Commissioner of Income Tax vs Muzaffar Nagar Kshetriya Gramin Bank Ltd.

This is an appeal filed by the Commissioner of Income Tax, Muzaffar Nagar, u/s 260A of the Income Tax Act, 1961, relating to the assessment year 2002-03.

The following question has been raised:

Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal is legally correct in holding that the interest earned by the co-operative bank on deposits of its non-SLR funds qualify for deduction u/s 80P(2)(a)(i) of the Income Tax Act 1961?

The assessee is a regional rural bank set up under the provisions of the Regional Rural Banks Act, 1976. This bank is declared to be a co-operative society for the purpose of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). For the assessment year under consideration, the assessee filed the return of income on July 31, 2001, and claimed the deduction of its entire income amounting to Rs. 65,86 u/s 80P(2)(a)(i) of the Act. The return was accepted u/s 143(1)(a) of the Act. Subsequently, a notice u/s 148 of the Act was issued and the case was reopened with the view to disallow the deduction in respect of the interest income accrued on the investment. According to the assessee, the claim did not qualify for the exemption u/s 80P(2)(a)(i) of the Act. The plea of the assessee was not accepted and the assessing authority passed the assessment order and disallowed the claim for exemption.

Being aggrieved by the assessment order, the assessee filed the appeal before the Commissioner of Income Tax (Appeals), Muzaffar Nagar, which was allowed.

Being aggrieved by the order of the Commissioner of Income Tax (Appeals), Addl. CIT, Range-2, Muzaffar Nagar, filed the appeal before the Income Tax Appellate Tribunal which has been dismissed by the impugned order.

The Tribunal has held as follows:

We have heard both the parties and carefully considered the rival contentions, examined the facts, evidence and material placed on record. From the facts discussed above, it is obvious that the Assessing Officer held that interest earned on investment exceeding the percentage required under the statutory liquidity ratio (SLR) was not entitled to deduction u/s 80P(2)(a)(i). For this purpose, the Assessing Officer has heavily relied on the decision of the Gujarat High Court in the case of Gujarat State Co-operative Bank Ltd. Vs. Commissioner of Income Tax, He has also referred to the judgment of the Hon''ble Supreme Court in the case of M.P. Cooperative Bank Ltd., Jabalpur Vs. Addl. Commissioner of Income Tax, M.P. Bhopal, This judgment was overruled by the apex court in the case of Commissioner of Income Tax Vs. KARNATAKA STATE CO-OPERATIVE APEX BANK, where it was held that interest arising from investment made in compliance with the statutory provisions to enable it to carry on banking business out of reserve funds by a co-operative society engaged in banking business was exempt u/s 80P(2)(a)(i) of the Act. In the case of The Commissioner of Income Tax, Bangalore Vs. The Banglore Distt. Coop. Central Bank Ltd., the Hon''ble apex court held that interest on Government securities and dividends of shares of the Industrial Finance Corporation was income from banking business and hence entitled to deduction u/s 80P(2)(a)(i) of the Act. In the case of Mehsana District Central Co-operative Bank Ltd. Vs. Income Tax Officer, the Hon''ble apex court held that interest earned from funds utilized for statutory reserves and income from hiring safe deposits was the income from banking business and hence entitled to deduction u/s 80P(2)(a)(i). Thus, the sum and substance of the aforesaid discussion and legal position is that the interest earned by the bank from investment in SLR and other investments forms part of banking business and is entitled to deduction u/s 80P(2)(a)(i) of the Act. As per the Banking Regulation Act, the banks are required to keep certain percentage of their total deposits in the statutory liquidity ratio (SLR) and the total deposits accepted from the public vary from year to year. The fact that in a particular year, the amount of investment made in the Government securities or deposits exceeds SLR would not mean that such investments have not been made in the banking business. Therefore, interest earned on such deposits/investments would form part of banking business entitled to deduction u/s 80P(2)(a)(i) of the Act. In the light of these facts and circumstances of the case and the legal position discussed above, we are of the considered opinion that the learned Commissioner of Income Tax (Appeals) was justified in allowing the deduction u/s 80P(2)(a)(i) of the Act. We confirm his order and reject the grounds of appeal of the Revenue.

Heard Sri R.K. Upadhyay, learned standing counsel.

We are of the opinion that the issue involved in the present case is no more res integra and is covered by the decisions of the apex court in the case of Commissioner of Income Tax Vs. KARNATAKA STATE CO-OPERATIVE APEX BANK, Mehsana District Central Co-operative Bank Ltd. Vs. Income Tax Officer, and a recent decision of the apex court in the case of CIT v. Naioanshahar Central Co-operative Bank Ltd. reported in [2007] 289 ITR 6 (SC) wherein in it has been held that where a co-operative bank carrying on business of banking is statutorily required to place a part of its funds in approved securities, the income is attributable thereto is the business of banking and is deductible u/s 80P(2)(a)(i) of the Act. In the present case, it is not the case of Revenue that the assessee had carried on any other business other than banking business. The deposit exceeding statutory liquidity ratio (SLR) was also in relation to banking activity. Hence, the income accrued out of such deposit also attributable to the banking business and deductible u/s 80P(2)(a)(i) of the Act. The issue involved in the present appeal is also covered by the decision of the this Court in the case of Gorakhpur Kshetriya Gramin Bank Vs. Commissioner of Income Tax,

In view of the decisions of the apex court, we do not find any merit in the present appeal. The appeal is, accordingly, dismissed.