1 In all these Tax Appeals the following substantial question of law which arises for determination has been framed at the time of admission :

Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in allowing deduction under Section 80-P(2)(a)(i) of the Income-tax Act,1961 on interest income as being attributable to the business of banking ?

2 On behalf of the appellant-revenue Mr. M.R. Bhatt, learned Senior Standing Counsel has taken the lead while Mr. B.B. Naik and Mr. T.U. Bhatt, learned Standing Counsel have supplemented the contentions on behalf of the revenue. On the other hand, on behalf of the respondent assessees Mr. S.N. Soparkar, learned Senior Advocate has taken the lead. Mr. R.K. Patel, Mr. S.N. Divetia, Mr. K.R. Dixit and Mr. T.P. Hemani, learned Advocates have also addressed the Court. Mr. K.H. Kazi, learned Advocate has been permitted to intervene and address the Court.

3 The Assessment Year in Tax Appeal No. 208 of 2003 is 1995-96 and the relevant accounting period is Financial Year 1994-95. The assessee, a Cooperative Society, filed return of income declaring total income at Rs. Nil. The Assessing Officer called upon the assessee to furnish particulars of investments relating to circulating capital and particulars of investments relating to fixed capital. The assessee furnished such particulars pointing out that it had earned interest (both accrued and received) to the tune of Rs. 25,41,289.53 ps. from investments in (i) IDBI Bonds, (ii) SBI Bonds, (iii) Sardar Sarovar Narmada Bonds, and (iv) Kisan Vikas Patra. It was contended that the bank is duly registered under the Gujarat Co-operative Societies Act,1961 (G.C.S. Act) and is governed by G.C.S. act, rules and regulations framed thereunder; the assessee bank is regularly assessed since many years and income from interest on investments made by the assessee out of the reserve funds is being regularly treated as income from banking business; such income has continuously been held to be eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act,1961 (the Act). That reliance on the decision of Supreme Court in the case of Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT (1996) 218 ITR 438 (SC) was misplaced. However, the Assessing Officer treated all the aforesaid investments as 'fixed capital' and held that the investments were not available for normal banking business. Therefore, the entire income was taxable and accordingly he framed assessment on total income of Rs. 25,41,289.53 ps.

3.1 The assessee carried the matter in appeal. The CIT (Appeals) however, relying on his own order in case of another Co-operative Bank dismissed the appeal. When the matter came up before the Tribunal, in light of the fact that dispute between the assessees viz. Co-operative Banks on one side and the Revenue was being raised in cases of all Co-operative Banks in the State of Gujarat, a Special Bench comprised of three Members was constituted. The Special Bench rendered its decision on 20/11/2002 allowing the appeals filed by the assessee. Tax Appeals No. 178 of 2003 and 208 of 2003 arise out of the order of the Special Bench, while Tax Appeal Nos. 371 to 375 of 2003 arise out of another order wherein the Bench of the Tribunal has followed and applied the Special Bench decision.

4 It is an admitted position between the parties that the controversy remains the same in all the Tax Appeals, except in relation to the findings of facts recorded by the Tribunal. In these circumstances, this group of Tax Appeals has been taken up for final hearing and disposal and the decision rendered herein shall apply mutates mutants subject to variations in facts, if any, in cases of all other assessees.

5 On behalf of the appellant revenue the principal submission is based on the premise that the decision of this High Court in the case of Gujarat State Co-operative Bank Ltd. v. Commissioner of Income Tax, is not reversed by the Apex Court in the case of Mehsana District Central Co.operative Bank Ltd. v. Income Tax Officer, on the issue of interest on voluntary reserves. It was submitted that this Court had formulated three questions : The first one relating to income earned from utilization of statutory reserves under Section 67(2) of the GCS Act, 1961; the second one in respect of income earned from utilization of voluntary reserves other than statutory reserves mentioned above; and third one in respect of deduction of locker rent. That the first and third questions have been answered in favour of the assessee and on these two counts the decision of this Court has been reversed by the Apex Court; in so far as the second issue relatable to interest from voluntary reserves is concerned, the Apex Court having restored the issue to the Commissioner (Appeals), a presumption would arise that the Apex Court has not reversed the decision of this High Court. Therefore, it was urged that the interest income per-se was not entitled to deduction under Section 80P(2)(a)(i) of the Act, as not being attributable to Sbusiness of banking. That only in the event of the assessee producing evidence to show that the said interest income has been realized in the course of ordinary business of banking, the benefit would be allowable. Elaborating on the submission, it was contended that the assesee cannot take recourse to provisions of Section 5(b) read with Section 6(1)(a) of the Banking (Regulations) Act,1949 (the B.R. Act), because the Apex Court was aware of the said provisions and despite that the Supreme Court has issued certain direction in its judgment on the issue relatable to voluntary reserves.

1. As a first alternative, it was contended that in case it is held that the judgment of this High Court in the case of Gujarat State Co-operative Bank Ltd. (supra) is reversed also on the issue of voluntary reserves, then the Tribunal was required to firstly, undertake an exercise to ascertain as to whether such interest income is attributable to the business of banking and secondly, record a finding of fact as to whether such interest income has been utilised by the assessee in the course of its ordinary banking business. That in so far as voluntary reserves are concerned, the assessee is under no obligation to create and maintain such reserves, and such voluntary reserves would be in the nature of parking of idle funds. Therefore, such voluntary reserves are different from statutory reserves and cannot be covered by Section 5(b) of B.R. Act and such parking of idle funds is not even an activity falling within any of the Clauses (a) to (o) of Section 6(1) of the B.R. Act.

5.2 A further alternative contention was raised that the Special Bench of the Tribunal has merely analysed the facts and figures of only Surat District Co-operative Bank Limited (Respondent in Tax Appeal No. 178 of 2003) and there is no analysis of facts in so far as other assessees before the Special Bench are concerned. Thus, the Tribunal has failed to comply with the direction of the Apex Court.

5.3 It was therefore urged that the Tribunal has failed to abide by a binding decision of the Supreme Court in the case of Mehsana District Central Co-operative Bank Ltd. (supra) and the order of the Tribunal being a nullity is required to be quashed and set aside.

5.4 That the intent and purpose of Section 80P(2)(a)(i) of the Act is to grant deduction to income which has a direct and proximate nexus to the activity of banking or providing credit facility carried on by a Cooperative Society. That if both the terms banking business and Sproviding credit facilities are read together the intention of the legislature becomes clear and that is to provide benefit of deduction to a cooperative society which actually provides credit/finance to its members in furtherance of the cooperative movement and not for the purposes of profit making. That strictly speaking only activities specified in the definition of banking as per Section 5(b) of the B.R. Act can give rise to income which can be claimed to be deductible u/s.80P(2)(a)(i) of the Act and not the other activities enumerated in Section 6(1)(a) of the B.R. Act.

6 On behalf of the assessee it was submitted that the width and scope of income governed under Section 80P(2)(a)(i) of the Act is such which would take within its fold all income arising from investments in securities considering the definition of Banking under Section 5(b) of the Act and 6(1)(a) of the B.R. Act. That investment in securities is part of ordinary banking business; it is normally a mode of carrying on banking business to invest monies in such a manner that they are readily available and that is just as much part of conducting bank's business as receiving deposits or lending monies; investments in securities which are easily realizable would be part of the stock-in-trade or circulating capital and therefore eligible for deduction under Section 80P(2)(a)(i) of the Act.

6.1 It was submitted that the decision of this Court in the case of Gujarat State Co-operative Bank Ltd. (supra) cannot continue to hold the field because the direction given by the Apex Court conclusively establishes that the said decision of this High Court has been set aside.

6.2 That the Tribunal has not gone beyond the decision and the direction of the Apex Court and the contention on behalf of the revenue that the Tribunal has not abided by the decision of the Apex Court is factually incorrect as the Tribunal has looked at the source of income as well as its destination. The Tribunal has given clear findings that : (a) investments are acquired by utilizing the income of the bank, (b) investments are in the nature of easily excusable securities or other mode of investments, and (c) that investments are in permissible mode either under B.R. Act or G.C.S. Act.

6.3 That all investments /funds of a bank constituted a single/mixed fund from which loans and advances are given and investments made; thus there are no separate funds like statutory reserves and voluntary reserves. That considering the definition of Sworking capital under Section 2(24) of the G.C.S. Act all investments would amount to stock in trade of a bank; all income earned from investments, whether from voluntary or statutory reserves, would be business income and entitled to deduction under Section 80P of the Act. There is no distinction between investments relatable to statutory reserves and investments from voluntary reserves as they form integral part of banking business, that being the only activity of the assessee. Hence all income is attributable to business of banking.

6.4 While interpreting Section 80P of the Act the object of the provision must be borne in mind and a liberal construction should be made so as to achieve the object of the provision. Where two interpretations are possible, one which favours the assessee must be adopted.

6.5 Section 6(2) of the B.R. Act prohibits a bank from carrying on any business other than what is prescribed under Section 6(1) of the B.R. Act. Section 71 of GCS Act prohibits investments in any mode which is not approved. None of the assessee banks have carried on any business which is not permissible under the provisions of the B.R. Act, or made any investments in any mode prohibited by provisions of B.R. Act or G.C.S. Act. This is apparent from the fact that no action for any such violation has been initiated/taken against any of the assessee banks. That in fact, all interest income earned from utilization of reserves has been taxed under the head 'business' and not under the head 'income from other sources'. Therefore, once income is from a business and the assessee is admittedly not carrying on any other business except business of banking, income is deductible under Section 80P of the Act.

7. It is an accepted position that the income earned by all Co-operative Banks was held to be eligible for deduction under Section 80P(2)(a)(i) of the Act since number of years but when the Apex Court rendered its decision in case of Madhya Pradesh Co-operative Bank Ltd. (supra) the revenue undertook an exercise to distinguish between fixed capital and circulating capital. It is in back-drop of this position that the controversy arose, but the said issue is now no longer resintegra and in subsequent decision, the Apex Court has categorically overruled the aforesaid decision in case of Madhya Pradesh Co-operative Bank Ltd.(supra) .

8. However, in the meantime this Court in the case of Gujarat State Co-operative Bank Limited, (supra) held that a Co-operative Bank would have three types of reserves : (i) Banking Reserves, (ii) Statutory Reserves (iii)Voluntary Reserves. According to this Court the income from investments out of banking reserves fund viz. first category would alone be eligible for deduction under Section 80P of the Act while income from statutory and voluntary reserves, namely second and third category would not be eligible for deduction under Section 80P of the Act. While deciding the issue this Court had reframed the questions in the following terms :

[i] Whether the Tribunal was right in law in disallowing the claim of the assessee-bank for deduction under Section 80P(2)(a)(i) in respect of income earned from utilisation of its reserve funds being statutory reserves under Section 67(2) of the Gujarat Co-operative Societies Act,1961 ?

[ii] Whether the assessee-bank is entitled to claim deduction under Section 80P(2)(a)(i) in respect of income earned from utilisation of its voluntary reserves other than the statutory reserves mentioned above ?

[iii] Whether the Tribunal was right in law in holding that the locker rent is not deductible under Section 80P(2)(a)(i)?

9. In so far as first question is concerned the Apex Court in the case of Mehsana District Central Co-operative Bank Limited (supra) has held that the same is covered against the revenue by judgment delivered by Supreme Court in the case of CIT v. Karnataka State Co-operative Apex Bank (2001) 251 ITR 194 (SC) and therefore answered the said question in favour of the assessee.

10. In so far as the third question is concerned, according to Apex Court in light of Section 6(1)(a) of the B.R. Act it was clear that provision of Safe Deposit Vaults is part of the ordinary banking business of bank; therefore, the income derived from hiring out of Safe Deposit Vaults is income from the business of banking and hence deductible under Section 80P(2)(a)(i) of the Act. Accordingly, the third question was also answered in favour of the assessee.

11. In relation to the second question this is what is observed by the Apex Court :

Now, as to the second question, we have heard learned counsel and been referred to various decisions including the decision of this Court in Bihar State Co-operative Bank Limited v. CIT . To be able to answer the question, it is necessary to ascertain, as a fact, whether the income derived by the assessee from the investment of its voluntary reserves has been utilised by it in the course of its ordinary banking business. Though the assessee placed before the assessing authority its books of account and balance-sheets, the fact aforestated was not considered at any stage, for one or other reason on which it is not necessary for us to dilate. We think that it is in the interests of justice that the assessee should have the opportunity to lead evidence before the Commissioner (Appeals) to establish as a fact what is stated above. So far as the second question is concerned, therefore, the matter is stand restored to the Commissioner (Appeals) for being decided afresh. He shall also decide any consequential issue that may arise.

12. It is in the aforesaid backdrop that this Court is required to determine as to whether income arising from utilization of voluntary reserves is, or is not, deductible under Section 80P(2)(a)(i) of the Act. According to revenue, the finding recorded by this Court in relation to the second question have not been reversed by the Apex Court and hence would be binding both on the assessees and the revenue as well as this Court. There can be no doubt that if the finding recorded in the judgment of this Court stands it would bind both the assessees and the revenue as well as operate as a precedent so far as this Court is concerned. Therefore, considering the fact that, elaborate submissions were made by both the sides it is necessary to examine as to whether the finding in relation to the second question has been reversed by the Apex Court or not. It is necessary to take note of the fact that the revenue has never contended that the said finding is approved.

13. The arguments raised on behalf of revenue do not merit acceptance for the simple reason that, firstly, when the said issue was directly before the Apex Court, if the finding of this Court was to remain there was no occasion for the Apex Court to issue direction in the aforesaid terms. When it is stated by the Apex Court that the matter in relation to the second question stands restored to Commissioner (Appeals) for being decided afresh and he shall also decide any consequential issue that may arise then it becomes abundantly clear that the finding of this Court rendered in case of Gujarat State Co-operative Bank Limited (supra) does not survive. The Apex Court has in fact not answered the question. Its direction begins with the use of the words STo be able to answer the question, and thereafter the direction follows : Therefore, the entire question is left wide open subject to the aforesaid direction.

1. Secondly, the judgment and order of this Court, when carried in appeal before the Apex Court on the very same issue, would not have any independent existence thereafter in light of principle of merger. The judgment and order of the High Court would stand merged in the judgment and order of the Apex Court, especially in a case where the issue in question is directly considered by the Supreme Court.

13.2 Thirdly, in relation to the second question the High Court answered the same by stating :

The reasoning which has commended itself to us for holding that the interest earned on statutory reserves under Section 67(1) of the Gujarat Co-operative Societies Act cannot be said to be profits and gains of banking activity applies with much greater force to the voluntary reserves.

13.3 The aforesaid reasoning relatable to statutory reserves has categorically been overruled by the Apex Court and the first question is answered in favour of the assessee. Therefore, the revenue cannot successfully contend that the finding in relation to the second issue survives. Even if it is not categorically overruled, the said finding is neither approved nor does it survive. In fact, even if it is not stated, it stands set aside when the direction is issued to Commissioner (Appeals) to decide afresh the said issue as well as any consequential issue.

14. The next question that arises for consideration is whether the Tribunal has 'overruled' (as contended by Mr.Naik) the decision/direction of the Apex Court. The Tribunal cannot overrule the decision of either the High Court or the Supreme Court. The Tribunal may, through erroneous process of reasoning state that a decision of the Apex Court is not applicable, or the Tribunal may ignore a decision but that does not amount to overruling a decision. However, in the present case whether that is the situation or not, may be examined. But before that it is necessary to briefly recapitulate as to what constitutes a binding precedent.

15. The principles governing Article 141 of the Constitution of India may be briefly recapitulated. In the case of (i) Krishena Kumar v. Union of India & Ors., :

19. The doctrine of precedent, that is being bound by a previous decision, is limited to the decision itself and as to what is necessarily involved in it. It does not mean that this Court is bound by various reasons given in support of it, especially when they contain Spropositions wider than the case itself required. This was what Lord Selborne said in Caledonian Railway Co. v. Walker"s Trustees and Lord Halsbury in Quinn v. Leathem. Sir Frederick Pollock has also said : SJudicial authority belongs not to the exact words used in this or that judgment, nor even to all the reasons given, but only to the principles accepted and applied as necessary grounds of the decision.

20. In other words, the enunciation of the reason or principle upon which a question before a court has been decided is alone binding as a precedent. The ratio decidendi is the underlying principle, namely, the general reasons or the general grounds upon which the decision is based on the test or abstract from the specific peculiarities of the particular case which gives rise to the decision. The ratio decidendi has to be ascertained by an analysis of the facts of the case and the process of reasoning involving the major premise consisting of a pre-existing rule of law, either statutory or judge-made, and a minor premise consisting of the material facts of the case under immediate consideration. If it is not clear, it is not the duty of the court to spell it out with difficulty in order to be bound by it. In the words of Halsbury (4th edn., Vol. 26 para 573) The concrete decision alone is binding between the parties to it, but it is the abstract ratio decidendi, as ascertained on a consideration of the judgment in relation to the subject matter of the decision, which alone has the force of law and which, when it is clear what it was, is binding; but, if it is not clear, it is not part of a tribunal"s duty to spell out with difficulty a ratio decidendi in order to be bound by it, and it is always dangerous to take one or two observations out of a long judgment and treat them as if they gave the ratio decidendi of the case. If more reasons than one are given by a tribunal for its judgment, all are taken as forming the ratio decidendi.

33. Stare decisis et non quieta movere. To adhere to precedent and not to unsettle things which are settled. But it applies to litigated facts and necessarily decided questions. Apart from Article 14 of the Constitution of India, the policy of courts is to stand by precedent and not to disturb settled point. When court has once laid down a principle of law as applicable to certain state of facts, it will adhere to that principle, and apply it to all future cases where facts are substantially the same. A deliberate and solemn decision of court made after argument on question of law fairly arising in the case, and necessary to its determination, is an authority, or binding precedent in the same court, or in other courts of equal or lower rank in subsequent cases where the very point is again in controversy unless there are occasions when departure is rendered necessary to indicate plain, obvious principles of law and remedy continued injustice. It should be invariably applied and should not ordinarily be departed from where decision is of long standing and rights have been acquired under it, unless considerations of public policy demand it.

(ii) Arnit Das v. State Of Bihar.,

20. A decision not expressed, not accompanied by reasons and not proceeding on a conscious consideration of an issue cannot be deemed to be a law declared to have a binding effect as is contemplated by Article 141. That which has escaped in the judgment is not the ratio decidendi. This is the rule of sub silentio, in the technical sense when a particular point of law was not consciously determined. (See State of U.P. v. Synthetics & Chemicals Ltd. SCC, para 41.).

(iii) Indian Petrochemicals Corporation Ltd. & Anr. v. Shramik Sena,

8. We have perused the impugned order of the High Court. We are unable to appreciate the approach of the High Court. Even when it was faced with diametrically apposite (sic opposite) interpretation of the judgment of this Court, it was expected of the High Court to decide the case (writ petition) on merit according to its own interpretation of the said judgment. Instead the High Court after referring to rival contentions of the parties, in para 3, observed thus:

In our view, the right course for the petitioner will be to approach the Apex Court and to seek a clarification of the said order. Mr. Singhvi is agreeable to take necessary steps.

(iv) Director of Settlements, A.P. & Ors. v. M.R. Apparao & Anr., .

7. So far as the first question is concerned, Article 141 of the Constitution unequivocally indicates that the law declared by the Supreme Court shall be binding on all courts within the territory of India. The aforesaid Article empowers the Supreme Court to declare the law. It is, therefore, an essential function of the Court to interpret a legislation. The statements of the Court on matters other than law like facts may have no binding force as the facts of two cases may not be similar. But what is binding is the ratio of the decision and not any finding of facts. It is the principle found out upon a reading of a judgment as a whole, in the light of the questions before the Court that forms the ratio and not any particular word or sentence. To determine whether a decision has Sdeclared law it cannot be said to be a law when a point is disposed of on concession and what is binding is the principle underlying a decision. A judgment of the Court has to be read in the context of questions which arose for consideration in the case in which the judgment was delivered. An Sobiter dictum as distinguished from a ratio decidendi is an observation by the Court on a legal question suggested in a case before it but not arising in such manner as to require a decision. Such an obiter may not have a binding precedent as the observation was unnecessary for the decision pronounced, but even though an obiter may not have a binding effect as a precedent, but it cannot be denied that it is of considerable weight. The law which will be binding under Article 141 would, therefore, extend to all observations of points raised and decided by the Court in a given case. So far as constitutional matters are concerned, it is a practice of the Court not to make any pronouncement on points not directly raised for its decision. The decision in a judgment of the Supreme Court cannot be assailed on the ground that certain aspects were not considered or the relevant provisions were not brought to the notice of the Court (see Ballabhadas Mathurdas Lakhani v. Municipal Committee, Malkapur and AIR 1973 Supreme Court 794). When the Supreme Court decides a principle it would be the duty of the High Court or a subordinate court to follow the decision of the Supreme Court. A judgment of the High Court which refuses to follow the decision and directions of the Supreme Court or seeks to revive a decision of the High Court which had been set aside by the Supreme Court is a nullity. (See Narinder Singh v. Surjit Singh and Kausalya Devi Bogra v. Land Acquisition Officer.)

(v)Delhi Administration (now NCT of Delhi) v. Manohar Lal, :

5. We have carefully considered the submissions of the learned counsel appearing on either side. Apparently, the learned Judge in the High Court was merely swayed by considerations of judicial comity and propriety and failed to see that merely because this Court has issued directions in some other cases, to deal with the fact situation in those other cases, in the purported exercise of its undoubted inherent and plenary powers to do complete justice, keeping aside even technicalities, the High Court, exercising statutory powers under the criminal laws of the land, could not afford to assume to itself the powers or jurisdiction to do the same or similar things. The High Court and all other courts in the country were no doubt ordained to follow and apply the law declared by this Court, but that does not absolve them of the obligation and responsibility to find out the ratio of the decision and ascertain the law, if any, so declared from a careful reading of the decision concerned and only thereafter proceed to apply it appropriately, to the cases before them.

(vi) Divisional Controller, KSRTC v. Mahadeva Shetty & Anr.,

23. So far as Nagesha case relied upon by the claimant is concerned, it is only to be noted that the decision does not indicate the basis for fixing of the quantum as a lump sum was fixed by the Court. The decision ordinarily is a decision on the case before the court, while the principle underlying the decision would be binding as a precedent in a case which comes up for decision subsequently. Therefore, while applying the decision to a later case, the court dealing with it should carefully try to ascertain the principle laid down by the previous decision. A decision often takes its colour from the question involved in the case in which it is rendered. The scope and authority of a precedent should never be expanded unnecessarily beyond the needs of a given situation. The only thing binding as an authority upon a subsequent Judge is the principle upon which the case was decided. Statements which are not part of the ratio decidendi are distinguished as obiter dicta and are not authoritative. The task of finding the principle is fraught with difficulty as without an investigation into the facts, it cannot be assumed whether a similar direction must or ought to be made as a measure of social justice. Precedents sub silentio and without argument are of no moment. Mere casual expressions carry no weight at all, nor every passing expression of a Judge, however eminent, can be treated as an ex cathedra statement having the weight of authority.

16. Therefore, it becomes necessary to ascertain as to what is the decision of the Apex Court. In other words, what is the distinction between the decision on the case before the Court and what is the ratio decidendi. Can it be stated that the Apex Court has laid down a principle which acts as a precedent and is binding upon the authority. In the words of Apex Court, the task of finding out the principle is fraught with difficulty. However, one thing is certain, whatever is stated, it is for the High Court to decide the issue on merits according to its own interpretation of the judgment of the Apex Court. It is not open to the High Court to direct the parties to approach the Apex Court and seek a clarification of the order of the Apex Court. But, it is equally well settled that a decision not expressed, not accompanied by reasons cannot be deemed to be a law declared to have a binding effect as contemplated by Article 141 of the Constitution.

17. In the present case, admittedly the Court has left the whole issue open and issued direction so as STo be able to answer the question. Therefore, in context of this fact-situation the issue may be examined and dealt with. The basis of Revenue's entire case is that Section 80P(2)(a)(i) of the Act talks of 'business of banking'; 'Banking' is defined by Section 5(b) of the B.R. Act; Section 6(1) of the B.R. Act talks of additional activities : hence, no ancillary activities are permissible; Section 5(b) does not contemplate parking of idle funds because such funds are not for the purpose of lending.

01/08/2005

18. Based on the aforesaid direction issued by the Apex Court in the case of Mehsana District Central Co-operative Bank Limited (supra) it was vehemently urged on behalf of the revenue that before any deduction could be permitted under Section 80P of the Act it was necessary to ascertain as to how the income arising from utilisation of voluntary reserves was applied or utilised by the assessee in the course of its ordinary banking business. As to what is the purport of such direction requires to be examined and ascertained in context of the provisions of the Act.

19. Section 80P of the Act appears in Chapter VIA of the Act. The said Chapter pertains to deductions to be made in computing total income. It is divided into four heads or four parts :

A : General Sections ( Sections 80A to 80B) B : Deduction in respect of certain payments (Sections 80C to 80GGC) C : Deductions in respect of certain incomes (Sections 80H to 80TT) D : Other deductions ( Sections 80U to 80VV) Section 80A(1) of the Act provides that in computing total income of an assessee, there shall be allowed from gross total income, the deductions specified in Sections 80C to 80U, in accordance with and subject to the provisions of this Chapter viz. Chapter VIA. Under sub-section (2) of section 80a a ceiling has been placed, viz., the aggregate amount of deductions under the Chapter shall not exceed the gross total income of an assessee. Under Section 80B(5) Sgross total income has been defined to mean the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VIA. As to what is the nature of the income which is to be included in the gross total income is laid down vide Section 80AB of Act. The said Section provides that where any deduction is required to be made or allowed under any Section included in Chapter VIA under the heading SC- Deductions in respect of certain incomes in respect of any income of the nature specified in any of the Sections falling under the heading 'C', then for the purposes of the inclusion in the gross total income, notwithstanding anything contained in any of the said Sections, the amount of income of that nature as computed in accordance with provisions of the Act(before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is amenable to deduction and which is included in the gross total income. On a conjoint reading of Section 80B(5) and 80AB of the Act it is apparent that for seeking deduction in respect of incomes falling in any of the Sections specified under heading 'C' of Chapter VIA such income has to be computed in accordance with the provisions of the Act and then included in gross total income; and gross total income means the total income, computed in accordance with the provisions of the Act, and at both the stages while computing total income deductions under Chapter VIA are not to be taken into consideration. Therefore, income under a particular head comprising of a specific item has to be in the first instance computed in accordance with the provisions of the Act, that is, all the permissible deductions/allowances have to be first taken into consideration (excluding deductions under Section VIA) and the figure of net income arrived at after such computation has to form part of the total income. In other words, the net income relatable to a particular head or item has to go in as a component of the gross total income before any deduction under Chapter VIA is to be allowed.

20. Once this is the scheme laid down by the statute, all such allowable expenditure, in the form of various allowances and deductions, are already taken care of from the income earned by an assessee under a particular head. In case of income falling under the head Sprofits and gains of business or profession Section 29 of the Act stipulates that the income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D of the Act. Therefore, in case of an assessee carrying on business of banking in the first instance, income under Section 28 is computed in accordance with the provisions of Section 29 of the Act and such net figure is taken as a component of the total income or gross total income for the purpose of deduction under Chapter VIA. If this be the position, the direction issued by the Apex Court cannot be read to mean that an exercise to ascertain the expenditure is required to be undertaken for the purpose of determination of deductibility or otherwise of income earned from utilization of voluntary reserves.

21. Examining the issue from a slightly different angle. One may take into consideration the provisions of Section 4 read with Section 5 and Section 2(45) of the Act. The charge of income tax is fastened under Section 4 of the Act in respect of the total income of the previous year. Such total income includes all income from whatever source derived which is either received or accrues to an assessee during any previous year. Section 2(45) of the Act defines Stotal income to mean the total amount of income referred to in Section 5, computed in the manner laid down in the Act. Thus, all income received by or accruing to an assessee during any previous year is to be charged to tax after computation in the manner prescribed by the Act. Therefore, in case of an assessee, like the present assessee, all interest income, actually received or accrued, has to be computed in the manner provided in the Act so as to form the total income which is subjected to charge under Section 4 of the Act. That once again gives an indication that all such income has to be computed as provided on a conjoint reading of Sections 28 and 29 of the Act and only thereafter the net figure is required to be taken up for consideration for the purpose of ascertaining deductibility or otherwise under Section 80P of the Act which falls under the heading 'C' of Chapter VIA of the Act.

22. In the case of Tuticorin Alkali Chemicals And Fertilizers Ltd. v. Commissioner of Income Tax, , the Supreme Court reiterates fundamental principles thus :

xxxx xxxx Under the Income-tax Act,1961, the total income of the company is chargeable to tax under Section 4. The total income has to be computed in accordance with the provisions of the Act. Section 14 lays down that for the purpose of computation, income of an assessee has to be classified under six heads :

(A) Salaries.

(B) Interest on Securities.

C. Income from house property.

(D)Profits and gains of business or profession.

(E)Capital gains.

(F) Income from other sources.

xxx xxx xxx xxx The computation of income under each of the above six heads will have to be made independently and separately. There are specific rules of deduction and allowances under each head. No deduction or adjustment on account of any expenditure can be made except as provided by the Act.

xxx xxx xxx xxx It is well settled that tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of revenue nature. If so, the amount will have to be taxed. Pondicherry Railway Co.Ltd. v. CIT [1931] 1 Comp Cas 314; AIR 1931 PC 165.

23. In these circumstances, it would be useful to reproduce what the Apex Court has laid down in context of its earlier judgments or orders. In case of Ravindra Singh v. Phool Singh And Another , the Supreme Court, while dealing with tenancy and land laws in context of U.P., Imposition of Ceiling on Land Holdings Act,1960 has stated thus :

In the light of the above provisions, the Authorities ought to have examined the offer of surrender made by the respondent, Phool Singh in accordance therewith. He must be asked to surrender lands which are not the subject-matter of transfer. Only where the Prescribed Authority is satisfied that surrender of surplus land is not possible without including the transferred land, will he accept the surrender of transferred land, to the extent necessary with the necessary consequences flowing therefrom. The High Court and Authorities under the Act, however, have not followed this course because they felt that the order of this Court dated 7.5.1981 entitles the respondent Phool Singh to surrender such land as he chooses. We are of the opinion that they were not right in construing this Court's order in the above manner. Firstly, the appellant herein was not heard (he says that he was not even a party to the said SLP) before passing such order. Secondly, the said order cannot be understood as laying down proposition contrary to law. All that it says is that the petitioner therein, i.e., respondent Phool Singh Swill be entitled to choice in respect of plots forming the subject-matter of the sale deed. The said words are not capable of being construed as authorising Phool Singh to surrender the transferred land even if he is in a position to comply with the requirement of surrender of surplus land without touching the transferred land. To repeat, the order of this Court cannot and should not be construed in a manner inconsistent with the provisions of the Act. This Court could not have contemplated passing an order contrary to the provisions of the Act or to authorise the respondent Phool Singh to surrender surplus land contrary to the provisions of the Act. We are, therefore, of the opinion that the said order of this Court is not capable of nor can it be construed as overriding or superseding the provisons of the Act. The choice referred to in the order of this Court is the choice referred to in Section 12-A(d) and not independent of it.

24. The legal position thus is that an order of the Apex Court cannot be understood as laying down a proposition contrary to law. The order of the Apex Court cannot and should not be construed in a manner so as to be inconsistent with the provisions of the statute as the Apex Court could not have contemplated passing an order contrary to the provisions of the Act. The contention on behalf of the revenue, therefore, to the extent that the destination or the application of the income has to be ascertained for the purposes of determining the deductibility of the income based on the aforesaid direction of the Apex Court in the case of Mehsana District Central Co.operative Bank Ltd. (supra) cannot be accepted for the aforestated reasons. The Scheme of the Act as to accrual of income, charge of tax at the point of accrual; whether a particular receipt is of the nature of revenue of the nature of income, gets determined once and for all when the income is earned; and is not dependent upon its destination or manner of utilisation. All expenses, allowances and deductions are already taken into consideration before the income forms part of total income. It is at this stage that the eligibility to deduction under Section 80P of the Act comes up for determination. The direction of the Apex Court cannot be read to have meant as being inconsistent with the basic statutory scheme of the Act.

25. Then, it becomes necessary to read and understand the direction made by the Apex Court. It is stated that factually it may be ascertained Swhether the income derived by the assessee from the investments of its voluntary reserves has been utilised by it in the course of its ordinary banking business. Considering the Scheme of the Act, the only meaning that one can make of the direction is to read the direction to intend to convey so as to ascertain that income earned by an assessee in earlier years from investment of funds constituting voluntary reserves has been utilised by the assessee for the purpose of making further investments which are in easily realisable securities, in permissible modes of investments and any income attributable to such investments would be eligible for deduction under Section 80P(2)(a)(i) of the Act. One cannot say that the direction to ascertain utilisation is for the purpose of determination of accrual of income or for determining its eligibility to deduction considering the Scheme of the Act which is set out hereinbefore. The expenses, which a bank is required to incur in course of its ordinary banking business, have already gone into consideration before the net figure is worked out for the purpose of claiming deduction under Section 80P(2)(a)(i) of the Act. Hence, to reiterate, the direction can only mean ascertainment of utilisation of net income of earlier years, which forms part of the funds which are invested, and given the nomenclature of voluntary reserves.

26. Section 80P of the Act in so far as is relevant for the present reads as under :

Deduction in respect of income of co-operative societies.

80P.(1) Where, in the case of an assesee being a co-operative society, the gross total income includes any income referred to in Sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this Section, the sums specified in Sub-section (2), in computing the total income of the assessee.

(2)The sums referred to in Sub-section (1) shall be the following, namely :-

(a)in the case of a co-operative society engaged in '(i) carrying on the business of banking or providing credit facilities to its members, or ii. xxx xxx xxx iii. xxx xxx xxx iv. xxx xxx xxx v. xxx xxx xxx vi. xxx xxx xxx vii. xxx xxx xxx the whole of the amount of profits and gains of business attributable to any one or more of such activities.

27. Sub-section (1) of Section 80P stipulates that in case of an assessee who is a Cooperative Society, the sums specified in Sub-section (2) shall be deducted while computing total income of the assessee, provided the gross total income includes any income referred to in Sub-section (2). Sub-section (2) specifies the sums which are deductible by way of specifying activities in Clauses (a) to (f). In Clause (a) again, the activities which are of the prescribed nature, are specified vide sub-Clauses (i) to (vii). In the event of a Co-operative Society carrying on any one of such businesses as specified by sub-Clauses (i) to (vii) or engaged in any one or more such activities the whole of the amount of profits and gains of business attributable to any one or more activities shall be deducted. Thus, the provision itself gives an inherent indication that for the purpose of constituting the sum deductible while computing the total income of the assessee, the sum has to be the amount of profits and gains of business. It is necessary to take note of the fact that in Sub-section (2) of Section 80P of the Act word 'income' is not used but the word used is 'sum' which is the 'whole of the amount of profits and gains of business'. Therefore, under Sub-section (1) the gross total income has to include income from any of the specified activities and for the purpose of deduction the sums specified in Sub-section (2) shall be deducted in computing the total income of an assessee, namely, a Co-operative Society. Before analysing sub-Clause(i) of Clause (a) of Sub-section (2) of Section 80P of the Act it is necessary to take note that under sub-section (3) of section 80p the deduction available under sub-section (1) of section 80p shall be allowed after reducing from the qualifying income, the income, if any, as referred to in Sections specified therein viz. Section 80HH etc. This is one more indication available in the Scheme of the Act to denote that what is deductible under the provisions of Chapter VI-A is in terms of the provisions of the Act with special reference to Section 80B(5) read with Section 80AB of the Act is the net figure.

28. Section 80P(2)(a)(i) of the Act permits a Co-operative Society engaged in carrying on the business of banking or providing credit facilities to its members to claim deduction of the whole of the amount of profits and gains of business attributable to such activity viz., business of banking or providing credit facilities to its members. On a plain reading it becomes apparent that the two activities are distinct and separate activities. The first activity viz.,carrying on the business of banking connotes a larger activity than the activity of providing credit facilities to its members. The latter is restricted qua the members of the society while the former is wide enough to take within its sweep as its potential customers, both the members and non members. The interpretation canvassed by the Revenue that the latter phrase has a restrictive effect on the former expression 'business of banking' ignores the word 'or' which occurs between the two phrases. There is no warrant for reading the word 'or' as 'and'. Once legislature has used the term 'or', the logical consequence that flows from contextual setting is that it provides for an alternative, a different distinct activity.

29. In the case of Kerala State Co-operative Marketing Federation Ltd and Ors. v. Commissioner of Income Tax, , the Apex Court was called upon to resolve a controversy in the context of Section 80P(2)(a)(iii) of the Act but after reproducing the entire Section at page 819 it was observed as under :

We may notice that the provision 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.

30. Therefore, while examining a case wherein a Co-operative Society claims deduction under Section 80P(2)(a)(i) of the Act one has to bear in mind the object with which the provision is introduced viz., to encourage and promote growth of the Co-operative Sector in the economic life of the country and in pursuance of the declared policy of the Government. The Apex Court has also stated that if a question arises as to whether any particular category of income of a Co-operative Society is exempt from tax what has to be seen is whether the income falls within any of the several heads because each would be a separate and distinct head and merely because conditions for deduction under one head are not satisfied that does not necessarily mean that an assessee is not entitled to deduction under another head wherein conditions stand fulfilled. Hence the contention on behalf of the revenue that the first activity namely business of banking has to take colour from the second activity namely providing credit facilities to members does not merit acceptance.

31. Section 80P requires that profits and gains of business must be attributable to any one or more of the specified activities. The phrase 'attributable to' has come up for consideration in various cases before the Apex Court. In the case of Vellore Electric Corporation Ltd. v. Commissioner of Income Tax, the assessee before the Apex Court was an Electricity Supply Undertaking. A dispute arose as to whether investment, of sums appropriated to the contingencies reserve, in securities authorised under the Indian Trusts Act,1882 and income derived by way of interest therefrom was attributable to profits and gains of the business of the assessee for the purposes of Section 80I of the Act. The Apex Court observed as under :

In Cambay Electric Supply Industrial Co.Ltd., this court has said (page 93) :

'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'.

This would mean that it is not necessary that the income should have been earned from the actual conduct of the business of generation and distribution of electricity. What is required is that the activity from which the income is earned must have a direct and proximate connection with the priority industry of generation and distribution of electricity.

32. In light of the above decision when the investments are made in securities, which are permissible mode of investments, either under the B.R. Act or GCS Act read with Indian Trusts Act income arising therefrom would be attributable to the business of banking and the assessee would be eligible for deduction in terms of Section 80P(2)(a)(i) of the Act.

33. The dispute therefore : as to what constitutes Sbusiness of banking; because the whole of the amount of profits and gains of business attributable to business of banking is deductible while computing the total income of an assessee, where an assessee is a Co-operative Society. Therefore, two fold inquiry is contemplated : firstly, what is the meaning to be assigned to the phrase business of banking; and secondly, what would be the profits and gains attributable to business of banking.

34. The assessee, being a Co-operative Society is governed by GCS Act and because it carries on business of banking it is also amenable to provisions of B.R. Act. Section 2(7) of the GCS Act defines a 'Co-operative Bank' to mean a society registered under the GCS Act and doing business of banking as defined in Clause (b) of Sub-section (1) of Section 5 of the Banking Companies Act,1949 (now the B.R. Act). Section 2(19) of the GCS Act defines a 'society' to mean a Co-operative Society registered, or deemed to be registered, under the GCS Act. These two definitions assume importance considering the fact that Section 80P of the Act does not use the term Co-operative Bank ; Section 80P only talks of an assessee which is a Co-operative Society. It is in light of this distinction between the use of the terms that one will have to appreciate whether the business of banking as contemplated by Section 80P of the Act is required to be restricted only to the definition given under Section 5(b) of the B.R. Act. Section 2(24) of the GCS Act defines 'Working Capital 'to mean 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. Here also the definition cannot be restricted to mean money raised by borrowing as was sought to be contended by revenue. Sources of working capital are inclusive in nature, viz apart from paid up share capital, funds built out of profits and money raised by borrowing, there could be monies raised by other means also which would constitute working capital of a Co-operative Society.

35. Chapter VI of the GCS Act deals with Property and Funds of Societies. Section 65 stipulates the prohibitions as to distribution of the funds or the assets of the society. Section 66 pertains to appropriation of profits. section 67 of the gcs act deals with reserve fund and under Sub-section (2) it is provided that at least one-fourth of the net profits of the society each year, shall be carried to the reserve fund; and such reserve fund may be used in the business of the society or may, subject to provisions of section 71, be invested as per directions, general or special, issued by the State Government. But from this, it does not flow that reserve fund has necessarily to be restricted to only one-fourth of the net profits each year. Similarly by virtue of Sub-section (3) of Section 67 of the GCS Act it is permissible for a society to carry to the reserve fund amount less than one-fourth of the net profits but not less than one-tenth of the net profits : however, from this it is not possible to read that a larger amount cannot be credited to the reserve fund. The prescription under Sub-sections (2) & (3) is of the minimum amount. There is no upper limit laid down and none can be read in the provision. Section 71 lays down the mode of investment or deposit of funds. From this provision it is not possible to infer that a Co-operative Society carrying on the business of banking cannot invest in a security which is otherwise permissible in terms of Clause (d) of Sub-section (1) of Section 71 of the GCS Act. The said Clause permits investments in any of the securities specified in Section 20 of the Indian Trusts Act,1882. Therefore, on a plain reading of the aforestated provisions of the GCS Act, the Scheme which unfolds is that in case of a Society carrying on business of banking, it would be permissible to make investments or deposits in any of the specified investments as provided in section 71 of the gcs act including in any of the modes specified in Section 20 of the Indian Trusts Act without there being any upper limit as to the amount that can be invested, once the statutory requirement of reserve fund as stipulated in section 67(2) of the gcs act is satisfied.

36. Section 5(b) of the B.R. Act defines 'Banking' and reads as under :

Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise;

The provision stipulates accepting of deposits of money from the public, such deposits being repayable on demand or otherwise and also withdrawal by cheque, draft, order or otherwise. The provision also states that the purpose of accepting such deposits is lending or investment. Therefore, on the one hand, an entity carrying on business of banking is required to accept the deposits which are repayable on demand or permitting withdrawal in any of the specified modes, and on the other hand, the funds generated by acceptance of deposits are available for the purpose of lending or investment. In a given case, a bank may accept deposits and merely invest them, and earn profits from the difference between the rates of interest : paid on the deposits and earned on the investments. Or, the bank may accept deposits and lend the funds, and again earn the profits on the basis of difference in rates of interest on the borrowings made and advances given. Or a third situation, which clearly a prudent banker would engage himself in, would be where deposits are accepted, and certain portion thereof invested and balance advanced. Under the provisions of the B.R. Act every banking company, including a Co-operative Society carrying on business of banking, is required to obtain licence from the Reserve Bank, maintain certain percentage of its assets in specified securities and most importantly, file necessary returns at periodical intervals as stipulated by the B.R. Act. Similarly, the accounts of the society, including balance sheet, are required to be prepared in the manner specified and are subject to Inspection, Audit and Regulation by the Reserve Bank of India. These provisions indicate an entity carrying on business of banking is not absolutely or wholly free; is amenable to supervision /regulation. In other words, its investments are subject to scrutiny; and any impermissible investment will not be permitted to continue, if made, by the regulator i.e. Reserve Bank of India.

37. Section 6(1) of the B.R. Act specifies Forms of Business in which a Banking Company may engage. Section 6 finds its place in Part II under the heading BUSINESS OF BANKING COMPANIES. Sub-section (1) of Section 6 of the B.R. Act specifies that a banking company may engage in any one or more of the forms of business specified in Clauses (a) to (o). Sub-section (1) of Section 6 opens with the use of the phrase SIn addition to the business of banking and on the basis of the said phrase revenue contends that this would not amount to business of banking and business of banking has to be restricted to the definition of 'Banking' stipulated in Section 5(b) of the B.R. Act. On a plain reading of the provision it is apparent that Section 6(1) is an enabling provision and to read the same as restricting the scope of the business, which an entity may carry on, is not only an incorrect reading of the provision but does not flow from the plain language employed by the provision. Under Clause (a) there are at least 11 different activities specified as forms of business in which a banking company may engage. Bearing in mind that Section 80P(2)(a)(i) of the Act requires a Co-operative Society, and not a Co-operative Bank defined under the GCS Act, to be engaged in carrying on business of banking it is not possible to restrict the scope of the business to the definition of 'Banking' under Section 5(b) of the B.R. Act. Clause (n) of Sub-section (1) of Section 6 of the B.R. Act is an inherent pointer to the interpretation one is required to place on Section 6(1) of the B.R. Act. The said Clause permits a bank of 'doing all such things as are incidental or conducive to the promotion or advancement of the business of the banking company'. Thus there is a live link, a proximate nexus between Clauses (a) to (o) of Section 6(1) and the business of 'Banking' under Section 5(b) of the B.R. Act. To say that investment of funds (so called surplus) is not conducive to the promotion or advancement of the business of banking would not only be derogatory of and contrary to the provisions but pedantic. It is not necessary to dilate any further in this regard as in case of Mehsana District Central Co-operative Bank Ltd.(supra) the Apex Court has already accepted the fact that hiring out of Safe Deposit Vaults and earning rental income therefrom would constitute a form of business of banking so as to be eligible for deduction under Section 80P(2)(a)(i) of the Act.

38. Even otherwise, as already noted hereinbefore, a banking company including a Co-operative Society, may accept deposits for the purpose of lending or investment. The definition does not stipulate that investment has to be only to the extent provided either by GCS Act or B.R. Act. To read it to be so would mean reading in a restriction which is not available in the provision on a plain reading. What the legislature has not provided cannot be read in by a Court, much less the Revenue.

39. In the case of Commissioner of Income Tax v. U.P.Co-operative Federation Ltd., , the Apex Court was called upon to resolve a controversy under the Indian Income-tax Act,1922 whereunder by Section 14(3) of the 1922 Act similar provision was made to extend certain advantages to Co-operative Societies. In the case before the Apex Court the assessee Co-operative Society earned interest on certain security deposits placed with agent and a question arose as to whether the same would amount to Sinvestment. The Apex Court held that there could be no dispute that the money provided by the assessee was by way of investment. In fact, if this money had not been made available the business as stipulated under the Scheme could not have been carried out and perhaps there would have been no business. After observing thus, the Apex Court took note of the term Sinvestment as follows:

'Investment' has not been defined in the Act. P.Ramanatha Aiyar's Law Lexicon (Reprint Edition 1987) states :

The term 'invest' is used in a sense broad enough to cover the loaning of the money but is not restricted to that mode of 'investment' or loans made on commercial paper. The word 'invest' has been judicially defined as follows :

To place property in business; to place so that it will be safe and yield a profit. It is also commonly understood as giving money for some other property (as) investing funds on lands and houses.

'Investment' means, in common parlance, putting out money on interest, either by way of loan, or by purchase of income producing property...

39.1 In the same decision the Apex Court has further observed SWe would like to point out that under Section 14(3), provision has been made to extend certain advantages to co-operative societies in order that the legislative purpose of providing incentives to the co-operative movement may be fulfilled. Taking note of the object of the enactment the Apex Court upheld the approach and interpretation placed by the High Court by stating that Sthe provisions contained in Section 14(3) should be liberally construed.

40. Therefore, taking clue from the aforesaid pronouncement made by the Apex Court, it is not possible to read and interpret the meaning of the term Sinvestment used in Section 5(b) of the B.R. Act in a restricted sense but it has to be read in a sense broad enough to denote placing of property in business; to place so that it will be safe and yield a profit. In other words, in common parlance, putting out money on interest, either by way of loan or by purchase of income producing property.

41. Considering the issue from a slightly different angle. Section 6(2) of the B.R. Act provides that no banking company shall engage in any form of business other than those referred to in Section 6(1) of the Act, and under Section 8 of the B.R. Act a banking company is prohibited from trading in goods, either by way of buying or selling or bartering of goods. Therefore, any bank, including a Co-operative Society engaged in business of banking cannot carry on any other business except as permitted under Section 5(b) read with Section 6(1) of the B.R. Act. Hence to treat the investments made by an assessee as being investments not in the course of business is not warranted by the provisions of the B.R. Act. One cannot presume that an assessee would voluntarily engage in activities which are prohibited specifically by the B.R. Act.

42. During the course of hearing a contention was raised on behalf of the revenue that an assessee bank must accept deposits, only for the purpose of advancing loans and for the purpose of statutorily prescribed investments. Any deposits in excess of such requirements, if invested, would tantamount to not carrying on business of banking. At the cost of repetition, as already noticed hereinbefore, the definition of the term 'Banking' does not impose any such restriction and it is not possible to read any such restriction. Even otherwise the entire premise is based on a fallacious understanding of the business. It is never possible for a bank to match the sum total of its borrowings in the form of deposits with the amounts lent out and invested. The bank earns profits because of the spread between rate of interest between borrowings made and the loans advanced and investments made. The deposits accepted by the bank carry interest at varying rates depending on the time frame and taking into consideration the required amount towards the interest payable to the depositors coupled with the expenses to be incurred for carrying on business, including fixed over-heads like salaries etc., it would be asking for an impossibility if an entity is required to carry on business as envisaged by revenue viz.,to match total amount of deposits with the total of amount advanced and invested.

43. In the case of Punjab Co-operative Bank Ltd. v. Commissioner of Income Tax (1940) 8 ITR 635, the Privy Council stated - SIn the ordinary case of a Bank the business consists in its essence of dealing with money and credit. The Banker has always to keep enough cash or easily realisable securities to meet any probable demand by depositors, and if some of the securities are realised in order to meet withdrawals by depositors, this is clearly a normal step in carrying on the banking business, in other words, that it is an act done in what is truly the carrying on of the banking business.

43.1 This view was reiterated with emphasis by the Apex Court in the case of Bihar State Co-operative Bank Ltd. v. Commissioner of Income Tax (1960) 39 ITR 114 wherein it was observed :

it is a normal mode of carrying on banking business to invest moneys in a manner that they are readily available and that is just as much a part of the mode of conducting a bank's business as receiving deposits or lending moneys or discounting hundies or issuing demand drafts. That is how the circulating capital is employed and that is the normal course of business of a bank. The moneys laid out, in the form of deposits as in the instant case would not cease to be a part of the circulating capital of the appellant nor would they cease to form part of its banking business. The returns flowing from them would form part of its profits from its business. In a commercial sense the directors of the company owe it to the bank to make investments which earn them interest instead of letting moneys lie idle. It cannot be said that the funds of the bank which were not lent to borrowers but were laid out in the form of deposits in another bank to add to the profit instead of lying idle necessarily ceased to be a part of the stock-in-trade of the bank, or that the interest arising therefrom did not form part of its business profits.

43.2 In the case of Addl. Commissioner of Income Tax v. Ahmedabad District Co-operative Bank Ltd., , this Court stated :

The laying out by a bank of its surplus and idle funds in easily realisable securities or debentures or deposits may be with twin objectives, viz.,to encash them readily in case of need and not to lose interest by keeping them idle. Merely because they are the securities or debentures payable at a certain specified period or that there was no variation in them would not convert them into investments pure and simple.

44. The question therefore would arise as to whether any distinction can be drawn between so called surplus funds/idle funds and statutory investments. It is necessary to bear in mind that a reserve per se does not yield any income. It is the investment of the fund backing a reserve which would yield income. Therefore, whatever be the nomenclature of a particular reserve, the funds of an assessee in totality are conglomerate of the total amount of deposits/investments, profits and other realisations. Money has no colour and the nomenclature used to segregate different funds is only for the sake of administrative convenience. Otherwise it is not possible to state that a particular portion of the fund emanates from the deposits received or from the profits earned in the earlier years. Thus, these funds are utilized, are invested, to earn further profits by way of interest. The only caveat, as can be seen running through the entire case law commencing from the Privy Council decision is that such funds must be invested in easily realizable securities. The twin objective as laid down by this Court is not to lose interest by keeping the funds idle and invested in securities so as to encash them readily in case of need. This is in consonance with the definition of the term 'Banking'. The deposits are accepted as payable on demand or otherwise, and also permitting withdrawal by cheques and other prescribed modes.

45. However, the business of banking is primarily a business in trust, a business of putting trust in a banker. How does a bank ensure that the customer places trust. It has to offer not only good returns but also safety and liquidity. In other words, the depositor must be ensured that the depositor will get good returns on its deposit, the deposits would be safe and deposits would be available for withdrawal as and when required, subject to the terms of the contract between the parties. It is in this context that the requirement of investment being in easily realisable securities or money being readily available for meeting the demand made by the depositor is taken as touch stone of the business of banking.

46. The depositor is not aware of the definition of the term 'Banking' as provided under the B.R. Act nor is he concerned with the same. His only concern is to place his funds with a 'Bank', which in common parlance is defined as a financial establishment which uses money deposited by the customer for investment, pays it out when required, makes loans at interest, exchanges currency, etc. When the term 'Bank' is used as a verb in its transitive form it would take within its sweep deposit of money or valuables in a bank. The phrase 'Bank on' indicates to rely on. Thus, a depositor banks on a particular bank or a banker while making deposit in the bank. The only way the depositor gains confidence, places reliance on, or banks upon a particular establishment, is by looking at the total of the assets of the bank concerned. The assets would include all investments net of liabilities. In other words a balance-sheet which reflects sound financial health of a bank would get preference over an establishment whose balance-sheet reflects weak finances. It is for this purpose that a prudent banker is required to invest in various modes, including in securities of different kinds to carry on the business of banking. It is in this context that the concept of easily realisable securities, investments wherefrom moneys are readily available, comes into sphere of banking. The business is not only to be transacted by banker alone. The customer is an equally vital component of such a business and it is the trust that he has in a particular establishment which ultimately permits the establishment to carry on the business of banking. Thus all investments, even if one accepts Revenue's artificial distinction, surplus or not, are essential and conducive to the promotion or advancement of the business of banking.

47. In the case of Commissioner of Income Tax v. Karnataka State Co-operative Apex Bank (2001) 251 ITR 194 the Apex Court has stated that there is nothing in the phraseology of Section 80P(2)(a)(i) of the Act which makes it applicable only to income derived from working or circulating capital. As already noticed hereinbefore the said decision has been followed and applied by the Apex Court in the case of Mehsana District Central Co-operative Bank Ltd. (supra) in case of income from utilization of funds forming statutory reserves and income from hiring out of Safe Deposit Vaults.

47.1 In the case of Commissioner of Income Tax v. Ramanathapuram Dist. Co-op. Central Bank Ltd., , the Apex Court following its earlier decisions in case of Karnataka State Co-operative Apex Bank (supra) and Mehsana District Central Co-operative Bank Ltd. (supra) upheld the decision of the High Court holding that interest on securities, subsidies received from the Government and dividend income should be regarded as business income and the assessee is entitled to deduction under Section 80P(2)(a)(i) of the Act.

48. Before concluding it is necessary to bear in mind the approach advocated by the Apex Court in the case of Mysore Minerals Ltd. v. Commissioner of Income Tax . It is laid down at page 778 :

The provision should be so interpreted and the words used therein should be assigned such meaning as would enable the assessee securing the benefit intended to be given by the Legislature to the assessee. It is also well settled that where there are two possible interpretations of a taxing provision the one which is favourable to the assessee should be preferred.

49. As already stated hereinbefore, it is not possible to read the direction issued by the Apex Court as laying down a proposition which is contrary to the statutory scheme. However, as can be seen from the impugned order of the Tribunal rendered by the Special Bench the following findings of facts have been recorded after analysing the evidence placed before it.

The destination of such income has always been the same mixed /common fund constituting the working capital. Such interest income on investments in Government securities etc., made out of working capital (including voluntary reserves) has been credited in profit and loss account and have been utilised for meeting various banking expenses debited in the profit and loss account and surplus has merged with the working capital available for carrying on the banking business of lending and/or of making such investments. Such inseparable mixed/common funds, which constitutes the source and origin of such investments is also the destination of such income and proceeds of its realisation on encashment. All such activities are integral part of normal banking activities of banking business carried on by these societies.

The aforesaid findings would cover Tax Appeal Nos. 208 of 2003 and Tax Appeal No. 178 of 2003, because the Tribunal has found Sthe facts of all the present cases so far as they relate to claim for grant of deduction under Section 80P(2)(a)(i) are almost similar.

50. In so far as Appeal Nos. 371 to 375 of 2003 are concerned the Tribunal has after referring to the Special Bench decision analysed the details of investments on which interest income is earned year-wise and applied the decision of the Special Bench. In paragraph Nos. 6 and 7 the Tribunal has issued direction in relation to the miscellaneous income as well as interest on suspense account and directed the Assessing Officer to verify the facts and held that Sincome which has no nexus or connection to the banking activity alone be brought to tax and grant exemptions to others.

51. During the course of hearing on behalf of the appellant revenue 13 authorities were cited, and on behalf of the respondent assessees 21 authorities were cited. All the authorities have been taken into consideration even if the same have not been specifically enumerated.

9.8.2005.

52. To summarise :

i. The finding of this Court rendered in case of Gujarat State Co-operative Bank Limited (supra) does not survive when in relation to the second question it is stated by the Apex Court that the matter stands restored to Commissioner (Appeals) for being decided afresh;

ii. It is well settled that a decision not expressed, not accompanied by reasons cannot be deemed to be a law declared to have a binding effect as contemplated by Article 141 of the Constitution;

iii. It is for the High Court to find out what is distinction between the decision on the case before the Supreme Court and what is the ratio decidendi so as to decide the issue on merits according to its own interpretation of the judgment of the Apex Court;

iv. As per the Scheme of the Income Tax Act net income relatable to a particular head or item has to go in as a component of the gross total income before any deduction under Chapter VIA is allowed;

v. In case of an assessee, carrying on business of banking income under Section 28 is computed in accordance with provisions of Section 29 of the Income Tax Act and the net figure is taken as a component of the total income or gross total income for the purpose of deduction under Chapter VIA;

vi. In case of an assessee, like the present assessee, all interest income, actually received or accrued, has to be computed in the manner provided in the Act so as to form the total income which is subjected to charge under Section 4 of the Act;

vii. The order of the Apex Court cannot and should not be construed in a manner so as to be inconsistent with the provisions of the statute as the Apex Court could not have contemplated passing an order contrary to the provisions of the Act;

viii. Thus the direction by the Supreme Court can only mean ascertainment of utilization of net income of earlier years, which forms part of the funds which are invested, and given the nomenclature of voluntary reserves;

ix. Under Section 80P(2)(a)(i) of the Act the two activities, viz., business of banking or providing credit facilities to its members, are distinct and separate activities; the former connotes a larger activity than the activity of providing credit facilities to its members;

x. The provision of Section 80P has been introduced on the statute book to encourage and promote growth of the co-operative sector in the economic life of the country;

xi. When the investments are made in securities, in permissible mode of investments, under the B.R. Act or GCS Act read with Indian Trusts Act income arising therefrom would be attributable to the business of banking, and eligible for deduction under Section 80P(2)(a)(i) of the Act;

xii. Definition of 'working capital' under Section 2(24) of the GCS Act cannot be restricted to mean money raised by borrowing;

xiii. The Scheme under the GCS Act in case of society carrying on business of banking is that, it would be permissible to make investments or deposits in any of the specified modes as provided in section 71 of the gcs act including any of the modes specified in Section 20 of the Indian Trusts Act without there being any upper limit as to the amount that can be invested, once the statutory requirement of reserve fund stipulated in section 67(2) of the gcs act is satisfied;

xiv. Section 6(1) of the B.R. Act is an enabling provision and to read the same as restricting the scope of business of banking would be an incorrect reading which does not flow from the plain language employed by the provision;

xv. Section 80P(2)(a)(i) of the Act requires a Co-operative Society, and not a Co-operative Bank defined under the GCS Act, to be engaged in carrying on business of banking; hence it is not possible to restrict the scope of the business to the definition of 'Banking' under Section 5(b) of the B.R. Act;

xvi. There is a live link, a proximate nexus between Clauses (a) to (o) of Section 6(1) and the business of 'Banking' under Section 5(b) of the B.R. Act;

xvii. The definition of 'Banking' under Section 5(b) of the B.R. Act does not stipulate that investment should be should be only to the extent provided either by the GCS Act or B.R. Act;

xviii. The meaning of the term 'investment' in Section 5(b) of the B.R. Act has to be read so as to denote placing of property in business so that it will be safe and yield profit;

xix. Considering the provisions of Section 6(2) and Section 8 of the B.R. Act to treat the investments made by an assessee as being investments not in the course of business is not warranted by the provisions of the B.R. Act;

xx. Whatever be the nomenclature of a reserve, the funds of an assessee in totality are conglomerate of the total amount of deposits/investments, profits and other realisations;

xxi. The requirement of investment being in easily realisable securities or money being readily available for meeting the demand made by the depositor is taken as touch stone of the business of banking to ensure that the depositor gets good returns accompanied by safety and liquidity;

xxii. All investments, surplus or not, are essential and conducive to the promotion or advancement of the business of banking when considered from the view point of a depositor.

53. In these circumstances for the aforestated reasons the question requires to be answered in the affirmative. The Tribunal was right in allowing deductions under Section 80P(2)(a)(i) of the Act on interest income as being attributable to the business of banking. All the Tax Appeals are accordingly dismissed. There shall be no order as to costs.