2003 (9) TMI 6 - HC - Income Tax

Exemption under section 80(2)(a)(i) banking - investment of the reserves and other funds in various securities - Whether Tribunal was right in holding that the income from such investment could be said to be from banking business and exempt under section 80(2)(a)(i) of the Income-tax Act 1961? - There is no doubt and it is not disputed that the assessee-co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so any income derived from funds so placed arises from the business carried on by it and the assessee has not by reason of section 80P(2)(a)(i) to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business the income derived therefrom would be income from the assessee s business question is answered in the affirmative and in favour of the assessee

Summary

Issues:
1. Whether investment of reserves and other funds in various securities requires the sanction of the Registrar of the Co-operative Societies under section 63 of the Co-operative Societies Act?
2. Whether such investment can be considered of banking nature?
3. Whether income from such investment can be classified as from banking business and exempt under section 80(2)(a)(i) of the Income-tax Act, 1961?

Analysis:

Issue 1: The Tribunal referred questions regarding the necessity of Registrar's sanction for investment in securities. The Revenue argued against the Tribunal's decision, citing previous High Court judgments. The assessee's counsel supported the Tribunal's stance. The court considered the arguments and referred to the Madhya Pradesh Co-operative Bank case where the Supreme Court held that interest on government securities with banks does not qualify for exemption under section 80P. However, the court also mentioned the Karnataka State Co-operative Apex Bank case, where it was held that income derived from funds placed with banks for banking business is exempt. The court concluded that the Revenue's contention cannot be accepted based on the apex court's pronouncement, and therefore, answered the question in favor of the assessee.

Issue 2: The Tribunal questioned whether the investment could be considered of banking nature. The court's analysis of the relevant case law, specifically the Karnataka State Co-operative Apex Bank case, supported the view that income derived from funds placed with banks for banking activities is considered income from the business itself. Therefore, the court answered this question in the affirmative, aligning with the assessee's position.

Issue 3: The pivotal question revolved around whether income from the investment could be classified as from banking business and exempt under section 80(2)(a)(i) of the Income-tax Act, 1961. The court's decision on this question was crucial as it would impact the answers to the preceding issues. Relying on the Karnataka State Co-operative Apex Bank case, the court concluded that income derived from funds placed for banking purposes is indeed exempt. Therefore, the court answered this question affirmatively, in favor of the assessee. Consequently, questions 1 and 2 became irrelevant in light of the decision on question 3. The court's detailed analysis and reliance on relevant legal precedents led to a judgment in favor of the assessee, with no costs imposed.