2010 (2) TMI 54 - HC - Income Tax

Cooperative bank qualifies for tax deduction based on business activities, Court rejects revenue's compliance arguments

The Court upheld the Tribunal's decision to allow the deduction under Section 80-P(2)(a)(i) for the cooperative urban bank's banking activities, ... Deduction u/s 80P(2)(a)(i) versus 80P(2)(c) - The primary business of the assessee is banking. For the assessment year 2004-2005, the assessee filed its return of income admitting an income of Rs.26,14,953/- and claimed exemption under Section 80-P of the Income Tax At. The assessee relied upon Section 80-P(2)(a)(i) for deduction in respect of income derived from purely banking activities. Holding that the assessee is engaged in the activity of purchasing and selling securities which does not partake the character of banking activities, the assessing officer did not allow the deduction under Section 80-P(2)(a)(i), but has allowed the deduction upto Rs.50,000/- in terms of Section 80-P(2)(c) of the Income Tax Act – held that - This being a factual finding by the Tribunal that the assessee had made profit from securities only abiding the RBI guidelines, we are not inclined to go into this ground. In fact the Tribunal had relied upon the decision in Mayavaram Co-operative Urban Bank Limited case in ITA No.208/Mds/2007 dated 7.9.2007, wherein the submission of the learned counsel for the assessee that the assessee was eligible for deduction on the whole amount of profits and gains of business attributable to any one or more than such activities was accepted for deduction – order of ITAT allowed full deduction u/s 80P(2)(a)(i) sustained Issues:1. Interpretation of Section 80-P(2)(a)(i) of the Income Tax Act for deduction in respect of income derived from banking activities.2. Applicability of Supreme Court judgments in determining eligibility for deduction under Section 80-P(2)(a)(i).3. Whether investments should be limited to members of the society for deduction under Section 80-P(2)(a)(i).4. Compliance with Reserve Bank of India norms in determining eligibility for deduction under Section 80-P(2)(a)(i).Analysis:1. The primary issue in this case revolves around the interpretation of Section 80-P(2)(a)(i) of the Income Tax Act for claiming deductions related to income derived from banking activities. The assessee, a cooperative urban bank, claimed exemption under this section for the assessment year 2004-2005. The assessing officer denied the deduction under Section 80-P(2)(a)(i) on the grounds that the bank was engaged in purchasing and selling securities, which were deemed not part of banking activities. However, the Tribunal allowed the appeal, stating that the bank's activities qualified as business activities, entitling the assessee to the deduction.2. The second issue pertains to the applicability of Supreme Court judgments in determining the eligibility for deduction under Section 80-P(2)(a)(i). The respondent relied on the judgment in Commissioner of Income Tax v. Nawanshahar Central Co-operative Bank Ltd. and other related cases to support their claim for deduction. The revenue contested this, arguing that the Supreme Court judgments were not directly applicable to the present case due to specific factual distinctions.3. Another issue raised was whether investments should be restricted to members of the society for claiming deduction under Section 80-P(2)(a)(i). The revenue contended that investments should only be with the members of the society and not with outsiders to qualify for the deduction. However, the Court did not delve into this issue as it was not raised earlier in the proceedings and was not a ground of appeal.4. The final issue concerns compliance with Reserve Bank of India norms in determining eligibility for deduction under Section 80-P(2)(a)(i). The revenue argued that the assessee could only hold up to ten percent in approved securities as per RBI norms, and any amount exceeding this limit would not be eligible for deduction. However, the Court noted that this argument was raised for the first time during the appeal before the Court and was not considered by the assessing officer or the Tribunal. As a result, the Court declined to entertain this argument, emphasizing that it was a factual issue raised belatedly.In conclusion, the Court dismissed the tax case appeal, finding no merit in the revenue's contentions and upholding the Tribunal's decision to allow the deduction under Section 80-P(2)(a)(i) for the assessee's banking activities.