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TMI Blog2006 (7) TMI 241X X X X Extracts X X X X X X X X Extracts X X X X ..... (A), the deposits/security were held as Stock in Trade and hence income therefrom was held to be Business Income eligible for deduction under section 80P(2)(i) of the Income-tax Act, 1961. 2. That the order of the ld. CIT(A) being erroneous in law and on facts may be set aside and the order of the Assessing Officer may be restored." 2. The only issue involved is whether assessee will be entitled to exemption under section 80P(2)(a)(i) of interest and discount amounting to Rs. 10,77,60,566, commission, exchange and brokerage amounting to Rs. 15,41,695, miscellaneous income amounting to Rs. 3,10,792, and locker rent amounting to Rs. 1,79,180. The Assessing Officer disallowed the claim on the ground that assessee has shown these income from investment and hence they are assessable as income from other sources. The Ld. CIT(A) considered the decision of Hon'ble Supreme Court in CIT v. Ramanathapuram District Co-operative Central Bank Ltd. [2002] 255 ITR 423 and in CIT v. Bangalore District Co-operative Central Bank Ltd. [1998] 233 ITR 282 and of Mehsana District Central Co-op. Bank Ltd. v. ITO/Gujarat State Co-operative Bank Ltd. v. CIT [2001] 251 ITR 522 and held in assessee's favo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t under section 145(3) of the Income-tax Act. 4.4 Further, the profit and loss account and balance sheet and tax audit report was available on record may be a provisional one. The appellant has also filed copy of statutory audit report before completion of the assessment which has not been considered by the Assessing Officer and the addition on account of interest income has been made without considering the expenditure of Rs. 8,49,33,292 which has been incurred on deposit and borrowings etc. In view of the decision cited as the interest from banking business is allowable as deduction, the Assessing Officer is not justified in not allowing deduction under section 80P(2)(a)(i) on the interest of discount amounting to Rs. 10,77,60,556. Similarly, the commission exchange and brokerage is also related to the banking business activities and the locker rent is also allowable as per the decision of Hon'ble Supreme Court, therefore, the deduction under section 80P(a)(i) is allowable to the assessee on these two items also. As regards the income from sale of non-banking assets amounting to Rs. 7,407 and miscellaneous income of Rs. 3,10,792 is concerned, the appellant has not brought any m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivate loans and negotiating and issuing the same; (d) the effecting, insuring, guaranteeing, undertaking and issuing the same; (e) The effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private of State, municipal or debenture stock of any company-corporation or association and the lending of money for the purpose of any such issue; (f) Carrying on any transacting every kind of guarantee and indemnity business; (g) Managing, selling and realizing any property which may come into the possession of the company in satisfaction or post satisfaction of any of its claims; (h) Acquiring and hold and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security; (i) Undertaking and executing trusts; (j) Undertaking the administration or estates as executors, trustee or otherwise; (k) Establishing and supporting or aiding in the establishment and support of association, institutions, funds, trusts and conveniences calculated to benefit employees or ex-employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve funds of Apex Bank were invested in Government Securities under instructions of the State Government and the Government instructions were that reserve fund could not be utilized as working capital, then interest on Government Securities forming part of reserve funds are not entitled to special deduction under section 81 [now section 80P(2)(a)(i)]. 7. However, in CIT v. Bangalore District Co-op. Central Bank Ltd. [1998] 233 ITR 282. Hon'ble Supreme Court held that where Co-op. society is engaged in banking business, then interest earned on Government securities and dividend on shares of Industrial Finance Corporation would be business income of the bank and hence, it will be entitled for special deduction. 8. As there was a difference of opinion between two judgments of Supreme Court on the issue, the matter was referred to a larger Bench in CIT v. Karnataka State Co-op. Apex Bank [2001] 251 ITR 13, the larger Bench consisting of three judges of the Hon'ble Supreme Court. In CIT v. Karnataka State Co-op. Apex Bank [2001] 251 ITR 194 held as under: "Interest arising from investment made, in compliance with statutory provisions to enable it to carry on banking business, out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court held that interest on securities, subsidies from Government and dividend are income from banking business. " Held, that (i) interest on securities (ii) subsidies from the Government, and (iii) dividend received by the assessee, a co-operative society carrying on banking business, were business income of the assessee, and the assessee was entitled to deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, in respect thereof. CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194 (SC) and Mehsana District Central Co-operative Bank Ltd. v. ITO [2001] 251 ITR 522 (SC) followed. Held also that CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194 (SC) and Mehsana District Central Co-operative Bank Ltd. v. ITO [2001] 251 ITR 522 (SC) are correctly decided." 11. In Mehsana District Central Co-op. Ban k Ltd. v. ITO [2001] 251 ITR 522, Hon'ble Supreme Court held that interest earned on utilization of statutory reserve as well as voluntary reserve and rent on safe deposit vaults are banking business income. "Where the assessee, a co-operative bank, derived (i) income from utilization of its funds for statutory reserves under section 67(2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, Indira Vikas Patra, Kisan Vikas Patras, short-term fixed deposits in banks out of its surplus funds. The Assessing Officer disallowed the deduction claimed by the assessee under section 80P(2)(a)(i) of the Income-tax Act, 1961. The Commissioner (Appeals) took the view that the deduction was admissible only against the income from Banking business and since the income derived out of the funds was not a part of ordinary banking business of the assessee, the deduction was not admissible. The Tribunal held that the assessee had rightly claimed the deduction and directed the Assessing Officer to read the assessment by granting deduction. On appeal: 'Held, that none of the authorities had come to the conclusion that the assessee had not utilised its surplus or voluntary reserve funds in the course of its ordinary banking business. But the view taken by the Commissioner (Appeals) was that the determination of the nature claimed by the assessee could be granted only in a case where investments were made out of statutory reserve funds. The reasoning was contrary to the law laid down by the Supreme Court. Thus, the view taken by the Tribunal had to be upheld as correct'." 14. Similar ..... 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