TC/44/2002 of SYNDICATE BANK EMPLOYEES` Vs THE INCOME TAX OFFICER, on 23 December 2005

JUDGMENT

P.P.S.JANARTHANA RAJA,J

The following substantial questions of law are raised by theAppellant Assessee under the Act:

"1. Whether on the facts and circumstances of thecase, the Tribunal is right in law in holding that theInterest Tax Act would be applicable to the petitionerherein?

https://hcservices.ecourts.gov.in/hcservices/

2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that theactivities of borrowing money and lending money to themembers of the petitioner is similar to the one that iscarried on by bankers, which accepts deposits from thedepositors and lends money to various borrowers?

3. Whether on the facts and in the circumstances ofthe case, the Tribunal is right in holding that thejudgment of the Madras High Court reported in Vol.233 ITR104, is applicable to the facts of the case?

4. Whether on the facts and in the circumstances ofthe case, the Tribunal is right in not considering theapplication of Sec.3, Sec.22 and Sec.56 of the BankingRegulation Act, 1949 to the facts of the case withreference to the petitioner Co-operative Society?

5. Whether on the facts and in the circumstances ofthe case, the Tribunal is right in law in holding that"there is a law of parallel between the Banking businessand the activities of the assessee"?

6. Whether on the facts and in the circumstances ofthe case, the Tribunal is right in law in not consideringthe observation of the Division Bench of Madras High Courtwhich specifically held that no authority is to beinfluenced by the order passed by the Single Judge of theMadras High Court and should pass an order independentlyafter application of mind?

7. Whether on the facts and in the circumstances ofthe case, the Tribunal is right in confirming the demandwithout considering whether the appellant carries on tehbusiness of banking after satisfying the various normslaid down in the Banking Regulation Act?"

2. The facts need to the above questions of law are asunder:-

The Appellant is a Co-operative Thrift & Credit Societyregistered under the provisions of the Multi State Co-operativeSocieties Act. The relevant assessment year is 1992-93 and thecorresponding accounting year ended on 31.3.92. It did not filed areturn of chargeable interest under the Interest Act of 1974. Theassessing officer issued a notice under Section 10 of the said Actwhich was served on the appellant assessee on 01.03.1997. Theappellant filed a writ petition before this Court challenging thesaid notice and the same was dismissed on 20.11.1997. The HighCourt directed the appellant to prefer objection to the respondent'snotice. Accordingly, the appellant filed his objection before therespondent herein raising several grounds that the Interest Taxhttps://hcservices.ecourts.gov.in/hcservices/could not apply to it, as it being the Co-operative Society, and notcarrying on the business of banking. Later, the appellant assesseefiled a Writ Appeal No.581 of 1998 wherein a Division Bench of this Court was pleased to observe that the respondent herein would decidethe issues before him without reference to and without beinginfluenced by the observation of this Hon'ble Single Judge dated28.11.1997 of this Court, reported in 233 ITR 104. Later, theAssessing Officer issued a notice to the petitioner calling upon tofile his return of chargeable interest and Nil return was filed,since the appellant was not come in the purview of the Interest TaxAct. The Assessing Officer held that the interest accrued to theappellant assessee for the period from 01.10.1991 to 31.03.1992should be brought to tax under the provisions of interest tax byholding that the appellant society is a credit institution withinthe meaning of Section 2(5)A of the Interest Act and holding thatthe appellant society is engaged in banking within the purview ofthe said section. The Assessing Officer also computed chargeableinterest at Rs.8,00,000/- as against Rs.6,96,159/- found by theappellant for the period from October 1991 to March 1992.

3. Aggrieved by the order, the appellant filed an appeal tothe Commissioner of Income Tax Appeal and raised the issue ofjurisdiction as well as assessment of interest tax. The firstAppellate Authority dismissed the appeal but reduced the chargeableinterest from Rs.8,00,000/- to Rs.6,96,159/-, on verification by theAssessing Officer of the same. Against the aforesaid order of theCommissioner of Income Tax Appeal, the first Appellate Authority,the appellant filed an appeal before the Income Tax AppellateTribunal, contending that:

(i) the petitioner was not an assessee under the Income TaxAct and was not liable for levy of interest under the Interest TaxAct being a co-operative society not engaged in the business ofbanking;

(ii) that the first Appellate Authority's conclusion that theprocessing for the assessment was not barred by limitation, was nottenable on facts and in law;

(iii) that the first Appellate Authority erred in assumingthat there was an escapement of assessment in the petitioner's caseand

(iv) that notwithstanding his statement that the assessmentshould have been u/s 10 and not u/s 8, his conclusion that it was aninadvertant error which does not vitiate the assessment, isuntenable;

Facts

(v) that the conclusions of both the Assessing Authority aswell as the first Appellate Authority are based totally on theobservations of the learned Single Judge in the Writ Petition,eventhough there was a specific direction of the Division Bench ofMadras High Court that the matter should be independentlyconsidered, without either of the officers being influenced by thehttps://hcservices.ecourts.gov.in/hcservices/observations in the writ petition by the Hon'ble single Judge.

(vi) that the first Appellate Authority has lost sight of the fact that only co-operative societies engaged in banking business,would come under the purview of the Interest Tax Act. Since thepetitioner in the instant case does not carry on the business ofbanking either under the provisions of Interest Tax Act or under theBanking Regulation Act, it would not be liable.

(vii) that the crucial and material issue as to whether theappellant carries on the business of banking after satisfying thevarious norms laid down by the Banking Regulation Act, has not beenconsidered.

4. Hearing the above arguments advanced by the learnedcounsel for the appellant, the Income Tax Appellate Tribunal heldthat the Interest Tax shall be attracted to the appellant assesseeand affirmed the order of the authorities below.

5. The counsel appearing for the appellant Society submittedthat the business of advancing money by way of loan to the membersis not equivalent to the business of banking. The business ofbanking commercially and legally is not synonymous with the moneylending or accepting of deposits. The banking is legally andcommercially, a specific class of business, which the AppellantSociety does not carry on. The crucial and material issue as towhether the Appellant Society carried on the business of banking hasnot been considered and the Tribunal had unjustly assumed that thebusiness of taking deposit and advancing loan is a business ofbanking. Further, it was stated that the Tribunal has notconsidered the application under Section 3, Section 22 and Section56 of the Banking Regulation Act, 1949 to the facts of the case withreference to the Appellant Co-operative Society. Further, it wasstated that from 01.04.1993, reference to Co-operative Society wasexcluded and even upto 01.04.1993 only a Co-operative Societyengaged in the business of banking, is included within thedefinition of credit institution. Such aspect had been ignored bythe authorities.

6. Section 2(5)A(i) of the Interest Act which existed upto01.04.1993 reads as under:

"Credit Institution" means-(i) a banking company to which the BankingRegulation Act, 1949 (10 of 1949) applies(including any bank or banking institutionreferred to in Section 51 of that Act (or acooperative society engaged in carrying on thebusiness of banking not being a cooperativesociety providing credit facilities to farmersor village artisans).

This sub-section (5-A) was inserted by theFinance (No.2) Act, 1991 with effect fromhttps://hcservices.ecourts.gov.in/hcservices/1.10.91 and by the Finance Act 1992, the wordsin a square brackets in the above subsection,namely "or a co-operative society engaged in

carrying on the business of banking nor being aco-operative society providing credit facilitiesto farmers or village artisans" were omittedwith effect from 1.4.1993. Accordingly thesewords were part of sub-section (5A) of Section 2of the Act from 1.10.91 to 31.3.92".

7. Thus, going by the relevant provisions it may be seen thatthe charging section in respect of credit institution other thanscheduled banks, interest tax is charged on every credit institutionfor every assessment year. The term "Co-operative Society" incarrying on the business of banking refers to a Co-operative Societyneed not necessarily a banking company or a company to which theprovision of Banking Regulation Act, 1949 are made applicable. ACo-operative Society which lending money to its members or acceptingdeposits or raising loans from financial or banking institution andadvancing the same to its members, amounts to doing the business ofbanking. The fact that it is only a thrift society or itsactivities are limited to its members only, could not any way affectthe issue, whether the appellant Society is a credit institution forthe purpose of levy of interest tax. The Bye-law of the appellantsociety has been placed before us. The clause 2(b) of the objectclause reads as follows:

"The objects of the society shall be:

a) generally to encourage thrift, self-help andcooperation among the members.b) to borrow funds from members or others to beutilised for granting loans to members foruseful purposes."

8. From a reading of the above bye-laws, it is clear that theassessee carrying on the business of banking and because itsactivities are limited only to its members, could not in any wayaffect the issue whether the appellant assessee is CreditInstitution for the purpose of levy of interest. Since theappellant assessee is engaged in the business of banking, providingcredit to its members, it is a credit institution for the purpose oflevy of interest under Interest Tax Act, 1974. The other argumentof the counsel for the appellant was that the assessee not being abanking company and the provisions of Banking Regulation Act notbeing made applicable, cannot be taken as a credit institution. Wefeel that the term "a Co-operative Society engaged in carrying onthe business of banking" refers to a particular kind of Co-operativesociety and it need not necessarily be a banking company or acompany to which the provisions of Banking Regulation Act are madeapplicable.

9. In view of the above, we are of the opinion that theinterest tax is attracted to the appellant society and the revenuerightly initiated interest tax proceeding and accordingly leviedhttps://hcservices.ecourts.gov.in/hcservices/Interest Tax Act. In view of the matter, we answered the abovequestions of law in favour of the revenue and hence dismiss theabove tax case (appeal) filed by the appellant assessee.

Consequently, the connected TCMP is also dismissed. No order as tocosts. Sd/Asst.Registrar /true copy/

Sub Asst.Registrar

To1. THE INCOME TAX OFFICER,CITY CIRCLE -I(7)121 NUNGAMBAKKAM HIGH ROAD,CHENNAI -34.2. THE ASSISTANT REGISTRARINCOME TAX APPELLATE TRIBUNALRAJAJI BHAVAN, BESANT NAGAR,CHENNAI -903. THE SECRETARYCENTRAL BOARD OF DIRECT TAXESNEW DELHI4.THE COMMISSIONER OF INCOME TAX (APPEALS)-IX,CHENNAI -34.+1cc to Mr.Anita Sumanth, Advocate Sr 50802+1cc to M/s.Pushya Sitharaman SSC & IT SR 50553VC (CO)km/4.1.

TC.(Appeal) No.44 of 2002and TCMP.No.8 of 2003