ADDL.CIT, Hyderabad v. M/s Sri Satavahana Grameen Bank, Hyderabad

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B HYDERABAD BEFORE SHRI N.R.S. GANESAN JUDICIAL MEMBER AND SHRI CHANDRA POOJARI ACCOUNTANT MEMBER 1) ITA NO.1078/HYD/2009 : ASSTT. YEAR 2006-07 ACIT RANGE -9 HYDERABAD (APPLICANT) 2) CO.NO.59/HYD/2009 M/S SRI SATAVAHANA GRAMEEN BANK HYDERABAD. (PAN AAAJSO 354F) VS. M/S SRI SATAVAHANA GRAMEEN BANK HYDERABAD. (PAN AAAJSO 354F) (RESPONDENT) ASST. YEAR : 2006-07 ACIT RANGE -9 HYDERABAD (APPLICANT) (RESPONDENT) APPLICANT BY : SMT. NIVEDITA BISWAS DR RESPONDENT BY : SHRI T. UMAKANT O R D E R PER CHANDRA POOJARI ACCOUNTANT MEMBER THE FIRST APPEAL PREFERRED BY THE REVENUE AND THE CROSS APPEAL PREFERRED BY THE ASSESSEE ARE DIRECTED AGAINST TH E ORDER OF THE CIT(A) -VI HYDERABAD DATED 14.8.2009 AND PERTAINS TO THE ASSESSMENT YEAR 2006-07. 2. THE REVENUE RAISED THE FOLLOWING GROUNDS: 1. THE CIT(A) ERRED ON FACTS AND IN LAW 2. THE CIT(A) ERRED IN GRANTING RELIEF U/S 80P FOR IN COME ON INVESTMENTS OF SURPLUS FUNDS MADE BY THE ASSESSEE THOUGH SUCH I NCOME IS NOT EARNED FROM BANKING BUSINESS. 3. THE CIT(A) ERRED IN NOT APPRECIATING THAT AN ASSES SEE CAN HAVE INVESTMENT AS WELL AS BUSINESS ACTIVITY AND THE INC OME FROM 2 2 INVESTMENT ACTIVITY HAS TO BE TREATED AS INCOME UND ER THE HEAD 'OTHER SOURCES'. 4. THE CIT(A) ERRED IN RECORDING A FINDING THAT THE SU RPLUS FUNDS ARE DEPLOYED IN BANKING ACTIVITY THOUGH THE ASSESSEE FA ILED TO FURNISH PROOF TO THE FACT THAT THE FUNDS WEE DEPLOYED IN LI QUID FORM FOR USE AT SHORT NOTICE. 3. AFTER HEARING THE BOTH PARTIES WE ARE OF THE OPINION THAT THIS ISSUE HAS BEEN SQUARELY COVERED BY THE ORDER OF THE TRIBUNAL DATED 11/5/2007 (SMC) IN THE CASE OF M/S SUDHA COOPERATIVE URBAN BANK LIMITED SURYAPET IN ITA NO.341/HYD/07 FOR THE ASSESSM ENT YEAR 2003- 04 WHEREIN IT WAS HELD AS FOLLOWS: 'I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. I FIND THAT TH ERE IS NO DISPUTE THAT THE ASSESSEE IS CARRYING ON THE BUSINESS OF BANKING/PRO VIDING CREDIT FACILITIES TO ITS MEMBERS. IT IS ALSO NOT IN DISPUTE THAT THE AS SESSEE INVESTED A SUM OF RS.1 CRORE WITH APFSFC OUT OF THE NON-SLR FUNDS AVA ILABLE WITH THE BANK AT THE RELEVANT TIME IN ACCORDANCE WITH THE GUIDELINES ISSUED BY THE RBI. I FURTHER FIND THAT SUCH INVESTMENT OF 1 CRORE WAS MA DE BY THE ASSESSEE IN THE NORMAL COURSE OF ITS BUSINESS TO EARN INTEREST. I FURTHER FIND THAT THE TERM 'BANKING' HAS NOT BEEN DEFINED UNDER THE IT ACT. H OWEVER IT HAS BEEN DEFINED UNDER SECTION 5 (B) OF THE BANKING REGULATI ON ACT WHICH SAYS THAT BANKING MEANS THE ACCEPTING FOR THE PURPOSE OF LEN DING OR INVESTMENT OF DEPOSITS OF MONEY FROM THE PUBLIC REPAYABLE ON DEM AND OR OTHERWISE AND WITHDRAWABLE BY CHEQUES DRAFT ORDER OR OTHERWISE'. I FURTHER FIND THAT THE LEARNED. CIT(A) AFTER CONSIDERING THE PROVISIONS OF SECTION 80P(2)(2)(A)(I) SECTION 5(B) AND SECTION 6 OF THE BRA AND THE DECIS IONS OF THE HON'BLE SUPREME COURT HIGH COURTS AND TRIBUNAL HAS HELD VI DE PARA 12 13 AND 14 OF HIS ORDER AS UNDER:- 12. IN THIS SENSE ANY BANK INCLUDING COOPERATIVE BANK M AY ACCEPT DEPOSITS FROM THE PUBLIC NOT ONLY FOR LENDING THE M ONEY BUT ALSO FOR THE PURPOSE OF MAKING INVESTMENTS. AS SUCH THE ACT IVITY OF INVESTMENT EITHER IN SLR OR NON SLR INVESTMENT CANN OT BE DIVORCED FROM THE BUSINESS OF BANKING. IT MAY BE PERTINENT TO MENTION THAT THE BRA HAS NOT DEFINED THE TERM 'BUSINESS OF BANKING'. BUT THE STATUTORY PROVISION OF SECTION 80P OF THE IT ACT 1961 HAS US ED THE TERM 'BUSINESS OF BANKING' WHICH HAS WIDER CONNOTATION T HAN THE TERM 'BANKING' USED IN THE BRA. UNDER SUCH WIDER EXPRES SION USED IN THE IT STATUTE IT MAY NOT BE JUSTIFIED TO HOLD THAT THE A CTIVITY OF MAKING INVESTMENT IN SLR OR NON SLR INVESTMENT SHOULD NOT BE CONSIDERED AS INTEGRAL PART OF BANKING BUSINESS AND THEREBY IT MA Y NOT BE JUSTIFIED TO HOLD THAT ANY INCOME ARISING OUT OF SUCH INVEST MENT ACTIVITY OF A COOPERATIVE BANK HAS TO BE TREATED AS NON PROFIT IN COME OR INCOME FROM OTHER SOURCES. 13. 13. SIMILAR ISSUES DECIDED BY VARIOUS TRIBUNALS H CS AND SUPREME COURT ON THIS POINT MAY BE ANALYZED AS UNDER: I) BIHAR STATE COOPERATIVE BANK VS. CIT: DECIDING SIM ILAR ISSUES ABOUT THE INTEREST EARNED BY THE BANK FROM INVESTME NT OF 3 3 FUNDS WITH ANOTHER BANK TO BE PROFIT FROM BANKING B USINESS OR INCOME FROM OTHER SOURCES; THE HON'BLE SUPREME COUR T IN THEIR ORDER DATED 22.2.1960 HAD HELD AS UNDER: '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 STOCK IN TRADE O F THE BANK OR THAT THE INTEREST ARISING THERE FROM DID NOT FOR M PART OF ITS BUSINESS PROFITS . THE HIGH COURT WAS IN ERROR IN TREATING INTEREST DERIVED FROM DEPOSITS AS NOT ARISING FROM THE BUSINESS OF THE BANK AND THEREFORE NOT FALLING WITH IN THE INCOME EXEMPTED. II) CIT VS. DHANSURA PEOPLE COOPERATIVE BANK LTD. WHIL E DISPOSING THE SPECIAL LEAVE PETITION FILED BY THE I T DEPARTMENT AGAINST THE JUDGMENT OF GUJARAT HIGH COURT IN TAX A PPEAL NO.304 OF 2005 THE HON'BLE SUPREME COURT HAD UPHEL D THE FINDINGS OF THE GUJARAT HIGH COURT. THE HIGH COURT HAD CONFIRMED VIEWS OF HON'BLE ITAT TO THE EFFECT THAT DEDUCTION U/S 80P OF THE IT ACT 1961 ON INTEREST INCOME EARN ED FROM INVESTMENT OF VOLUNTARY RESERVES WAS ATTRIBUTABLE T O THE BUSINESS BANKING. III) MEHSANA DISTRICT CENTRAL COOPERATIVE BANK VS. ITO: IN THIS CASE THE HON'BLE SC HELD THAT THE COOPERATIVE BANK WAS ENTITLED TO DEDUCTION U/S 80P (2) (A) (I) OF THE IT ACT 1961 IN RESPECT OF INTEREST EARNED FROM THE FUNDS UTILIZED FOR THE STATUTORY RESERVES. IV) CIT VS. KARNATAKA STATE COOPERATIVE APEX BANK: IN THIS CASE THE HON'BLE SUPREME COURT HELD THAT THE ASSESSEE CO OPERATIVE BANK IS REQUIRED TO PLACE A PART OF ITS FUNDS WITH STATE BANK OR RBI TO ENABLE IT TO CARRY ON ITS BANKING BUSINESS. THIS BEING SO ANY INCOME DERIVED FROM THE FUNDS SO PLACED ARI SES FROM BUSINESS CARRIED OUT BY IT AND THE ASSESSEE HAS NOT ONLY REASONS OF SECTION 80P (2) (A) (I) TO PAY INCOME TA X THEREON. THE PLACEMENT OF SUCH FUNDS BEING IMPERATIVE FOR TH E PURPOSE OF CARRYING ON THE BANKING BUSINESS THE INCOME DERI VED THERE FROM WOULD BE INCOME FROM ASSESSEE'S BUSINESS. V) IN THE CASE OF AP COOPERATIVE BANK: THE HON;BLE IT AT HYDERABAD WHILE DECIDING THIS ISSUE ON 25.9.2001 HA S HELD THAT NO DISTINCTION CAN BE MADE BETWEEN INCOME EARN ED FROM SLR SECURITIES AND INCOME EARNED FROM NON SLR SECUR ITIES. VI) IN THE CASE OF SURAT DISTRICT COOPERATIVE BANK: T HE HON'BLE SPECIAL BENCH ITAT HAS HELD THAT INTEREST ON INVEST MENT MADE BY A COOPERATIVE BANK IN GOVERNMENT. SECURITIES/INV ESTMENT MADE BY WAY OF MANDATORY/MINIMUM MANDATORY BANKING RESERVES AS REQUIRED BY THE RELEVANT PROVISIONS OF BANKING REGULATION ACT/INCOME FROM FIXED DEPOSITS WITH BANKS/INCOME FROM INVESTMENT IN INDIRA VIKAS PATHRA /KISAN VIKAS PATHRA/OTHER APPROVED MODES OF INVESTMENT OF SURPLUS FUNDS AVAILABLE OUT OF WORKING CAPITAL INCLUDING VO LUNTARILY RESERVES ARE AN INTEGRAL PART OF NORMAL BANKING ACT IVITIES CARRIED ON BY THE COOPERATIVE BANKS AND THE BANKS A RE ENTITLED TO GRANT OF DEDUCTION IN RESPECT OF SUCH I NCOME UNDER THE MAIN PROVISION OF SECTION 80P(2)(A)(I) OF THE I NCOME TAX ACT 1961. 4 4 VII) FARRUKABAD GRAMEEN COOPERATIVE BANK VS. ACIT CIRCL E 2(1) DARRUKABAD REPORTED IN 2006 103 ITD 207(AGRA): IN THIS CASE THE HON'BLE ITAT AGRA BENCH HAS HELD THAT THE PROV ISION OF SECTION 80P(2)(A)(I) OF THE INCOME TAX ACT 1961 D OES NOT MAKE ANY DISTINCTION BETWEEN TWO TYPES OF INTEREST EARNED FROM SLR INVESTMENTS AND NON SLR INVESTMENTS. WHA T HAS TO BE SEEN IS WHETHER THE INCOME IN RESPECT OF WHICH T HE DEDUCTION IS CLAIMED IS ATTRIBUTABLE TO THE BUSINES S OF BANKING THE ACTIVITY OF INVESTMENT EITHER IN SLR OR NON S LR INVESTMENT CANNOT BE DIVORCED FROM THE BUSINESS OF BANKING. WHILE INVESTMENT ARE MADE BY A BANK IN ACCORDANCE W ITH THE GUIDELINES OF THE RBI AND THE FUNDS MANAGEMENT IS M ADE IN SUCH A MANNER SO AS TO BE CONDUCIVE TO THE PROFITAB LE RUNNING OF BANKING BUSINESS THEN SUCH ACTIVITY HAS TO BE TR EATED AS PART OF INCIDENTAL BUSINESS OF BANKING. 14. ON A PERUSAL OF ALL THE RULINGS GIVEN BY THE JUDIC IAL AUTHORITIES ON THE ISSUES INVOLVED IT CANNOT BE FAIRLY BE HELD THAT TH E INVESTMENT OF RS.1 CRORE BY THE APPELLANT BANK WITH THE APSFC IN NOVEM BER 2002 OUT OF ITS AVAILABLE SURPLUS FUNDS WAS AN INTEGRAL PART OF THE BUSINESS OF BANKING CARRIED ON BY THE ASSESSEE. ACCORDINGLY TH E INTEREST EARNED FROM SUCH INVESTMENTS HAS TO BE TREATED AS PART OF PROFIT AND GAINS OF BANKING BUSINESS. SUCH INTEREST INCOME CANNOT BE A SSESSED TO TAX AS INCOME FROM OTHER SOURCES. FOR SUCH REASONS THE DE NIAL OF THE ASSESSING OFFICER OF EXEMPTION U/S 80P(2)(A)(I) OF THE INCOME TAX ACT 1961 IN RESPECT OF INTEREST INCOME OF RS.336410 IS CONSIDERED NOT SUSTAINABLE UNDER LAW AND FACTS AND HENCE THE DISAL LOWANCE IS HEREBY CANCELLED'. IN THE ABSENCE OF ANY CONTRARY MATERIAL OR DISTINGU ISHABLE FEATURE BROUGHT ON RECORD BY THE REVENUE AGAINST THE FINDING OF THE LEARNED CIT(A) AND KEEPING IN VIEW THE RATIO OF VARIOUS DECISIONS RELI ED ON BY THE LEARNED. CIT(A) VIZ. MEHSANA DISTRICT CENTRAL COOPERATIVE BA NK LTD VS. ITO (2001) 251 ITR 522 (SC) CIT VS. KARNATAKA STATE COOPERATI VE APEX BANK (2001) 251 ITR 194 (SC) AP COOPERATIVE BANK VS. ADDL. CIT IN ITA NO.150/HYD/98 DATED 25.9.01 FOR ASSESSMENT YEAR 199 4-95 SURAT DISTRICT COOPERATIVE BANK LTD. VS. ITO (2003) 85 ITD 1 (AHD. SB) AND IN THE CASE OF FARUKHABAD GRAMIN BANK VS. CIT (2006) 103 ITD 20 7(AGRA) I AM OF THE VIEW THAT THE INTEREST INCOME EARNED ON INVESTMENT OF FDR WITH APSFC IS A PART OF PROFIT AND GAINS OF BANKING BUSINESS ELIGIB LE FOR DEDUCTION U/S 80P(2) (A) (I) OF THE ACT AND ACCORDINGLY THE ORDER PASSED BY THE LEARNED. CIT(A) IS UPHELD. THE GROUNDS TAKEN BY THE REVENUE ARE THEREFORE REJECTED. IN THE RESULT THE APPEAL STANDS DISMISSED. 4. IN VIEW OF THE ORDER OF THE TRIBUNAL WE ARE INCLINED TO HOLD THAT INCOME EARNED FROM INVESTMENTS OF SURPLUS FUNDS MAD E BY THE ASSESSEE IS ATTRIBUTABLE TO THE BUSINESS OF BANKING AND IS E NTITLED TO DEDUCTION U/S 80P (2)(A)(1) OF THE INCOME TAX ACT 1961 AND 5 5 ACCORDINGLY WE UPHOLD THE ORDER OF THE CIT(A) ON THI S ISSUE. HENCE THE APPEAL OF THE REVENUE IS DISMISSED. 5. NOW COMING TO THE CROSS APPEAL OF THE ASSESSEE THE ASSESSEE RAISED THE FOLLOWING GROUNDS: 1. THE APPELLATE ORDER PASSED BY THE CIT(A) IS S O FAR AS CONFIRMING THE ORDER OF ASSESSING OFFICER RESTRICTING THE TDS CREDIT TO THE ASSESSEE ONLY FOR PART OF THE YEAR RELATING TO ASSESSMENT YE AR 2006-07 IS CONTRARY TO LAW UNJUST AND UNSUSTAINABLE. 2. THE APPELLATE AUTHORITY OUGHT TO HAVE CONSIDERE D THAT THE BANKS/FINANCIAL INSTITUTIONS USUALLY DEDUCT TAX ONL Y AT THE TIME OF PAYMENT OF INTEREST AND REMIT THE SAME TO THE GOVT. IN THE SAME ASSESSMENT YEAR IN WHICH THE DEDUCTION IS MADE. 6. THE LEARNED AUTHORIZED REPRESENTATIVE SUBMITTED THAT THE ASSESSEE WAS RECEIVED INTEREST ON SHORT AND LONG TERM INVEST MENTS AFTER DEDUCTING TDS ON THE DATE OF PAYMENT ON SUCH INTEREST FOR EITHER HALF YEARLY/YEARLY. IN SUCH A SCENARIO DEDUCTION AND DEPOSIT TO THE CREDIT OF CENTRAL GOVT. ARE FALLING ON THE DATE OF PAYMENT OF INTEREST WHICH PERIOD MAY FALL IN TWO DIFFERENT ASSESSMENT YEARS. BASING ON TH E ACCOUNTING STANDARDS THE BANK IS TAKING ACCRUED INTEREST AT THE Y EAR END AND REVERSING THE SAME AT THE BEGINNING OF THE SUCCEEDING YE AR. IT IS A WELL SETTLED LAW THAT TAX CREDIT IS TO BE GRANTED IN THE ASSE SSMENT YEAR IN WHICH DATE OF DEDUCTION OF THE TAX AT SOURCE FALL NOT I N THE ASSESSMENT YEAR IN WHICH INCOME IS DECLARED ON ACCRUAL BASIS. HE REL IED ON THE ORDER OF THE DELHI TRIBUNAL IN THE CASE OF ASHOKA HOLDI NGS LTD. VS. ITO IN IT APPEAL NO.2175(DELHI) OF 1982 DECIDED ON JULY 11 1983 HELD THAT THE CREDIT FOR TAX DEDUCTION AT SOURCE WAS TO BE ALLOWE D A IN THE ASSESSMENT YEAR IN WHICH THE DATE DEDUCTION OF TAX AT A S OURCE FALLS AND NOT IN THE ASSESSMENT IN WHICH THE INCOME ACT DECLARED ON ACCRUAL BASIS.'. 6 6 7. THE DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT SECTION 199 OF THE ACT WHICH APPLICABLE TO THE FACT OF THE PRE SENT CASE AND THE SAME WAS APPLIED BY THE CIT(A) AS SUCH THE SAME MAY BE CONFIRMED AND HE RELIED ON THE ORDER OF THE CIT(A). 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. AS PER SECTION 199 OF THE IT ACT STIPULATES AS FO LLOWS: I) THE ASSESSEE SHOULD PRODUCE THE CERTIFICATE FOR THE AMO UNT OF TAX DEDUCTED AT SOURCE. II) IT SHOULD SHOW THAT INCOME SUBJECTED TO TAX DEDUCTED AT SOURCE IS DISCLOSED IN THE RETURN OF THE ASSESSMENT YEAR AS 'ASSESSABLE' . BOTH THE CONDITIONS ARE TO BE SATISFIED. IT IS THEREFORE CLEAR THAT THE ASSESSEE WILL NOT BE ENTITLED TO HAVE BENEFIT OR CREDIT FOR T HE AMOUNT THOUGH MENTIONED IN THE CERTIFICATE FOR THE ASSESSMENT YEAR IF T HE INCOME RELATABLE TO THE AMOUNT IS NOT SHOWN AND IS NOT ASSESSABLE IN THAT ASSESSMENT YEAR. IF INSTEAD OF THE ENTIRE INCOME REFERAB LE TO THE AMOUNT OF TAX DEDUCTED ONLY A PORTION OF INCOME IS F OUND ASSESSABLE THE BENEFIT HAS TO BE ALLOWED ONLY ON THE PORTION SHO WN. IF THE BALANCE INCOME ON ACCOUNT OF THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE OR FOR SOME OTHER REASON IS FOUND TO BE ASSESSABLE I N FUTURE THEN THE CREDIT FOR THE BALANCE TAX DEDUCTED AT SOURCE CA N BE ALLOWED ONLY IN FUTURE WHEN THE INCOME IS ASSESSABLE. THE CENTR AL BOARD OF DIRECT TAXES CIRCULAR NO.5 OF 2001DATED 2ND MARCH 2001 ALSO SUPPORTS THE VIEW THAT WHERE TAX IS DEDUCTED FROM THE AMOUNT WHICH IS LIABLE TO BE ASSESSED AND SPREAD OVER MORE THAN ONE FINANCIAL YEAR CREDIT SHALL BE ALLOWED ON PRO RATA BASIS AND IN THE SAME PROPORTIO N IN WHICH SUCH INCOME IS OFFERED FOR TAXATION IN DIFFERENT ASSESSMENT YE ARS. 9. AS PER THE ABOVE PROVISIONS OF SECTION 199 THE A SSESSEE IS ENTITLED FOR A CREDIT FOR TDS TO THE EXTENT OF INCOM E OFFERED BY THE 7 7 ASSESSEE AND BALANCE MENTIONED IN THE CERTIFICATE IS TO BE ALLOWED IN THE YEAR IN WHICH SUCH INCOME IS DISCLOSED OR OTHERWISE IS FOU ND TO BE ASSESSED AS INCOME OF THE ASSESSEE. IN VIEW OF THIS WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) AND THE SAME IS CONFIRMED. 10. IN THE RESULT THE APPEAL OF THE REVENUE AS WE LL AS CROSS APPEAL OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT : 29.1.20 10. SD/- SD/- (N.R.S. GANESAN) JUDICIAL MEMBER (CANDRA POOJARI) ACCOUNTANT MEMBER DATED THE 29 TH JANUARY 2010. COPY FORWARDED TO: 1. THE ACIT RANGE 9 HYDERABAD. 2. M/S SRI SATAVAHANA GRAMEEN BANK RRB 9-27/1 LAL ITHA NAGAR DILSUKHNAGAR HYDERABAD 3. CIT(A)-VI HYDERABAD. 4. CIT HYDERABAD 5. THE D.R. ITAT HYDERABAD. NP