2009 (2) TMI 85 - HC - Income Tax

Interest income on Reserve Fund investments not deductible under Income Tax Act

MEHSANA DIST. CENTRAL CO. OP BANK LTD. Versus CIT.

The High Court of Gujarat ruled in favor of the assessee, holding that interest income on investments of the statutory Reserve Fund of a bank is not ... Whether ITAT was right in holding that the interest income on certain investments of statutory Reserve Fund of the applicant bank can not be considered as the income of the applicant Bank, from its banking business and therefore the same is not eligible for deduction u/s 80P(2)(a)(i) – question is answered in the negative i.e. in favour of the assessee and against the revenue Issues:Interpretation of tax law - Deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 for interest income on investments of statutory Reserve Fund.Analysis:The High Court of Gujarat heard a reference from the Income-tax Appellate Tribunal regarding the eligibility of interest income on investments of the statutory Reserve Fund of a bank for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 for the Assessment Year 1994-95. The issue was whether the interest income of Rs. 81,10,923/- could be considered as part of the bank's income from its banking business. Both parties agreed that a previous judgment in the case of Commissioner of Income-tax Vs. Baroda Peoples Co-operative Bank Ltd. had already addressed this issue. The Court noted that the said judgment resolved the matter, and therefore, detailed facts and contentions were not necessary.The Court referred to the judgment in the case of Commissioner of Income-tax Vs. Baroda Peoples Co-operative Bank Ltd., where it was held that interest income on investments of the statutory Reserve Fund of a bank cannot be considered as income from the banking business. Based on this precedent, the High Court concluded that the interest income in question was not eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961. Consequently, the Court ruled in favor of the assessee and against the revenue. The reference was disposed of with no order as to costs.In summary, the High Court of Gujarat, relying on a previous judgment, clarified the interpretation of tax law regarding the eligibility of interest income on investments of the statutory Reserve Fund of a bank for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961. The Court's decision was based on the principle that such interest income cannot be considered as part of the bank's income from its banking business, leading to the denial of the deduction claimed by the assessee.