2005 (11) TMI 164 - AT - Income Tax

Issues Involved:
1. Deduction under section 80P(2)(a)(i) for income from SLR and non-SLR investments.
2. Treatment of Rs. 4,58,76,000 received from the government.
3. Imposition of interest under sections 234B, 234D, and withdrawal under section 244A.

Detailed Analysis:

1. Deduction under Section 80P(2)(a)(i) for Income from SLR and Non-SLR Investments:

The primary issue was whether the income from SLR (Statutory Liquidity Ratio) and non-SLR investments qualifies for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961. The assessee, a Regional Rural Bank (RRB), claimed this deduction, arguing that the entire income is attributable to its banking business.

The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) [CIT(A)] denied this deduction, stating that the investments were not in accordance with the Regional Rural Banks Act, 1976, and the income from such investments does not qualify for the deduction. The AO argued that the income from these investments was not part of the banking business as defined under the Banking Regulation Act, 1949, and the RRB Act, 1976.

The Tribunal's Judicial Member (JM) upheld the AO's view, emphasizing that the banking activity, as per the RRB Act, is narrower and should be confined to the target group within the notified area. However, the Accountant Member (AM) dissented, arguing that the investments are part of the banking business and the income from these investments is attributable to the banking business, thus qualifying for the deduction.

The Third Member, Vice President R.V. Easwar, resolved the difference by agreeing with the AM, holding that the income from both SLR and non-SLR investments is eligible for deduction under section 80P(2)(a)(i). The Third Member emphasized that the term "attributable to" used in the section has a wider connotation than "derived from," and includes income from activities closely connected to the banking business.

2. Treatment of Rs. 4,58,76,000 Received from the Government:

The second issue was the treatment of Rs. 4,58,76,000 received by the assessee from the government, which was shown under the "share deposit account" in the balance sheet. The AO treated this amount as a revenue receipt, taxable in the year under consideration, while the CIT(A) upheld this view, treating it as a protective addition.

The AM noted that the addition was made on a protective basis and should be assessed substantively in the assessment year 1996-97 if the stay on the assessment proceedings is vacated. The JM, however, made observations on the merits, treating the amount as taxable revenue receipt.

The Third Member agreed with the AM, stating that since the addition was made on a protective basis, no observations on the merits should be made, and the issue should be resolved in the assessment year 1996-97.

3. Imposition of Interest under Sections 234B, 234D, and Withdrawal under Section 244A:

The AO imposed interest under sections 234B and 234D and withdrew interest under section 244A without passing a speaking order. The CIT(A) upheld the AO's action, stating that the charging of interest is mandatory as per the Supreme Court's decision in CIT v. Anjum M.H. Ghaswala.

The Tribunal, concurring with the CIT(A), held that the imposition of interest is consequential and mandatory, thus rejecting the assessee's ground on this issue.

Conclusion:

The appeal was allowed in favor of the assessee regarding the deduction under section 80P(2)(a)(i) for income from SLR and non-SLR investments. The protective addition of Rs. 4,58,76,000 was left to be assessed substantively in the assessment year 1996-97. The imposition of interest under sections 234B, 234D, and withdrawal under section 244A was upheld as mandatory and consequential.

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