2002 (9) TMI 15 - HC - Income Tax

Special deduction - The only question involved herein is whether the Tribunal is justified in holding that the respondent-assessee is entitled to deduction under section 80P(2)(a)(i) of the Act in respect of the interest and dividend income of Rs. 2,50,664 derived out of investment in National Savings Certificates, Indira Vikas Patras, Kisan Vikas Patras, short-term fixed deposits in banks and shares of Maharashtra State Finance Corporation of India. - We hold that the view ultimately taken by the Tribunal, though not on a very sound reasoning, has to be upheld as correct. The appeal is accordingly dismissed.

Summary

Issues:
1. Interpretation of deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis:
The High Court of Karnataka considered an appeal by the Department under section 260A of the Income-tax Act, 1961, regarding the entitlement of a co-operative bank to a deduction under section 80P(2)(a)(i) for interest and dividend income. The bank had invested in various financial instruments, and the Assessing Officer disallowed the deduction claimed under section 80P(2)(a)(i). The Commissioner of Income-tax (Appeals) held that the deduction was only admissible against income from banking business and not from investments. However, the Tribunal disagreed, stating that the bank had rightly claimed the deduction. The Department challenged this decision, citing a Supreme Court judgment regarding the utilization of income from voluntary reserves in the ordinary banking business.

The Supreme Court's judgment emphasized the importance of ascertaining whether income from investments of voluntary reserves was utilized in the ordinary banking business. In this case, the authorities did not find that the bank did not use its surplus funds in its banking operations. The Commissioner's view that the deduction could only be granted for investments made from statutory reserve funds was deemed contrary to the law established by the Supreme Court in a previous case. The Supreme Court had clarified that investments made by a bank to earn interest are part of its normal business operations and contribute to its profits. Therefore, the Tribunal's decision, although not based on strong reasoning, was upheld by the High Court as correct, leading to the dismissal of the appeal.