2011 (7) TMI 80 - HC - Income Tax

Deduction u/s.80P(2)(a)(i) - Inclusion of interest in advance rent - interest income on advance rent is earned in accordance with the norms laid down by RBI and hence it would be income earned during the course of carrying on the business of banking - As the interest income earned by the assessee is directly linked to the banking business carried on by the assessee - Appeal is dismissed

Summary

Issues:
Interpretation of Section 80P(2)(a)(i) of the Income Tax Act regarding the eligibility of interest income on advance rent received by a cooperative bank for deduction.

Analysis:
The judgment by the Bombay High Court, delivered by J.P. Devadhar and A.A. Sayed, JJ., pertains to the interpretation of Section 80P(2)(a)(i) of the Income Tax Act concerning the eligibility of interest income on advance rent received by a cooperative bank for deduction. The case involved an appeal by the revenue challenging the direction given by the ITAT to include the interest on advance rent for the purpose of deduction under Section 80P(2)(a)(i) for the assessment year 2005-06. The respondent-assessee, a cooperative bank, had paid advance rent to a landlord for premises to carry on banking business, subject to payment of interest. The assessing officer rejected the claim of the assessee, contending that the interest income from advance rent did not qualify as income from banking business under Section 80P(2)(a)(i) of the Act.

Upon appeal, the CIT(A) ruled in favor of the assessee, stating that the interest income was indeed received in the course of banking business and thus eligible for deduction under Section 80P of the Act. The ITAT upheld the CIT(A)'s decision, prompting the revenue to file the present appeal. The revenue's counsel argued that the decision in Totgar's Co-operative Sale Society Ltd. v. ITO was applicable and rendered the ITAT's decision unsustainable.

However, the Court distinguished the present case from Totgar's Co-operative Sale Society Ltd. based on several crucial factors. Firstly, the Apex Court itself had differentiated cases concerning co-operative banks from those involving cooperative sale societies. Secondly, the interest income in the current scenario arose from providing advance rent for premises essential to conducting banking business, establishing a direct connection to the banking operations. Thirdly, the Reserve Bank of India had issued guidelines permitting cooperative banks to pay advance rent to landlords, subject to interest and other specified conditions, aligning with the banking business norms.

Consequently, the Court upheld the ITAT's decision, emphasizing that the interest income on advance rent was linked directly to the banking business activities of the assessee, making it eligible for deduction under Section 80P of the Act. The judgment concluded by dismissing the appeal, stating no merit in the revenue's contentions, and awarded no costs in the matter.