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Issues:
- Interpretation of section 80P(2)(a)(i) of the Income-tax Act, 1961 regarding exemption of income derived from interest on securities for a cooperative society. - Determination of whether securities held by a cooperative bank form part of stock-in-trade and if income from such securities qualifies for exemption under section 80P(2)(a)(i) of the Act. Analysis: The judgment by the High Court of Madhya Pradesh addressed a reference made by the Income-tax Appellate Tribunal regarding the exemption of income derived from interest on securities for a cooperative society under section 80P(2)(a)(i) of the Income-tax Act, 1961. The Commissioner of Income-tax challenged the exemption claimed by a cooperative bank, arguing that the securities held by the bank did not qualify as stock-in-trade. The Income-tax Officer initially assessed the income derived from securities as taxable, but the Appellate Assistant Commissioner ruled in favor of the bank, stating that securities held by banking companies form part of stock-in-trade and are exempt under section 80P(2)(a)(i) of the Act. The Tribunal upheld the Appellate Assistant Commissioner's decision, leading to the Department's appeal. The bank contended that its income, including interest on securities, should be exempt as it was engaged in banking business, citing the wide connotation of "banking business" under the Banking Regulation Act, 1949. The bank's counsel referenced relevant provisions of the Madhya Pradesh Co-operative Societies Act, 1960, and Supreme Court precedents to support the exemption claim. The High Court analyzed the provisions of the Banking Regulation Act, 1949, specifically section 24, which mandates banking companies to maintain a percentage of assets in the form of securities. The Court emphasized that securities deposited in compliance with this provision constitute stock-in-trade for cooperative societies engaged in banking business. The Court cited previous decisions by various High Courts and the Supreme Court to support the exemption claim for income derived from securities held in compliance with regulatory requirements. The Revenue's counsel argued that the bank's securities holdings did not involve transactions, making them liable for taxation. However, the Court rejected this argument, distinguishing the case from previous judgments and affirming that interest on securities held in compliance with regulatory provisions qualifies for exemption under section 80P of the Act. The Court concluded that income from interest on securities derived by the cooperative bank alone is exempt under the Act, ruling in favor of the bank and denying costs in the case.
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