2009 (7) TMI 1150 - HC - Income Tax

Whether on the facts and in the circumstances of the case, the ITAT was right in law in holding that the assessee is entitled to claim deduction u/s 80P(2)(a)(i) of IT Act, in respect of proportionate interest income derived on investments in Government securities in excess of SLR requirement out of reserve fund? Whether on the facts and in the circumstances of the case, the proportionate interest income derived by the assessee from the investment in SLR securities out of reserve Fund, is attributable to business of banking and the assessee is eligible to claim deduction u/s 80P(2)(a)(i) of the Act? Held that - In the present case, the investments have been made by the Bank in government securities, fixed deposits, etc. and the income is utilized for business. There is nothing on record to show that this case of the assessee is not acceptable in view of the law clearly stated by the Bench of this Court in C. I. T. v. Ratnagiri District Central Co-operative Bank Ltd. 2001 (9) TMI 60 - BOMBAY High Court for which we have no reasons to disagree. We dismiss the appeal while answering the questions in favour of the assessee.

Issues:
1. Interpretation of Section 80P(2)(a)(i) of the Income Tax Act, 1961.
2. Eligibility of a bank to claim deduction under Section 80P(2)(a)(i) for interest income derived from investments in excess of SLR requirement.
3. Determination of whether interest income derived by the bank from investments in SLR securities is attributable to the business of banking.

Analysis:
1. The appeal was filed against the Order of the Income Tax Appellate Tribunal, Panaji Bench, regarding the interpretation of Section 80P(2)(a)(i) of the Income Tax Act, 1961. The Division Bench framed questions of law related to the entitlement of the assessee to claim deduction under this section for interest income derived on investments in Government securities in excess of SLR requirement out of the reserve fund.

2. The facts revealed that the assessee bank had made investments exceeding the statutory liquidity ratio (SLR) as per the Banking Regulation Act. The Assessing Officer had taxed the excess investment in SLR securities, which was upheld by the Commissioner of Income Tax (Appeals). The authorities believed that income from investments beyond SLR would be eligible for deduction under Section 80P(2)(a)(i) only if it was income from the banking business. The Commissioner declined to interfere, stating that income not forming part of the circulating or working capital of the banking business was not attributable to the business of banking.

3. The Income Tax Appellate Tribunal upheld the orders, citing judgments from the Gujarat High Court and the Special Bench of the Ahmedabad High Court. The Tribunal ruled that interest income on investments in various securities out of surplus funds available from working capital was attributable to the business of banking and eligible for deduction under Section 80P(2)(a)(i). The Tribunal allowed the appeal based on this principle.

4. The Department's counsel referred to a judgment of the Division Bench of the Bombay High Court, arguing against the deduction. However, the court rejected this submission, citing the case law that short-term deposits by banks were considered income from normal banking business and exempt from income tax. The court found that the investments made by the bank in government securities and fixed deposits were for business purposes, and the income generated was attributable to the banking business. Therefore, the court dismissed the appeal in favor of the assessee, in line with the legal principles established by previous judgments.

5. In conclusion, the court upheld the assessee's right to claim deduction under Section 80P(2)(a)(i) for interest income derived from investments in excess of SLR requirements, as long as such income was attributable to the business of banking. The judgment clarified the application of the law in encouraging cooperative movements in the country and emphasized the importance of income being directly linked to the banking business to qualify for the deduction under the Income Tax Act.

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