2013 (1) TMI 85 - HC - Income Tax

Interest earned on non-SLR funds by Co-operative Bank qualifies for tax exemption under Income Tax Act.

Commissioner of Income-tax Versus Gulshan Mercantile Urban Co-Operative Bank Ltd.

Commissioner of Income-tax Versus Gulshan Mercantile Urban Co-Operative Bank Ltd. - TMI Issues Involved:1. Whether interest earned by a Co-operative Bank on deposits of its non-SLR funds is income from Banking Business and consequently exempt under Section 80P(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 80P(2)(a)(i) of the Act.3. Whether the definition of financing Bank or Central Bank in the U.P. Co-operative Society Act restricts banking business to only members of the co-operative societies of the assessee's bank, thereby affecting the exemption under Section 80P(2)(a)(i).Detailed Analysis:Issue 1: Interest earned by a Co-operative Bank on deposits of its non-SLR fundsThe Tribunal held that interest earned by the assessee, a Co-operative Bank, on the deposits of its non-SLR funds is income from Banking Business and is consequently exempt under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The Supreme Court has previously ruled in cases like CIT v. Karnataka State Cooperative Apex Bank and CIT v. Nawanshahar Central Co-operative Bank Ltd. that income as interest from deposits of SLR Funds in approved securities is attributable to the business of banking and is deductible under Section 80P(2)(a)(i). However, the question regarding non-SLR funds was remanded to the Commissioner (Appeals) for a fresh decision in Mehsana District Central Co-operative Bank Ltd.Issue 2: Interest earned on deposits of non-SLR fundsThe Court considered the question of whether interest earned on deposits of non-SLR funds qualifies for deduction under Section 80P(2)(a)(i). The respondent argued that the same reasoning applied to SLR funds should extend to non-SLR funds, citing the Supreme Court's decision in Bihar State Co-operative Bank Ltd. and judgments by the Gujarat High Court and Bombay High Court. These courts have held that interest from deposits of non-SLR funds by cooperative banks is attributable to the business of banking and thus qualifies for deduction under Section 80P(2)(a)(i).Issue 3: Definition of financing Bank or Central Bank in U.P. Co-operative Society ActThe Court examined whether the definition of financing Bank or Central Bank in the U.P. Co-operative Society Act restricts banking business to only members of the co-operative societies of the assessee's bank. The respondent argued that the Supreme Court in Bihar State Co-operative Bank Ltd. explained that interest earned from deposits of surplus funds should be treated as interest earned in the banking business. The Bombay High Court in Goa Urban Co-operative Bank Ltd. also held that investments in excess of statutory liquidity ratio (SLR) securities are subject to deduction under Section 80P(2)(a)(i). The Court concluded that the business derived from SLR or non-SLR funds does not make a difference for qualifying the interest earned by the cooperative bank under Section 80P(2)(a)(i).Conclusion:The Court found that the Tribunal did not err in its findings that interest from non-SLR deposits qualifies for exemption under Section 80P(2)(a)(i). The interest from such deposits is attributable to the business of banking. Consequently, the questions framed were decided against the revenue and in favor of the respondent assessee.