2009 (9) TMI 570 - HC - Income Tax

Co-Operative Society - Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal is justified in holding that rental income of Rs. 12, 21, 698 from house property does not qualify for deduction under section 80P of the Income-tax Act as banking business income ?(2) Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal is justified in holding that the interest income of Rs. 14, 23, 316 earned on investment of reserve fund is not derived from regular banking business of the appellant and does not qualify deduction under section 80P of the Income-tax Act ? Held that - section 6(1) of the Banking Regulation Act 1949 indicates the forms of business in which banking companies may engage. Section 6(1) incorporates leasing which means that the business of leasing by the banking company is a recognized form of business. Obviously therefore the income derived by the appellant a co-operative bank from lease of immovable property would be entitled to special deduction u/s 80P.

Summary

Issues Involved:
1. Whether the rental income of Rs. 12,21,698 from house property qualifies for deduction under section 80P of the Income-tax Act as banking business income.
2. Whether the interest income of Rs. 14,23,316 earned on investment of reserve fund is derived from regular banking business and qualifies for deduction under section 80P of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Rental Income Deduction under Section 80P:
The appellant, a co-operative society engaged in banking, claimed that rental income from its immovable properties should be exempt from income-tax under section 80P of the Income-tax Act. The claim was rejected by the Assessing Officer, Commissioner of Income-tax (Appeals), and the Income-tax Appellate Tribunal. The Tribunal held that the rental income does not qualify for exemption as banking business income. However, the appellant argued that under section 6(1) of the Banking Regulation Act, 1949, leasing is a recognized form of banking business. This position was supported by the Division Bench judgment of the Karnataka High Court in CIT v. Grain Merchants Co-operative Bank Ltd. [2004] 267 ITR 742 (Karn) and the Supreme Court judgment in Gujarat State Co-operative Bank Ltd. v. CIT [2001] 251 ITR 522 (SC). Consequently, the High Court concluded that the rental income qualifies for exemption under section 80P, as leasing is an accepted banking activity.

2. Interest Income from Reserve Fund Investment:
The appellant also claimed exemption for interest income earned from compulsory investments in Government securities, arguing that this should be considered part of its regular banking business under section 80P(2)(a)(i) of the Income-tax Act. Initially, this claim was rejected based on the Supreme Court judgment in Madhya Pradesh Co-operative Bank Ltd. v. Addl. CIT [1996] 218 ITR 438, which held that such income does not qualify for exemption. However, this position was overruled by a later Supreme Court judgment in CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194, which stated that income from compulsory investments in Government securities is derived from the business of banking and qualifies for exemption. The High Court noted that the Tribunal failed to consider this later judgment and thus erred in rejecting the appellant's claim. Therefore, the interest income from compulsory investments was deemed exempt from income-tax.

Conclusion:
The High Court allowed the appeal, setting aside the Tribunal's order. It directed that the appellant is entitled to exemptions for both the rental income and the interest income from compulsory investments. The Assessing Officer was instructed to revise the demands accordingly, and the appellant was entitled to a refund of any amounts already deposited, with interest as per statutory provisions from the date of deposit till the date of refund.