COMMISSONER OF INCOME TAX SHIMLA vs. MS H.P.STATE CO-OPERATIVE BANK LTD

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ITA/4/2010HC Himachal PradeshHPHC01002200201001 April 2010Author: HONOURABLE MR. JUSTICE DEEPAK GUPTA,HONOURABLE MR. JUSTICE SANJAY KAROL5 pages
AI SummaryPartly Allowed

What did the High Court hold?

The High Court held that the interest earned on deposits of non-SLR and surplus funds in non-statutory reserves is directly attributable to the business of banking. The Court reasoned that any banking institution carrying on banking business would not keep its reserves uninvested. Investing funds, including those from non-statutory reserves, is part of prudent business management and an integral component of banking activities. The Court reiterated its earlier decision in ITA No. 40 of 2006, finding that the term "attributable to" is wide in scope and encompasses income generated from such investments. Regarding the revenue's reliance on the Apex Court's judgment in Totgar’s case, the High Court distinguished it, noting that the Apex Court itself clarified that its judgment was confined to the facts of that case, which involved a cooperative society not carrying on banking business. Since the present assessees are cooperative banks carrying on banking business, the Totgar’s case was held not applicable. Therefore, the questions were answered in favour of the assessee and against the revenue. All appeals were disposed of accordingly.

What were the facts?

The appeals were filed by the Commissioner of Income Tax, Shimla, against M/s. H.P. State Co-operative Bank Ltd., The Jogindra Central Co-operative Bank Ltd., and The Kangra Central Co-operative Bank Ltd. The assessment years are not explicitly stated. The appeals challenged the orders of the Income Tax Appellate Tribunal (ITAT) concerning the allowability of deduction under Section 80P(2)(a)(i) of the Income Tax Act, 1961. The core issue revolved around interest earned by the assessee co-operative banks on deposits of non-SLR and surplus funds in non-statutory reserves. The High Court was to decide if this income was attributable to the banking business and thus eligible for deduction.

What were the issues?

1. Whether the assessee co-operative bank was entitled to deduction under Section 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 cannot be said to be profits or gains of business, and hence falls outside the purview of Section 80P(2)(a)(i)? 2. Whether the ITAT was correct in law in holding that the issue regarding allowability of deduction under Section 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 Co-op. Bank, whereas that judgment related to income from investment of statutory reserves only? Assessee's Contentions: The assessee argued that interest earned on deposits made out of non-SLR funds is attributable to their banking activities, as investing reserve funds to earn income is part of prudent business management and banking activity. They relied on the High Court's previous judgment in ITA No. 40 of 2006 and connected matters. Revenue's Contentions: The revenue contended that the income earned on non-SLR and surplus funds in non-statutory reserves did not fall within the purview of Section 80P(2)(a)(i). They sought to rely on the Supreme Court's judgment in M/s. The Totgars Cooperative Sale Society Limited Vs. Income Tax Officer, Karnataka, which they argued decided a similar question in favour of the revenue.

Which sections of the Income-tax Act were involved?

Section 80P(2)(a)(i)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA I.T.A No. 4 of 2010 alongwith ITA Nos.5, 6, 7 and 8 of 2010. Date of decision: 1.4.2010 ITA No.4, 5, 6, 7 and 8 of 2010 Commissioner of Income Tax, Shimla …. Appellant (in all the appeals) Versus M/s.H.P State Co-operative Bank Ltd. The Mall, Shimla ….. Respondent (In ITA No.4 of 2010) The Jogindra Central Co-operative Bank Ltd. The Mall, Solan ….. Respondent (In ITA Nos.5 and 7 of 2010) The Kangra Central Co-operative Bank Ltd. Dharamshala, Distt. Kangra. ……. Respondent (In ITA Nos.6 and 8 of 2010) Coram: The Hon’ble Mr. Justice Deepak Gupta, J. The Hon’ble Mr.Justice Sanjay Karol, J. Whether approved for reporting? No For the appellant: Mr.Vinay Kuthiala, Advocate (in all the appeals). 2 Deepak Gupta, J (Oral). These aforesaid Income Tax Appeals

are being disposed of by a common judgment since the following identical questions of law are involved in all these cases:-

1.

Whether the assessee co-opertive 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).

2.

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 Co-op. Bank, whereas that judgment related to income from investment of statutory reserves only.

3

This Court had decided these questions vide judgment dated 3.11.2009 in Income Tax Appeal No.40 of 2006 and other connected matters wherein virtually identical question of law was involved. We had answered the question in favour of the assessee in the following terms:- “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

4 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.”

Sh.Vinay Kuthiala, learned counsel for the revenue states that he wants to rely upon one judgment of the Apex Court delivered after the aforesaid judgment was delivered by us. He has drawn our attention to the judgment of the Apex Court passed in M/s. The Totgars Cooperative Sale and the assessee-Society before the Apex Court

5 was not carrying on banking business. The relevant portion of the judgment of the Apex Court reads as follows:- “A number of judgments were cited on behalf of the assessee(s) in support of its contention that the source was irrelevant while construing the provisions of Section 80P of the Act. We find no merit because all the judgements cited were cases relating to Cooperative Banks and assessee-Society is not carrying on Banking business. We are confining this judgment to the facts of the present case.”

Admittedly, in the present case(s), the assessee(s) is a Cooperative Bank carrying on banking business, therefore, the law laid down by the Apex Court in Totgar’s case is not applicable to the present case. All the appeals are disposed of in the aforesaid terms. No order as to costs.

( Deepak Gupta )

Judge

April 1, 2010

(Sanjay Karol) (m) Judge

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