1. This is an appeal by assessee against the order of CIT(A). The assessee has taken the following grounds : "Under the facts and circumstances of the case the learned CIT(A) Rajasthan-II, Jaipur, has erred in confirming the action of the AO for rejection of appellant's claim of deduction under s.
80P(2)(a)(i) of Rs. 18,36,212 with reference to the dividend received on shares of Jaipur Metals & Electricals Ltd. held as banking assets." 2. The assessee is a co-operative society named as M/s. JME Employees Co-operative Credit & Thrift Society Ltd., Jaipur. During the year under consideration the assessee filed return declaring income for 21 months. The assessee claimed exemption under s. 80P(2)(a)(i) of the IT Act in respect of dividend income received by the appellant on shares of JMEL held as banking activity. The AO disallowed the exemption by holding that the dividend income earned on shares is not qualified under s. 80P(2)(a)(i) as this exemption is only allowed to those assessees who does the business of banking. The assessee preferred first appeal before CIT(A). Detailed submission were submitted and reliance was also placed on various decisions of various High Courts and decisions of various benches of the Tribunal. The CIT(A) distinguished the present case with the facts of other cases. He found that in all cases on which the reliance is placed were found that the income of those assessees were attributable to the banking business. In all these cases income was earned as interest on Government securities whereas in the present case the income was earned as dividend on shares. He further observed that it is quite possible that sometime there may not be any income because of fluctuation in rate of shares and, therefore, there may be loss on account of shares. Therefore, he found that the facts are distinguishable and the claim of the assessee was dismissed on this account.
4. The lengthy arguments were putforth by both the parties. The learned Departmental Representative has filed written arguments also as well as strongly supported the orders of the authorities below. The learned counsel for the assessee submitted the submissions as were submitted before the CIT(A). Reliance was also placed on the cases which were cited before the CIT(A) and also reliance was placed on Maharashtra State Co-op. Land Development Bank Ltd. vs. ITO (1992) 41 ITD 491 (Bom). Mr. Sanjay Jhanwar also submitted that the share activities of the assessee are part of business of banking. Therefore, the claim of the assessee is allowable. He further stated that if it is found that shares activities are independent then there is no case of the assessee. Therefore, it has to be seen whether activities done by assessee are business activity related to banking activities or the share dealings are independent.
5. We have considered the rival submissions carefully. We have also perused the material placed on record. We have also seen the various case laws on which the reliance was placed by both the parties. The assessee has placed reliance on CIT vs. Co-op. Cane Development Union Ltd. (1979) 118 ITR 770 (All), CIT vs. Orissa State Co-op. Housing Corpn. Ltd. (1976) 104 ITR 157 (Ori), CIT vs. Dhar Central Co-op. Bank (1984) 149 ITR 438 (MP), 196 ITR 196 (sic), Malabar Co-op. Central Bank Ltd. vs. CIT (1975) 101 ITR 87 (Ker), ITO vs. Karnataka State Co-op.
Apex Bank Ltd. (1983) 6 ITD 763 (Bang) and ITO vs. Gujarat State Co-op.
Land Development Bank Ltd. (1984) 8 ITD 354 (Ahd) and (1992) 41 ITD 491 (Bom) (supra).
6. The learned Departmental Representative reliance on 218 ITR 338 (SC) (sic), CIT vs. Co-op. Supply & Commission Shop Ltd. (1993) 204 ITR 713 (Raj), Kottayam Co-op. Land Mortgage Bank Ltd. vs. CIT (1988) 172 ITR 443 (Ker), CIT vs. Rajasthan Rajya Sahkari Upbhokta Sangh Ltd. (1995) 215 ITR 448 (Raj) and Dy. CIT vs. Gujarat State Co-op. Bank Ltd. (1998) 60 TTJ (Ahd) 780 : (1998) 66 ITD 386 (Ahd).
7. Before proceeding further, we would like to see the relevant provisions of law of s. 80P(1) and (2)(a)(i) of the IT Act, which says as under : '80P(1). - Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-s. (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-s. (2), in computing the total income of the assessee.
(2) The sums referred to in sub-s. (1) shall be the following, namely : (i) carrying on the business of banking or providing credit facilities to its members or ......".
Provisions of law seems to be very clear which says the income earned by banking activity will be deducted while computing the total income of a co-operative society. In the present case the assessee is doing banking activity as well as the surplus funds are invested in purchasing shares of JMEL. The shares were purchased by the assessee as per objects of the society. Sub-cl. (e) of cl. 4 of the bye-laws of the society says "to raise funds or to take deposits from its members/employees of Jaipur Metals & Electricals Ltd. (JMEL) for acquisition/purchase of shares of Jaipur Metals & Electricals Ltd., its subsidiaries and associates on their behalf and to retain the acquired shares as trustees and deal in such shares, etc. on behalf of the beneficiaries on reasonable price, and to invest generally the sums received from JMEL on behalf of its employees in shares, securities etc. of any nature, in granting loan to its members for domestic, religious and social needs on reasonable terms." 8. We further noted that these shares were purchased after taking permission from the Government of Rajasthan. We also noted that the assessee during the year received interest of Rs. 4,40,161 against interest payment on borrowed funds of Rs. 8,10,776. Thus there was excess payment of interest of Rs. 4,16,007 on borrowed funds during the assessment year under consideration. Total dividend income earned during the assessment year by the assessee was at Rs. 18,36, 212 and after reducing the excess payment of interest of Rs. 4,16,007 the balance was claimed exempt under s. 80P(2)(a)(i). This income was after claiming other expenses of Rs. 2,15,372. These were some brief facts of the case here before us.
9. Now we have to see whether dividend income received by assessee on shares of JMEL are attributable to baking income or not. If the conclusion arrived at that the income from dividend was attributable to banking income then this will qualify for exemption under s.
80P(2)(a)(i) otherwise not. In case of CIT vs. Co-operative Cane Development Union Ltd. (supra), the Hon'ble Allahabad High Court has held that "the expression "attributable to" is much wider than the expression "derived from" and it covers receipts from sources other than the actual conduct of the business of the assessee". It was further held that "assessee received profits in Government securities as a condition for carrying on of the business as laid down by the statute and in the process it earned interest on the investment, the profits or gains from the investments are connected with or incidental to or attributable to the carrying on of the activity of supplying sugarcane carried on by the assessee and are exempt under s. 80P(2)(c) of the Act." In this case, the case of Cambay Electric Supply Industrial Co. Ltd. vs. CIT (1978) 113 ITR 84 (SC) was referred.
Likewise, in other cases on which reliance was placed by the learned counsel of the assessee, the findings are similar as the profits were earned as interest income on Government securities.
10. In case of Maharashtra State Co-operative Land Development Bank Ltd. vs. ITO (supra) the Bombay Bench of the Tribunal has held that "in the instant case, the assessee, a co-operative society, was engaged in carrying on the business, which was essentially and in pith and substance a business of banking. Under the provisions of the Banking Regulations Act or similar other laws, every banking company has to maintain a specified liquidity ratio or is statutorily required to invest in specified or approved securities or shares. This is done with a view to ensure the required liquidity on the part of the institution carrying on the business of banking. In such circumstances, that part of the activity of such institution cannot be held to be other than banking activity. The provisions of sub-cl. (i) of cl. (a) of sub-s.
(2) of s. 80P would, therefore, clearly be applicable to the profits and gains attributable to the carrying on of such activity. Therefore, the dividend income of the assessee from the shares of Government corporation was exempt under s. 80P(2)(a)(i)".
11. In cases in (1984) 6 ITD 763 (Bang) and (1983) 8 ITD 354 (Ahd) (supra), the findings are similar as in the case in (1979) 118 ITR 770 (All), (supra), wherein it was held that "interest earned on Government securities are attributable to assessee's banking activities and, therefore, exempt under s. 80P(2)(a)(i)." 12. Now we will discuss the ratios in cases relied upon by the learned Departmental Representative. In case of CIT vs. Co-operative Supply & Commission Shop Ltd. (supra) wherein the Hon'ble Rajasthan High Court has held "that interest on the outstanding balances in respect of supplies of goods would not qualify for special deduction under s.
80P(2)(a)(i)". The brief facts of this case were that the assessee allowed the facility of selling goods on credit to its members and charged interest on the balances and claimed exemption under s.
80P(2)(a)(i). The Hon'ble High Court held that this was not attributable to banking activity of the assessee. Therefore, the claim was disallowed.
13. There is no case law on p. 338 of 218 ITR as mentioned by the learned Departmental Representative. Therefore, it could not be considered.
14. In case of Kottayam Co-operative Land Mortage Bank Ltd. vs. CIT (supra), the Hon'ble Kerala High Court has held that "the expression 'attributable to' is much wider than the expression 'derived from' and it covers receipts from sources other than the actual conduct of the business of the assessee. Where, however, the society as owner of certain property lets out that property and receives the rental income, the income thus received cannot partake the character of profits and gains attributable to an activity carried on by the society." 15. In case of CIT vs. Rajasthan Rajya Sahkari Upbhokta Bhandar (supra), the Hon'ble Rajasthan High Court has observed that "the use of the word 'the whole of the amount of profits and gains of business attributable to any one or more of such activities' appearing at the end of sub-s. (2) of s. 80P could be only for such income which is attributable to the activities which are exempted. Where an assessee has maintained a composite account of the expenses incurred for earning the taxable as well as exempted income the expenditure has to be apportioned". After observing these observations, the Hon'ble High Court has held "that the Tribunal was not justified in holding that the assessee was entitled to deduction under s. 80P(2)(d) of the entire investment and not the net receipts".Dy. CIT vs. Gujarat State Co-operative Bank Ltd. (supra) the Ahmedabad Bench of the Tribunal has held that "the assessee was not entitled to deduction in respect of the interest earned on deployment of funds out of reserve funds with banks other than co-operative banks under s. 80P(2)(a)(i). However, proportionate expenses pertaining to the said investments should be allowed as deduction and only the net interest should be subjected to tax".
17. After considering the ratios of these valuable decisions, we find that the decisions are contradictory. Most decisions which are favouring assessee's plea are where the interest was earned on Government securities and in other cases which are not the case of the assessee are where the income earned from interest on advances to third parties or on balance amount which was against the members of the society and the interest was earned on that amount was considered that the income is not exempt under s. 80P(2).Kerala State Co-operative Marketing Federation Ltd. & Ors. vs. CIT (1998) 231 ITR 814 (SC), the apex Court has decided the issue where the exemption under s. 80P(2)(a)(iii) was involved. The apex Court has observed that "s. 80P of the IT Act, 1961, is introduced with a view to encouraging and promoting the growth of the co-operative sector in the economic life of the country and in pursuance of the declared policy of the Government. The correct way of reading the different heads of exemption enumerated in the section would be to treat each as a separate and distinct head of exemption. Whenever a question arises as to whether any particular category of an income of a co-operative society is exempt from tax what has to be seen is whether the income fell within any of the several heads of exemption. If it fell within any one head of exemption, it would be free from tax notwithstanding that the conditions of another head of exemption are not satisfied and such income is not free from tax under that head of exemption." 19. The controversy involved before the apex Court was whether income from marketing of agricultural produce is only exempt or marketing of agricultural produce done by other members were also exempt or not. The apex Court has held that as the objects of the society was of marketing of agricultural produce, it covers marketing of agricultural produce of its own and marketing of agricultural produce done by others.
Therefore, the decision was in favour of the assessee. The same analogy will be applicable here on the facts of the present case. The main objects of the assessee are of banking activity done for the benefit of its members. However, the society was free to invest the surplus funds in purchase of shares or to invest in Government securities. The distinguishable fact in the present case is that purchase of shares is not the main object of the assessee and there may be possibility of losses also because of fluctuation of the share market. In case of Government securities, there is no question of any loss because there always income earned as interest. It is also a distinguishable feature that Government securities can be encashed at any time as per condition of the Government security but shares cannot be encashed from the company itself. They can be only sold out in the market and there may be customer or there may not be customer for purchase of these shares.
Therefore, these activities cannot be said that these are attributable to the banking activity as per provisions of s. 80P(2)(a)(i). Of course, there is a permission from the State Government but IT Act is an independent and its provisions are separate and distinct. Therefore, if permission of the State Government is given or not given is hardly matter because there is not effect on the provisions of the IT Act.
Therefore, we find weight in the contention of the learned Departmental Representative that the sanction of investment in any movable or immovable assets other than banking business activity do not alter the nature of income. Hence the dividend income on investment in shares of JMEL did not fall under the banking business activity of the assessee in any manner nor the same falls under credit facilities provided to its members. We further find weight in the contention of the learned Departmental Representative that the assessee has borrowed funds from outside sources and paid more interest than earned. Therefore, there was no surplus funds with the assessee. The funds collected from the members were invested for purchase of shares and for banking activity the funds were borrowed from market and huge interest was paid.
Therefore also assessee does not qualify for exemption under s.
80P(2)(a)(i).
20. The banking activities are very clear. In our considered view they cannot be equated with the activity of shares purchasing and earning of dividend out of the same as we have already stated that the dividend earned on share purchased by assessee are distinct from the income earned on as interest on Government securities and Government securities are encashable at any time. They can be equated or can be treated as attributable to the income of bank. Therefore, in view of these facts and circumstances of the case, we find that assessee cannot succeed as we are of the view that dividend income earned by assessee on shares cannot be attributable to the income from bank. Therefore, we confirm the finding of CIT(A) and reject the ground of the assessee.