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2003 (10) TMI 21 - HC - Income TaxExemption u/s 80P(2)(a)(i) - respondent is the Co-operative Bank engaged in banking activity - Assessing Officer, while completing the assessment, took the view that the rental income received by the assessee in letting out the portion of the building partly occupied by it and the interest received from setting apart certain funds as reserve fund, does not come within the purview of section 80P(2)(a)(i) Held that interest received out of the funds deposited in the Reserve Bank and other banks are exempted from payment of tax in terms of section 80P(2)(a)(i)
Issues Involved:
1. Exemption of rental income under section 80P(2)(a)(i) of the Income-tax Act, 1961. 2. Exemption of interest income from reserve funds under section 80P(2)(a)(i) of the Income-tax Act, 1961. Detailed Analysis: Issue 1: Exemption of Rental Income The primary contention revolves around whether the rental income received by the assessee from letting out a portion of its building is exempt from tax under section 80P(2)(a)(i) of the Income-tax Act, 1961. The Tribunal and the Appellate Commissioner held that the rental income is exempt as it is considered part of the banking business. The Revenue argued that the rental income should not be considered as income derived from banking activities and thus should not be exempt under section 80P(2)(a)(i). They contended that letting out premises and receiving rent does not constitute banking business or providing credit facilities to members. They supported their argument by referring to clauses (a) to (f) of sub-section (2) of section 80P and emphasized that clause (f) makes a clear distinction between income from banking and non-banking activities. In contrast, the assessee's counsel argued that the acquisition, construction, and leasing of buildings are part of the banking business as per clauses (k) and (l) of sub-section (1) of section 6 of the Banking Regulation Act, 1949. They cited the Supreme Court's decision in Gujarat State Co-operative Bank Ltd. v. CIT [2001] 251 ITR 522, which held that income from leasing out safe deposit vaults is part of the ordinary banking business. The court concluded that the rental income received by the assessee should be treated as income from banking business. This decision was supported by the Supreme Court's interpretation in the Gujarat State Co-operative Bank Ltd. case, which recognized various activities, including leasing, as part of banking business under section 6 of the Banking Regulation Act. Issue 2: Exemption of Interest Income from Reserve Funds The second issue pertains to the interest income earned from reserve funds and whether it qualifies for exemption under section 80P(2)(a)(i). The Tribunal and the Appellate Commissioner ruled in favor of the assessee, stating that such interest income is part of the banking business. The Revenue contended that the reserve funds were not utilized for business activities and thus the interest earned should not be considered as income derived from banking activities. They argued that the funds in reserve were not part of the circulating capital and hence, the interest income should be taxable. The assessee's counsel countered by referring to the Karnataka High Court's earlier decision in ITO v. Karnataka Central Co-operative Bank Ltd. [2004] 266 ITR 635, which held that income from reserve funds is exempt from tax. They also cited the Supreme Court's decision in Bihar State Co-operative Bank Ltd. v. CIT [1960] 39 ITR 114, which recognized that investing reserve funds is a normal part of banking business and the returns from such investments form part of the bank's business profits. The court upheld the Tribunal's and the Appellate Commissioner's decisions, affirming that the interest income from reserve funds is indeed part of the banking business and thus exempt under section 80P(2)(a)(i). The court emphasized that investing reserve funds is a common banking practice and the returns from such investments are integral to the bank's business operations. Conclusion The appeals were dismissed, affirming that both the rental income and the interest income from reserve funds are exempt from tax under section 80P(2)(a)(i) of the Income-tax Act, 1961. The court found no merit in the Revenue's arguments and upheld the decisions of the Tribunal and the Appellate Commissioner.
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