THE COMMISSIONER OF INCOME TAX PUNE. vs. THE AHMEDNAGAR DISTRICT CENTRAL CO-OP BANK LTD, AHMEDNAGAR.

The short question involved is whether the interest earned on investments out of voluntary reserves would qualify for deductions under Section 80P (2)(a)(i) of the Income Tax Act. In each of the tax appeals, the assessment year is different and the amount of interest earned on the voluntary reserves, varies. However, since the issue involved is the same, we have heard these appeals together.

All the assessees i.e. the respondents in the respective appeals are the cooperative banks engaged in the business of banking as regulated by the Banking Regulation Act. They had invested certain amounts in voluntary reserves and had earned interest on the amount. The Assessing Officer has found that the income on interest was being utilised for distributing dividend. It is held that the interest earned on investments made from the voluntary reserves of the bank is a part of the bank's profit from which it was distributing the dividend. It was further held that the distribution of dividend was not a part of the banking business. Therefore, the assessee's claim that such income from interest on investments made from voluntary reserves qualified for a deduction under Section 80P(2)(a)(i) was rejected. While doing so, the 3 ta97.08 Assessing Officer relied on the judgment of the Supreme Court in Mehsana District Central Cooperative Bank Ltd.vs. Income Tax Officer, (2001) 170 CTR (SC) 169. The Commissioner (Appeals) has confirmed the order by holding that the amount earmarked by the bank from the interest earned on voluntary reserves for distributing dividend to its members could not be considered as utilisation of the funds in the ordinary course of banking.

Reliance has been placed by the learned Assistant Solicitor General on the judgment of the Supreme Court in the case of M/s The Officer, Karnataka, reported in [2010] 188 TAXMAN 282 (SC), in support of his submission that such interest earned cannot be considered to be a part of the banking business. He also submits that the judgment in the case of Mehsana District Central Co-operative Bank Ltd. vs. Income-tax Officer, (2001) 170 CTR (SC) 169, has not been followed by the Tribunal while allowing the appeal of the assessees.

The learned Advocate for the assessee has relied on various judgments of the Supreme Court, including in (i) Commissioner of Income Tax vs. Ramnathapuram Dist. Co-op. Central Bank Ltd. (2002) 175 CTR 175 (SC) 297, (ii) Commissioner of Income Tax vs. Nawanshahar Central Co-operative Bank Ltd. (2007) 208 the statutory reserves. While considering this issue, the Court observed;

The Tribunal in the present case has relied on the decisions of the Coordinate Benches of the Income Tax Appellate Tribunal and held that the disallowance of proportionate interest earned on the investments made out of voluntary reserves qualified for deductions as they were made in the course of assessee's banking activities.

The Tribunal, unfortunately, in all these cases, has passed a cryptic order relying on some of the judgments of the Supreme Court. However, the order does not indicate how the Tribunal has distinguished the judgment in the case of Mehsana District Central Cooperative Bank. There can be no doubt that the interest earned on investments or voluntary reserves would fall under the head "Profits and gains of business" and is thus deductible under Section 80P (2) (a) (i) of the Act.

In these circumstances, the matters are remanded to the Tribunal to decide them afresh.

Appeals are disposed of, accordingly. (M. T. JOSHI, J.)