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2012 (11) TMI 855 - HC - Income TaxExemption of Income u/s 80P - Interest on deposits of non-SLR funds - Income from Banking Business - held that - Whether the business Income is derived from or attributable to SLR or non-SLR funds would not make any difference for the purposes of qualifying the interest earned by the cooperative bank under Section 80P (2) (a) (i) as the deposits of surplus idle money available from working capital, including reserves, excess collection of interest tax and other incomes are all attributable to the business of banking. The interest from such deposits cannot be said to be beyond the legitimate business activities of the bank - ITAT committed no error in arriving at findings that the interest are not deposits of non-SLR funds and the cooperative bank will qualify for exemption under Section 80P (2) (a) (i) of the Act - decided against the revenue and in favour of the respondent assessee.
Issues Involved:
1. Whether interest earned by a Co-operative Bank on deposits of its non-SLR funds is income from Banking Business and consequently exempt under Section 80-P (2) (a) (i) of the Income Tax Act, 1961. 2. Whether interest earned on deposits of non-SLR funds is covered within the meaning of Section 80-P (2) (a) (i) of the Act. 3. Whether interest on Non-SLR investment is exempt under Section 80-P (2) (a) (i) despite the definition of financing Bank or Central Bank in U.P. Co-operative Society Act not referring to Section 5 or 6 of the Banking Regulation Act and restricting banking business to only members of the co-operative societies of the assessee's bank. Detailed Analysis: 1. Interest Earned by Co-operative Bank on Non-SLR Funds: The court examined whether the interest earned by a Co-operative Bank on deposits of its non-SLR funds qualifies as income from banking business and is consequently exempt under Section 80-P (2) (a) (i) of the Income Tax Act, 1961. The court noted that the Supreme Court in Commissioner of Income Tax v. Karnataka State Cooperative Apex Bank and similar cases held that income from SLR funds is attributable to the business of banking and is deductible under Section 80-P (2) (a) (i). The petitioner argued that non-SLR funds should not be subject to the same deduction, citing the Supreme Court's remand in Mehsana District Central Cooperative Bank Ltd. v. Income Tax Officer for fresh consideration. However, the respondent contended that the same rationale for SLR funds applies to non-SLR funds, supported by precedents from the Gujarat, Andhra Pradesh, and Bombay High Courts. 2. Coverage of Interest Earned on Non-SLR Funds: The court considered whether the interest earned on deposits of non-SLR funds falls within the meaning of Section 80-P (2) (a) (i) of the Act. The respondent argued that the Supreme Court in Bihar State Cooperative Bank Ltd. v. The Commissioner of Income Tax held that the placement of funds in deposits with other banks constitutes income from banking business. The court found that the judgments applicable to SLR funds also apply to non-SLR funds, as the interest earned from such deposits can be treated as profits and gains attributable to the business of banking. 3. Exemption of Interest on Non-SLR Investment: The court addressed whether the interest on Non-SLR investment is exempt under Section 80-P (2) (a) (i) despite the U.P. Co-operative Society Act's definition of financing Bank or Central Bank not referring to Section 5 or 6 of the Banking Regulation Act. The court referred to the Supreme Court's explanation in Bihar State Cooperative Bank Ltd. v. CIT, which clarified that interest earned from surplus funds should be treated as interest earned in the banking business. The Bombay High Court in CIT v. The Goa Urban Co-operative Bank Ltd. also supported this view, stating that the income from investments in government securities and fixed deposits is attributable to the business of banking. Conclusion: The court concluded that the interest earned by the Co-operative Bank on deposits of non-SLR funds qualifies for exemption under Section 80-P (2) (a) (i) of the Income Tax Act, 1961. The court decided against the revenue and in favor of the respondent assessee on all three questions, affirming that the interest from non-SLR funds is attributable to the business of banking and qualifies for deduction under Section 80-P (2) (a) (i). The department was directed to proceed accordingly.
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