2001 (8) TMI 15 - SC - Income Tax

Co-operative society - Whether the Tribunal was right in law in disallowing the claim of the assessee-bank for deduction under section 8OP(2)(a)(i) in respect of income earned from utilization of its reserve funds being statutory reserves under section 67(2) - Whether the Tribunal was right in law in holding that the locker rent is not deductible under section 80P(2)(a)(i) - Held, no

Summary

Issues:
- Assessment of deduction under section BOP(2)(a)(i) for income earned from utilization of reserve funds
- Entitlement to deduction under section 80P(2)(a)(i) for income from voluntary reserves
- Deductibility of locker rent under section 80P(2)(a)(i)
- Eligibility for deduction under section 80P for interest income on total reserve

Analysis:
1. Assessment of deduction under section BOP(2)(a)(i) for income earned from utilization of reserve funds:
The High Court reframed the questions related to the assessment years 1988-89 to 1994-95. The first question revolved around the deduction under section BOP(2)(a)(i) for income from utilizing statutory reserves under the Gujarat Co-operative Societies Act, 1961. The judgment in CIT v. Karnataka State Co-operative Apex Bank set a precedent favoring the assessee, ruling against the Revenue. Consequently, the first question was answered in the negative and in favor of the assessee.

2. Entitlement to deduction under section 80P(2)(a)(i) for income from voluntary reserves:
The second question addressed the entitlement of the assessee-bank to claim deduction under section 80P(2)(a)(i) for income derived from voluntary reserves other than statutory reserves. The court highlighted the importance of establishing, as a fact, whether the income from voluntary reserves was utilized in the ordinary banking business. The matter was remanded to the Commissioner (Appeals) for further examination and to allow the assessee to present evidence supporting the utilization of voluntary reserves in its banking operations.

3. Deductibility of locker rent under section 80P(2)(a)(i):
Regarding the third question on the deductibility of locker rent under section 80P(2)(a)(i), the court emphasized that providing safe deposit vaults is an integral part of the ordinary banking business, as per the Banking Regulation Act, 1949. Consequently, income from hiring out safe deposit vaults was deemed as income from banking business and thus deductible under section 80P(2)(a)(i), ruling in favor of the assessee.

4. Eligibility for deduction under section 80P for interest income on total reserve:
In the case concerning the eligibility for deduction under section 80P for interest income on the total reserve, the court differentiated between interest income on statutory and non-statutory reserves. The judgment favored the assessee for interest income on statutory reserves but remanded the decision on interest income from non-statutory reserves to the Commissioner (Appeals) for a fresh assessment in line with the precedent set in another case. The civil appeals were allowed, setting aside the judgment under appeal.

In conclusion, the Supreme Court's judgment addressed various issues related to deductions under specific sections of the Income-tax Act, emphasizing the necessity of factual evidence and compliance with banking regulations in determining the eligibility for deductions.