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Issues Involved:
1. Deductibility of interest income earned from short-term deposits under section 80P(2)(a)(i). 2. Applicability of the Madhya Pradesh Co-operative Societies Act provisions to the Gujarat Co-operative Societies Act. 3. Deductibility of locker rent under section 80P(2)(a)(i). Summary: 1. Deductibility of Interest Income from Short-Term Deposits: Issue: Whether interest income earned from short-term deposits with nationalised banks out of reserve funds is entitled to exemption u/s 80P(2)(a)(i). Judgment: The Tribunal held that interest income earned on deployment of funds out of reserve funds with banks other than co-operative banks is not deductible under section 80P(2)(a)(i). The Tribunal directed the Assessing Officer to allow proportionate expenses incidental to the said investment if the income is taxable. The High Court affirmed this decision, stating that the interest earned on deposits of non-SLR funds (funds other than those advanced as loans and the banking reserves) is not deductible under section 80P(2)(a)(i). The Court clarified that only income arising on deposits of "banking reserves" with other banks/institutions can be treated as income attributable to a banking activity. 2. Applicability of Madhya Pradesh Co-operative Societies Act: Issue: Whether the provisions of the Madhya Pradesh Co-operative Societies Act are substantially in pari materia with the Gujarat Co-operative Societies Act regarding the utilisation of reserve funds. Judgment: The Tribunal held that the provisions of the Madhya Pradesh Co-operative Societies Act were similar to the Gujarat Co-operative Societies Act, and therefore, income from investment of such reserve funds did not fall within the scope of section 80P(2)(a)(i). The High Court, however, found that the restrictions and prohibitions applicable under the Madhya Pradesh Act do not apply to the Gujarat Act. The Gujarat Act permits the use of reserve funds in the business of the society, unlike the Madhya Pradesh Act, which restricts the use of reserve funds to specific purposes only. Despite this, the Court concluded that the investment of reserve funds outside the banking business does not qualify for deduction under section 80P(2)(a)(i). 3. Deductibility of Locker Rent: Issue: Whether locker rent is entitled to exemption under section 80P(2)(a)(i). Judgment: The Tribunal held that the income by way of locker rent was not falling within income from banking business, following the judgment of the Madhya Pradesh High Court. The High Court affirmed this decision, stating that running a safe deposit vault is not a banking activity or an activity attributable to the banking activity properly so called. The rent on lockers cannot be treated as profits and gains attributable to banking activity. Conclusion: The High Court answered all the questions in favor of the Revenue and against the assessee. The Court also certified under section 261 of the Act that this is a fit case for appeal to the Supreme Court, considering the importance of the questions of law involved for all co-operative banks in India.
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