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Issues involved:
Interpretation of tax exemption u/s 81(i)(a) of the Income Tax Act, 1961 for a cooperative bank based on the classification of investments as stock-in-trade or reserve/provident fund. Summary: The High Court of Madhya Pradesh addressed a reference from the Income-tax Appellate Tribunal regarding the taxability of interest income from Government securities earmarked for reserve fund and provident fund of a cooperative bank. The bank, formed under the M. P. Co-operative Societies Act, 1957, was governed by specific regulations regarding the utilization of its reserve fund and provident fund. The Tribunal differentiated between securities forming part of the bank's stock-in-trade and those earmarked for reserve/provident fund, concluding that only the former constituted income from the bank's business of banking. In analyzing the applicability of tax exemption u/s 81(i)(a) of the Income Tax Act, the Court emphasized that income from banking business is exempt, not income from other activities of the society. It considered the nature of a bank's business, involving dealing with money and credit, and the necessity of maintaining circulating capital for withdrawals by depositors. The Court cited precedents to highlight that income from investments not forming part of circulating capital or stock-in-trade may not qualify for exemption under the Act. Regarding the reserve fund, the Court noted the restrictions on its utilization and concluded that investments from this fund did not constitute circulating capital. It referenced cases emphasizing the distinction between trading assets and idle funds, agreeing with the view that not all investments by a bank necessarily represent its trading assets. The Court also addressed the investment of the provident fund, highlighting the statutory prohibition on its use in the bank's business, leading to the exclusion of interest income from this source for tax exemption. In conclusion, the Court affirmed that interest income from investments earmarked for the reserve fund and provident fund of the cooperative bank did not qualify for tax exemption under u/s 81(i)(a) of the Income Tax Act. The decision was made based on the specific regulations governing the utilization of these funds and their classification as separate from the bank's stock-in-trade.
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