2014 (8) TMI 168 - HC - Income Tax

Exemption u/s 80P - Interest from investment voluntary reserve Whether the income is income from banking business or not Held that - Following the decision in Mehsana District Co-operative Bank Ltd. Versus Income-Tax Officer 2001 (8) TMI 15 - SUPREME Court - the assessee shall be entitled to the exemption under Section 80P(2)(a)(i) of the Act - if, the investments are made in the security, which is permissible mode of investment, the assessee shall be entitled to the special deduction - Section 80P(2)(a)(i) of the Act requires a Co-operative Society, and not a Co-operative Bank to be engaged in carrying on business of banking it is not possible to restrict the scope of the business to the definition of Banking under section 5(b) of the Banking Regulation Act - Even otherwise, a banking company including a co-operative society, may accept deposits for the purpose of lending or investment - The definition does not stipulate that investment has to be only to the extent provided either by the Gujarat Cooperative Societies Act or the Banking Regulation Act - when investments are made in securities, which are a permissible mode of investment, income arising therefrom would be attributable to the business of banking and the assessee would be eligible for deduction in terms of section 80P(2)(a)(i) Decided in favour of Assessee.

Summary

Issues:
1. Exemption under Section 80P(2)(a)(i) of the Income-Tax Act on interest received by a Cooperative Bank.
2. Denial of exemption by Assessing Officer and Revisional Authority.
3. Interpretation of the law based on previous court decisions.

Analysis:

Issue 1: Exemption under Section 80P(2)(a)(i)
The petitioner, a Cooperative Bank, filed a return claiming exemption under Section 80P(2)(a)(i) of the Income-Tax Act on interest received through investments. The Assessing Officer (AO) held the interest on voluntary reserve investments as taxable income, leading to the dispute.

Issue 2: Denial of Exemption
The petitioner challenged the AO's decision through a revision application under Section 264 of the I.T. Act, which was dismissed by the Revisional Authority. This denial of exemption formed the basis of the present Special Civil Application before the High Court.

Issue 3: Interpretation of Law
The petitioner relied on past court decisions, including the Hon'ble Apex Court's ruling in "MEHSANA DISTRICT CO. OP. BANK LTD." and a Division Bench decision in "BARODA PEOPLE'S COOPERATIVE BANK LTD." to support their claim for exemption under Section 80P(2)(a)(i). The court analyzed these precedents to determine the applicability of the exemption in the current case.

The court noted that previous judgments established that Cooperative Banks are entitled to exemption under Section 80P for interest earned on permissible investments. The Division Bench decision highlighted the distinction between banking activities and credit facilities, emphasizing the broad scope of banking operations for Cooperative Banks. It clarified that investments in permissible securities qualify for the special deduction under Section 80P.

Based on the legal precedents and interpretations, the High Court allowed the petition, quashing the order disallowing the exemption and holding the petitioner eligible for the tax exemption on the interest received through investments. The court's decision aligned with the principles laid down by the Hon'ble Apex Court and the Division Bench, ensuring the Cooperative Bank's entitlement to the exemption under Section 80P(2)(a)(i) of the Income-Tax Act.