Commissioner of Income Tax vs Himachal Gramin Bank

Deepak Gupta, J.—In this appeal filed by the revenue it is urged that the following substantial questions of law arise for decision:

Whether the Assessee cooperative bank was entitled to deduction u/s 80P(2)(a)(i) of the Income Tax Act in respect of interest earned on deposits of non-SLR and surplus funds in non statutory reserves, even though the income so earned can not be said to be profits or gains of business and hence falls outside the purview of Section 80P(2)(a)(i)?

Whether the ITAT was correct in law in holding that the issue regarding allowability of deduction u/s 80P(2)(a)(i) of the IT Act in respect of such income had been settled by the Hon''ble Supreme Court in the case of Nawanshaher Central Cooperative Bank, whereas that judgment related to income from investment of statutory reserves only?

These questions stands squarely covered by a judgment of this Court dated 3rd November, 2009 delivered in Commissioner of Income Tax v. M/s H.P. State Cooperative Bank Ltd, wherein it was held as follows:

Any banking institution, carrying on banking business will not keep its reserves uninvested where they earn no income. The question which arises is whether the income earned on account of interest on deposits made out of the non SLR funds can be said to be attributable to the banking activities of the bank. There can be no dispute with the preposition that the word attributable is much wider in scope than derived. The Legislature has used the words "attributable to" in conjunction with the phrase "any one or more of such activities".

The words used by the legislature are very important. The first word used is attributable, which is much wider in scope than the word derived. The second phrase used is any one or more of such activities. Any banking business providing credit facilities to its members and investing the sums deposited by the members of the society is part of banking business.

We are, therefore, of the considered view that the investment of the funds by the banks including the non reserves were part of the banking activities since no bank would like its reserve funds to remain idle and not earn any interest. This is not only prudent business management but is also a part of the activity of banking. Therefore, the interest earned on such deposits is directly attributable to the business of banking. The question is accordingly answered in favour of the Assessee and against the revenue.

Keeping in view the law laid down in the aforesaid Judgment, the questions raised are answered in favour of the Assessee and against the revenue and the appeal is dismissed in limine.