2012 (12) TMI 493 - HC - Income Tax

Deduction u/s 80P(2)(a)(i) - Co-operative Bank - interest on bank deposits of its non-SLR funds - held that - 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. The interest are not deposits of non-SLR funds and the cooperative bank will qualify for exemption under Section 80P (2) (a) (i) of the Act. - Decided in favor of assessee.

Issues Involved:
1. Whether interest earned by a Co-operative Bank on deposits of its non-SLR funds is income from Banking Business and 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 Income Tax Act.
3. Whether interest on Non-SLR investment is exempt under Section 80-P (2) (a) (i) despite the definition of financing Bank or Central Bank in the U.P. Co-operative Society Act not referring to Section 5 or 6 of the Banking Regulation Act.

Detailed Analysis:

Issue 1: Interest Earned by Co-operative Bank on Non-SLR Funds as Income from Banking Business
The court examined whether the interest earned by a Co-operative Bank on deposits of its non-SLR funds qualifies as income from banking business and thus is exempt under Section 80-P (2) (a) (i) of the Income Tax Act. The court referred to precedents where the Supreme Court held that income from SLR funds is attributable to the business of banking and thus deductible under Section 80-P (2) (a) (i). The court noted that the same reasoning applies to non-SLR funds, as established in the Bihar State Co-operative Bank Ltd. case, where interest from surplus funds deposited in other banks was considered income from banking business.

Issue 2: Coverage of Interest Earned on Non-SLR Funds under Section 80-P (2) (a) (i)
The court evaluated whether interest earned on deposits of non-SLR funds falls within the meaning of Section 80-P (2) (a) (i). The respondent argued that non-SLR funds should be treated similarly to SLR funds, citing various High Court judgments that supported this view. The court agreed, referencing judgments from the Gujarat, Andhra Pradesh, and Bombay High Courts, which held that interest from non-SLR funds qualifies for deductions under Section 80-P (2) (a) (i). The court concluded that the interest earned from non-SLR funds is attributable to the business of banking.

Issue 3: Exemption of Interest on Non-SLR Investment under Section 80-P (2) (a) (i)
The court addressed whether the interest on non-SLR investments is exempt under Section 80-P (2) (a) (i), despite the U.P. Co-operative Society Act not referring to Section 5 or 6 of the Banking Regulation Act. The court stated that the distinction between SLR and non-SLR funds does not affect the qualification for exemption under Section 80-P (2) (a) (i). The court cited the Bihar State Co-operative Bank Ltd. case, which clarified that interest from surplus funds deposited in other banks is part of the banking business. The court also referenced the Goa Urban Co-operative Bank Ltd. case, which supported the view that income from non-SLR investments is attributable to the business of banking.

Conclusion:
The court concluded that the interest earned by a Co-operative 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. The court dismissed the appeal, deciding all questions in favor of the respondent assessee and against the revenue. The department was directed to proceed accordingly.

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