2009 (11) TMI 534 - HC - Income Tax

Deduction u/s 80P - deduction under Section 80P(2)(a)(i) in respect of interest earned on deposits made out of the non-SLR funds - normal banking business/activities - Held that - The words used by the legislature are very important. The first word used is attributable, which is much wider in scope than the word derived. The second phrase used is any one or more of such activities. Any banking business providing credit facilities to its members and investing the sums deposited by the members of the society is part of banking business - the investment of the funds by the banks including the non reserves were part of the banking activities since no bank would like its reserve funds to remain idle and not earn any interest - herefore, the interest earned on such deposits is directly attributable to the business of banking - Deduction allowed.

Issues:
Interpretation of Section 80P(2)(a)(i) of the Income-tax Act, 1961 regarding deduction eligibility for interest earned on deposits made out of non-SLR funds in the case of a cooperative society engaged in banking.

Analysis:
The judgment by the High Court of Himachal Pradesh addressed the interpretation of Section 80P(2)(a)(i) of the Income-tax Act, 1961, focusing on whether the assessee bank was entitled to a deduction for interest earned on deposits made out of non-SLR funds. The court considered the essential question of law common to all cases regarding the eligibility of the bank for the deduction under this provision.

The court examined the provisions of Section 80P(2)(a)(i) which allow deductions for cooperative societies engaged in banking activities. The case involved a cooperative society registered under the H.P. Cooperative Societies Act and governed by the Banking Regulation Act, 1949. The society had invested funds both as statutory reserves (SLR) and non-SLR investments, raising the issue of whether interest earned on non-SLR deposits could be considered part of normal banking activities for deduction purposes.

Referring to the decision in Cambay Electric Supply Industrial Co. Ltd. vs. Commissioner of Income-tax, the court highlighted the significance of the term "attributable to" in determining income sources related to a business. The court emphasized that the term "attributable to" has a broader scope than "derived from," indicating that income need not directly result from the core business activities to be considered eligible for deduction.

The court also discussed the judgment in Commissioner of Income-tax vs. Karnataka State Co-operative Apex Bank, which clarified that income derived from funds essential for carrying out banking operations qualifies for deduction under Section 80P(2)(a)(i). This decision emphasized that funds placed for banking purposes, even if not part of working capital, are integral to the banking business and thus eligible for deduction.

Regarding the argument for remanding the case for further evidence, the court rejected the proposal, noting that the Tribunal had already ruled in favor of the bank. The court reasoned that interest earned on non-SLR deposits was inherently linked to banking activities, as prudent management dictates that reserve funds should be invested to generate income. Therefore, the interest earned on such deposits was deemed directly attributable to the business of banking, warranting the deduction under Section 80P(2)(a)(i).

In conclusion, the High Court of Himachal Pradesh upheld the Tribunal's decision in favor of the bank, ruling that the interest earned on deposits made out of non-SLR funds was attributable to banking activities and thus eligible for deduction under Section 80P(2)(a)(i). The appeals were consequently rejected in favor of the assessee, affirming the broader interpretation of income attribution in the context of cooperative banking activities.

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