2001 (8) TMI 9 - SC - Income Tax

Interest on mandatory bank placements is business income and exempt under section 80P(2)(a)(i), overruling contrary precedent

The SC held that interest earned on funds mandatorily placed with the State Bank or Reserve Bank arises from the assessee's banking business and is exempt ... Exemption for cooperative societies based on investment income - Whether, the Appellate Tribunal was right in law in holding that the interest income arising from the investment made out of reserve fund is exempt u/s 80P(2)(a)(i) - Assessee co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business - Held That:- There is no doubt, and it is not disputed, that the assessee-co-operative hank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of section 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee's business. We are unable to take the view that found favour with the Bench that decided the case of Madhya Pradesh Co-operative Bank Ltd. [1996] 218 ITR 438 (SC) that only income derived from circulating or working capital would fall within, section 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital. In the premises, we take the view that the decision, of this court in the case of Madhya Pradesh Co-operative Bank Ltd. [1996 (1) TMI 8 - SUPREME COURT], does not set down the correct law and that the law is as we have put it above. The question, accordingly, is answered in the affirmative and in favour of the assessee. The civil appeals are dismissed. Issues:Interpretation of section 80P of the Income-tax Act, 1961 regarding exemption for cooperative societies based on investment income.Analysis:The Supreme Court heard appeals due to a conflict between two previous judgments regarding the interpretation of section 80P of the Income-tax Act, 1961. The main issue revolved around whether interest income from investments made out of reserve funds by a cooperative society qualifies for exemption under section 80P(2)(a)(i) of the Act. The conflicting judgments were in the cases of Madhya Pradesh Co-operative Bank Ltd. and Bangalore District Co-operative Central Bank Ltd.In the Madhya Pradesh Co-operative Bank Ltd. case, the court considered the nature of investments made by the bank and the restrictions imposed by the government on the use of reserve funds. The court concluded that the interest income from such investments did not qualify for exemption under section 80P as they were not part of the bank's stock-in-trade or circulating capital essential for banking activities.However, in the Bangalore District Co-operative Central Bank Ltd. case, the court found that the investments made by the bank were in compliance with statutory provisions and necessary for carrying on banking business. These investments were considered as part of the business activities falling within the scope of section 80P(2)(a)(i).The Supreme Court disagreed with the previous judgment in the Madhya Pradesh Co-operative Bank Ltd. case, stating that any income derived from funds placed with State Bank or Reserve Bank of India for carrying on banking business should be exempt under section 80P(2)(a)(i). The court clarified that the provision does not restrict the exemption to income derived only from working or circulating capital, emphasizing that income from such essential funds is considered income from the business itself.Ultimately, the court held that the decision in the Madhya Pradesh Co-operative Bank Ltd. case did not reflect the correct interpretation of the law. The judgment favored the assessee, affirming that income derived from funds necessary for carrying on the banking business should be exempt under section 80P(2)(a)(i). As a result, the civil appeals were dismissed, and no costs were ordered.