2013 (7) TMI 560 - HC - Income Tax

Deduction u/s 80P(2)(a)(i) - Income from non-SLR funds - Tribunal held income from non-SLR funds is income from Banking Business and consequently exempt u/s 80-P(2)(a)(i) - 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 - Following decision of Commissioner of Income-Tax Versus Baroda Peoples Co-operative Bank Ltd. 2005 (7) TMI 33 - GUJARAT High Court - Decided against Revenue.

Summary

Issues Involved:
1. Whether interest earned by a cooperative 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 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. Cooperative Society Act not referring to Section 5 or 6 of the Banking Regulation Act and restricting banking business to only members of the cooperative societies of the assessee's bank.

Detailed Analysis:

Issue 1: Interest Earned on Non-SLR Funds as Income from Banking Business

The court examined whether the interest earned by a cooperative bank on the deposits of its non-SLR (Statutory Liquidity Ratio) funds qualifies as income from banking business and is thus exempt under Section 80-P (2) (a) (i) of the Income Tax Act, 1961. The court referred to the Supreme Court's rulings in *Commissioner of Income Tax v. Karnataka State Cooperative Apex Bank* and *Mehsana District Central Cooperative Bank Ltd. v. Income Tax Officer*, which established that income from statutory reserves is deductible under Section 80-P (2) (a) (i). The court concluded that the same reasoning applies to non-SLR funds, as interest earned from such deposits is attributable to the business of banking.

Issue 2: Coverage of Interest on Non-SLR Funds under Section 80-P (2) (a) (i)

The court considered whether interest earned on deposits of non-SLR funds falls within the scope of Section 80-P (2) (a) (i). The respondent argued that the Supreme Court in *Bihar State Cooperative Bank Ltd. v. The Commissioner of Income Tax* held that income from long-term deposits by cooperative banks is part of banking business income. The court also noted similar rulings by the Gujarat High Court, Andhra Pradesh High Court, and Bombay High Court, which supported the view that interest from non-SLR funds qualifies for deductions under Section 80-P (2) (a) (i). The court agreed with these precedents, affirming that such interest is attributable to the banking business.

Issue 3: Exemption of Interest on Non-SLR Investment under Section 80-P (2) (a) (i)

The court addressed whether interest on non-SLR investments is exempt under Section 80-P (2) (a) (i), considering the U.P. Cooperative Society Act's definitions. The court referred to the Supreme Court's interpretation in *Bihar State Cooperative Bank Ltd. v. CIT*, which clarified that interest earned from surplus funds deposited in other banks is part of the banking business. The court emphasized that the business of banking includes managing funds to ensure they are readily available to meet depositor demands, and thus, interest from such deposits is part of the bank's normal business operations.

Conclusion:

The court concluded that the interest earned by cooperative banks on deposits of non-SLR funds qualifies as income from the business of banking and is exempt under Section 80-P (2) (a) (i) of the Income Tax Act, 1961. The court found no error in the Income Tax Appellate Tribunal's decision and ruled in favor of the respondent assessee, deciding all three questions against the revenue. The department was directed to proceed accordingly.