TaxTMI 
TaxTMI 
2012 (10) TMI 618
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....posits of its non-SLR funds are also covered within the meaning of Section 80-P (2) (a) (i) of the Act? (3). Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that interest on Non-SLR investment is exempt under section 80-P (2) (a) (i) of the Act, ignoring that the definition of financing Bank or Central Bank in U.P. Cooperative Society Act does not refer to Section 5 or 6 of Banking Regulation Act and restrict banking business to only members of the co-operative societies of the assessee's bank? (4). Whether deduction u/s 80-P (2) (a) (i) of the Act is allowable on the income earned from voluntary reserves by the Cooperative Society engaged in Banking Business or not, in case asseessee is not able to explain the utilization of such income for the purpose of banking business?" 4. The respondent assessee is a Cooperative Society, engaged in banking business. The assessee filed its return on 27.10.2005, declaring 'nil' income. It computed net profit at Rs.1,16,24,896/-, and claimed deduction of total income under Section 80 P (2) (a) (i) of the Act. The AO found that the assessee has earned income on investment including interes....
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....f the Act provides that the "banking means the accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawal by cheque, draft order or otherwise. Section 6 (i) contain several clauses, describing, what are the other forms of business, in which a banking company may engage itself. A reading of Section 18 (1) of the Regional Rural Bank Act together with Section 5 (b) and Section 6 (1) of the Act, clarifies that a bank may engage itself not only in banking business but also in the other forms of business listed in Section 6 (1). Clause (a) of Section 6 (1) of the Act provides that the acquiring or holding etc of securities and investment of all kinds is one of the various businesses, which a banking company may carry on. Section 18 (2) of the Regional Rural Banking Act provides that without prejudice to the generality of the provisions of sub section (1), every regional rural bank may in particular undertake the business, namely, (a) the granting of loans and advances, particularly to small and marginal farmers and agricultural labours, whether individually or in groups, and cooperative societies, including a....
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.... Ltd. v. CIT (Supra) and the judgments rendered by the Gujarat High Court, Andhra Pradesh High Court and Bombay High Court in the cases cited as above, that the interest earned out of deposits of non-SLR funds, cannot be treated as profits and gains of business attributable to the activity of carrying on business of banking, or providing credit facilities to its members under Section 80P (2) (a) (i). 8. The Supreme Court in Bihar State Cooperative Bank Ltd. (Supra) explained in para 12 and 13 that the interest earned out of deposits of surplus fund has to be treated as interest earned in the banking business. Paras 11, 12 and 13 of the judgment are quoted as below:- "11. In the Surat Peoples' Co-operative Bank Ltd. v. The Commissioner of Income-tax, Ahmedabad (2) the profit arose during the course of banking business out of the sale of Government securities which formed part of the stock-in-trade and as it was a co- operative bank the profits made from such sales were held to be exempt from taxation under the Notification. 12. In the instant case the co-operative society (the appellant) is a Bank. One of its objects is to carry on the general business of banking. Like other bank....
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....ointed out above, it is a normal mode of carrying on banking business to invest moneys in a manner that they are readily available and that is just as much a part of the mode of conducting a Bank's business as receiving deposits or lending moneys or discounting hundies or issuing demand drafts. That is how the circulating capital is employed and that is the normal course of business of a bank. The moneys laid out in the form of deposits as in the instant case would not cease to be a part of the circulating capital of the appellant nor would they cease to form part of its banking business. The returns flowing from them would form part of its profits from its business. In a commercial sense the directors of the company owe it to the bank to make investments which earn them interest instead of letting moneys lie idle. It cannot be said that the funds of the Bank which were not lent to borrowers but were laid out in the form of deposits in another bank to add to the profit instead of lying idle necessarily ceased to be a part of the stock-in-trade of the bank, or that the interest arising therefrom did not form part of its business profits. Under the bye-laws 68 one of the objects of ....
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....ive Bank Ltd. case MANU/IB/5017/2002 : (2003) 262 ITR (AT) 1 and held as under: "In this case, it was held by the Special Bench of the Tribunal that the interest income on investment in government securities, fixed deposits, KVPs and IVPs, investments with the Unit Trust of India, etc., out of surplus/idle money available from working capital including voluntary reserves, excess collection of interest-tax and locker rent are all income attributable to business of banking and are eligible for grant of deduction Under Section 80P(2)(a)(i) of the Act. Respectfully following the decision of the Special Bench of the Tribunal, we allow the appeal of the assessee. In the result, the appeal filed by the assessee is allowed." 3. The learned Counsel appearing for the Department has relied upon the Judgment of the Division Bench of the Bombay High Court in the case of C.I.T. v. Ratnagiri District Central Co-operative Bank Ltd. MANU/MH/0578/2001 : (2002) Vol.254 Income Tax Reports page 697 to contend that this deduction was not permissible. We are not inclined to accept this submission primarily in view of what is held in the case of C.I.T. v. Ratnagiri District Central Cooperative Bank Ltd.....