2000 (6) TMI 119 - AT - Income Tax

Issues Involved:
1. Exemption under Section 80P(2)(a)(i) of the Income Tax Act.
2. Nature and treatment of reserve funds and investments by a cooperative bank.
3. Applicability of the Supreme Court's decision in M.P. Cooperative Bank Ltd. vs. Addl. CIT.

Issue-wise Detailed Analysis:

1. Exemption under Section 80P(2)(a)(i):
The primary issue in both assessment years (1994-95 and 1995-96) revolves around the exemption claimed under Section 80P(2)(a)(i) of the Income Tax Act. The assessee, a cooperative bank, claimed that income from investments in government securities, development bonds, shares, and fixed deposits should be exempt under this section. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)) had differing views on the extent of this exemption. For 1994-95, the CIT(A) allowed partial relief, disallowing Rs. 81,10,923 out of Rs. 3,50,91,800. For 1995-96, the CIT(A) upheld the AO's disallowance of Rs. 4,16,97,546.

2. Nature and Treatment of Reserve Funds and Investments:
The cooperative bank's reserve funds and investments are governed by Sections 66 to 71 of the Gujarat Cooperative Societies Act, 1961, and Rules 26 and 29 of the Gujarat Cooperative Societies Rules, 1965. The Tribunal examined whether these reserves and investments could be considered part of the bank's circulating capital or stock-in-trade. The Tribunal noted that the investments in government securities and other long-term investments were fixed and stagnant, indicating that they were not part of the circulating capital. Thus, income from these investments could not be considered as arising from the bank's regular business activities.

3. Applicability of Supreme Court's Decision in M.P. Cooperative Bank Ltd. vs. Addl. CIT:
The Tribunal heavily relied on the Supreme Court's decision in M.P. Cooperative Bank Ltd. vs. Addl. CIT, which clarified that income from investments in government securities and reserve funds, which are not easily encashable and are kept for contingencies, cannot be considered part of the bank's stock-in-trade or circulating capital. The Tribunal found significant similarities between the provisions of the Gujarat Cooperative Societies Act and the M.P. Cooperative Societies Act, thereby applying the Supreme Court's ruling to the present case. The Tribunal also noted that the decision in CIT vs. Bangalore Cooperative Bank Ltd. did not apply as it was based on a specific factual finding that the interest income was attributable to banking business, a finding not present in the current case.

Detailed Findings:
- For the assessment year 1994-95, the Tribunal upheld the CIT(A)'s decision to disallow Rs. 81,10,923 from the exemption claim under Section 80P(2)(a)(i), agreeing that these funds were not part of the bank's circulating capital.
- For the assessment year 1995-96, the Tribunal upheld the CIT(A)'s decision to disallow Rs. 4,16,97,546, again agreeing that these funds were not part of the bank's circulating capital.
- The Tribunal directed the AO to allow proportionate administrative expenses to be deducted from the interest income before disallowing the exemption under Section 80P(2)(a)(i) for both assessment years.

Conclusion:
The Tribunal concluded that the interest income on investments to the extent of the reserve funds for both assessment years falls outside the purview of Section 80P(2)(a)(i) and upheld the AO's decision to deny the exemption. However, the Tribunal allowed the deduction of proportionate administrative expenses from the interest income before disallowing the exemption. The appeals were partly allowed, directing the AO to give effect to this order.

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