ITAT: 80P(2)(a)(i) on Interest on Non-SLR investments

The assessee is a cooperative bank, engaged in the business of banking. AO restricting the claim u/s 80P as earned interest income is from investment in Non-SLR entities. CIT(A) , following the jurisdictional High Court judgement in the case of CIT v Sri Ram Sahakari Bank, has held that interest and dividend income derived out of investment in NSC, IVP, KVP, short term fixed deposit in banks and shares of Maharashtra Finance Cooperation of India is entitled for deduction u/s 80P(2)(a)(i).

On appeal before ITAT, Ld. DR relied on latest judgment of the Hon’ble Supreme Court in the case  reported in (2010) 004 TaxCorp (DT) 45326 (SC) , it has been categorically held that interest income earned by the assessee did not qualify for deduction u/s 80P(2)(a)(i) of the Act and the same is to be brought to tax u/s 56 of the Act.

Ld. AR drew our attention to the distinction between a cooperative bank carrying on the business of banking and a cooperative society providing credit facilities to its members and submitted that in para 11 of the judgement, the Hon’ble Supreme Court has clearly brought out the distinction between a cooperative society and a cooperative bank carrying on banking business. This difference is brought out by introduction of sub section 4 to section 80P w.e.f. 1/4/2007 (for and from asst. year 2007-08).

The words “attributable to” has a wider impact and indicate legislative intention to cover receipt from source other than actual conduct of the business which have a proximate connection with a main business or are incidental activity closely related to the main activity. Non-SLRs are the funds required and are necessary for conducting the banking activity. Investment of these funds in the manner prescribed by RBI is necessary to comply with the statutory provisions. Income arising from these investments is attributable to the banking activity.

The assessee, being a cooperative bank, though received interest from Non-SLR investments, the same continues to be part of the business funds which are required for the banking business of the assessee. These are funds are invested in the manner provided/specified by the provisions of Banking Regulation Act and also by the provisions of State Cooperative Societies Act, 1959. In this context, it cannot be said that the interest received from Non-SLR investments are not forming part of the banking business of the assessee cooperative bank.

Also Read: (2010) 004 TaxCorp (DT) 45326 (SC) not followed