2005 (7) TMI 33 - HC - Income Tax

Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in allowing deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, on interest income as being attributable to the business of banking? - question requires to be answered in the affirmative. The Tribunal was right in allowing deductions under section 80P(2)(a)(i) of the Act on interest income as being attributable to the business of banking

Issues Involved:
1. Whether the Income-tax Appellate Tribunal was right in allowing deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, on interest income as being attributable to the business of banking.

Comprehensive, Issue-wise Detailed Analysis:

1. Deduction under Section 80P(2)(a)(i) on Interest Income:

The primary issue for determination was whether the Income-tax Appellate Tribunal was correct in allowing deductions under section 80P(2)(a)(i) of the Income-tax Act, 1961, on interest income earned by cooperative societies from investments in bonds and other securities, treating it as income attributable to the business of banking.

Arguments by Revenue:

- The Revenue contended that the decision of the Gujarat High Court in Gujarat State Co-operative Bank Ltd. v. CIT [2001] 250 ITR 229 was not reversed by the Supreme Court in Mehsana District Central Co-operative Bank Ltd. v. ITO [2001] 251 ITR 522 regarding interest on voluntary reserves.
- The Revenue argued that only income earned from statutory reserves was eligible for deduction, not from voluntary reserves, as the latter were considered idle funds.
- The Tribunal was required to ascertain whether such interest income was attributable to the business of banking and whether it was utilized in the ordinary course of banking business.
- The Tribunal's analysis was limited to only one bank (Surat District Co-operative Bank Ltd.) and did not extend to others, thus failing to comply with the Supreme Court's directions.

Arguments by Assessee:

- The assessee argued that all income from investments in securities should be considered part of the ordinary banking business and eligible for deduction under section 80P(2)(a)(i).
- The decision of the Gujarat High Court in Gujarat State Co-operative Bank Ltd. [2001] 250 ITR 229 was effectively set aside by the Supreme Court.
- The Tribunal had complied with the Supreme Court's directions by analyzing the source and destination of the income, concluding that all investments were part of the bank's working capital and hence eligible for deduction.

Court's Analysis:

- The court noted that the Supreme Court had not upheld the Gujarat High Court's decision regarding voluntary reserves and had restored the issue to the Commissioner (Appeals) for fresh consideration.
- The court emphasized that the Tribunal had correctly analyzed the facts, concluding that all funds, including those from voluntary reserves, were part of the bank's working capital and used in the course of ordinary banking business.
- The court reiterated that the purpose of section 80P(2)(a)(i) was to promote the cooperative sector and should be interpreted liberally to achieve this objective.
- The court found that the Tribunal's findings were consistent with the statutory scheme and the Supreme Court's directions, confirming that investments in easily realizable securities were part of the business of banking.

Key Findings:

- The court held that section 80P(2)(a)(i) of the Act covers income from investments in securities as part of the business of banking.
- The court clarified that the term "business of banking" includes both statutory and voluntary reserves, provided the investments are in permissible modes and are part of the bank's working capital.
- The court rejected the Revenue's argument that only statutory reserves were eligible for deduction, affirming that all income from investments, whether from statutory or voluntary reserves, is attributable to the business of banking.

Conclusion:

The court concluded that the Tribunal was right in allowing deductions under section 80P(2)(a)(i) of the Act on interest income as being attributable to the business of banking. The tax appeals were dismissed, and the Tribunal's decision was upheld. There was no order as to costs.

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