Uttar Banga Kshetrya Gramin Bank, ... vs Department Of Income Tax

IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH: KOLKATA [Before Shri P. K. Bansal, AM & Shri Mahavir Singh, JM]

I.T.A No.927/Kol/2012 Assessment Year: 2004-05 Assistant Commissioner of Income-tax Vs. Uttar Banga Kshetriya Gramin Bank Circle-2, Jalpaiguri (PAN: AAAAK1555H) (Appellant) (Respondent)

Date of hearing: 08.04.2015 Date of pronouncement: 30.04.2015

For the Appellant: Shri Vijay Kumar, CIT, DR For the Respondent: Shri Ravi Tulsiyan, FCA

ORDER Per Shri Mahavir Singh, JM:

This appeal by revenue is arising out of order of CIT(A), Jalpaiguri in appeal No. 22/JAL/CIT(A)/JAL/2010-11 dated 19.03.2012. Assessment was framed by DCIT, Circle-2, Jalpaiguri u/s. 147 r.w.s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") for Assessment Year 2004-05 vide his order dated 16.12.2010.

2. The only issue in this appeal of revenue is against the order of CIT(A) in allowing deduction u/s. 80P of the Act on income earned from investments of the excess CRR and SLR balances and non SLR balances. For this, revenue has raised following ground no.2:

"2. That on the facts and circumstances of the case, the CIT(A) has erred in law and fact in allowing the benefit of Section 80P of the I. T. Act, 1961 to the assessee. However, the same is not allowable in present case the assessee is not entitled to the benefit of section 80P because of the violation of preamble of RRB Act and related provisions of the Act in respect of income earned from investment of the excess CRR & SLR balance and Non-SLR balance. In the case of Beharilal Jaiswal Vs. CIT 217 ITR 746 (SC), the Supreme Court held that "One arm of law cannot be utilized to defeat the other arm of law. Doing so would be opposed to public policy and bring the law into the ridicule."

3. Ld. CIT, DR at the outset, stated that this appeal is against the order of CIT(A) in appeal No. 22/JAL/CIT(A)/JAL/2010-11 dated 19.03.2012, which has deleted the addition made by AO while framing assessment u/s. 143(3) r.w.s. 147 of the Act in respect to expenses to the tune of Rs.7,74,44,216/- added back to the total income for 2 ITA No.927/K/2012 Uttar Banga Kshetriya Gramin Bank AY 2004-05

non maintenance of SLR and denying deduction u/s. 80P of the Act. Further, according to CIT, DR, the CIT(A) has allowed the deduction u/s. 80P(2) of the Act vide ground no. 4 as under:

"4. In this ground, the assessee has contended that the deduction u/s. 80P(2)(a)(i) be allowed. Regarding the allowability of deduction u/s. 80P(2)(a)(i), it may be stated that this issue has been discussed elaborately in my order in respect of another appeal No. 531/CIT(A)/Jal/2006-07 for the same assessment year. The AO is directed to follow the same order in respect of allowability of deduction u/s. 80P(2)(a)(i)."

Ld. CIT, DR made arguments only to the extent that there is violation of preamble of RRB Act, hence, disallowance u/s. 80P of the Act was rightly made by AO. Ld. CIT, DR relied on the decision of Hon'ble Supreme Court in the case of Kesavananda Bharati Vs. State of Kerala AIR 1973 (SC) 1461. But CIT(A) after going through the provisions of RRB Act noted that the assessee is entitled to deduction u/s. 80P of the Act due to following reasons:

"It may be mentioned here that Cash Reserve Ratio (CRR) and Statutory Liquidate Ratio (SLR) are maintained as per the stipulation of RBI from time to time and the balance portion commonly known as "Non-SLR" investment, is also made as per the guide line of RBI. The CRR amount is kept in the form of cash with the RBI. But on the other hand, the SLR amount comprised of-

a) Cash in Hand, b) Cash at Bank in CD A/c c) Term Deposit with Sponsor Bank (those were opened up to 2002) d) Investment in Govt. Securities.

Regarding the SLR deposits, reports are normally being sent to the NABARD, to the Sponsor Bank in every quarter who after compilation, send it to the RBI. Periodic statutory audit is also being conducted. There is no adverse remark against the investment by any authority. Thus, there is no possibility of making any investment in violation of the guideline of the RBI.

Being relevant, the preamble to the RRB Act, 1976 can be reproduced here-

"An Act to provide for incorporation, regulation and winding up of RRB with a view to developing the rural economy by providing, for the purpose of development of agriculture, trade, commerce, industry and other productive capacities in rural areas, credit and other facilities, particularly to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs, and for matters connected therewith and incidental thereto".

The Ld AO could not make out a case that the assessee bank has violated the provisions stipulated u/s.18(2) of the RRB Act which is the main activities of the assessee bank. There is no case of making investment outside the area of operation of the bank. There is no case that the assessee made advance to the parties who are not covered under Sub- clause (a) & (b) of Sec. 18(2).

3 ITA No.927/K/2012 Uttar Banga Kshetriya Gramin Bank AY 2004-05

Therefore, in my opinion, the assessee bank did not violate the spirit of its establishment. At the same time, it is an important question whether the ratio of the decision in case of Kesavanand Bharati which relates to interpretation of the Articles of the Constitution of India can be applied in case of an ordinary enactment where there is no express ambiguity in the provisions of that particular Section. According to the submission of the Ld AR, the assessee Bank had provided loans and advances to the weaker I priority sector as per the stipulation of RRB Act and only the balance portion is invested in other sectors, that too, following the guideline of the RBI seems to be a valid argument.

It may also be mentioned here that following the findings given in the present assessment order, the Ld AO has reopened the assessment of several preceding assessment years. However, after verification, the Ld. AO found that the assessee was entitled to the deduction u/s. 80P.

Thus, in view of the foregoing discussion, it is held that the benefit of Sec. 80P of the Act cannot be denied to the assessee."

While adjudicating appeal against the assessment framed u/s. 143(3) of the Act of the same assessment year, the CIT(A) has held as under:

"Thus, there is nothing wrong in the method of calculation adopted by the AO. Considering the facts and circumstances of the case, the AO has adopted the simplest method for computation of income and the Ld. AR could not point out any mistake thereon.

However, regarding the disallowance of Rs.7,74,44,217/-, it may be stated that in his order the Ld. AO has treated the income earned from investment of Non-SLR and excess SLR investment as taxable income and he has also held that such income is not qualified for deduction u/s. 80P of the Act. Since, the income has been considered as taxable because of violation of certain provisions of the Act and the claim of deduction was denied, the corresponding expenses to earn that income has to be allowed. Therefore, it is held that disallowance of Rs.7,74,44,217/- worked out by the Ld AO cannot be sustained and same is deleted."

No factual argument was made by Ld. CIT, DR except the violation of preamble of RRB Act. On the other hand, the Ld. Counsel for the assessee stated that the issue is covered by the decision of Hon'ble Supreme court in the case of Mehsana District Central Co-operative Bank Ltd. Vs. ITO (2001) 251 ITR 522 (SC), wherein he referred to the head notes as under:

"Where the assessee, a co-operative bank, derived (i) income from utilisation of its funds for statutory reserves under section 67(2) of the Gujarat Co-operative Societies Act, 1961, and (ii) income from hiring out of safe deposit vaults:

Held, (i) that the assessee was entitled to deduction under section 8OP(2)(a)(i) of the Income-tax Act, 1961, in respect of the interest earned from funds utilized for the statutory reserves. CIT v. Karnataka State Co-operative Apex Bank [2001] 251 1TR 194 (SC) followed.

(ii) That provision of safe deposit vaults was part of the ordinary banking business of a bank as shown by section 6(1)(a) of the Banking Regulation Act, 1949, and, therefore, income derived by the assessee from the hiring out of safe deposit vaults was income from the business of banking and deductible under section 8OP(2)(a)(i).

Decision of the Gujarat High Court in Gujarat State Co-operative Bank Ltd. v. CIT [2001] 250 ITR 229 reversed on these points.

Held also, that the question whether income derived by the assessee co-operative bank from the investment 4 ITA No.927/K/2012 Uttar Banga Kshetriya Gramin Bank AY 2004-05

of its voluntary reserves other than statutory reserves is exempt under section 8OP(2)(a)(i) depended upon whether the voluntary reserves were utilized in the course of its ordinary banking business. From the decision of the High Court to the effect that interest income of the assessee, a co-operative bank, from investments from its total reserves did not qualify for deduction under section 8OP(2)(a)(i) (see [2001]251 ITR 520) appeals were preferred to the Supreme Court :

Held, (i) that interest on investments from statutory reserves was eligible for deduction under section 8OP(2)(a)(i) :

CIT V. Karnataka State Cooperative Apex Bank (2001) 251 ITR 194 (SC) followed."

4. We have heard rival submissions and gone through facts and circumstances of the case. We find that this issue is covered by the decision of Hon'ble Supreme Court in the case of Mehsana District Central Co-operative Bank Ltd. supra. In view of the facts and circumstances as discussed above, we allow this appeal of assessee.

5. In the result, appeal of assessee is allowed.

6. Order is pronounced in the open court on 30.04.2015.

Sd/- Sd/- (P. K. Bansal) (Mahavir Singh) Accountant Member Judicial Member

Dated : 30th April, 2015

Jd.(Sr.P.S.)

Copy of the order forwarded to:

1. APPELLANT - ACIT, Circle-2, Jalpaiguri

2 Respondent - Uttar Banga Kshetriya Gramin Bank, Sunity Road, P.O & Dist. Coochbehar-736101 3. The CIT(A), Jalpaiguri 4. CIT, Jalpaiguri 5. DR, Kolkata Benches, Kolkata

/True Copy, By order,

Asstt. Registrar.