letter dt. 23-12-1996 (p. 62 of the paper-book) the assessee sought to distinguish the judgment of the Supreme Court in the case of the M.P. Co-operative Bank (supra). In this note it was pointed out to the assessing officer that under the MCS Act the reserve fund can be used in the business of the assessee and had in fact been so used by the assessee, as would be evident from the balance sheet as well as from the fact that the assessee is utilising its statutory reserve fund for the purpose of maintaining the SLR as provided by s. 24 of the BR Act.
(7) In the said note, the assessee declared and affirmed the fact that there is no restriction in Maharashtra under any law or notification on withdrawing the investments of the statutory reserves at short notice, that there is no express prohibition against using the reserve fund as part of the working capital and that there is no restriction whatsoever on the utilisation of the reserve fund. It was further affirmed that in the assessee's case that 'all investments representing statutory reserves are treated and utilised as stock-in-trade with full liberty to withdraw the investments whenever required by exigencies of business. '
(8) In its letter dt. 16th Jan., 1997, to the assessing officer (p. 74 of the paper-book), after seeking to distinguish the judgment of the Supreme Court on which reliance has been placed by the assessing officer, it has been categorically affirmed by the assessee as follows:
'Up to this date, no restrictions are placed on our clients by the Maharashtra State Government, Registrar under the Maharashtra State co-operative Societies Act or any other statutory authorities under the said Act for the use of their statutory reserve fund for the purpose of their business. Therefore the principle and analogy laid down by the Honourable Supreme Court in their decision in MP. Co-operative Bank Ltd. v. Addl. CIT (1996) 134 CTR (SC) 92 : (1992) 218 ITR 438 (SQ cannot be applied in the case of our clients. Moreover the conditions and restrictions mentioned in items 1 to 7 of your above letter have not been laid down by any statutory authority in the case of our clients, and therefore, the directions given by you without consideration of these facts and the provisions of Madhya Pradesh State Co-operative Societies.'
The above facts have been taken by us from the various letters addressed on behalf of the assessee to the assessing officer, copies of which are available in the paperbook, The assessee-bank had made a reference to the Dy. CIT under s. 144A of the Act seeking instructions on the issue and it is in response to the application that instructions were issued by the Dy. CIT to the assessing officer, rejecting the assessee's claims and contentions and directing the assessing officer to treat the interest on the Government securities as income from non-banking activities to be assessed under the head 'other sources', not entitled to the exemption under s. 80P. We find that neither in these instructions nor in any of the assessment orders have the facts pointed out by the assessee with respect to the reserve fund, the investments, the total absence of any instructions or prohibitions with regard to the investment of the reserve funds, etc. been disputed or denied. The directions of the Dy. CIT under s. 144A of the Act relate to the assessment year 1995-96 and these have been placed at pp. 70 to 73 of the paper-book. We have gone through the instructions and we do not find the factual position, canvassed by the assessee, having been disputed. Similarly we have gone through the assessment order for the assessment year 1992-93 which has been followed in the other assessment orders for the purpose of denying the assessee's claim for exemption. In the assessment order for the assessment year 1992-93, apart from reproducing the substance of the directions given by the Dy. CIT under s. 144A of the Act, the factual position pointed out on behalf of the assessee does not appear to have been disputed at all. In para 7 of this order, the assessing officer has adverted to the fact that the assessee had been given number of opportunities from August 1996, to, produce the relevant facts and that till date the facts have not been placed and that the assessee has been trying to misguide the department by saying that the decision of the Supreme Court is distinguishable both in law and on facts. We are not sure as to what is meant when it is said that the assessee has been trying to misguide the department but we are sure that had the assessing officer gone through the various letters written by the assessee both before him and before the Dy. CIT, he would have noticed that even on the factual aspect of the case, namely, the utilisation of the reserve fund, etc., the assessee had thrown much light and thereafter it was for the assessing officer to repudiate the same.
11. Be that as it may, we may now proceed to examine the applicability of the Supreme Court judgment in the case of Madhya Pradesh Co-operative Bank (supra) to the assessee's case. In that case the bank was an apex body controlling all district co-operative banks. Under s. 44 of the Madhya Pradesh Co-operative Societies Act, 1960, the assessee was required to invest or deposit its funds to maintain a cover to the extent necessary. Under the Madhya Pradesh Government Instructions No. CR 25/26 dt. 7-10-1960, no part of the reserve fund of apex banks can be utilised as working capital nor can any part of the reserve fund deposits be withdrawn except with the permission of the Registrar to meet losses or at the time of winding up and not otherwise. While framing the assessments for the assessment years in question, the Income Tax Officer included in the taxable income of the assessee, inter alia, interest earned on entitled to the benefit of s. 81 of the Income Tax Act, 1961. The Income Tax Officer rejected this claim. The Tribunal and, on a reference, the High Court, held against the assessee. The bank appealed to the Supreme Court. The Supreme Court noticed that there was a circular issued by the Madhya Pradesh Government in instruction No. CR 25126, dt. 7th Oct., 1960, which insofar as it concerned apex banks, read as under :
'(C) Apex Bank:
The reserve fund of the apex bank shall be fully invested outside its business in the Government securities. No part of its reserve fund should be utilised as its working capital.
3. All investments of reserve fund shall be specially marked as 'Reserve fund investment' and shall be shown separately in the annual balance sheets. The reserve fund deposits at every level shall carry the maximum rate of interest which a Central Bank or apex bank pays on fixed deposits for longest period or three per cent, whichever is higher. No part of the reserve fund deposits shall be drawn without the previous sanction of the Registrar, in the case of apex bank, Central Banks and large-sized societies and in the case of other primary societies without the permission of the Dy. Registrars. Such approval can be given when the amount is either required to meet losses, or, when the society is to be wound up. These eventualities will, however, be very rate.'
After noticing the circular, the Supreme Court noticed certain special features. The relevant discussion is contained at p. 445 of the report in : [1996]218ITR438(SC) (supra). After posing to itself the question as to whether investment of the reserve fund in securities can be stated to be investment of circulating capital or stock-in-trade, more to when it is noticed that the co-operative bank does not have an absolute and unfettered right to withdraw the same whenever it liked, the Supreme Court held that it is difficult to answer the question in the affirmative and hold that the Government securities can be considered as the bank's stock-in-trade or circulating capital because the co-operative bank was legally obliged to place the securities with the SBI/RBI, that these securities could not be withdrawn by the bank at their sweet will and that they can be withdrawn only in two contingencies, namely, to meet losses or when the society is to be wound up. The Supreme Court noticed that the investment of the reserve fund in such securities was not (in the case before them) to meet the probable eventuality to pay off the depositors should they demand the same. It was for these reasons and because of the presence of such conditions imposed by the circular that the Supreme Court held that the steatites relating to the reserve fund cannot be considered as the bank's stock-in-trade or circulating capital. The Supreme Court went on to further observe that securities coming out of the reserve fund which cannot be easily encashed and which can be utilised only when certain contingencies mentioned in the circular arose, cannot be considered as circulating capital or stock-in-trade because such securities are more or less in the nature of a fixed asset of the society-bank, being out of circulation for an indefinite period. Such securities were held to be at arm's length from the normal banking business, to be utilised on the happening of certain events which may virtually bring a cessation of the business. It was, therefore, held that the Government securities which were put in cold storage for an indefinite period of time, cannot be considered as the assessee's stock-in-trade.
12. A reading of the aforesaid observations appearing in p. 445 of the report (in 218 ITR), clearly and unmistakably convey the impression that the decision turned only on the existence of the conditions prescribed in the circular issued by the Madhya Pradesh Government. The corollary is that if such conditions are not present in a given case, the conclusion does not follow that the securities cannot be considered as the bank's stock-in-trade or circulating capital, with the result that the interest earned therefrom must be held to be part of the income from the normal banking activities of the co-operative bank. That is our understanding of the effect of the observations made by the Supreme Court.
13. In the present case, firstly there are no such instructions issued by the Maharashtra Government, to which our attention has been drawn, containing conditions that are identical with the circular issued by the Government of Madhya Pradesh. Our attention has not also been drawn to any instructions issued by the Registrar of co-operative societies in the State of Maharashtra which prohibit or cur-tail the right of the assessee-bank to invest its surplus funds in the securities prescribed by s. 20 of the Indian Trusts Act, in accordance with s. 70(b) of the MCS Act. The assessee-bank has been investing much more than the statutory reserve fund in securities prescribed by the Indian Trusts Act. For example, according to the annual accounts for the year ended 31st March, 1996, though the statutory reserve fund stood at Rs. 4,54,79,43,000, in the 'capital and liabilities' side of the balance sheet, the total investments in Central and State Government securities stood at Rs. 7,77,62,19,276 and the other trustee securities stood at Rs. 2,49,49,85,860, under the head 'investments' in the 'property and assets' side of the balance sheet. All these investments are under s. 70(b) of the MCS Act. There are also investments in the shares of co-operative institutions to the extent of Rs. 19,88,250 and other investments in the form of fixed deposit with other institutions to the tune of Rs. 77 crores. We are not concerned with these two items in the present appeals. In note No. (1) below the head 'investments', it has been stated that out of the total investment, securities of the book value of Rs. 45,585 lakhs, face value of Rs. 45,520 lakhs are earmarked against statutory reserve fund. This substantiates the statement of the assessee that the investment in securities under s. 70(b) of the MCS Act is much more than the investment of the statutory reserve fund. It was stated on behalf of the assessee that in the present appeal we are concerned with the if interest earned by the assessee from the entire investments under s. 70(b). The details regarding the securities earmarked for the reserve fund, relevant for the year ended 31st March, 1996, as an example, have been given at pp. 146 to 148 of the paperbook. In the course of his arguments, Mr. Dastur had drawn our attention to these details to submit that it will be clear from them that the investments earmarked for reserve fund are not 'sterilized' or put in 'cold storage', as happened in the case before the Supreme Court and that the details would show that these securities have been dealt with.in the normal course of the assessee's banking business. Particular attention was drawn to such securities as were sold during the year ended 31-3-1996, and also to those securities which were purchased during the year. For example, item No. 7 at p. 146 shows '12.75 per cent Government of India stock 1996' of the book value of Rs. 1,88,70,000 as having been sold after 30-6-1995. Item No. 9 in the same page shows further purchase of '12.50 per cent GOI stock 2004' to the extent of about Rs. 13 crores after 30-9-1995. The purpose was to show that these securities were freely brought and sold by the assessee without the necessity of taking permission from either the Registrar or from the State Government. It was also stated by Mr. Dastur that the profit or loss arising out of the sale of such securities was shown by the assessee under the head 'business'. Thus, factually it appears that there was no restriction of any kind on the assessee's right to invest the surplus funds in securities prescribed by s. 20 of the Indian Trusts Act or in its right to deal with such securities as it thought fit, depending on the exigencies of the normal business. It may be recalled that in the letter dt. 16-1-1997, addressed to the Dy. CIT, after the issue of instructions under s. 144A, the assessee had affirmed that there were no restrictions on its right to use the statutory reserve fund for the purpose of the business and the relevant portion of the assessee's letter has already been extracted by us earlier. In the earlier letter dt. 23-12-1996, also the assessee had drawn the attention of the Dy. CIT that it is utilising its statutory reserve fund for the purpose of maintaining SLR as per the Banking Regulation Act and had also filed a copy of the statutory declaration furnished by it to the RBI in this behalf. Even in this letter the assessee had claimed that all the investments representing statutory reserves were utilised as stock-in-trade with full liberty to withdraw them whenever required by the exigencies of the business.
Mr. Dastur had also referred to p. 83 of the paper-book, which is a letter written by the assessee on 24-1-1997, in response to a query raised by the assessing officer on 22-1-1997. In this letter the purpose of holding the investments has been explained by the assessee under two heads .. money market conditions and purchase of new securities. There is reference to the SLR and its relationship with the extent of the investment, the relationship of call money rates with the investments and under the head 'purchase of new securities', it is explained that when old securities mature for liquidity purposes, new securities giving higher rate of interest are purchased. The details of the interest rates are also given in this letter. This letter has been signed by the Chief Officer, Funds Management. These facts, to which repeated attention of the IT authorities had been drawn on behalf of the assessee, have not been contradicted with any evidence by the assessing officer or by the Dy. CIT in proceedings under s. 144A. The position thus obtaining in the assessee's case is that there are no instructions either of the State Government or of the Registrar of co-operative societies placing restrictions upon the assessee with regard to the investment of the reserve fund on the lines of the circular issued by the Madhya Pradesh Government in the case before the Supreme Court. If that is the factual position, it is difficult to apply the principle laid down in that decision and hold that the interest earned by the assessee on these investments is not to be considered as income from business and that the said income does not enjoy the exemption under s. 80P(2)(a)(i) of the IT Art.
14. Mr. Tralshawala had submitted on behalf of the department that both the M.P. Act and the Maharashtra Act are similar. Of course they are similar in many respects but that does not advance the case of the Revenue because despite the similarities between the various provisions of these two Acts, what has got to be focussed is whether there is anything similar to the circular issued by the MP Government in the present case. Similarities of a general nature are only to be expected because as rightly pointed out by Mr. Tralshawala, both the enactments are in relation to the co-operative. banking sector. However, as we stated earlier, the effort must be to see whether either the State Government or the Registrar had exercised control and prescribed conditions over the reserve fund and other investments of the assessee-bank so as to bring its case on par with the case before the Supreme Court. Mr. Dastur pertinently (and quite interestingly) drew the analogy of the two leading batsmen in the world today. Sachin Tendulkar and Brian Lara and pointed out that though there may be very many similarities between the two in the sense that they play all the shots in the game, are immensely talented, may be using the same brand and type of cricketing gear and the like, yet essentially their style of play is quite different from one another, the most striking difference being that the former is a right-hander and the latter is a left-hander. We get the point which Mr. Dastur wants to make. Mr. Tralshawala had submitted that s. 66 of the MCS Act which deals with reserve fund and the utilisation thereof in the business or the investment thereof in accordance with the directions of the State Government subject to s. 70, must be contrasted with s. 70 which provides for the investment of the funds outside the banking business and inasmuch as the assessee had invested funds in the securities specified by s. 70(b), namely, as per s. 20 of the Indian Trust Act, it -must be held that the funds have been invested outside the banking business and, therefore, the decision of the Supreme Court is applicable. He had also pointed out that r. 54(2) of the MCS Rules provides for control by the Registrar of the reserve fund investments and this provision is at par with s. 44(2) of the M.P. Act, under which the M.P. State Government issued the circular considered by the Supreme Court. It was, therefore, contended that it is not correct to say that there is nothing in the present case similar to the circular issued by the M.P. Government. Sec. 66(2) provides that every society should carry at least 1/4th of the net profits each year to the reserve fund and the reserve fund may be used in the business of the society itself or may be invested in such securities as the State Government may direct, subject to s. 70. Sec. 70 prescribes the securities in which the bank may invest its funds, Clauses (a) to (d) specify the securities in which the funds can be invested. Clause (e) permits the society to invest in any other mode permitted by the rules or by general or special order of the State Government. Rule 54(1) has been framed under s. 70(e). The rule says that the society shall, in addition to the modes specified in cls. (a) to (d) of s. 70, invest or deposit the reserve fund in any one or more of certain other investments which are listed therein. It will thus be noted that r. 54(1) comes into play only where the reserve fund is invested in any securities other than the securities mentioned in cls. (a) to (d) of s. 70. If the bank has invested in such securities as are prescribed in cls. (b) of s. 70, r. 54(1) stands excluded. In the present case the assessee having invested in trust securities in accordance with s. 70(b), it is not subject to r. 54(1). Rule 54(2) is an under :
'No society whose reserve fund has been separately invested or deposited shall draw upon, pledge or otherwise employ such fund except with the sanction of the Registrar previously obtained in writing.'
This rule, it is submitted on behalf of the Revenue, is similar to s. 44(2) of the M.P. Act under which the circular was issued by the M.P. State Government and, therefore, the Supreme Court decision applies to the assessee-bank also. Sec. 44 of the M.P. Act is as under
'Sec. 44 :
(1) Subject to the provisions of sub-ss. (2) and (3), a society may invest or deposit its funds :
(a) in Government Savings Bank or in a co-operative Bank; or
(b) in any of the securities specified in s. 20 of the Indian Trusts Act, 1882 (11 of 1882); or
(c) with the federal society of which it is a member or in the purchase of the share thereof, 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
(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 ..
Provided that the approval of the Registrar shall not be necessary under cl. (d) if shares are to be purchased to become a member thereof according to the bylaws of such society.
(2) The reserve fund of a society shall be invested or utilised only in suet, manner and on such terms and conditions as may be laid down by Registrar in this behalf.
(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.
(4) 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.'
It will be noticed that s. 44(1) is substantially similar to s. 70 of the MCS Act. However, there is a fundamental difference. Sec. 44(1) of the M.P. Act has been expressly made subject to the provisions of sub-section (2), which gives the power to the Registrar to prescribe the manner and the terms and conditions according to which the reserve fund of the society may be invested. It should be noticed that whereas under the M.P. Act the Registrar has such power even with respect to the investment in the securities specified by the Trusts Act, s. 70(b) of the MCS Act does not provide for any such power. Even otherwise r. 54(2) of the MCS Rules does not expressly confer power to the Registrar to lay down the manner of the investment of the reserve fund or the utilisation thereof or to prescribe terms and conditions in this behalf, as in s. 44(2) of the M.P. Act. All that r. 54(2) of the MCS Rules says is that the previous sanction of the Registrar in writing is necessary for drawing upon, pledging or otherwise employing the reserve fund which has been separately invested or deposited. The rule cannot be read as if it conferred powers upon the Registrar even to control the manner of investment f the reserve fund or the utilisation thereof and to lay down terms and conditions as in the case of the M.P. Act. As already noticed, the assessee has been realising the investments in dispute and it is nobody's case that such realisation has been done in violation of r. 54(2). Sec. 146(j) makes it an offence if a committee of a society or an officer or member thereof wilfully neglects or refuses to do any act, or to furnish any information required for the purposes of this Act by the Registrar. Sec. 146(k) also makes it an offence if a committee or an officer or member of the society wilfully make a false return or furnishes false information. No proceedings to this effect taken by the Registrar has been brought to our notice in the present case. Mr. Tralshawala then relied on the judgment of the Rajasthan High Court in C1T v. Rajasthan State Coopera Live Bank . He drew our attention to p. 64 of the report wherein r. 55 of the Rajasthan Co-operative Bank Rules, 1966, has been extracted. Rule 55(3) says that no co-operative society whose reserve fund has been separately invested or deposited shall draw upon, pledge or otherwise employ such fund, except with the sanction of the Registrar previously obtained in writing. This rule is similar to r. 54(2) of the Maharashtra Rules. After adverting to these rules the Rajasthan High Court held that these provisions can be. compared with the M.P. Government instruction dt. 7-10-1960, on the basis of which the Supreme Court held in : [1996]218ITR438(SC) (supra) that investment of reserve funds and securities is not to meet the probable eventuality to pay for the depositors and, therefore, cannot be considered as circulating capital. Taking inspiration from this judgment, Mr. Tralshawala submitted that the Rajasthan High Court's decision applies to the present case because r. 55(3) of the Rajasthan Rules is identical to r. 54(2) of the Maharasthra Rules. The difficulty in accepting this contention is that as per r. 55(4) of the Rajasthan Rules, which is extracted at p. 65 of the report the reserve fund of a society shall be available, with the sanction of the Registrar, for being utilised for any of the following purposes, subject to the condition that the amount drawn shall be reimbursed as directed by the Registrar, unless such condition is dispensed with:
(1) to meet unforeseen losses incurred by the assessee;
(2) to meet such claims of the creditors of the society as cannot otherwise be met; and
(3) to provide for other financial needs in times of special scarcity.
In our humble understanding, it is because of the above rule which is similar to the circular issued by the M.P. Government, that the Supreme Court decision was held applicable to the Rajasthan case. We have already seen that there is no such explicit rule in the Maharashtra Rules nor is there any express provision in the MCS Act to the above effect and prescribing conditions similar to the ones contained in the M.P. Government circular. Therefore, in our opinion, the judgment of the Rajasthan High Court does not apply to the present case. If anything, there is an observation at p. 67 of the report which supports the assessee's case vis-a-vis r. 54(2) of the Maharashtra Rules. The Rajasthan High Court has observed that simply because the permission was not taken from * the Registrar for investment in a particular mode, the income derived will not change its character. Therefore, even, assuming that no permission from the Registrar was taken by the assessee before us for realising the securities, the interest earned will not change its character as part of the banking business of the assessee.
15. Various other provisions, similar to each other were referred to by the learned departmental Representative in the Maharashtra Act and Rules as well as the M.P. Act and Rules. He also referred to certain provisions of the Multi (sic) State Co-operative Societies Act, 1985. We consider it unnecessary to refer to them or discuss them in detail because as already stated, the assessee's case would fall within the ratio of the Supreme Court decision only if there is a statutory provision or a circular or instructions issued by the Maharashtra Government or the Registrar containing the terms and conditions similar to those contained in the instruction dt. 7th Oct., 1960 issued by the M.P. Government. Since our attention has not been drawn to any such statutory provision or instructions. We are unable to consider the assessee's case as falling within the ratio of the Supreme Court judgment.
16. Our attention has also been invited by Mr. Tralshawala to certain authorities wherein it has been held that certain items of income received by banks such locker rent, etc. are not attributable to the banking activities. We are not referring to these authorities in detail because the issue before us is not the same. For the same reason we are not also discussing the following authorities cited on behalf of the department :
(1) C1T v. Kerala State Co-operative Marketing Federation : [1994]207ITR319(Ker)
(2) CIT v. U.P. Co-operative Cane Union Federation : [1996]217ITR231(All) and
(3) CIT v. Quilon Central Coir Marketing Co-operative Society (1998) 229 1TR 348.
17. Mr. Tralshawala had referred to pp. 137 to 144 of the paper-book filed by the assessee which contain the details of securities earmarked for reserve fund for various years and submitted that some of the securities would mature only in the year 2015, 2006, 2007, etc. which showed that funds to that extent have been taken out of the normal banking business and put in cold storage, thereby attracting the principle laid down by the Supreme Court. The learned counsel for the assessee however clarified that these are the years in which the security would mature for repayment and it does not necessarily mean that the assessee is compelled to hold on to such securities till the period of maturity. It was also pointed out that these securities are normally dealt with the market just as any other security and merely because they mature after a long period, it does not mean that they are, put in cold storage, so long as the assessee is free to realise the same at any time before maturity. Our attention was also drawn to the details filed in pp. 147-148 of the paper-book which showed that the securities maturing in the year 2001, 2002, 2008, 2009, 2011, etc. have been sold during the year ended 31st March, 1996. Having regard to this clarification given on behalf of the assessee, we hold that the argument of Mr. Tralshawala does not further the case of the Revenue.
18. We may now refer briefly to a few points made by Mi. Dastur. He submitted that the judgment of the Kerala High Court in CIT v. Kerala State Co-operative Marketing Federation (supra) cited by Mr. Tralshawala has been reversed by the Supreme Court in Kerala State Co-operative Marketing Federation Ltd. v. CIT (1998) 147 CTR (SQ 29 : 98 Taxman 313 (SC). He drew our attention to r. 36 of the MCS Rules and submitted that this is the only provision for cold storage of the securities under the Maharashtra enactment and that the assessee has no such security in its possession. This rule lays down conditions under which the Maharashtra State Co-operative Bank Ltd. (the assessee herein), can borrow money. It is provided herein that the borrowing shall be, limited to 15 times of the assessee's paid-up capital and reserves, excluding accumulated losses, bad debts and overdue interest. The sanction of the Registrar is necessary to exceed this limit. The proviso to the rule says that the bank may incur liabilities in excess of the above limit by receiving deposits or borrowing loans subject to the condition that the amount received as deposits or borrowed as loans in excess of the limit shall not be utilised in the assessee's business, but shall be invested in Government securities and such securities shall be deposited with the RBI and the assessee shall not borrow against such securities. This provision insists on the assessee physically placing the securities with the RBI so that the assessee is disabled from utilising them in the normal course in its banking business and such securities may be utilised only when the deposits or loans come up for repayment, when the assessee is unable to repay them out of its working capital. The provisions has been envisaged as a sort of protection to the depositors and the persons who have advanced loans to the assessee-bank.
19. Mr. Dastur also submitted that as a matter of construction r. 54(2) of the MCS Rules applies only to investments made under r. 54(1) and does not apply to investments made under s. 70(b) of the MCS Act. Considering the context and the setting in which sub-r. (2) has been placed, we are inclined to agree with Mr. Dastur's contention, though in the earlier part of our order we have assumed that r. 54(2) applies to all types of investments including the investment under s. 70(b) and held that there is no evidence to show that there has been any violation of the sub-rule when the assessee realised the securities. Mr. Dastur also referred to the definition of 'working capital' contained in s. 2(31) of the MCS Act and submitted that as per the definition 'working capital' means funds at the disposal of a society inclusive of paid-up share capital, funds built out of profits and money raised by borrowing and by other means and according to the definition the reserve fund was also statutorily regarded as part of the working capital of the assessee-bank. In our opinion, the definition certainly supports the contention. The reserve fund has been built out of appropriations from the profit and, therefore, falls within the definition. The investments over and above the reserve fund and other funds specifically earmarked represent funds at the disposal of the assessee-bank and to that extent they form part of the working capital. They have remained in the assesee's business, having been invested out of the surplus funds and having also been offered for maintaining the SLR as per s. 24 of the Banking Regulation Act. These investments have not been cold storage or sterilized. They have remained in circulation, as can be seen from the fact that they have not been separately deposited with the RBI/SBI and as indicated by the fact that they have been bought and sold freely without any restriction.
20. Mr. Tralshawala sought to rely on a circular issued by the RBI to show that there were restrictions on the use of the reserve fund. The circular has not been referred to by the departmental authorities and, therefore, the assessee has had no opportunity of meeting the same. Even on merits, there is nothing in the circular which would advance the Revenue's case.
21. For the reasons given above, we are of the view that the assessee's case does not fall within the ratio laid down by the Supreme Court in Madhya Pradesh State Co-operative Bank Ltd. vs. Addl. CIT (supra). The interest earned by the assessee on the investments falls to be assessed as the assessee's business income and not as income under the head 'other sources'. The interest income would thus be income from carrying on the business of banking within the meaning of s. 80P(2)(a)(i) and the entire interest is exempt from income-tax. We hold accordingly.
22. The next issue is with regard to the reopening of the assessment for some of the years under appeal. These are the asst. yrs. 1986-87 to 1988-89. It is contended on behalf of the assessee that the notices for these years are barred by limitation. As per the provisions of s. 149(1)(b) as they stood prior to 1-4-1989, which is the clause that is applicable to cases under s. 147(b) on the footing that the Supreme Court decision in the case of M.P. Co-op. Bank (supra) constitutes 'information', the notices ought to have been issued within a period of 4 years from the end of the relevant assessment year. Applying this provision, the following position emerges :
Asst. yr.
Last date for issue of notice
S. 148 notice
1986-87
31-3-91
31-1-97
1987-88
31-3-92
31-1-97
1988-89
31-3-93
31-1-97
Thus, for the above years the reassessments are invalid because notices under s. 148 have not been issued within time.
23. The last issue relates to the levy of interest under s. 234B. It has been pointed out that in the original assessments the interest on investments had been assessed under the head 'business' and exemption under s. 80P(2)(a)(i) had also been granted. In fact, the assessing officer, for all the years, had issued certificates to the assessee under s, 197 of the Income Tax Act on the strength of which the persons paying the interest to the assessee did not deduct income-tax at source. The computation of the income had been rightly made as per s. 209(d) of the Act, taking into account the tax that would be 'deductible', though not deducted because of the certificates under s. 197. The interest liability arises only because of the change of opinion on the part of the assessing officer that the interest on investments is taxable and not exempt. Under the circumstances, it is contended that the levy of interest under s. 234B is illegal. The levy is supported on behalf of the Revenue.
24. On a careful consideration of the issue, we are of the view that there is force in the contention taken on behalf of the assessee. We, therefore, cancel the levy of interest. That apart, even as a consequence of our decision to exempt the interest from tax under s. 80PQ)(a)(i), the assessee would be entitled to relief.
25. Before parting with the appeals, we wish to refer to a plea taken up by Mr. Dastur with respect to the taxability of the interest from investments. He raised an 'alternative plea to the effect that if at all, only the proportionate interest referable to the investment of the statutory percentage of profits to be carried to the reserve fund can be denied the exemption. He pointed out that the Commissioner (Appeals) had accepted the alternative plea and has directed the assessing officer to work out such interest from the details to be filed by the assessee. Mr. Dastur filed a working-sheet before us to show how much such interest income would work out to and submitted that if the main plea that the entire interest is exempt is not acceptable, the assessing officer may be directed to examine the working sheet and arrive at the proportionate interest that is taxable. In other words, the alternative plea was that only to the extent of 25 per cent of the net profits which his to be compulsorily carried to a reserve fund under s. 66(2) of the MCS Act, it can be considered that the investments representing such statutory reserve are locked up without the assessee-bank having any right over the same to deal with as it pleased. Only to this proportionate interest, the ratio of the Supreme Court judgment in the case of M.P. Co-op. Bank (supra) could be, if at all, considered applicable. Mr., Dastur also submitted that the expenditure incurred to earn the interest income must be allowed as deduction, on the basis of. CIT v. Maharashtra Sugars : [1971]82ITR452(SC) , against the interest income sought to be taxed. Reference was also made to the judgment of the Bombay High Court in CIT v. Silk & Art Silk Mills Association Ltd. : [1990]182ITR38(Bom) and the Gujarat High Court in Add]. C1T v. Laxmi Agents (P) Ltd. (1989) 80 CTR (Bom) 163 : (1980) 125 ITR 227. Since we have accepted the main contention that the entire interest earned from the investments is exempt from tax under s. 80P(2)(a)(i), the question of examining the alternative plea does not arise at this stage. However, it would be advisable for the assessing officer to examine the alternative plea in the light of the details and working sheet to be filed by the assessee before him and have such interest quantified, so that any controversy in that behalf which may arise at a future date is avoided as also any delay in future, when the issue is required to be examined, is avoided.
26. In the result, the appeals are allowed.