The Commissioner of Income Tax vs The Goa Urban Co-operative Bank Ltd.

Swatanter Kumar, C.J.—The present appeal is directed u/s 260A of the Income Tax Act, 1961(hereinafter referred to as the Act) against the Order of the Income Tax Appellate Tribunal, Panaji Bench, Panaji, dated 30th November, 2004. While admitting the present appeal, the Division Bench passed an Order dated 18th July, 2005 and framed the following questions of law which read as under:

(A) Whether on the facts and in the circumstances of the case, the ITAT was right in law in holding that the assessee is entitled to claim deduction u/s 80P(2)(a)(i) of IT Act, in respect of proportionate interest income derived on investments in Government securities in excess of SLR requirement out of reserve fund?

(b) Whether on the facts and in the circumstances of the case, the proportionate interest income derived by the assessee from the investment in SLR securities out of reserve Fund, is attributable to business of banking and the assessee is eligible to claim deduction u/s 80P(2)(a)(i) of the Act?

The facts are hardly in controversy. The investment by the assessee Bank is in excess of statutory liquidity ratio i.e. 25% of demand and liabilities in terms of Section 24 of the Banking Regulation Act. However, the excess investment made in SLR securities were subjected to taxation by the Assessing Officer vide his Order dated 24th February, 1999 which was upheld in appeal by the Commissioner of Income Tax(Appeals). It was felt by the authorities that the income from any investments coming out of SLR would be entitled to deduction u/s 80P(2)(a)(i) in terms of the Judgment of the Supreme Court in M.P. Cooperative Bank Ltd., Jabalpur Vs. Addl. Commissioner of Income Tax, M.P. Bhopal, only if it was income from the banking business. These amount had been invested in approved securities by the Assessee Bank i.e. the Central Bank and other trust securities. Noticing that the object of Section 80P(2)(a)(i) was to encourage co-operative movement in the country and any income of the society from the investment which does not form part of the circulating capital or working capital or stock-in trade of the banking business cannot be said to be the profits and gains attributable to the business of banking and entitled to deduction u/s 80P(2)(a)(i), on these reasonings, the Commissioner declined to interfere in the appeal. The Income Tax Appellate Tribunal while upholding both these orders whilst referring to the Judgment of the Gujarat High Court in the case of Commissioner of Income Tax-III Vs. The Baroda Peoples Co-op. Bank Ltd., followed the principle while referring to the Special Bench Judgment of the Ahmedabad High Court in the case of (2003) 78 TTJ 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 u/s 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.

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 Commissioner of Income Tax, Kolhapur Vs. Ratnagiri Dist. Central Co-operative Bank Ltd., Ratnagiri, 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. (supra) as the issues are no way different. In fact in that case while referring to the Judgment of the Supreme Court in the case of The Bihar State Co-operative Bank Ltd. Vs. The Commissioner of Income Tax, where the Apex Court clearly held that short-term deposits by the Bank was income from normal banking business and was, therefore, exempt from the liability to pay Income Tax. It was further specifically held in that case that since the society in that case was engaged in banking activity, its normal business was to deal in money and credit and, therefore, the money laid out in the form of short-term deposit did not cease to be a circulating capital and interest earned thereon, could not be other than income generated from the business of banking, and, was therefore exempt from tax. In the present case, the investments have been made by the Bank in government securities, fixed deposits, etc. and the income is utilized for business. There is nothing on record to show that this case of the assessee is not acceptable in view of the law clearly stated by the Bench of this Court, for which we have no reasons to disagree. We dismiss the appeal while answering the questions in favour of the assessee. By this order, we dispose of the appeal with reference to the facts of the case.