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2011 (6) TMI 215 - HC - Income TaxExemption under section 80P(2)(a)(i) - whether a cooperative society carrying on the business of banking is entitled to claim exemption under section 80P(2)(a)(i) of the Act in respect of the income derived out of the investments made from voluntary reserves of such society - As per the case Muzaffar Nagar Kshetriya Gramin Bank Ltd. v.CIT 2010 -TMI - 76320 - ALLAHABAD HIGH COURT held ,that the deposit exceeding SLR was also in relation to banking activity, and hence income accrued out of such deposit is also attributable to the banking business which is deductible under section 80P(2)(a)(i) of the Act - Hence, Tribunal correctly recorded a finding that the income earned by the respondents/cooperative banks is attributable to the business of banking and, therefore, exempt from income-tax under section 80P(2)(a)(i) of the Act - Decided in favour of assessee.
Issues Involved:
1. Maintainability of the appeals under Section 260A of the Income-tax Act, 1961. 2. Whether the income derived from voluntary reserves of a cooperative society carrying on the business of banking is exempt under Section 80P(2)(a)(i) of the Income-tax Act, 1961. Detailed Analysis: Maintainability of Appeal: Before addressing the core issue, the court examined the maintainability of the appeals under Section 260A of the Income-tax Act, 1961. Section 260A, introduced by the Finance (No. 2) Act, 1998, allows an appeal to the High Court against orders of the Tribunal on substantial questions of law. The court emphasized that a question of law must arise out of the Tribunal's order and should have been raised before the Tribunal. The court found that the issue of whether income from non-SLR reserves amounts to business income was indeed raised before the CIT (Appeals) and the Tribunal, making the appeals maintainable. Whether the Income from Voluntary Reserves is Exempted: The core issue was whether a cooperative society engaged in banking can claim exemption under Section 80P(2)(a)(i) for income derived from investments made from voluntary reserves. The court analyzed Chapter VIA of the Income-tax Act, particularly Section 80P, which provides deductions for cooperative societies. The court noted that Section 80P(2)(a)(i) allows deductions for profits and gains attributable to the business of banking. The court referred to the Supreme Court's interpretation of the term "attributable to" in Cambay Electric Supply Industrial Co. Ltd v. CIT, which is broader than "derived from." The court concluded that income from banking business, including interest from both statutory and non-statutory reserves, is attributable to banking and qualifies for deduction under Section 80P(2)(a)(i). The court further examined the Banking Regulation Act, 1949, and the Andhra Pradesh Cooperative Societies Act, 1964, noting that cooperative banks must comply with statutory requirements, including maintaining Statutory Liquidity Ratio (SLR) and reserve funds. The court found no distinction in the Income-tax Act between income from statutory and non-statutory deposits, asserting that all income from banking activities, including interest from surplus funds, is exempt. The court cited several precedents, including: - Bihar State Co-operative Bank Ltd v. CIT: Interest from deposits is part of banking business profits. - Karnataka State Cooperative Apex Bank: Interest from mandatory investments qualifies for exemption. - Mehsana District Central Co-operative Bank Ltd.: Interest from voluntary reserves utilized in ordinary business is deductible. - Nawanshahar Central Cooperative Bank Ltd.: Investments by a banking concern are part of the business of banking, and income from such investments is deductible. The court rejected the revenue's argument that only income from SLR reserves is deductible, emphasizing that cooperative banks' income from all banking activities, including non-SLR investments, is exempt under Section 80P(2)(a)(i). The court also dismissed the relevance of cases like Nainital District Cooperative Bank and Totgars' Cooperative Sale Society Ltd., noting that they did not pertain to cooperative banks. Conclusion: The appeals were dismissed, affirming that income derived from voluntary reserves of a cooperative society engaged in banking is exempt under Section 80P(2)(a)(i) of the Income-tax Act, 1961. The court upheld the Tribunal's finding that such income is attributable to the business of banking and qualifies for exemption.
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