2005 (8) TMI 287 - AT - Income Tax

Issues Involved:
1. Whether the interest earned on investments made out of surplus funds is exempt under section 80P(2)(a)(i) of the Income Tax Act.
2. Interpretation of the terms "attributable to" versus "derived from" in the context of section 80P(2)(a)(i).
3. Applicability of the Supreme Court's decision in the case of Madhya Pradesh Co-operative Bank v. Addl. CIT.
4. Whether investments in Kisan Vikas Patras, NABARD Bonds, State Government Securities, and other similar instruments can be considered part of the banking business.
5. Whether the reserve funds created by the assessee can be considered surplus funds.

Detailed Analysis:

1. Exemption under Section 80P(2)(a)(i)
The primary issue was whether the interest earned on investments made out of surplus funds is exempt under section 80P(2)(a)(i). The Assessing Officer argued that these investments were out of surplus funds and not attributable to the banking activity, thus not eligible for exemption. However, the Commissioner of Income-tax (Appeals) and the Tribunal found that the investments were part of the banking business, as they were made to comply with statutory requirements and were thus eligible for exemption under section 80P(2)(a)(i).

2. Interpretation of "Attributable to" vs. "Derived from"
The Tribunal emphasized the distinction between "attributable to" and "derived from," noting that the former has a broader scope. The Supreme Court in Cambay Electricity Supply Industrial Company Ltd. v. CIT clarified that "attributable to" encompasses a wider range of income sources related to the business activities. The Tribunal agreed with the assessee's argument that the interest earned on investments is attributable to banking activities and thus qualifies for exemption under section 80P(2)(a)(i).

3. Applicability of the Madhya Pradesh Co-operative Bank Case
The Assessing Officer relied on the Madhya Pradesh Co-operative Bank case to argue that income from investments not available on short-term notice should be treated as income from other sources. However, the Tribunal and CIT(A) found this case inapplicable, as the Supreme Court in Karnataka State Co-op. Apex Bank clarified that the decision in the Madhya Pradesh Co-operative Bank case did not set the correct law. The Tribunal concluded that the interest from statutory investments should be considered as income from banking business.

4. Investments in Kisan Vikas Patras and Other Instruments
The Tribunal examined whether investments in Kisan Vikas Patras, NABARD Bonds, State Government Securities, and other similar instruments could be considered part of the banking business. The Tribunal referred to various judgments, including the Karnataka High Court's decision in Sri Ram Sahakari Bank Ltd., which held that such investments are part of the normal banking business. The Tribunal concluded that these investments are indeed part of the banking business and the interest earned from them is eligible for exemption under section 80P(2)(a)(i).

5. Reserve Funds as Surplus Funds
The Assessing Officer treated the reserve funds as surplus funds, arguing that income from such investments cannot be attributed to banking activities. However, the Tribunal found that these reserves were created as per statutory guidelines and are part of the capital employed in the business. The Tribunal emphasized that reserves created under statutory guidelines should not be considered surplus funds. The Tribunal concluded that the interest income from these investments is attributable to the banking business and is eligible for exemption under section 80P(2)(a)(i).

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the interest income earned from investments in Kisan Vikas Patras, NABARD Bonds, State Government Securities, and other similar instruments is attributable to the banking business and is thus exempt under section 80P(2)(a)(i). The appeals filed by the revenue were dismissed.

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