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2013 (1) TMI 85 - HC - Income TaxExemption u/s 80-P (2) (a) (i) - Interest earned on deposits of non-SLR funds - assessee is a Co-operative Bank - Held that - Ratio of the judgments, which are applicable to SLR funds would also be equally applied to non-SLR funds as it cannot be said on the basis of the judgment of the Supreme Court in Bihar State Co-operative Bank Ltd. (1960 (2) TMI 8 - SUPREME COURT). Short-term deposits by the Bank was income from normal banking business and was, therefore, exempt from the liability to pay Income Tax. It was further specifically held in that case that since the society in that case was engaged in banking activity, its normal business was to deal in money and credit and, therefore, the money laid out in the form of short-term deposit did not cease to be a circulating capital and interest earned thereon, could not be other than income generated from the business of banking, and, was therefore exempt from tax The question as to whether the business 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 - thus 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) - in favour of the 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 80P(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 80P(2)(a)(i) of the Act. 3. Whether the definition of financing Bank or Central Bank in the U.P. Co-operative Society Act restricts banking business to only members of the co-operative societies of the assessee's bank, thereby affecting the exemption under Section 80P(2)(a)(i). Detailed Analysis: Issue 1: Interest earned by a Co-operative Bank on deposits of its non-SLR funds The Tribunal held that interest earned by the assessee, a Co-operative Bank, on the deposits of its non-SLR funds is income from Banking Business and is consequently exempt under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The Supreme Court has previously ruled in cases like CIT v. Karnataka State Cooperative Apex Bank and CIT v. Nawanshahar Central Co-operative Bank Ltd. that income as interest from deposits of SLR Funds in approved securities is attributable to the business of banking and is deductible under Section 80P(2)(a)(i). However, the question regarding non-SLR funds was remanded to the Commissioner (Appeals) for a fresh decision in Mehsana District Central Co-operative Bank Ltd. Issue 2: Interest earned on deposits of non-SLR funds The Court considered the question of whether interest earned on deposits of non-SLR funds qualifies for deduction under Section 80P(2)(a)(i). The respondent argued that the same reasoning applied to SLR funds should extend to non-SLR funds, citing the Supreme Court's decision in Bihar State Co-operative Bank Ltd. and judgments by the Gujarat High Court and Bombay High Court. These courts have held that interest from deposits of non-SLR funds by cooperative banks is attributable to the business of banking and thus qualifies for deduction under Section 80P(2)(a)(i). Issue 3: Definition of financing Bank or Central Bank in U.P. Co-operative Society Act The Court examined whether the definition of financing Bank or Central Bank in the U.P. Co-operative Society Act restricts banking business to only members of the co-operative societies of the assessee's bank. The respondent argued that the Supreme Court in Bihar State Co-operative Bank Ltd. explained that interest earned from deposits of surplus funds should be treated as interest earned in the banking business. The Bombay High Court in Goa Urban Co-operative Bank Ltd. also held that investments in excess of statutory liquidity ratio (SLR) securities are subject to deduction under Section 80P(2)(a)(i). The Court concluded that the business derived from SLR or non-SLR funds does not make a difference for qualifying the interest earned by the cooperative bank under Section 80P(2)(a)(i). Conclusion: The Court found that the Tribunal did not err in its findings that interest from non-SLR deposits qualifies for exemption under Section 80P(2)(a)(i). The interest from such deposits is attributable to the business of banking. Consequently, the questions framed were decided against the revenue and in favor of the respondent assessee.
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