2014 (3) TMI 890 - AT - Income Tax

Deduction u/s 80P(2)(a)(i) of the Act Sale of Govt. securities Held that - The assessee has a valid licence issued by the RBI for conducting banking business and as per the guidelines issued by the RBI an Urban Co-operative Bank is required to maintain investment in certain securities as per RBI guidelines that income derived from the funds was so placed arose from the business carried on by it - The placement of such funds being imperative for purpose of carrying on the banking business, the income derived therefrom would be income from the assessee s business Relying upon CIT vs. Nawanshahar Central Co-operative Bank Ltd. 2005 (8) TMI 28 - SUPREME COURT OF INDIA - any income derived from funds so place arose from the business carried on by it and the assessee had not, by reason of section 80P(2)(a)(i), to pay income-tax Decided against Revenue.

Summary

Issues:
1. Interpretation of Section 80P(2)(a)(i) for deduction on income from Govt. Securities.
2. Classification of Co-operative Society as a Co-operative Bank.
3. Application of Supreme Court decisions on income derived from funds invested in Govt. Securities.

Analysis:
1. The primary issue in this case revolved around the interpretation of Section 80P(2)(a)(i) concerning the deduction on income from Govt. Securities. The department contested the CIT(A)'s decision to allow the deduction, arguing that the income earned did not qualify as "Income from Banking activity." The CIT(A), however, justified the deduction by emphasizing that the Co-operative Society held a valid banking license and was mandated by RBI guidelines to invest in Govt. Securities, making the income derived from such investments integral to the banking business. The CIT(A) referred to various judicial precedents, including decisions by the Hon'ble Supreme Court, to support the allowance of deduction under Section 80P(2)(a)(i).

2. Another crucial aspect addressed was the classification of the Co-operative Society as a Co-operative Bank. The Assessing Officer initially rejected the deduction under Section 80P(2)(a)(i) by asserting that Co-operative Societies did not fall under the definition of banks. However, both the CIT(A) and the ITAT panel disagreed with this stance. They highlighted that the Co-operative Society held a valid banking license issued by the RBI, indicating its status as an Urban Co-operative Bank. The judges emphasized that the income derived from Govt. Securities investments was essential for the banking business and, therefore, qualified for the deduction under Section 80P(2)(a)(i).

3. The application of Supreme Court decisions on income derived from funds invested in Govt. Securities played a pivotal role in the judgment. The CIT(A) and the ITAT panel cited specific cases such as CIT vs. Nawanshahar Central Co-operative Bank Ltd., where the Supreme Court ruled that income from funds placed with banks or the Reserve Bank was considered business income eligible for deduction under Section 80P(2)(a)(i). By aligning with these precedents, the ITAT panel dismissed the department's appeal, upholding the allowance of deduction for the Co-operative Bank's income from Govt. Securities.