2013 (10) TMI 463 - AT - Income Tax

Exemption u/s 80P - co-operative bank - interest income earned on investment out of SLR/Non SLR surplus funds - section 80P(2)(d) versus section 80P(2)(a). Held that - Reliance has been placed upon the judgment in the case of CIT vs. Andhra Pradesh State Co- operative Bank Ltd 2011 (6) TMI 215 - ANDHRA PRADESH HIGH COURT , wherein it has been held that All the income from banking business referred to under section 80P(2)(a)(i) of the Act would qualify for deduction under the Act - The income earned by the co-operative bank either by deposit of the prescribed percentage of its reserves or by deposit of their surplus funds is exempted. The income from either category of the deposits is certainly attributable to the business of banking. As long as the deposit of the surplus funds in other banks for the purpose of earning interest is not unauthorized or not barred by any of the applicable statutes, the income is certainly attributable to the business of banking. There is no concept of voluntary or non-statutory reserves. When the reserve fund of the society exceeds 25 per cent. of its working capital, the excess could be utilized in the business of the society with the sanction of the Registrar of Co- operative Societies If a co-operative bank derives income by lending money to its members, it being business of banking, is eligible for deduction. The statutory liquidity ratio, cash reserve or reserve fund required to be maintained by a scheduled bank or a co- operative bank under the provisions of the Reserve Bank of India Act, 1934, or the Banking Regulation Act, 1949, are all activities which are part of the business of banking. If section 80P(2)(a) of the Act is given a restrictive meaning as including the interest earned only on the statutory deposits made by a co-operative society, it would amount to supplying a casus omissus and has to be avoided by the court - Investment of funds by banks including the non-reserves is part of banking activities since no bank would like its reserve funds to remain idle and not earn any interest. Therefore, the interest earned on such deposits is directly attributable to the business of banking and, therefore, exempt under section 80P(2)(a)(i) the Act Decided against the Revenue.

Summary

Issues:
Interpretation of sections 80P(2)(a) and 80P(2)(d) of the IT Act, 1961 for exemption eligibility based on interest income earned on investments out of surplus funds.

Detailed Analysis:

1. Issue of Exemption Eligibility under Section 80P(2)(a) or 80P(2)(d):
The primary issue in this case revolved around determining whether the interest income earned by the assessee on investments made out of surplus funds beyond SLR/Non-SLR covered funds qualified for exemption under section 80P(2)(a) or 80P(2)(d) of the IT Act, 1961. The Assessing Officer contended that the income derived from investments in mutual funds and fixed deposits did not fall under the purview of section 80P as it was not part of core banking activities. The CIT(A), however, ruled in favor of the assessee, leading to the Revenue's appeal. The crux of the matter was whether the interest income on non-SLR funds could be considered as business income eligible for exemption under section 80P(2)(a).

2. Judicial Precedents and Interpretation:
The learned DR argued that only interest income on SLR funds should qualify as business income, citing the Supreme Court's decision in CIT vs. Karnataka State Co-operative Apex Bank. On the contrary, the learned AR relied on the judgment of the jurisdictional High Court in CIT vs. Andhra Pradesh State Co-operative Bank Ltd. to support the contention that all income from banking business, including interest earned on surplus funds, should be eligible for deduction under section 80P(2)(a). The High Court's decision emphasized that as long as the deposit of surplus funds for earning interest was not unauthorized, it could be attributed to the business of banking, irrespective of statutory or non-statutory reserves.

3. Decision and Rationale:
After considering the arguments and legal precedents, the Appellate Tribunal affirmed the CIT(A)'s decision in favor of the assessee. The Tribunal concurred with the Andhra Pradesh High Court's interpretation that all income from banking activities, including interest earned on deposits of surplus funds, should qualify for exemption under section 80P(2)(a) of the IT Act. The Tribunal highlighted that construing section 80P(2)(a) restrictively to cover only statutory deposits would create a gap in the legislation, which should be avoided. Therefore, the Tribunal dismissed the Revenue's appeal, upholding the assessee's eligibility for exemption under section 80P(2)(a) for the interest income earned on investments made out of surplus funds.

In conclusion, the judgment clarified the scope of exemption under section 80P(2)(a) of the IT Act, emphasizing that income derived from banking activities, including interest earned on surplus funds deposited for investment purposes, should be eligible for deduction. The decision relied on legal precedents and statutory interpretation to support the assessee's claim for exemption, ultimately dismissing the Revenue's appeal.