2013 (12) TMI 1372 - HC - Income Tax

Co-op Bank's Interest on Non-SLR Deposits Exempt under Income Tax Act

The Commissioner of Income Tax & Another Versus M/s. Muzaffarnagar District Co-Operative Bank Ltd.

The Supreme Court held that interest earned by a Co-operative Bank on deposits of non-SLR funds qualifies for exemption under Section 80-P (2) (a) (i) of ... Interest earned on non-SLR funds - Held that:- Following CIT v. The Goa Urban Co-operative Bank Ltd [2009 (7) TMI 1150 - BOMBAY HIGH COURT] - Whether the business is derived from or attributable to SLR or non-SLR funds would not make any difference for the purposes of qualifying the interest earned by the cooperative bank under Section 80P (2) (a) (i) as the deposits of surplus idle money available from working capital, including reserves, excess collection of interest tax and other incomes are all attributable to the business of banking - The interest from such deposits cannot be said to be beyond the legitimate business activities of the bank - Decided against Revenue. Issues Involved:1. Whether interest earned by the assessee, a Co-operative Bank, on deposits of its non-SLR funds is income from Banking Business and consequently exempt under Section 80-P (2) (a) (i) of the Income Tax Act, 1961.2. Whether interest earned on deposits of non-SLR funds falls within the meaning of Section 80-P (2) (a) (i) of the Income Tax Act.3. Whether interest on Non-SLR investment is exempt under Section 80-P (2) (a) (i) considering the definitions in U.P. Co-operative Society Act and Banking Regulation Act.4. Whether interest on Non-SLR investment is exempt under Section 80-P (2) (a) (i) despite the deposits being placed in banks not approved by the Registrar, Cooperative Societies.Detailed Analysis:Issue 1:The Tribunal held that interest earned by the assessee, a Co-operative Bank, on deposits of its non-SLR funds is income from Banking Business and consequently exempt under Section 80-P (2) (a) (i) of the Income Tax Act, 1961. The Supreme Court's judgments in Commissioner of Income Tax v. Karnataka State Cooperative Apex Bank, Mehsana District Central Cooperative Bank Ltd. v. Income Tax Officer, and Commissioner of Income Tax v. Nawanshahar Central Cooperative Bank Ltd. support that income from SLR funds is attributable to the business of banking and deductible under Section 80P (2) (a) (i). The Court applied the same reasoning to non-SLR funds, concluding that interest from non-SLR deposits is also attributable to banking business.Issue 2:The Tribunal's decision that interest earned on deposits of non-SLR funds falls within the meaning of Section 80-P (2) (a) (i) of the Act is supported by the Supreme Court's judgment in Bihar State Cooperative Bank Ltd. v. The Commissioner of Income Tax. This case established that the placement of funds by a cooperative bank in deposits with other banks, even on long-term deposits, amounts to income arising from banking business. The Gujarat High Court in Commissioner of Income Tax-III v. the Baroda Peoples Co-op. Bank Ltd. and the Andhra Pradesh High Court in CIT-III v. The Andhra Pradesh State Cooperative Bank Ltd. also held that interest from non-SLR funds qualifies for deductions under Section 80 P (2) (a) (i).Issue 3:The Tribunal's decision that interest on Non-SLR investment is exempt under Section 80-P (2) (a) (i) was challenged on the grounds that the U.P. Co-operative Society Act restricts banking business to members of the cooperative societies. However, the Court found that the Supreme Court in Bihar State Cooperative Bank Ltd. v. CIT and various High Courts have consistently held that interest earned from deposits of non-SLR funds is attributable to the business of banking. Therefore, the definition of financing Bank or Central Bank in the U.P. Co-operative Society Act does not affect the exemption under Section 80-P (2) (a) (i).Issue 4:The Tribunal considered whether the assessee-bank deposited non-SLR funds in banks not approved by the Registrar, Cooperative Societies. The Court found that this issue was neither raised nor considered by the income tax authorities, and thus does not arise from the facts of the case. Consequently, the Tribunal did not commit any error in its findings.Conclusion:The Court concluded that the interest earned on deposits of non-SLR funds by the cooperative bank qualifies for exemption under Section 80P (2) (a) (i) of the Income Tax Act. The questions framed were decided against the revenue and in favor of the respondent assessee. The department is to proceed accordingly.