2008 (9) TMI 112 - HC - Income Tax

Assessee is a co-operative society, and carries on banking activities, including providing credit facilities to its members additions on account of interest received by the assessee various loans given to the staff - Whether the amount of interest earned by the respondent Bank on various loans extended to its employees from deposit of P.F. and Housing loan is eligible to be exempted u/s 80P (2) (a) (i) Held, no revenue s appeal allowed

Issues Involved:
1. Eligibility for exemption under Section 80P (2) (a) (i) of the Income Tax Act, 1961.
2. Interpretation of "business of banking" in relation to loans provided to employees.

Issue-Wise Detailed Analysis:

1. Eligibility for Exemption under Section 80P (2) (a) (i) of the Income Tax Act, 1961:

The primary issue in these appeals was whether the interest earned by a cooperative society (the assessee) on loans provided to its employees (specifically PF loans and housing loans) qualifies for exemption under Section 80P (2) (a) (i) of the Income Tax Act, 1961. The relevant section provides that a cooperative society engaged in the business of banking or providing credit facilities to its members can claim exemption on the whole of the profits and gains of such business.

The assessee argued that since it is a bank and lending is an essential part of its banking activities, the interest earned on loans to employees should be exempt. The revenue, on the other hand, contended that the exemption applies only to profits and gains from business activities directly related to banking or providing credit facilities to members, and not to loans provided to employees.

2. Interpretation of "Business of Banking" in Relation to Loans Provided to Employees:

The court examined whether the interest income from loans to employees could be considered as profits and gains attributable to the business of banking. According to Section 5(b) of the Banking Regulation Act, 1949, "banking" involves accepting deposits from the public for lending or investment. Section 6 of the same act enumerates various forms of business activities that a banking company may engage in, emphasizing dealings with the public at large.

The court noted that the schemes for PF loans and housing loans were specifically designed for the employees of the bank and not for the general public or even the members of the cooperative society. The court highlighted that these activities were more akin to employee benefits provided by an employer rather than banking activities carried out by a bank.

Judgment and Analysis:

The court referred to various judgments to understand the scope of "business of banking" and the applicability of Section 80P (2) (a) (i). It cited the Allahabad High Court judgment in Gorakhpur Kshetriya Gramin Bank, which stated that income derived from activities essential to the banking business could be exempt. However, the court distinguished the present case by emphasizing that the loans in question were not provided to the public or members but exclusively to employees, making it an act of the employer rather than a banking activity.

The court also referred to the Supreme Court judgment in CIT Vs. Karnataka State Co-operative Apex Bank, where it was held that income derived from funds placed with the State Bank or Reserve Bank of India for carrying on banking business was exempt. However, the court clarified that advancing loans to employees was not imperative for carrying on banking business.

Conclusion:

The court concluded that the interest earned on PF loans and housing loans provided to employees does not qualify for exemption under Section 80P (2) (a) (i). The activity of providing these loans was not part of the banking business but rather an employee benefit provided by the employer. Consequently, the appeals were allowed, the orders of the Tribunal were set aside, and the orders of the assessing authorities were restored. The substantial question of law was answered in favor of the revenue and against the assessee.

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