Introduction: In a significant ruling, the Calcutta High Court addressed the matter of co-operative societies and their eligibility for Section 80P(2)(a)(i) deduction concerning interest earned from funds utilized for statutory reserves. This case, titled “CIT Vs Paschim Banga Gramin Bank,” sheds light on an essential aspect of taxation for co-operative banks and societies in India.
Background: The case revolves around the interpretation of Section 80P(2)(a)(i) of the Income Tax Act, 1961. This section deals with deductions available to co-operative societies. Specifically, it pertains to the deduction of income arising from the activities of co-operative societies engaged in banking business.
The key contention in this case was whether interest income derived from investments made in compliance with statutory provisions, using reserve funds to facilitate the co-operative society’s banking operations, is eligible for the Section 80P(2)(a)(i) deduction.
Court’s Decision: The Calcutta High Court considered the arguments presented by both the revenue and the respondent. The revenue raised the issue of whether the interest earned by a co-operative bank on deposits not subject to statutory liquidity ratio (SLR) requirements (i.e., funds other than those advanced as loans and banking reserves) is deductible under Section 80P(2)(a)(i).
The court referred to relevant precedents, including the decisions of the Hon’ble Supreme Court in the cases of Commissioner of Income Tax vs. Karnataka State Co-operative Apex Bank (2001) and Mehsana District Central Co-operative Bank Ltd. vs. Income-tax Officer (2001). These judgments established that interest income arising from investments made in adherence to statutory provisions, enabling co-operative societies to conduct banking operations, is exempt under Section 80P(2)(a)(i) of the Income Tax Act.
The court emphasized that the placement of such funds from the reserve was imperative for the co-operative society to carry out its banking business. Consequently, the income derived from these investments should be categorized as income from the assessee’s business, making it eligible for the Section 80P(2)(a)(i) deduction.
Conclusion: The Calcutta High Court’s ruling in the case of “CIT Vs Paschim Banga Gramin Bank” reaffirms the eligibility of co-operative societies for the Section 80P(2)(a)(i) deduction. Interest income generated from investments made in accordance with statutory provisions to support the co-operative society’s banking activities, utilizing reserve funds, is considered exempt under the Income Tax Act.
This decision aligns with the principles established by the Hon’ble Supreme Court in previous judgments and provides clarity on the tax treatment of such interest income for co-operative societies engaged in banking business. It underscores the importance of adhering to statutory requirements and the fundamental role of reserve funds in facilitating co-operative banking operations in India.
FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT
The Court : This appeal by the revenue filed under Section 260A of the Income Tax Act, 1961 (the Act) is directed against the order 7th September, 2007 passed by the Income Tax Appellate Tribunal, ‘A’ Bench, Kolkata (Tribunal) in ITA No.1094/Kol/2007 for the assessment year 2004-05.
The appeal was admitted on 13th August, 2008 on the following substantial question of law :
“Whether on the facts and circumstances of the case the Income Tax Appellate Tribunal was correct in allowing deduction under Section 80P(2)(a)(i) to the assessee in view of the decision reported in 250 ITR 229 where it was held, “Income earned by co-operative Bank on deposits of its non SLR deposits (i.e. funds other than those advanced as loans and the banking reserves) is not deductible under section 80P(2)(a)(i) ?”
We have heard Mr. Tilak Mitra, learned standing counsel appearing for the appellant and Ms. Sutapa Roychowdhury, learned counsel for the respondent.
The substantial questions of law raised by the revenue have been answered in favour of the assessee and against the revenue by the Hon’ble Supreme Court in the case of Commissioner of Income Tax vs. Karnataka State Co-operative Apex Bank, 2001 (251) ITR 194 and in the case of Mehsana District Central Co-operative Bank Ltd. vs. Income-tax Officer, 2001 (251) ITR 522. In the said decision, it has been held that interest arising from investment made, in compliance with statutory provisions to enable the co-operative society to carry on banking business, out of reserve fund by such society engaged in banking business, is exempt under Section 80P(2)(a)(i) of the Act. Further, the placement of such funds being imperative for the purpose of carrying on banking business the income therefrom would be income from the assessee’s business. Therefore, it was held that the assessee/co-operative society was entitled to deduction under Section 80P(2)(a)(i) of the Act in respect of interest earned from funds utilised for such statutory reserves.
Thus, applying the law laid down by the Hon’ble Supreme Court in the aforementioned decisions, this appeal is dismissed and the substantial question of law is answered against the revenue.