C.I.T.-GANDHINAGAR vs. MEHSANA JILLA SAHAKARI KHARID VECHAN SANGH LTD.

Facts

The assessee, Mehsana Jilla Sahakari Kharid Vechan Sangh Ltd., filed its return for assessment year 1996-97. The assessee incurred a trading loss of Rs. 4,29,763/- but had income from interest, dividend, and other services totaling Rs. 11,11,840/-. The Assessing Officer disallowed the set-off of business loss. The CIT(Appeals) allowed the appeal, granting deduction under Section 80P(2)(d) for interest income of Rs. 7,94,992/-. The Income Tax Appellate Tribunal (Tribunal) further allowed the assessee's appeal. The revenue (CIT-Gandhinagar) has filed this appeal against the Tribunal's order dated 13.02.2003.

Held

The High Court held that the Tribunal was right in allowing deductions under Section 80P(2)(a)(i) of the Income Tax Act, 1961, on interest income as being attributable to the business of banking. This decision was based on the reasoning provided in a co-ordinate bench's judgment in Tax Appeal No. 178 of 2003 (reported in 280 ITR 282, Commissioner of Income Tax – III vs. The Baroda Peoples Co-op Bank Ltd). The extensive reasoning in the cited judgment established that investments made in securities, in permissible modes under the B.R. Act or GCS Act read with the Indian Trusts Act, would be attributable to the business of banking and eligible for deduction under Section 80P(2)(a)(i). The court affirmed that the scheme under the GCS Act permits societies carrying on banking business to make investments, and there is a nexus between various clauses of Section 6(1) of the B.R. Act and the business of banking. The question of law was answered in the affirmative. The appeal was dismissed.

Key Issues

1. Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in allowing deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961, on interest income as being attributable to the business of banking. The assessee contended that the interest income earned was attributable to its banking business and therefore eligible for deduction under Section 80P(2)(a)(i). The revenue argued that the Tribunal erred in allowing the deduction, implying that the interest income was not attributable to the business of banking as defined or understood under the Act. The judgment refers to a prior decision in Tax Appeal No. 178 of 2003, which dealt with similar facts and circumstances, and extensively quotes its reasoning.