Co-operative Bank : Income from banking business : Deduction u/s.80P(2)(a)(i) of Income-tax Act, 1961 : Interest received from investments made in Kisan Vikas Patra and Indira Vikas Patra out of voluntary reserve : Is income from banking business exempt u

[CIT v. The Solapur Nagari Audyogic Sahakari Bank Ltd. (Bom.),
ITA No. 46 of 2008 dated 16-6-2009 (Not reported)]

The following question was raised before the Bombay High
Court in the appeal filed by the Revenue :

“Whether the interest income received by a co-operative
bank from investments made in Kisan Vikas Patra (‘KVP’ for short) and Indira
Vikas Patra (‘IVP’ for short) out of voluntary reserves is income from
banking business exempt u/s. 80P(2)(a)(i) of the Income-tax Act, 1961 ?”

The Bombay High Court answered the question in the
affirmative and in favour of the assessee and held as under :

“(i) This Court in the case of CIT v. Ratnagiri
District Central Co-operative Bank Ltd., 254 ITR 697, after considering
various provisions of the Maharashtra Co-operative Societies Act, 1960 and
the Banking Regulation Act, 1949 has held that the investments made by a
co-operative bank in IVP out of the funds generated from the banking
business would have direct and proximate connection with or nexus with the
earning from banking business and attract the provisions of S. 80P(2)(a)(i)
of the Act. In other words, this Court in the above case has held that the
interest income earned by a co-operative bank from IVP would be income from
banking business, if the investment in IVP represented the funds generated
from the banking business. The said decision has been upheld by the Apex
Court by dismissing the Special Leave Petition filed by the Revenue.

(ii) Thus, it is clear that investment in KVP/IVP by a
co-operative bank is a permissible banking business and for availing
deduction u/s. 80P(2)(a)(i) of the Act, the co-operative bank has only to
show that the investment in KVP/IVP have been made from the funds generated
from the banking business. Whether the investments in KVP/IVP have been made
out of statutory reserves or non-statutory reserves is wholly irrelevant, so
long as the funds in the statutory reserves or the non-statutory reserves
are the funds generated from the banking business.

(iii) It is not the case of the Revenue that the amounts
in the non-statutory reserves were not the amounts generated from the
banking business. In these circumstances, the decision of the Tribunal in
holding that the interest income from KVP/IVP was from the business of
banking eligible for deduction u/s.80P(2)(a)(i) of the Act cannot be
faulted.”