The Judgment of the Court was delivered by
V.G Sabhahit, J.:— This appeal is filed by the assessee being aggrieved by the order passed by the Income-tax Appellate Tribunal, Bangalore Bench “A” in I.T.A No. 1460.Bang/2003 dated November 9, 2004, wherein the Appellate Tribunal by allowing the appeal of the Revenue has held that income received by the assessee from investment in security and bank deposits would not qualify for exemption under section 80P(2)(a)(i) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), and accordingly, has set aside the order passed by the first appellate authority—Commissioner of Income-tax (Appeals), Hubli, dated September 26, 2003 and restored the order passed by the Assessing Officer.
2. The essential facts of this case leading up to the filing of this appeal are as follows:
The assessee is a co-operative society registered under the Co-operative Societies Act. The assessee filed returns for the assessment years 1991-92 to 1999-2000. The return of the income for the assessment year 1991-92 was filed on September 27, 1991 disclosing the income of Rs. 1,25,94,454 under the head of “Income from business” and claiming exemption for the same under section 80P(2)(a)(i) of the Act and the total income returned was “nil”. The return of income was processed under section 143(1)(a) of the Act on September 9, 1992, accepting the return, statement of income, audit report under section 44AB of the Act, printed trading and profit and loss account and balance-sheet which were filed along with the return of income. The business carried on by the assessee was marketing of agricultural produce of the members of the society. The business activity other than marketing of the agricultural produce resulted in net loss. The assessment was reopened with issue of notice under section 148 of the Act dated May 31, 2001. The assessee filed a letter dated June 7, 2001 requesting to treat the return filed under section 139(1) of the Act as the return in response to the notice under section 148 of the Act. However, it filed a return on August 9, 2001 disclosing the income as declared in the original return filed on September 27, 1991. After giving the assessee an opportunity of hearing before the Assessing Officer and the assessee appeared through advocate and chartered accountant and submitted that the assessee invested funds which were not required immediately for the business purposes for a short-term instead of keeping the funds idle and therefore, it was not a source of income as an ordinary investor and therefore, such deposits were not an investment but an activity as a prudent businessman. It was also pleaded that if the assessee's submission is not accepted and such interest is to be assessed without giving deduction under section 80P of the Act, then the interest income from bank deposits should be computed after allowance of proportionate interest paid on members deposits.
3. A reference was made under section 144A of the Act to the Additional Commissioner of Income-tax, Range-I, Hubli, seeking directions about the assessment of interest income and the Additional Commissioner of Income-tax after notifying the assessee and hearing the representative of the assessee held by order dated September 30, 2002, that interest income from debtors was entitled to be exempted. However, interest on bank deposit other than co-operative banks and interest on bonds and securities, interest earned from co-operative banks and deposits was entitled to deduction under section 80P(1)(iii) of the Act. However, interest accrued on bank deposits other than co-operative banks and interest from bonds and securities, the Additional Commissioner of Income-tax held that interest on bank deposits other than co-operative banks and interest on securities and bonds, income is assessable as income from other sources for which deduction under section 80P(1)(iii) would be admissible. Further, there was no deduction for expenditure that the entire income would be assessable as income. After hearing the representative of the assessee and considering the contention, the Assessing Officer by his order dated January 20, 2003 held that the following directions given in section 144A of the Act that income from deposit (other than co-operative banks) and income from bonds and securities is assessable as income from other sources and the said income is assessable without deductions for interest expenditure and no deduction under section 80P(2)(a)(i) of the Act is allowable and further there shall be no deduction of interest expenditure.
4. Being aggrieved by the said order of the Assessing Officer order, the assessee preferred an appeal before the first appellate authority—Commissioner of Income-tax (Appeals) Hubli, and the first appellate authority by order in Appeal Nos. 214/215/216/217/27/213A/26/218.HBL/CIT(A)/HBL/2002-03 and 2003-04 allowed the appeal accepting the contentions of the assessee that the income received from deposits and securities is attributable to profits gains of the assessee and therefore, entitled to exemption under section 80P(2)(a)(i) of the Act and set aside the order passed by the assessing authority.
5. Being aggrieved by the order passed by the first appellate authority, the Revenue preferred appeal in I.T.A No. 1460.Bang/2003. The assessee has also filed cross-objections being aggrieved by the finding given by the first appellate authority regarding the validity of the notice issued under section 148 of the Act. The Income-tax Appellate Tribunal by order dated November 9, 2004 allowed the appeal filed by the Revenue and dismissed the cross-objections by holding that the Assessing Officer was justified in reopening the assessment under section 147 of the Act and proper notice was issued under section 148 of the Act and consequently, assessment under section 143(3) read with section 144A of the Act is valid and further held that income from securities and deposits in business does not qualify for exemption under section 80P(2)(a)(i) of the Act as the said income is not attributable to gains and profits of the assessee as the assessee is not doing any banking business and further held that the first appellate authority was not justified in relying upon the decisions wherein the assessee was a cooperative bank and since the assessee was not doing any banking business, the income received from deposits in banks wherein in respect of the surplus funds and was not attributable to profits and gains of business arid accordingly, held that the same did not qualify for exemption under section 80P(2)(a)(i) of the Act and accordingly, set aside the order passed by the first appellate authority and restored the order passed by the Assessing Officer.
6. Being aggrieved by the order of the Income-tax Appellate Tribunal, the assessee has preferred this appeal.
7. The appeal was admitted on June 8, 2005.
8. We have heard the learned counsel for the appellant and the learned counsel appearing for the respondent-Revenue.
9. Having regard to the contentions urged, the substantial questions of law that arise for determination in this appeal are:
“(i) Whether the finding of the Income-tax Appellate Tribunal that interest received by the assessee from securities and deposits in bank is not attributable to the amount of profits and gains of the business and therefore, does not qualify for exemption under section 80P(2)(a)(i) of the Act and as assessed under section 56 of the Act is contrary to law and calls for interference in this appeal?
(ii) Whether the finding of the Income-tax Appellate Tribunal that proceedings for reopening of assessing order under section 147 of the Act was proper and notice issued under section 148 of the Act was valid, is contrary to law and calls for interference in this appeal?”
10. And we answer points Nos. 1 and 2 by holding that the finding of the Tribunal is justified and does not call for interference in this appeal.
11. The learned counsel appearing for the appellant submitted that the assessee is a co-operative society registered under the Co-operative Societies Act. Out of the profits earned by the assessee, certain investments have been made in securities like Kisan Vikas Patra and other bonds and also deposits in banks. The assessee is carrying on the business of providing credit facilities to its members and therefore, the appellant-society being an assessee engaged in providing credit facilities to his members, the interest received on deposits in business and securities is attributable to the business and securities is attributable to the business of the assessee as its job is to provide credit facilities to its members and marketing of agricultural products of its members.
12. The learned counsel submitted that the word “attributable” is wider than the words “derived from” and when the income received from securities and deposits is considered in relation to the objects of the assessee society, and the business run by it, it is clear that the interest received on security and deposits in bank is attributable to profits and gains of business and therefore, the Commissioner of Income-tax has rightly held that the said income qualifies for exemption under section 80P(2) and the Tribunal was not justified in reversing the said finding and in restoring the order passed by the Assessing Officer. In support of his contention, the learned counsel has relied upon a number of decisions and in particular the decision of this court in CIT v. Producin Pvt. Ltd. [2007] 290 ITR 598 wherein the Division Bench of this court has held, income received from short-term deposits made by the assessee is attributable to profits and gains of business and cannot be treated as income form other sources. He has also relied upon the decisions of the hon'ble Supreme Court in CIT v. Karnataka State Co-operative Apex Bank reported in [2001] 251 ITR 194 and other decisions wherein the assessee was doing banking business. The learned counsel further submitted that in respect of the assessment years prior to preceding 6 years from the date of service under section 148 of the Act in view of the said notice is illegal as the notice has not been issued after obtaining permission of the competent authority and the permission of the competent authority to reopen the case has been obtained subsequent to May 31, 2001 to overcome the provisions of the Amendment Act which has come into effect on June 1, 2001 enabling opening of assessment in respect of 10 years preceding notice. The learned counsel submitted that the material on record would show that as on the date of issuing of the notice, the approval from the Additional Commissioner of Income-tax required under section 151 of the Act has not been obtained and, therefore, the notice issued is without jurisdiction and, therefore, the order passed by the assessing authority confirmed by the Income-tax Appellate Tribunal is liable to be set aside.
13. In response to the arguments of the learned counsel for the appellant the learned counsel for the respondent submitted that the decisions of this court in CIT v. Producin Pvt. Ltd. [2007] 290 ITR 598 has been set aside by the hon'ble Supreme Court in Civil Appeal No. 1332 of 2006 (CIT v. Producin Pvt. Ltd. [2010] 322 ITR 270) and therefore, the observations made in the said judgment are not helpful to the appellants in the said case. The learned counsel further submitted that it has been observed in the said judgment while setting aside the judgment passed by this court that where investment is of surplus, the interest is received from the investment made of surplus funds as contended by the Revenue, the same is not attributable to profits, gains and income from business and only where the interest received from security and deposits is attributable to the business profits and gains of the assessee, the same would qualify for exemption under section 80P(2)(a)(i) of the Act.
14. The learned counsel further submitted that what is invested by the assessee in securities and funds is not in respect of the statutory deposits as the assessee is not doing any banking business and what was invested is the surplus funds available with the assessee which has nothing to do with the object of providing credit facilities to members or marketing agricultural produce of the members of the assessee and therefore, the said income is not attributable to the business of the assessee and does not qualify for exemption under section 80P(2)(a)(i) and therefore, the order passed by the Income-tax Appellate Tribunal restoring the assessment order is justified and does not call for interference in this appeal.
15. We have given anxious consideration to the contentions of the learned counsel appearing for the parties in the light of the principles laid down in the decisions relied upon by the learned counsel for the parties.
16. It has to be stated at the outset that many of the decisions relied upon by the learned counsel for the appellant pertain to cases wherein the assessee was a co-operative bank. Admittedly, the assessee in the present case is not a co-operative bank and it is not doing any banking business and even according to the assessee, the activities of the assessee would fall within the ambit of section 80P(2)(a)(i) and (iii) of the Act.
“80P. Deduction in respect of income of co-operative societies.—
(1) Where, in the case of an assessee 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…
(iii) the marketing of agricultural produce grown by its members, or…
the whole of the amount of profits and gains of business attributable to any one or more of such activities.”
17. It is well settled that the total income of the assessee is chargeable to tax under section 4 of the Act. The total income has to be computed in accordance with the provisions of section 14 of the Act which lays down for the purpose of computation of 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.
18. By an amendment made in 1988 “interest on securities” has been made chargeable to tax as business income when such interest forms part of business profits and in all other cases under section 56(2)(id) of the Act as income under each of the above six heads will have to be made independently and separately. There are specific rules of deduction and allowance under each head. No deduction or adjustment on account of any expenditure can be made except as provided by the Act.
19. In the present case, it is not disputed that the assessee is not doing any banking business and therefore, the various decisions relied upon by the learned counsel for the appellant-assessee wherein the assessee was doing business of banking is not helpful to him to support the case of the appellant. Further, it is also not the case of the assessee that the statutory deposits are required to be made by the assessee as required by the assessee doing banking business by making deposits in RBI in which case also the interest earned from the said deposits can be attributable to the business of banking and in the present case it is clear from the perusal of the material on record that the assessee is claiming benefit of section 80P of the Act on the ground that it is a society registered under the Co-operative Societies Act and the object of the society is to arrange for the sale of agricultural produce of the members to the best advantage and to advance loans to the members on the security of their produce, raw or processed. The assessee has also other objects which are not relevant for discussion having regard to the provisions of section 80P of the Act and the contention of the assessee before the Assessing Officer was that income received from the deposits in banks and securities is attributable to the business of advancing loans to members on security of the produce and therefore, qualifies for deduction as income from the head “Profits and gains of business”. The main decision upon which the learned counsel for the appellant relied upon to substantiate his contention in that behalf wherein it was held that interest derived from short-terms deposits on surplus funds would also qualify for deduction under section 80P(2)(a)(i), but the said decision in CIT v. Producin Pvt. Ltd. [2007] 290 ITR 598, has been reversed by the hon'ble Supreme Court in Civil Appeal No. 1332 of 2006 (see page 270) and it is observed in the said judgment, the hon'ble Supreme Court while setting aside the order passed in the judgment of this court in CIT v. Producin Pvt. Ltd. [2007] 290 ITR 598 has observed while remanding that, according to the Department, it was the case of surplus being invested in FDR whereas, according to the assessee it was the case of advance having been received from the exporter which was invested in FDR for short duration and therefore, the decision of this court reported in CIT v. Producin Pvt. Ltd. [2007] 290 ITR 598 is not available to the appellant in the present case to substantiate the contention.
20. It is clear from the perusal of the material available on record that the appellant does not claim to be a banking company though a vague reference is made by the learned counsel for the appellant and that reference is made by the learned counsel with reference to rule 28 of the Karnataka Cooperative Societies Rules, 1960.
“28. Maintenance of fluid resources.—Every co-operative society accepting deposits and granting cash credits should maintain fluid resources in such form and according to such standards as may be fixed by the Registrar, from time to time, by general or special order.”
21. It is clear from the perusal of the said rule that every co-operative society accepting deposits and granting cash credits should maintain fluid resources in such form and according to such standard as may be fixed by the Registrar, from time to time, by general or special order.
22. The abovesaid contention has not been taken before the assessing authority or the Income-tax Appellate Tribunal and no material whatever is produced to show that the appellant-society is authorised to accept deposits and the perusal of the said provision would show that the issuance of fluid resources has to be done where the society is doing banking business, i.e, accepting deposits and granting cash credits and, therefore, there is no merit in the contention of the learned counsel for the appellant that the interest is earned out of the statutory deposits. The assessee is admittedly not doing any banking business. What is invested in security and term deposits with the bank is the surplus funds in the possession of the assessee and as the assessee is not doing any banking business, interest accrued from securities and deposits in banks other than co-operative societies were taken as relatable to profits and gains of the society as the said investment does not in any way affect the working capital is not a part of the circulating capital, but only out of the surplus funds available to the society and the assessee has not proved that there is no obligation on the part of the assessee to hold any securities as the part of the business and what is invested in securities and deposits is the surplus funds available with the assessee and it Would not in any way affect the circulating capital of the society and, therefore, it is clear that the finding arrived at by the Income-tax Appellate Tribunal that the interest received from securities and deposit except deposits with the banks other than co-operative banks is not relatable to the business of the assessee in the present case and consequently, it is not qualified for deduction and consequently cannot qualify for computation of exemption under section 80P of the Act is justified.
23. The Income-tax Appellate Tribunal has rightly held that the appellate authority-Commissioner of Income-tax (Appeals) has relied upon the decisions wherein the assessee was a banking company and, therefore, the said decisions were not applicable to the assessee in the present case which is not admittedly doing any banking business and, therefore, the order passed by the Commissioner of Income-tax (Appeals) could not be sustained and the same is liable to be set aside by restoring the order passed by the Assessing Officer.
24. It is also clear from the perusal of the material on record that the actual reserve and other funds held by the assessee was rupees seven crores ninety-two lakhs in the assessment year 1991-92 and it has increased to twenty six crore ninety-five lakhs in the assessment year 1999-2000 and investment in bank deposits, bonds, securities and other assets was rupees four crores and five lakhs in the assessment year 1991-92 and has increased to rupees twelve crores ten lakhs up to the assessment year 1999-2000 and, therefore, capital and reserve not only cover the investment in banks, bonds, securities and other assets but they were nearly 50 per cent, of such funds and what was invested is the surplus funds has been available for investment therefore, they are considered as own funds for investment and, therefore, the income by way of interest arising on deposits on banks securities is a source of income apart from marketing activity of the assessee and since earning of interest is not a business activity of the assessee is assessable to income from other sources and moreover the source of investment in bank deposits, securities and bonds are attributable to own funds. There has been no charge by way of interest explained and accordingly, for the aforesaid reasons, we hold that the finding of the Income-tax Appellate Tribunal is justified and does not call for interference in this appeal and accordingly, we answer substantial question No. 1.
25. Substantial question No. 2.
26. It was contended by the assessee that initiation of the proceedings by issuing notice under section 148 of the Act without obtaining prior approval of the Additional Commissioner of Income-tax is without jurisdiction. It is the case of the assessee that in view of the amendment of the Act with effect from June 1, 2001, the reopening of the cases is restricted to six years in place of ten years which has to gain passing advantage if any notices were got served on May 31, 2001, even before sending it to the approval of the Additional Commissioner of Income-tax as mandatory under section 151 of the Act.
27. The said contention was repelled by the Revenue by contending that the notice has been issued only after obtaining approval of the Additional Commissioner of Income-tax and communication of the said approval was received by letter and therefore, there is compliance with section 151 of the Act. The Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal on verification of the original records found that there was no merit in the contention of the assessee as the original records reveal that the previous permission of the Additional Commissioner of Income-tax has been obtained before issuing notice to the assessee and only the communication of the said approval was received on June 8, 2001. There is concurrent finding by both the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal on the said contention and on verification of the original records, we also find that the permission of the Additional Commissioner of Income-tax on May 31, 2001 and the same was communicated on June 8, 2001 and therefore, issuance of notice was only after obtaining approval of the Assistant Commissioner of Income-tax and the contends of the original records would clearly belie the issuance of the assessee with the notice under section 148 of the Act was issued without obtaining permission of the Additional Commissioner of Income-tax cannot be accepted and the same is liable to be rejected and therefore, the finding of the Tribunal in this behalf is also justified and does not warrant interference in this appeal and accordingly, we answer substantial question of law No. 2.
28. In view of our answer to substantial questions of law Nos. 1 and 2, we hold that there is no merit in this appeal, and accordingly, we dismiss this appeal and the order passed by the Income-tax Appellate Tribunal, Bangalore Bench “A” in I.T.A No. 1460.Bang/2003 dated November 9, 2004 is confirmed.