2012 (10) TMI 478 - HC - Income Tax

Interest earned on deposits made out of the non-SLR funds - Deduction under Section 80P(2)(a)(i) - Held that - As decided in Mehsana District Co-operative Bank Ltd. Versus Income-Tax Officer 2001 (8) TMI 15 - SUPREME COURT no dispute with the preposition that the word attributable is much wider in scope than derived. The Legislature has used the words attributable to in conjunction with the phrase any one or more of such activities . Investment of the funds by the banks including the non reserves were part of the banking activities since no bank would like its reserve funds to remain idle and not earn any interest. This is not only prudent business management but is also a part of the activity of banking. Therefore, the interest earned on such deposits is directly attributable to the business of banking - in favour of assessee.

Issues:
1. Interpretation of Section 80P(2)(a)(i) of the Income-tax Act, 1961 regarding deduction for interest earned on deposits made out of non-SLR funds.
2. Application of legal precedents related to deduction under Section 80P(2)(a)(i) in the context of income earned from investments by a cooperative society engaged in banking activities.

Detailed Analysis:
1. The judgment involved the interpretation of Section 80P(2)(a)(i) of the Income-tax Act, 1961, concerning the eligibility of a cooperative society engaged in banking business to claim a deduction for interest earned on deposits made out of non-SLR funds. The key question was whether such income could be considered as earned from normal banking activities to qualify for the deduction under the said provision.

2. The facts of the case highlighted that the cooperative society, registered under the H.P. Cooperative Societies Act and governed by the Banking Regulation Act, had invested funds in both statutory reserves (SLR) and non-SLR investments. The central issue was whether interest earned on deposits from non-SLR funds could be attributed to normal banking business/activities, thus making it eligible for the deduction under Section 80P(2)(a)(i).

3. The judgment referenced legal precedents to support the interpretation of the term "attributable to" in tax laws. Citing the Cambay Electric Supply Industrial Co. Ltd. case, the court emphasized that the expression "attributable to" has a wider import than "derived from," indicating that income sources beyond direct business operations could still be considered as part of the business activity for tax purposes.

4. The legal arguments presented by both parties referenced relevant Supreme Court judgments, such as the Commissioner of Income-tax vs. Karnataka State Co-operative Apex Bank, to establish the principles governing deductions under Section 80P(2)(a)(i) for cooperative banks. The court examined conflicting interpretations in previous cases to arrive at a conclusion applicable to the present scenario.

5. The judgment ultimately concluded that the interest earned on deposits made out of non-SLR funds by the cooperative society was directly attributable to its banking activities. It reasoned that prudent business management for any banking institution would involve investing reserve funds to earn interest, aligning with the broader interpretation of activities falling under the scope of banking business for the purpose of claiming deductions under Section 80P(2)(a)(i).

6. Based on the comprehensive analysis of the legal provisions, precedents, and factual circumstances, the court ruled in favor of the assessee, rejecting the revenue's arguments and upholding the entitlement of the cooperative society to the deduction under Section 80P(2)(a)(i) for the interest earned on deposits made out of non-SLR funds. The judgment provided a detailed rationale for the decision, emphasizing the legislative intent behind the tax provision and the wider scope of activities considered integral to banking operations.

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