There is no dispute with reference to the fact that assessees license was cancelled consequent to the decision of the Supreme Court that the assessee is not eligible to be considered as a State Cooperative Bank. The incomes under consideration are arising in the financial year 2004-05, i.e., from 1-4-2004 to 31-3-2005. During this period the assessee could not engage itself in any banking activity as the license was cancelled. As submitted the assessee was in the process of winding up and most of the incomes were earned by way of interest on the deposits made earlier when the assessee was undertaking the business of banking for the purpose of SLR, CRR purposes and also in the course of business with various other organizations. Substantial incomes arose due to sale of investments as gains. Thus the income earned by the assessee during the financial year 2004-05 is to the tune of Rs. 100.30 crores. Out of this amount of Rs. 1.26 crores on interest on loans and advances was allowed by the AO as deduction under section 80P(2)(a)(i) being income from providing credit facilities to its members. An amount of Rs. 1.97 crore as the miscellaneous income is nothing but crediting the unclaimed dividend provided earlier. The AO not only disallowed the claim under section 80P on the balance of incomes but also brought to tax the miscellaneous income pertaining to reversal of unclaimed dividend. As briefly stated earlier, the CIT (A) allowed deduction of the incomes pertaining to interest on investment as income earned in banking business and profit on sale of investment treated as capital gains while deleting the miscellaneous incomes. The issues for consideration as contested in Ground 1 & 2 are : whether (a) the incomes earned on interest on investment can be considered as income from banking business and (b) if so whether deduction under section 80P(2)(a) on the above incomes is eligible for deduction under 80P(2)(a)(i). the assessee was in the business of banking till the license was cancelled by the RBI in the previous year relevant to the assessment year 2004-05. It was the contention of the AO, after analyzing the provisions of sections 5A and 6A of the Banking Regulation Act, that the assessee is not in the business of banking as the assessee was not a State Cooperative Bank and it could not do banking business in the State of Maharashtra. Further to the above the AO also extracted the last Para of the Apex Court order wherein it was held that the assessee cannot be allowed to continue to operate as State Cooperative Bank. In view of the clear findings of the Supreme Court and considering the fact that the license was cancelled by the RBI on 30-10-2003, the AO was of the opinion that the assessee cannot be considered as a State Cooperative Bank and so the incomes arising cannot be considered as business of banking. The CIT(A) did not consider the issue in its correct perspective while allowing the deduction to the assessee on the incomes arising from the investments made in erstwhile banking business. It is to be noted that the main reason for allowing deduction by him under section 80P(2)(a)(i) is primarily based on the fact that the AO himself allowed the deduction to the cooperative society on certain incomes vide Para No. 3.9 of the CIT(A) order the findings of the AO in the assessment order is the basis for giving relief to the assessee. The tone and tenor of the order was in allowing the deduction as a cooperative society under section 80P(2)(a)(i). As can be seen from the deduction is eligible for a cooperative society engaged in carrying on the business of banking or providing credit facilities to its members. The use of word or in section 80P(2)(a)(i) indicate that these two are mutually exclusive deductions. Either a cooperative society is engaged in carrying on the business of banking or it is engaged in providing credit facilities to its members, it cannot be considered that a cooperative society is engaged in carrying on business of banking as well as providing credit facilities to members. Therefore, a cooperative society engaged in providing credit facilities to its members cannot be considered as a cooperative society engaged in carrying on in the business of banking. The provisions of BR Act do prohibit doing any other activity other than banking business. Likewise, no person can carry on business of banking without any license. There is no doubt that the assessee admits and AO also accepts that the assessee cooperative society is providing credit facilities to its members and an amount of Rs. 1.26 crores was already allowed as deduction. Therefore, the incomes that will not form part of providing credit facilities to its members, cannot be allowed as a deduction under section 80P(2)(a)(i). Section 80P also allows deduction of incomes of one or more activities of cooperative society stated in clause 2(a). However this should be for activities separately mentioned from sub-clause (i) to (vii) as the word Or at the end of each sub-clause is preceded by , a comma which is not the case in sub clause (i) where the word or has no ,(comma) preceding it. This indicates the legislative intention of allowing deduction on any one or more activities stated from sub-clause (i) to (vii) but not with the activity specified in sub clause (i) itself. Assessee can be allowed only one of the deduction under sub-clause (i), i.e., either of incomes from banking business or incomes from providing credit facilities to its members and not both. The assessees income cannot be considered as from the business of banking on the reason that the assessee is not having any license to do the business of banking. It was held by the Supreme Court in assessees own case that the assessee status cannot be considered as a State Cooperative Bank at the first instance and therefore, the RBI could not have granted a license to the assessee. While admitting the assessee is not permitted to do the business of banking, it was the contention of the assessee before the AO, CIT (A) and before this Tribunal that the activity permitted by the section 6 of Banking Regulation Act, 1949 permits a Banking Company in engaging in or more of the certain forms of business listed from to in the section. As can be seen from the sub-section (1) of section (6) of the Banking Regulation Act, in addition to business of banking, a banking company may engage in any one or more of the listed forms of business. This means that the assessee should be in the business of banking to engage in any one or more of the forms of business listed under section 6 of BR Act. It can be seen from the section 56 of BR Act modifies Banking Company or a Company which shall be construed as referring to Co-operative Bank. A cooperative Bank means a State Cooperative Bank, a Central Cooperative Bank and Primary Cooperative Bank. As held by the Supreme Court in the assessees own case, assessee cooperative society cannot be held as a State Cooperative Bank. Therefore, application of provisions of Banking Regulation Act to the Multi State Cooperative Society which did not have a license to act as a cooperative bank cannot be considered. Unless it is a cooperative bank, it cannot be said to be covered by the provisions of sections 5 and 6 of the Banking Regulation Act. The definitions stated in section 56 define a cooperative bank, a cooperative credit society, the multi-State Cooperative Bank and a multi-State Cooperative Society separately. The assessee being a multi-State Cooperative Society cannot fall under the definition of the cooperative bank. Therefore, references to banking company or the company or such company in the Bank Regulations Act cannot be made applicable to the assessee society. Therefore, the contention that the assessee was indulging in other activities permitted by section 6 of the Banking Regulations Act, 1949 cannot be accepted, as the said provision is not applicable to cooperative society, which is not a cooperative bank. Therefore, the incomes arising to the assessee consequent to the cancellation of the banking license cannot be considered as incomes from the business of banking on the reason that the assessee is not a state cooperative bank. Such incomes cannot be allowed deduction under 80P(2)(a)(i). There is no doubt on provisions of section 176 are applicable to a discontinued business and sub-section 3A provides for taxing the sums received after discontinuance as income of the year of the receipt. In our opinion reliance placed on the above provision is mis-placed as the assessee has not discontinued the business. During the year the assessee is in the business and has offered income from interest on advances to the members as business income only. Therefore, the question of considering the discontinuation of business does not arise. What happened in the assessees case is only cancellation of license to do the banking business, but the assessee is not prevented in doing any other business by the cooperative society. Only the activity of banking was prohibited. Even otherwise, the issue is not whether the income is to be brought to tax as business income or not. The issue is whether the incomes arising out of investment is eligible for deduction under section 80P(2)(a)(i) as of banking business. Therefore, provisions of section 176(3)A does not help the case of assessee. The amendment brought out to the B.R. Act was made applicable to all the licenses granted to a multi-State Co-operative Society which was subsisting on the date of commencement of the amendment. Since the license of the assessee was already cancelled by the RBI, the above provisions could not come to the help of the assessee in restoring the banking license or protecting banking activity. Once the license was withdrawn, provisions of section 36A of BR Act automatically get applied. Accordingly, as provided in clause (za) of section 56, the provisions of section 11 applicable to the requirements as to minimum paid up capital and reserves and section. 18 regarding cash reserves and section 24 regarding maintenance of percentage of assets as provided in the Act shall not apply to a cooperative bank which has been refused license under section 22 or whose license has been cancelled under that section or has been prohibited from accepting deposits by virtue of any order made under this Act or of any alteration made in its bye-laws. The assessee societys deposits/ investments with RBI, stated to be for the fulfilling of the conditions under SLR/CRR Regulations go out of the purview of BR Act. In view of that reason also the incomes arising from investment from RBI can not be considered as arising from the business of banking. Since the incomes are not arising from the business of banking, such incomes cannot be allowed as deduction under section 80P(2)(a)(i) as the same also can not be considered as operational income of providing credit facilities to its members. In view of this, Tribunal is not in a position to uphold the orders of the CIT (A) in granting deduction to the assessee under section 80P(2)(a)(i) on the reason that the assessee is a cooperative society. Therefore, the revenues appeal contesting granting of deduction under section 80P(2)(a)(i) to income of Rs. 10,07,82,579 being the amount contested is to be upheld. The orders of the CIT(A) on this issue are reversed and the action of the AO in this regard is upheld.

Income Tax Act, 1961 Section 80P(2)(a)(i)

Deduction under section 80P - Co-operative society doing banking business Interest income on investment with the RBI--The incomes on which deduction was claimed under section 80P(2) should be operational income attributable to one of the activity of Society. On the principles established by the Supreme Court in the case of Totgars Cooperative Society Ltd., it is to be held that the income earned in the case of providing credit facilities to its members is rightly allowed as deduction under section 80P(2)(a)(i) by the AO and the CIT(A) was wrong in allowing the deduction on the interest income earned from the investments with the RBI. Since these funds are not utilized in the activity of providing credit facilities to the members, these incomes cannot be allowed as deduction under section 80P(2)(a)(i). It is already considered that the assessee is not in the banking business. Therefore, these incomes cannot be allowed as deduction as income arising out of providing credit facilities to its members.

Income Tax Act, 1961 Section 80P(2)(a)(i)

Deduction under section 80P - Co-operative society doing banking business income vis--vis capital gain on sale of investment--The assessee earned gains on sale of securities. The assessee had an investment of Rs. 433.55 crores as on 31-3-2004 which has become Nil as on 31-3-2005. All the above investments were sold to meet its liabilities consequent to the cancellation of the banking license. The assessee got a gain of Rs. 81,36,13,690 on sale of securities held for more than a year and Rs. 5,33,56,510 in respect of securities held for less than one year. It was the assessees contention that the total amount of Rs. 86,69,70,200 should get the deduction under section 80P(2)(a)(i). The AO, however, did not allow the deduction and brought to tax the entire amount. On appeal, the CIT(A) distinguished the above decisions and considered that the incomes arising on sale of capital assets cannot be considered as income from regular banking transactions. However, he directed the AO to treat the income as capital gains and directed for verification of the arithmetic calculations provided by the assessee. The revenue has aggrieved that the amount is treated as capital gain and not as business income whereas the assessee is aggrieved, in its only ground in its appeal, on the treatment given to the gains realized on sale of securities by the CIT(A).Held: Sale of investment would be charged as capital gains

Even though it was contended that placement of funds being necessary under section 24 of the BR Act giving rise to business income, disposal of such securities consequent to cancellation of licence could not be considered as income from banking business. For the reasons stated while deciding the issue in earlier grounds, Tribunal agrees with the findings of the CIT(A) that sale of securities and gains earned thereon could be considered as income from banking activity. Therefore, the findings of the CIT(A) is upheld that the gains were to be brought to tax as capital gains only. Even though the revenue contends that the assessee treated them as depreciable assets/business assets following the guidelines of the RBI and was maintaining investment fluctuation reserve/ investment depreciation fund, these issues do not prevent in treating the same as capital gain. The reserves might have been provided under the regulations then applicable under B R Act. But, there is no claim of deduction in computation of income as incomes are to be computed as per the IT Act. Therefore, the CIT(A)s directions in treating the amounts as long-term capital gain/short-term capital has to be upheld. In case the assessee has claimed any deduction in value of securities in any earlier year(s) by treating it as a tradeable stock/current assets, such reduced value only can be considered as value for the purpose of arriving the gains. However, as seen from the details filed before the CIT(A) which were referred to the AO for examination, there is no such claim and accordingly the contentions raised by the revenue are only academic in nature and not supported by facts. In view of the above, the orders of the CIT(A) is upheld to that extent and dismiss the grounds raised by the revenue as well as by the assessee respectively.

Income Tax Act, 1961 Section 80P(2)(a)

Business income - Profits chargeable to tax udner section 41 Unclaimed dividend written back--The ground for consideration was exclusion of amount taken to the Profit and Loss Account. Having noticed the mistake, the assessee filed a revised return reducing the above amount in computation of income. The AO however, did not allow the claim and brought to tax the entire miscellaneous income. After considering the submissions of the assessee that they have inadvertently taken it as a miscellaneous income, instead of crediting to statutory reserves and as the dividend declared in earlier years was not allowed as a deduction while computing the total income of the earlier years and so provisions of section 41 are not applicable, the CIT (A) accepted the submissions. He held that the dividend declared was application of income and not an expenditure claim. Therefore, the writing back of the unclaimed dividend of earlier years will not add to the income of the assessee.

Income Tax Act, 1961 Section 41

ORDER

B. Ramakotaiah, A.M.

1. These two appeals are by the Assessee and Revenue contesting various issues, centered around the question whether the assessee is entitled for deduction u/s 80P on banking business.

2. The grounds of Revenue are as under:

1. Whether on facts and circumstances and in law, the CIT (A) erred in directing the Assessing Officer to allow the deduction under section 80P(2)(a)(i) of the Act holding that the cancellation of assessees banking license will not have any effect on the admissibility of deduction under Section 80-P in respect of the income from alleged banking business.

2. Whether on facts and circumstances and in law the CIT (A) erred in directing the Assessing Officer to allow the deduction under section 80-P(2)(a) in respect of the income of `10,07,82,579/- being income on investment.

3.(a) Whether on facts and circumstances and in law the CIT (A) erred in treating the investments in Govt. securities as long term capital assets and treating the income arising on the sale of these investments as long term capital gain thereby allowing indexation in the commutation of capital gains.

3 (b) while deciding so the CIT (A) has failed to appreciate that these investments are depreciable assets in view of the guidelines of the RBI and accordingly assessee has maintained investment fluctuation Reserve Fund/Investment Depreciation Fund.

4. Whether on facts and circumstances and in law the CIT (A) erred in directing the Assessing Officer to exclude the write off of unclaimed dividend of `1,90,88,857/- from the taxable income though assessee has credited this income in the P&L assessee company.

Ground Nos.5 & 6 are general in nature.

3. The assessee raised the following grounds in its appeal:

Ground I:

The CIT (A) erred in denying deduction under section 80 (P)(2)(a)(i) in respect of gains realized by sale of securities held in compliance with the provisions of Section.24 of the B.R.Act 1949 when the said section was applicable to the appellant at the relevant point of time (Para 5.4, Page 9).

The appellant submits that

i) The learned CIT (A) correctly narrated all the facts and rightly came to a conclusion that notwithstanding the cancellation of its license to carry on banking business, its activity to provide credit facilities to its member cooperatives is duly covered by the second limb of clause (a)(i) of Section.80(P)(2) and thus is entitled to the deduction provided therein (Para 3.10, page-6).

ii) In as much as the Supreme Court held that in (: 251 ITR 194 Head Note) "that placement of funds being imperative under section 24 of the B.R. Act gives rise to business income" income realized from holding and or disposing of such securities form integral part of profits of business.

iii) The expression "attributable to" occurring at the end of clause (a) qualified the term "the whole of profits & gains of business" of such activities is much wider in its import and covers all the incidents of the conduct of such activities. Dealing in securities is one such incident of the business of the appellant and therefore properly falls within the meaning of the term "the whole of Profits and Gains of business".

iv) The CIT (A) failed to appreciate that

a) Incentive deductions of the nature mentioned in Section.80P need to be interpreted liberally to promote the purpose and not to defeat it.

b) There is nothing in the provisions of clause 9a) of Section 9-P (2) which restricts the scope of deduction so as to deny deduction in respect of Profits realized on sale of securities.

c) There is a complete interlacing, inter connection, interdependence and absolute nexus and live link between the activities of providing credit facilities and recoveries of advances as also funds realized by sale of securities so as to make it the same business giving rise to "whole of profits"

d) The qualifying term "Whole" must receive full effect so as to encompass all types of profits related to a business.

The appellant, therefore, contends that the term "whole of the profits attributable to" which includes gains realized in respect of securities is deductible under section 80P(2)(a)(i).

Ground II

The appellant craves leave to add to, alter or amend any or all the above ground of appeal.

4. Briefly stated, assessee was registered under Multi State Cooperative Societies Act 1984 and was subsequently notified by Govt. of Maharashtra as a State Cooperative Bank. The Reserve Bank of India also gave the assessee license under the Banking Regulations Act, 1949. The Maharashtra State Govt.s notification and the license by the Reserve Bank of India were challenged by the Maharashtra State Cooperative Bank Ltd by a writ petition before the Honble Bombay High Court. The Bombay High Court quashed the notification of the Government and directed the RBI to review its decision granting license to assessee. The assessee challenged this decision before the Honble Supreme Court. The Supreme Court upheld the order of the Bombay High Court.

5. The Assessing Officer found that the RBI cancelled the assessees license w.e.f. 30.10.2003. In view of the fact that assessee was not permitted to carry on banking business under section 5(b) of Banking Regulation Act (B.R Act) 1949, the Assessing Officer proposed why the claim of deduction under section 80P(2)(a)(i) should not be disallowed.

6. The assessee explained before the Assessing Officer that banking business was carried on special circumstances i.e. in the process of winding up the Bank. The Bank which carried banking business till 29.10.2003 cannot be suddenly said to be not carrying banking business on 30.10.2003. The business is to be carried on for some time for the sake of closure of the activity. The nature of business i.e. banking cannot change by mere cancellation of license by the RBI. The process of closing down or liquidating of business is natural to a delicenced organization. The bank cannot stop making income which will continue to come by way of interest on investment already made or interest on loan/advances already given and outstanding as on the date of cancellation of the license. The assessee further submitted that the RBI cancelled the license and only denied the assessee from transacting business as mentioned under section 5(b) of the B.R. Act. The assessee was not barred from doing any form of business activities as mentioned in section.6 of the B.R. Act.

7. The Assessing Officer held that the activities under section 6 of the B.R. Act can be carried on in addition to the business of banking mentioned in Section 5(b). The essential condition is that the assessee should be a banking company under section 5(b) of the B.R. Act. The term banking company means any company which transacts the business of banking in India. Since the assessee has been barred from transacting banking business, benefit under section 5(b) is not available and as such benefit under section 6 will also not be available.

8. He further observed that Section 22 of the B.R. Act states that no company shall carry on a banking business in India unless it holds a license issued on that behalf by the RBI. The right to carry on activities mentioned in Section 6(a) to 6(o) of the B.R. Act, 1949 flows from the issue of license to any company. Section 80P of the I.T. Act states that the income earned from the banking business by cooperative society will qualify for deduction. Since the assessee is not a banking company during the year under consideration, income earned from such activity will not qualify for exemption under section 80P(2)(a)(i). The Assessing Officer further observed that the assessees existence as a State Co-Operative Bank has ended as the relevant notification has been already struck down by the Bombay High Court. Since the assessee is not a banking company and also not a cooperative bank, the income earned from certain activities do not qualify for deduction under section 80 (P)(2)(a)(i). Accordingly he held the following income of the assessee as taxable.

S.No

Name

Amount (`)

1

Income on investments

10,07,82,579

2

Interest on balances with RBI and other bank funds

27,19,052

3

Commission, exchange and brokerage

3,11,942

4

Profit on sale of investments

86,69,70,200

5

Miscellaneous income

1,97,09,871

9. The Assessing Officer however accepted assessees plea that it is a cooperative society undertaking activity of providing credit facilities to its members. He held that this status of the assessee continued to remain even after its license to transact banking activity was cancelled. Therefore, he accepted that income earned from providing credit facilities to its members qualifies for deduction under section 80P(2)(a)(i). Accordingly, he allowed deduction on an income of `1,26,03,473/- being interest on advance to its members under section 80P(2)(a)(i).

10. Before the CIT (A), it was contended that the assessee was a cooperative bank carrying on its banking activities in accordance with a validly granted license which was in operation and the activities were carried on validly pursuant to the license issued by the RBI and as such the assessee was entitled to exemption under section 80P(2)(a)(i). It was further contended that the assessee being a cooperative society is also involved in providing credit facilities to its members. Therefore, the claim is allowable on either of the activity i.e. banking or providing credit facilities. It was further submitted that the assessee is a cooperative society involved in either of the two activities, income from other sources are also exempted following the decision of the Honble Supreme Court in the case of CIT vs. Karnataka State Cooperative Apex Bank, : 251 ITR 194 .

11. Considering the submissions of the assessee, the CIT gave relief by holding as under:

3.9. I have carefully considered the submissions of the learned Authorized Representative and gone through the assessment order and the judicial decisions cited. Section 80P primarily refers to a cooperative society. Section 80P(2)(a)(i) specifically speaks about the cooperative society engaged in carrying on the business of the banking or providing credit facilities to its members. The appellant was registered as a State Cooperative Bank by the notification of Govt. of Maharashtra. In his assessment order at page 7 the Assessing Officer has accepted that it is a cooperative society which has granted loans to various member cooperative societies from which it was earning income. The relevant portion of the assessment order is as under:

As regards the alternative contention that the provisions of section 36 (viia), apply to the assessee as it is a non-scheduled bank, it is to be stated that the assessees license to conduct banking business was cancelled and the assessee did not hold any license during the financial year under consideration. Therefore, question of application of provisions of section 36 (1) (viia) to the case of the assessee does not arise.

As regards the contention that the assessee being a cooperative society, it was undertaking the activity of providing credit facilities to its members, there is merit in it. As stated earlier, the assessee was registered under the Multi State Cooperative Societies Act, 1984 as a cooperative society. This status of the as continues to remain even after its license to transact banking activities was cancelled. It is seen that the assessee has granted loans to various cooperative societies from which it was earning income. Therefore, the income earned from providing credit facilities to its members qualifies for deduction under section 80P(2)(a)(i) of the I.T. Act, 1961. As per details filed, the assessee has earned a sum of `1,26,03,473/- as interest on advances to its members. This is allowed as deduction under section 80P(2)(a)(i) of the I.T. Act.

3.10. Since the appellant is a cooperative society and has advanced loans to its members, it is entitled to deduction under section 80P(2)(a)(i). Cancellation of its banking license and its status as a Cooperative Bank by order of High Court and Supreme Court will not have any effect on the admissibility of deduction under section 80P of the Act. In view of this the AO is directed to allow deduction under section 80P(2)(a)(i) as claimed.

12. Consequent to above findings, the CIT (A) vide Para No.4.4 allowed deduction in respect of income arising out of investments with RBI holding that the receipts are from investments in government securities compulsorily made by the banking company. Para No.4.4 is as under:

4.4. I have carefully considered the submissions of the learned AR and gone through the facts of the case. The AO has already granted deduction under section 80P in respect of `1,26,03,473/- as income arising out of providing credit facilities to its members. In view of the decision of the Supreme Court and the decision of the ITAT cited by the learned AR, the balance sum of `10,07,85,279/- will also be entitled to deduction under section 80P(2)(a) a the receipts are from the investments in Govt. Securities compulsorily made by the banking company. The AO is directed to allow the deduction in respect of this income.

13. Similarly the CIT (A) accepted that the assessee is a banking company and allowed the deduction under section 80P, on the incomes disallowed by the Assessing Officer except gains from sale of securities which he treated as Long Term Capital Gain vide the findings in Para 5.4. Therefore, both the assessee and revenue are contesting the issue on the directions of the CIT in this regard.

14. The learned Departmental Representative in her submissions argued that the assessee company having been debarred from the business of banking cannot be said to be involved in the business of banking. Therefore, the incomes can not be considered as incomes from banking business. On the incomes earned in the course of providing credit facilities to the members, Assessing Officer himself allowed deduction. It was her contention that the CIT (A) without examining the nature of the income allowed deduction under section 80P(2)(a)(i) on the reason that the assessee is a cooperative society, even though the assessee is not a cooperative bank to be allowed deduction on banking business. She relied on the decision of the Honble Supreme Court in the case of Totgars Cooperative Sales Society Ltd vs. Income Tax Officer 322 ITR 283 (SC). It was the submission that since the assessee is a cooperative society, the incomes from the so called banking activities cannot be allowed as a deduction without there being any banking business.

15. The Learned Counsel however, reiterated the submissions made before the CIT (A) that the assessee continued to have income from business of banking, even though the licenses were cancelled as it is in the process of winding up and the incomes earned on the surplus of sale of investment should also be considered as income arising in the course of business of banking. To that extent it was submitted that the CIT (A) has erred in treating the said gains from sale of securities under the head capital gain instead of business income. To buttress his arguments, the Learned Counsel referred to the provisions of Section 176 (3A) to submit that where any business is discontinued in any year any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax, accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such being received before such discontinuance. It was his submission that the surplus arising on discontinuation of business of banking is also to be treated as business of banking and so to that extent supported the order of the CIT (A) in allowing deduction out of the incomes earned from business of banking under sec.80P. He also relied on the various orders of the Bombay High Court to support his arguments:

a) In the case of CIT vs. Star Andheri Estates : 208 ITR 573 for the proposition that the amount is assessable on the amount due to firm prior to the dissolution received after the dissolution.

b) In the case of United Construction Contractors vs. CIT Kerala 208 ITR 915 where scope of Section. 176 was considered and amount received after discontinuance of business was held assessable while interest paid/expenditure incurred in earning the income was held deductible.

c) In the case of CIT vs. Vockhardt (P) Ltd : 215 ITR 793 (Bom.) for relying on the provisions of 176(3A).

d) on the decision of Andhra Pradesh High Court in the case of CIT vs. A.P. State Cooperative Bank Ltd, 60 DTR 281 with reference to the business of banking and considering the incomes earned on deposits made with reference to Section.5(b),(c) and Section.6 of the Banking Regulation Act along with Section.80P(2)(a) to hold that whether or not the deposits are made in discharging statutory obligations or otherwise, being income from banking business would be eligible for exemption under the said provisions.

e) on the decision of the Income Tax Officer vs. Maharashtra State Cooperative Bank Ltd in ITA No.123 of 2010 of Honble Bombay High Court dated 28.7.2011 to submit that interest on fixed deposits placed with other banks other than cooperative banks qualified for deduction under section 80P(2)(a)(i) distinguishing judgment of the Apex Court in the case of Totgars Cooperative Society Ltd, 322 ITR 283.

f) The decision of the Honble Supreme Court in the case of CIT vs. Karnataka State Cooperative Apex Bank for the proposition that interest arising from investment made in compliance with the statutory provisions to enable it to carry on banking business is exempt under section 80P(2)(a)(i) of the Income Tax Act. The placement of such funds being for the purpose of carrying on banking business, the income there from would be the income from the assessees business. There is nothing in the phraseology of Section 80P(2)(a)(i) which makes it applicable only to the income derived from working or circulating capital.

The Learned Counsel also placed the list of chronological dates and events from 10.10.1994 to 2.12.2005 i.e. from registration of the assessee as a Multi state cooperative society under the Multi state cooperative societies Act 1984 to order of winding up of the assessee and appointment of liquidator on 02.12.2005. It was the Learned Counsels submission that the assessee having been permitted to do the banking business cannot be said to be out of banking business just because the license was cancelled and the incomes arising consequent to the cancellation of banking license also are to be considered as income from banking business invoking the provisions of Section 176(3A) and so the assessee is eligible for deduction under section 80P(2)(a) applicable to the banking business.

16. We have considered the submissions and rival contentions, pursued the orders of the Assessing Officer and CIT (A) and various case law relied upon by the parties before us. There is no dispute with reference to the fact that assessees license was cancelled consequent to the decision of the Honble Supreme Court that the assessee is not eligible to be considered as a State Cooperative Bank. The incomes under consideration are arising in the financial year 2004-05 i.e. from 1.4.2004 to 31.3.2005. During this period the assessee could not engage itself in any banking activity as the license was cancelled. As submitted the assessee was in the process of winding up and most of the incomes were earned by way of interest on the deposits made earlier when the assessee was undertaking the business of banking for the purpose of SLR, CRR purposes and also in the course of business with various other organizations. Substantial incomes arose due to sale of investments as gains. The nature of income as earned by Assessee is as under:

a)

Interest earned on loans and advances

`1,26,03,473

b)

Interest on investments

`10,07,02,579

c)

Interest earned on balance with RBI and other inter bank funds

`27,19,052

d)

Commission Exchange and Brokerage

`3,11,942

e)

Profit on sale of investment

`86,69,70,200

f)

Miscellaneous incomes

`1,97,09,071

17. Thus the income earned by the assessee during the financial year 2004-05 is to the tune of `100.30 crores. Out of this amount of `1.26 crores on interest on loans and advances was allowed by the Assessing Officer as deduction under section 80P(2)(a)(i) being income from providing credit facilities to its members. An amount of `1.97 crore as the miscellaneous income is nothing but crediting the unclaimed dividend provided earlier. The Assessing Officer not only disallowed the claim u/s 80P on the balance of incomes but also brought to tax the miscellaneous income pertaining to reversal of unclaimed dividend. As briefly stated earlier, the CIT (A) allowed deduction of the incomes pertaining to interest on investment as income earned in banking business and profit on sale of investment treated as capital gains while deleting the miscellaneous incomes. The issues before us for consideration as contested in Ground 1 & 2 are whether (a) the incomes earned on interest on investment can be considered as income from banking business and (b) if so whether deduction under section 80P(2)(a) on the above incomes is eligible for deduction under 80P(2)(a)(i).

18. As stated above, the assessee was in the business of banking till the license was cancelled by the RBI in the previous year relevant to the Assessment Year 2004-05. It was the contention of the Assessing Officer, after analyzing the provisions of Section 5A and 6A of the Banking Regulation Act, that the assessee is not in the business of banking as the assessee was not a State Cooperative Bank and it could not do banking business in the State of Maharashtra. Further to the above the learned Assessing Officer also extracted the last Para of the Apex Court order wherein it was held that the assessee cannot be allowed to continue to operate as State Cooperative Bank. In view of the clear findings of the Honble Supreme Court and considering the fact that the license was cancelled by the RBI on 30/10/2003, the Assessing Officer was of the opinion that the assessee cannot be considered as a State Cooperative Bank and so the incomes arising cannot be considered as business of banking.

19. The CIT (A) in our opinion did not consider the issue in its correct perspective while allowing the deduction to the assessee on the incomes arising from the investments made in erstwhile banking business. It is to be noted that the main reason for allowing deduction by him under section 80P(2)(a)(i) is primarily based on the fact that the Assessing Officer himself allowed the deduction to the cooperative society on certain incomes and as extracted above vide Para No.3.9 of the CIT(A) order the findings of the Assessing Officer in the assessment order is the basis for giving relief to the assessee. The tone and tenor of the order was in allowing the deduction as a cooperative society under section 80P(2)(a)(i).

20. Before analyzing the issue, it is necessary to extract the provisions of Section 80P(2)(a)(i):

80P.(1) Where, in the case of an assessee being a cooperative 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 cooperative society engaged in-

i) carrying on the business of banking or providing credit facilities to its members, or

ii) a cottage industry, or

iii) the marketing of agricultural produce grown by its members, or

iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or

v) the processing, without the aid of power, of the agricultural produce of its members, or

vi) the collective disposal of the labour of its members, or

vii) fishing or allied activities, that is to say, the catching, curing, processing preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities:

Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:-

1) The individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities;

2) The co-operative credit societies which provide financial assistance to the society;

3) The State Government;

As can be seen from the above, the deduction is eligible for a cooperative society engaged in carrying on the business of banking or providing credit facilities to its members. The use of word or in Section 80P(2)(a)(i) indicate that these two are mutually exclusive deductions. Either a cooperative society is engaged in carrying on the business of banking or it is engaged in providing credit facilities to its members, it cannot be considered that a cooperative society is engaged in carrying on business of banking as well as providing credit facilities to members. Therefore, in our opinion, a cooperative society engaged in providing credit facilities to its members cannot be considered as a cooperative society engaged in carrying on in the business of banking. The provisions of BR Act do prohibit doing any other activity other than banking business. Likewise, no person can carry on business of banking without any license. There is no doubt that the assessee admits and Assessing Officer also accepts that the assessee cooperative society is providing credit facilities to its members and an amount of `1.26 crores was already allowed as deduction. Therefore, the incomes that will not form part of providing credit facilities to its members, cannot be allowed as a deduction under section 80P(2)(a)(i). We also notice that section 80P also allows deduction of incomes of one or more activities of cooperative society stated in clause 2(a). However this should be for activities separately mentioned from Sub clause (i) to (vii ) as the word Or at the end of each sub clause is preceded by , a comma which is not the case in sub clause (i) where the word or has no ,(comma) preceding it. This indicate the legislative intention of allowing deduction on any one or more activities stated from sub clause (i) to (vii ) but not with the activity specified in sub clause (i) itself. We are of the considered opinion that assessee can be allowed only one of the deduction under sub clause (i), i.e. either of incomes from banking business or incomes from providing credit facilities to its members and not both.

21. The assessees income can not be considered as from the business of banking on the reason that the assessee is not having any license to do the business of banking. It was held by the Honble Supreme Court in assessees own case that the assessee status cannot be considered as a State Cooperative Bank at the first instance and therefore, the RBI could not have granted a license to the assessee. While admitting the assessee is not permitted to do the business of banking, it was the contention of the assessee before the Assessing Officer, CIT (A) and before us that the activity permitted by the Section 6 of Banking Regulation Act, 1949 permits a Banking Company in engaging in or more of the following forms of business listed from "a to o" in the section. Those activities are as under:

6. Forms of business in which banking companies may engage:- (1) In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely:-

(a) The borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hoondees, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, travellers cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances, the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities;

(b) Acting as agents for any government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a (managing agent or secretary and treasurer) of a company.

(c) Contracting for public and private loans and negotiating and issuing the same;

(d) The effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private of State, municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue;

(e) Carrying on and transacting every kind of guarantee and indemnity business;

(f) Managing, selling and realizing any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims;

(g) Acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security;

(h) Undertaking and executing trusts;

(i) Undertaking and administration of estates as executor, trustee or otherwise;

(j) Establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents or connections of such persons; granting pensions and allowances and making payments towards insurance; subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any public, general or useful object;

(k) The acquisition, construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company;

(l) Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company;

(m) Acquiring and undertaking the whole or any part of the business of any person or company, when such business is of a nature enumerated or described in this sub-section;

(n) Doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company;

(o) Any other form of business which the Central Government may, by notification in the official gazette, specify as a form of business in which it is lawful for a banking company to engage

22. As can be seen from the sub-section (1) of Section (6) of the Banking Regulation Act, in addition to business of banking, a banking company may engage in any one or more of the listed forms of business. This means that the assessee should be in the business of banking to engage in any one or more of the forms of business listed above. The banking company has been defined under section 5 as under:

5 (c) "Banking Company" means any company which transacts the business of banking in India"

Explanation: Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause;........

5 (d) "Company" means any company as defined in section 3 of the Companies Act, 1956 (1 of 1956); and includes a foreign company within the meaning of section 591 of that Act.

23. Combined reading of above provisions indicate that the banking company means a company defined under section 3 of the Companies Act doing transaction of business of banking in India. However, this benefit was extended to the cooperative bank by virtue of PART V inserted by Act 23 of 1965 w.e.f. 1.3.1966. Section 56 of the Banking Regulation Act modifies the provisions of the Banking Regulation Act as under:

56. Act to apply to cooperative societies subject to modifications:- The provisions of this Act, as in force for the time being, shall apply to, or in relation to, cooperative societies as they apply to, or in relation to, banking companies subject to the following modifications, namely:-

(a) Throughout this Act, unless the context otherwise requires:-

(i) References to a "banking company" or "the company" or "such company" shall be construed as references to a cooperative bank:

(ii) References to "commencement of this Act" shall be construed as references to commencement of the Banking Laws (Applicable to Cooperative Societies) Act, 1965 (23 of 1965);

(b) In section 2, the words and figures "the Companies At, 1956 (1 of 1956) and" shall be omitted;

(c) In section 5-

(i) After clause (cc), the following clauses shall be inserted, namely:-

(cci) "Cooperative Bank" means a state cooperative bank, a central cooperative bank and a primary cooperative bank;

(ccii) "cooperative credit society" means a society registered or deemed to have been registered under any Central Act for the time being in force relating to the multi-state cooperative societies, or any other Central or State law relating to cooperative societies for the time being in force;

(cciii) "Director" in relation to a cooperative society, includes a member of any committee or body for the time being vested with the management of the affairs of that society;

(cciii-a) multi State Cooperative Bank" means a multistate cooperative society which is a primary cooperative bank;

(cciii-b) "multi state cooperative society" means a multi state cooperative society registered as such under any Central Act for the time being in force relating to the multi-state cooperative societies but does not include a national cooperative society and a federal cooperative;

(cciv) "primary agricultural credit society" means a cooperative society-

(i) The primary object or principal business of which is to provide financial accommodation to its members for agricultural purposes or for purposes connected with agricultural activities (including the marketing of crops) and

(ii) The bye-laws of which do not permit admission of any other cooperative society as a member;

Provided that this sub-clause shall not apply to the admission of a cooperative bank as a member by reason of such cooperative bank subscribing to the share capital of such cooperative society out of funds provided by the State Government for the purpose;

(ccv) "primary cooperative bank" means a cooperative society other than a primary agricultural credit society-

(i) The primary object or principal business of which is the transaction of banking business;

(ii) The paid-up share capital and reserves of which are not less than one lakh of rupees; and

(iii) The bye-laws of which do not permit admission of any other cooperative society as a member;

Provided that this sub-clause shall not apply to the admission of a cooperative bank as a member by reason of such cooperative bank subscribing to the share capital of such cooperative society out of funds provided by the State Government for the purpose;

(ccvi) "Primary credit society" means a cooperative society, other than a primary agricultural credit society:-

(i) The primary object or principal business of which is the transaction of banking business;

(ii) The paid-up share capital and reserves of which are less than one lakh of rupees; and

(iii) The bye-laws of which do not permit admission of any other cooperative society as a member:

Provided that this sub-clause shall not apply to the admission of a cooperative bank as a member by reason of such cooperative bank subscribing to the share capital of such cooperative society out of funds provided by the State Government for the purpose.

Explanation:- If any dispute arises as to the primary object or principal business of any cooperative society referred to in clauses (cciv), (ccv) and (ccvi), a determination thereof by the Reserve Bank shall be final;

(ccvii) "Central Cooperative Bank" "primary rural credit society" and "State Cooperative Bank" shall have the meanings respectively assigned to them in the National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981).

[Emphasis supplied]

24. It can be seen from the above that Section 56 modifies Banking Company or a Company which shall be construed as referring to cooperative bank. A cooperative bank means a State Cooperative Bank, a Central Cooperative Bank and Primary Cooperative Bank. As held by the Honble Supreme Court in the assessees own case, assessee cooperative society cannot be held as a State Cooperative Bank. Therefore, application of provisions of Banking Regulation Act to the Multi State Cooperative Society which did not have a license to act as a cooperative bank cannot be considered. Unless it is a cooperative bank, it cannot be said to be covered by the provisions of Section 5 and 6 of the Banking Regulation Act. The definitions stated in Section 56 define a cooperative bank, a cooperative credit society, the multi-State Cooperative Bank and a multi-State Cooperative Society separately. The assessee being a multi-State Cooperative Society cannot fall under the definition of the cooperative bank. Therefore, references to banking company or the company or such company in the Bank Regulations Act cannot be made applicable to the assessee society. Therefore, the contention that the assessee was indulging in other activities permitted by Section 6 of the Banking Regulations Act, 1949 cannot be accepted, as the said provisions is not applicable to cooperative society, which is not a cooperative bank. Therefore, the incomes arising to the assessee consequent to the cancellation of the banking license cannot be considered as incomes from the business of banking on the reason that the assessee is not a state cooperative bank. Such incomes cannot be allowed deduction under 80P(a)(i).

25. Honble Supreme Court in the case of Totgars Cooperative Sale Society (322 ITR 283) had an occasion to analyse various incomes arising to cooperative society. In the above referred case the issue is whether the interest income arising on short term deposit on security which are not required immediately for the purpose of business can be considered as amount of profits and gains of business eligible for deduction under section 80P(2)(a)(i). Considering the issue the Honble Supreme Court held as under:

The words "the whole of the amount of profits and gains of business" in section 80P(2) of the Income Tax Act, 1961, emphasize that the income in respect of which deduction is sought by a cooperative society must constitute the operational income and not the other income which accrues to the society.

The interest income arising to a cooperative society carrying on the business of providing credit facilities to its members or marketing of agricultural produce of its members, on the surplus, which is not required immediately for business purposes, from investment in short-term deposits and securities, has to be taxed as income from other sources under section 56 of the Income-Tax Act, 1961. Such interest cannot be said to be attributable to the activities of the society, viz, carrying on the business of providing credit facilities to its members or marketing of agricultural produce of its members. Interest income of such society from amounts retained by it cannot be said to be attributable either to the activity mentioned in section 80P(2)(a)(i) or section 80P(2)(a)(iii) of the Act.

Section 80P(2)(a)(i) cannot be placed on a par with Explanation (baa) to Section HHC, section HHD(3) and section 80HHE(5).

Decision of the Karnataka High Court in Totgars Coopeative Sale Society Ltd v. Income Tax Officer (2010) 322 ITR 272 affirmed.

26. In the above said decision, the Honble Supreme Court also observed that:

A number of judgments were cited on behalf of the assessee(s) in support of its contention that the source was irrelevant while construing the provisions of section 80P of the Act. We find no merit because all the judgments cited were cases relating to co-operative banks and the assessee society is not carrying on banking business. We are confining this judgment to the facts of the present case. To say that the source of income is not relevant for deciding the applicability of section 80P of the Act would not be correct because we need to give weightage to the words "the whole of the amount of profits and gains of business" attributable to one of the activities specified in section 80P(2)(a) of the Act. An important point needs to be mentioned. The words "the whole of the amount of profits and gains of business" emphasize that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the society. In this particular case, the evidence shows that the assessee society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income falls in the category of "other income" which has been rightly taxed by the Department under section 56 of the Act.

27. Therefore, the incomes on which deduction was claimed under 80P should be operational income attributable to one of the activity of Society. On the principles established by the Honble Supreme Court in the case of Totgars Cooperative Society Ltd( supra), it is to be held that the income earned in the case of providing credit facilities to its members is rightly allowed as deduction under section 80P(2)(a)(i) by the Assessing Officer and the CIT (A) was wrong in allowing the deduction on the interest income earned from the investments with the RBI. Since these funds are not utilized in the activity of providing credit facilities to the members, these incomes cannot be allowed as deduction under section 80P(2)(a)(i). It is already considered that the assessee is not in the banking business. Therefore, these incomes cannot be allowed as deduction as income arising out of providing credit facility to its members.

28. Decisions rendered in the context of cooperative bank did not apply to the cooperative society. In the course of arguments, the Learned Counsel relied on various judgments given in the context of cooperative bank. Since the assessee is not a cooperative bank, those cases are not applicable to the facts of the case and hence no reliance can be placed on the judgments given in the context of business of banking/cooperative bank. Reliance was placed on the provisions of Section 176(3A) by the Ld. Counsel that the income arising out of the discontinued business should also be brought to tax. Provisions of Section 176(3)A are as under:-

176(3)A. Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance.

29. There is no doubt on provisions of section 176 are applicable to a discontinued business and Sub-section 3A provides for taxing the sums received after discontinuance as income of the year of the receipt. In our opinion reliance placed on the above provision is mis-placed as the assessee has not discontinued the business. During the year the assessee is in the business and has offered income from interest on advances to the members as business income only. Therefore, the question of considering the discontinuation of business does not arise. What happened in the assessees case is only cancellation of license to do the banking business, but the assessee is not prevented in doing any other business by the cooperative society. Only the activity of banking was prohibited. Even otherwise, the issue is not whether the income is to be brought to tax as business income or not. The issue is whether the incomes arising out of investment is eligible for deduction under section 80P(2)(a)(i) as of banking business. Therefore, we are of the opinion that provisions of section 176(3)A does not help the case of assessee.

30. We have already considered Part V of the Banking Regulations Act, while considering the provisions of section 56 applicable to cooperative bank. Provisions of section 22A were introduced in the Banking Regulations Act, 1949 by the Act 24 of 2004 w.e.f. 24.09.2004 which are as under:

22A. Validation of licenses granted by Reserve Bank to multi-State cooperative societies-Notwithstanding anything contained in any law or judgment delivered or decree or order of any Court made:-

(a) No license, granted to a multi-State cooperative society by the Reserve Bank under section 22 which was subsisting on the date of commencement of the Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004 shall be invalid or be deemed ever to have been invalid merely by the reason of such judgment, decree or order;

(b) Every license, granted to a multi-State Cooperative society by the Reserve Bank under section 22 which was subsisting on the date of commencement of the Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004 shall be valid and be deemed always to have been validly granted in accordance with law;

(c) a multi-State Cooperative society whose application for grant of license for carrying on banking business was pending with the Reserve Bank on the date of commencement of the Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004 shall be eligible to carry on banking business until it is granted a license in pursuance of section 22 or is, by a notice in writing notified by the Reserve Bank that the license cannot be granted to it.

31. The reason for introduction of the above provision was stated as under:-

Amendment Act 24 of 2004-Statement of Objects and Reasons:- In view of large deposits and working funds of cooperative banks, certain provisions of the Banking Regulation Act, 1949 were made applicable, by the Banking Laws (Application to Cooperative Societies) Act, 1965, to the State Cooperative Banks, the Central Cooperative Banks and primary non-agricultural banks.

2. The Honble Supreme Court in the Apex Co-operative Bank of Urban Bank of Maharashtra & Goa Ltd vs. Maharashtra State Co-operative Bank Ltd., and others held that the Reserve Bank of India (RBI) by virtue of its power under section 22 of the Banking Regulation Act, 1949 cannot grant a license to Assessment Year co-operative bank unless it is a State Co-operative bank or a central co-operative bank or a primary co-operative bank and it would be necessary that a declaration under the National Bank for Agriculture and Rural Development Act, 1981 be first obtained. It further held that the State Govt. could not have declared the appellant i.e. the Apex Co-operative Bank of Urban Bank of Maharashtra & Goa Ltd., being a co-operative society registered under the Multi State Cooperative Societies Act, 1984 as a State Cooperative Bank. Therefore, the Honble Supreme Court also directed Reserve Bank of India to forthwith revoke the banking license granted to the Appellant.

3. In view of the specific directions given by the Honble Supreme Court in the aforesaid case, the RBI cancelled with effect from 30th October, 2003, the license issued to the Apex Co-operative Bank of Urban Bank of Maharashtra & Goa Ltd. There are thirty-four other multi-State co-operative banks (MSCBs), which have been granted license under the provisions of Banking Regulation Act, 1949. In view of the judgment in the above case, doubts have been expressed about the legality of the license issued to other MSCBs.

4. In order to remove the doubts about the legality of the licenses issued to other MSCBs and to resolve any difficulties which might arise in the future, it had, therefore, become necessary to urgently carry out necessary amendments in the Banking Regulation Act, 1949 and the Deposit Insurance and Credit Guarantee Corporation Act, 1961 (DICGC Act) to make specific legal provision with retrospective effect, for the validity of the licenses issued to other MSCBs by the RBI and also to enable the RBI to issue in future the licenses to the Multi- State Cooperative Societies to carry on banking business and make the multi-State cooperative banks eligible for insurance of their deposits under the Deposit Insurance Credit Guarantee Corporation Act, 1961. This will protect the interests of small depositors.

5. Since Parliament was not in session and it had become necessary to take immediate action to provide for the above matters, the Banking Regulation (Amendment) and Miscellaneous Provisions Ordinance, 2004 was promulgated by the President on the 24th September, 2004 inter alia to-

(a) provide that the licenses granted to the existing

multi-State co-opeative banks by the RBI shall be

deemed to have been validly granted.

(b) enable the RBI to issue in future the licenses to co- operative societies registered under the Multi-State Co-operative Societies Act, 2002 to carry on the banking business;

(c) make provisions for supersession of Board of Directors of a multi-State cooperative bank in certain cases;

(d) provide that an order sanctioning a scheme of compromise and arrangement or reorganization or reconstruction or winding up or supersession of the Board of winding up of multi-State co-operative bank in certain cases.

(e) make these multi-State co-operative banks as "eligible co-operative bank" under section 2(gg) of the DICGC Act so that their deposits can be insured by the Deposit Insurance and Credit Guarantee Corporation established under section 3 of that Act;

(f) make provision for reimbursement to the Deposit Insurance and Credit Guarantee Corporation by liquidator or transferee bank to the extent and in the manner provided in section 21 o DICGC Act.

32. Therefore, the amendment brought out to the Act was made applicable to all the licenses granted to a multi-State Co-operative Society which was subsisting on the date of commencement of the amendment. Since the license of the assessee was already cancelled by the RBI, the above provisions could not come to the help of the assessee in restoring the banking license or protecting banking activity. Once the license was withdrawn, provisions of section 36A of B.R. Act automatically get applied. Accordingly, as provided in (za) of Section 56, the provisions of Section 11 applicable to the requirements as to minimum paid up capital and reserves and section.18 regarding cash reserves and section 24 regarding maintenance of percentage of assets as provided in the Act shall not apply to a cooperative bank which has been refused license under section 22 or whose license has been cancelled under that section or has been prohibited from accepting deposits by virtue of any order made under this Act or of any alteration made in its bye-laws. In view of these provisions, the assessee societys deposits/ investments with RBI, stated to be for the fulfilling of the conditions under SLR/CRR Regulations go out of the purview of BR Act. In view of that reason also the incomes arising from investment from RBI can not be considered as arising from the business of banking. Since the incomes are not arising from the business of banking, such incomes cannot be allowed as deduction under section 80P(2)(a)(i) as the same also can not be considered as operational income of providing credit facilities to its members.

33. In view of this, we are not in a position to uphold the orders of the CIT (A) in granting deduction to the assessee under section 80P(2)(a)(i) on the reason that the assessee is a cooperative society. Therefore, the revenues appeal contesting granting of deduction under section 80P(2)(a)(i) to income of `10,07,82,579/- being the amount contested in ground No.1 and 2 is to be upheld. We reverse the orders of the CIT (A) on this issue and uphold the action of the Assessing Officer in this regard.

34. The next issue for consideration is whether the CIT (A) is right in treating the gain on sale of investments in govt. securities as capital gain. As briefly stated, the assessee earned gains on sale of securities. The assessee had an investment of `433.55 crores as on 31.03.2004 which has become Nil as on 31.03.2005. All the above investments were sold to meet its liabilities consequent to the cancellation of the banking license. The assessee got a gain of `81,36,13,690/- on sale of securities held for more than a year and `5,33,56,510/- in respect of securities held for less than one year. It was the assessees contention that the total amount of `86,69,70,200/- should get the deduction under section 80P(2)(a)(i). It has placed reliance on the decision of Baroda Peoples Cooperative Bank (: 280 ITR 282) and Electra Urban Credit Cooperative Society vs. Income Tax Officer 761 ITD 43 (Cal) (3rd Member). The Assessing Officer however, did not allow the deduction and brought to tax the entire amount. The CIT (A) distinguished the above decisions and considered that the incomes arising on sale of capital assets cannot be considered as income from regular banking transactions. However, he directed the Assessing Officer to treat the income as capital gains and directed for verification of the arithmetic calculations provided by the assessee. The revenue has aggrieved that the amount is treated as capital gain and not as business income whereas the assessee is aggrieved, in its only ground in its appeal, on the treatment given to the gains realized on sale of securities by the CIT(A).

35. We have considered the issue and rival contentions. Even though it was contended that placement of funds being necessary under section 24 of the B.R. Act giving rise to business income, disposal of such securities consequent to cancellation of license can not be considered as income from banking business. For the reasons stated above while deciding the issue in Ground no.1 & 2, we agree with the findings of the CIT(A) that sale of securities and gains earned thereon cannot be considered as income from banking activity. Therefore, we uphold the findings of the CIT (A) that the gains are to be brought to tax as capital gains only. Even though the revenue contends that the assessee treated them as depreciable assets/business assets following the guidelines of the RBI and was maintaining investment fluctuation reserve/ investment depreciation fund, we are of the opinion that these issues do not prevent in treating the same as capital gain. The reserves might have been provided under the regulations then applicable under B R Act. But there is no claim of deduction in computation of income as incomes are to be computed as per the Income Tax act. Therefore, the CIT (A)s directions in treating the amounts as long term capital gain/short term capital has to be upheld. In case the assessee has claimed any deduction in value of securities in any earlier year(s) by treating it as a tradeable stock/current assets, such reduced value only can be considered as value for the purpose of arriving the gains. However, as seen from the details filed before the CIT (A) which were referred to the Assessing Officer for examination, there is no such claim and accordingly the contentions raised by the revenue are only academic in nature and not supported by facts. In view of the above, we uphold the orders of the CIT (A) to that extent and dismiss the grounds raised by the revenue as well as by the assessee respectively.

36. The next ground for consideration is exclusion of an amount of `1,90,88,857/- contested by the Revenue in Ground No.4. The assessee had written back unclaimed dividend declared by the assessee in earlier years to P&L account under the head "miscellaneous income". It was submitted that these amounts should have been adjusted in the reserve account and should not have been taken to the P&L A/c. Having noticed the mistake, the assessee filed a revised return reducing the above amount in computation of income. The Assessing Officer however, did not allow the claim and brought to tax the entire miscellaneous income. After considering the submissions of the assessee that they have inadvertently taken it as a miscellaneous income instead of crediting to statutory reserves and as the dividend declared in earlier years was not allowed as a deduction while computing the total income of the earlier years and so provisions of Section 41 are not applicable, the CIT (A) accepted the submissions. He held that the dividend declared was application of income and not an expenditure claim. Therefore, write back of unclaimed dividend of earlier years will not add to the income of the assessee.

37. After considering the rival contentions and after examining the record, we agree with the findings of the CIT (A). As the assessee has not claimed expenditure when dividend was paid, the write back of the unclaimed dividend cannot be treated as income under the provisions of the Act, just because the same was credited to the P&L account. We therefore, reject the ground raised by the revenue on this issue.

38. In the result, the Revenues appeal is partly allowed and assessees appeal is dismissed.

Order pronounced in the open court on 30th November 2011.