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2012 (10) TMI 618 - HC - Income TaxInterest income from the deposits of non SLR funds - disallowance of exemption under Section 80P (2) (a) (i) - assessee is a cooperative bank - Held that - As decided in Bihar State Co-operative Bank Versus CIT 1960 (2) TMI 8 - SUPREME COURT short-term deposits by the Bank was income from normal banking business and was, therefore, exempt from the liability to pay Income Tax, the money laid out in the form of short-term deposit did not cease to be a circulating capital and interest earned thereon, could not be other than income generated from the business of banking. The question as to whether the business is derived from or attributable to SLR or non-SLR funds would not make any difference for the purposes of qualifying the interest earned by the cooperative bank under Section 80P (2) (a) (i) as the deposits of surplus idle money available from working capital, including reserves, excess collection of interest tax and other incomes are all attributable to the business of banking. The interest from such deposits cannot be said to be beyond the legitimate business activities of the bank - in favour of assessee.
Issues Involved:
1. Whether interest earned by a Cooperative Bank on deposits of its non-SLR funds qualifies as income from Banking Business and is consequently exempt under Section 80-P (2) (a) (i) of the Income Tax Act, 1961. 2. Whether interest earned on deposits of non-SLR funds is covered within the meaning of Section 80-P (2) (a) (i) of the Act. 3. Whether interest on Non-SLR investment is exempt under Section 80-P (2) (a) (i) of the Act, considering the definition of financing Bank or Central Bank in the U.P. Cooperative Society Act. 4. Whether deduction under Section 80-P (2) (a) (i) of the Act is allowable on income earned from voluntary reserves by a Cooperative Society engaged in Banking Business, if the assessee cannot explain the utilization of such income for banking purposes. Detailed Analysis: 1. Interest Earned by Cooperative Bank on Non-SLR Funds: The Tribunal held that interest earned by the assessee, a Cooperative Bank, on deposits of its non-SLR funds is income from Banking Business and is consequently exempt under Section 80-P (2) (a) (i) of the Income Tax Act, 1961. This decision was based on the interpretation that such interest income is a part of the banking business and not income from other sources. 2. Coverage of Non-SLR Funds under Section 80-P (2) (a) (i): The Tribunal found that investments made by the assessee in FDRs with U.P. Cooperative Bank and the interest earned thereon were entitled to deduction under Section 80 (P) (2) (a) (i) of the Act. The Tribunal's reliance on previous decisions, including the Supreme Court's ruling in CIT Vs. Karnataka State Cooperative Apex Bank, affirmed that such interest income falls within the ambit of Section 80-P (2) (a) (i). 3. Definition of Financing Bank or Central Bank: The Tribunal considered the definition of financing Bank or Central Bank in the U.P. Cooperative Society Act and concluded that the interest on Non-SLR investment is exempt under Section 80-P (2) (a) (i) of the Act. The Tribunal noted that the Banking Regulation Act allows cooperative societies to maintain statutory liquidity reserves, and such investments are part of the banking business. 4. Deduction on Income Earned from Voluntary Reserves: The Tribunal addressed whether deduction under Section 80-P (2) (a) (i) is allowable on income earned from voluntary reserves. It concluded that investments in both SLR and non-SLR funds should be considered as part of the banking business. The Tribunal emphasized that the business of banking includes making investments to strengthen the liquidity position of the bank, and thus, income from such investments qualifies for deduction under Section 80-P (2) (a) (i). Conclusion: The High Court upheld the Tribunal's findings, emphasizing that the interest income from non-SLR deposits qualifies for exemption under Section 80-P (2) (a) (i) of the Income Tax Act. The court referenced previous judgments, including those from the Supreme Court and various High Courts, to support its decision. The court concluded that the distinction between SLR and non-SLR investments does not affect the qualification of interest income for exemption under the relevant section of the Act. The appeal was dismissed, and the questions were decided in favor of the respondent assessee.
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