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Issues: (i) Whether interest earned on funds maintained as reserve fund was exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961. (ii) Whether rental income from letting out premises owned by the co-operative bank was income from banking business eligible for exemption under section 80P(2)(a)(i) of the Income-tax Act, 1961.
Issue (i): Whether interest earned on funds maintained as reserve fund was exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961.
Analysis: Interest earned from reserve funds kept in deposits formed part of the bank's circulating capital and was treated as arising from the normal mode of carrying on banking business. The Court followed the earlier view that such returns were business profits of the bank and fell within the exemption available to co-operative banks under section 80P(2)(a)(i).
Conclusion: The issue was decided in favour of the assessee and against the Revenue.
Issue (ii): Whether rental income from letting out premises owned by the co-operative bank was income from banking business eligible for exemption under section 80P(2)(a)(i) of the Income-tax Act, 1961.
Analysis: Sections 5(b) and 6(1)(k) and 6(1)(l) of the Banking Regulation Act, 1949 were read as showing that acquisition, construction, maintenance, leasing, and dealing with the bank's property can form part of banking business. The heads of exemption in section 80P were treated as separate and distinct, and the income from letting out the bank's premises was held to fall within the banking-business exemption rather than being taxed as income from house property under section 22.
Conclusion: The issue was decided in favour of the assessee and against the Revenue.
Final Conclusion: The appeals failed because both the reserve-fund interest and the rental income were held to be covered by the statutory exemption available to the co-operative bank.
Ratio Decidendi: Income derived from reserve-fund investments and from leasing of a bank's own premises may constitute banking-business income where the statute treats such activities as part of banking and the relevant exemption provision is construed as separate heads of exemption.
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