2010 (1) TMI 175 - HC - Income Tax

Deduction- The assessee is a regional rural bank set up under the provisions of the Regional Rural Banks Act, 1976. This bank is declared to be a co-operative society for the purpose of the Income-tax Act, 1961. For the assessment year under consideration, the assessee filed the return of income on July 31, 2001, and claimed the deduction of its entire income amounting to Rs. 65,86 under section 80P(2) (a) (i) of the Act. The return was accepted under section 143(1) (a) of the Act. Subsequently, a notice under section 148 of the Act was issued and the case was reopened with the view to disallow the deduction in respect of the interest income accrued on the investment. According to the assessee, the claim did not qualify for the exemption under section 80P(2) (a) (i) of the Act. The plea of the assessee was not accepted and the assessing authority passed the assessment order and disallowed the claim for exemption. The Commissioner (Appeals) and Tribunal allow it. Held that- it was not the case of the Revenue that the assessee had carried on any other business other than banking business. The deposit exceeding the statutory liquidity ratio was also in relation to banking activity. Hence, the income accrued out of such deposit was also attributable to the banking business and was deductible under section 80P(2)(a)(i).

Summary

Issues:
Interpretation of section 80P(2)(a)(i) of the Income-tax Act, 1961 regarding deduction eligibility for interest earned by a co-operative bank on deposits of its non-SLR funds.

Analysis:
The case involved an appeal by the Commissioner of Income-tax regarding the assessment year 2002-03, questioning the eligibility of a co-operative bank's interest income for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961. The bank claimed the deduction for its entire income under this section, but the assessing authority disallowed the claim upon reopening the case. The Commissioner of Income-tax (Appeals) allowed the bank's appeal, which was then challenged before the Income-tax Appellate Tribunal.

The Tribunal considered the Assessing Officer's stance that interest earned on investments exceeding the statutory liquidity ratio (SLR) was not entitled to deduction under section 80P(2)(a)(i). The Tribunal referred to various judgments, including those of the Gujarat High Court, the Supreme Court, and other apex court decisions. It highlighted that interest earned from investments made in compliance with statutory provisions for banking business out of reserve funds by a co-operative society was exempt under section 80P(2)(a)(i). The Tribunal emphasized that interest on such deposits/investments formed part of banking business and was eligible for deduction under the Act.

The High Court, in its judgment, reiterated the legal position established by apex court decisions in cases such as CIT v. Karnataka State Co-operative Apex Bank and Mehsana District Central Co-operative Bank Ltd. It emphasized that income from deposits exceeding SLR was attributable to the banking business of the co-operative bank and thus deductible under section 80P(2)(a)(i). The court also referenced its own previous decision in Gorakhpur Kshetriya Gramin Bank v. CIT to support the conclusion. Ultimately, the High Court dismissed the appeal, citing the consistency of the legal principles established by the apex court and the specific circumstances of the case.

In conclusion, the judgment clarifies the interpretation of section 80P(2)(a)(i) regarding the eligibility of interest income earned by a co-operative bank on deposits of its non-SLR funds for deduction. The decision aligns with established legal precedents and underscores that such income is attributable to the banking business of the co-operative bank, making it eligible for deduction under the Income-tax Act, 1961.