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Issues Involved:
1. Whether the interest on securities received by the assessee amounting to Rs. 49,086 is exempt from tax under section 80P(2)(a)(i) of the Income-tax Act, 1961. Issue-Wise Detailed Analysis: 1. Exemption of Interest on Securities under Section 80P(2)(a)(i): Facts and Circumstances: The key issue is whether the interest on securities amounting to Rs. 49,086 earned by the assessee, a co-operative society engaged in banking, is exempt from tax under section 80P(2)(a)(i) of the Income-tax Act, 1961. The Income-tax Appellate Tribunal, Cochin Bench, had rejected the assessee's claim for exemption, leading to the reference of this question to the High Court. Assessee's Argument: The assessee argued that the interest earned on securities should be considered as business income. This argument was based on the Banking Regulation Act, 1949, which mandates banking institutions to invest in securities. The assessee contended that such investments are part of the banking business, thus making the interest earned from these securities business income. Revenue's Argument: The revenue countered that the Tribunal had already determined that the securities held by the assessee were not stock-in-trade, which is a factual finding. The Tribunal's decision was based on the premise that the statutory compulsion to invest in securities does not automatically classify such securities as stock-in-trade. Tribunal's Findings: The Tribunal had stated, "Maintenance of such assets (cash, gold or securities) to the statutory extent is no doubt part of banking operations but no further presumption arises (to the effect) that such assets represent the stock-in-trade of the bank." The Tribunal concluded that the assessee had not demonstrated that the securities were stock-in-trade, thus rejecting the claim under section 80P(2)(a)(i). High Court's Analysis: The High Court found that the Tribunal had misconstrued the nature of banking business. The Court emphasized that holding securities is an integral part of banking operations to ensure liquidity and meet unforeseen liabilities. The Court noted that the legislative requirement for banks to hold a certain percentage of assets in securities does not negate the fact that these securities are part of the bank's business and stock-in-trade. The High Court referred to the Supreme Court's decision in Bihar State Co-operative Bank Ltd. v. Commissioner of Income-tax, where it was held that short-term deposits by a banking institution are part of its business, and the interest earned is business income. The High Court applied this principle, stating that the interest earned from securities held by the assessee is also business income. Legal Precedents: The Court also addressed other relevant legal precedents. It cited the Supreme Court's judgment in Commissioner of Income-tax v. Chugandas and Co., which clarified that different heads of income under the Income-tax Act are for computation purposes and do not alter the nature of the income. The decision in Commissioner of Income-tax v. Cocanada Radhaswami Bank Ltd. further supported the view that business income can be classified under different heads for computation without changing its fundamental nature. Conclusion: The High Court concluded that the interest earned from securities is indeed business income. Consequently, section 80P(2)(a)(i) of the Income-tax Act, which provides for the exemption of income for co-operative societies engaged in banking, applies to the assessee. The Court answered the question in the affirmative, in favor of the assessee, and against the department. Final Judgment: The sum of Rs. 49,086 should be exempted under section 80P(2)(a)(i) of the Income-tax Act. The Court directed that the parties bear their respective costs due to the complexity of the issue and the lack of clear precedent from the Court. Order: A copy of the judgment will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench. The question was answered in the affirmative.
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