2006 (2) TMI 234 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of interest income from Government securities and banks as "Income from other sources" versus "Income from business."
2. Eligibility for deduction under Section 80P(2)(a)(i) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of Interest Income:
The primary issue was whether the interest income earned by the assessee, a co-operative society engaged in banking, from Government securities and other banks should be classified as "Income from business" or "Income from other sources."

- Assessment Year 1993-94 (ITA No. 630/Jp/1999):
- The Assessing Officer (AO) classified the interest income from Government securities (Rs. 5,53,125) and other banks (Rs. 8,36,748) as "Income from other sources" under Section 56 of the Income Tax Act. The AO relied on the Supreme Court's decision in the case of Madhya Pradesh Co-operative Bank Ltd. vs. Addl. CIT, which held that income from Government securities is not part of circulating capital or stock-in-trade and thus not eligible for exemption under Section 80P.
- The CIT(A) upheld the AO's decision.
- However, the Tribunal noted that the Supreme Court's decision in Madhya Pradesh Co-operative Bank Ltd. was overruled by a larger bench in CIT vs. Karnataka State Co-operative Apex Bank, which held that income from funds placed with RBI or SBI is part of the business activity of the bank and thus eligible for exemption under Section 80P(2)(a)(i). Consequently, the Tribunal allowed the appeal, treating the interest income as "Income from business."

- Assessment Year 1996-97 (ITA No. 246/Jp/2000):
- Similar facts and issues as in the assessment year 1993-94. The AO included interest income from Government securities (Rs. 2,67,500) and other banks (Rs. 11,32,997) as "Income from other sources."
- Following the decision in the earlier appeal, the Tribunal treated the interest income as "Income from business" and allowed the appeal.

- Assessment Year 1997-98 (ITA No. 637/Jp/2000):
- The AO included interest income from Government securities (Rs. 5,35,000), banks (Rs. 11,26,929), and dividend income (Rs. 2,24,987) as "Income from other sources."
- The Tribunal, consistent with its earlier decisions, treated the interest income as "Income from business" and allowed the appeal.

2. Eligibility for Deduction under Section 80P(2)(a)(i):
The secondary issue was whether the assessee was eligible for deduction under Section 80P(2)(a)(i) for the interest income earned from Government securities and banks.

- Assessment Year 1993-94 (ITA No. 630/Jp/1999):
- The Tribunal held that the investments in Government securities and with banks are part of the banking activity and form part of stock-in-trade and working or circulating capital. Therefore, the interest income is eligible for deduction under Section 80P(2)(a)(i).

- Assessment Year 1996-97 (ITA No. 246/Jp/2000):
- Following the decision in the earlier appeal, the Tribunal held that the interest income is eligible for deduction under Section 80P(2)(a)(i).

- Assessment Year 1997-98 (ITA No. 637/Jp/2000):
- Consistent with its earlier decisions, the Tribunal held that the interest income is eligible for deduction under Section 80P(2)(a)(i).

Conclusion:
In all three appeals, the Tribunal concluded that the interest income from Government securities and banks should be treated as "Income from business" and is eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act. The appeals were partly allowed in favor of the assessee.