2009 (6) TMI 15 - HC - Income Tax

Deduction u/s 80P - Interest income from KVP and IVP invested from voluntary reserves - whether to be treated as business income under section 80P(2)(a)(i)of the Income Tax Act 1961 - the surplus funds not immediately required for day to day banking were kept in voluntary reserves and invested in KVP/IVP - there is no dispute that voluntary reserves were the funds generated from the banking business - held that in all these cases the Tribunal was justified in holding that the interest income received by the cooperative banks from the investments in KVP/IVP made out of the funds in the voluntary reserves were eligible for deduction under section 80P(2)(a)(i) of the Act.

Summary

Issues:
Whether interest income received by a Cooperative Bank from investments made in Kisan Vikas Patra and Indira Vikas Patra out of voluntary reserves is income from banking business exempt under section 80P(2)(a)(i) of the Income Tax Act, 1961?

Analysis:

The judgment addresses the common question of law raised in multiple appeals regarding the tax treatment of interest income received by a Cooperative Bank from investments in Kisan Vikas Patra (KVP) and Indira Vikas Patra (IVP) made out of voluntary reserves. The main contention revolves around whether such income qualifies for exemption under section 80P(2)(a)(i) of the Income Tax Act, 1961. The appellant's counsel argued that previous decisions cited by the revenue do not apply to the present case as the investments in KVP/IVP were made from voluntary reserves, not statutory reserves as in previous cases. However, the court refers to precedents, such as the Ratnagiri District Central Cooperative Bank case, to establish that investments made from funds generated from banking business, regardless of the source of reserves, qualify for the exemption.

The court emphasizes that the source of funds for investments in KVP/IVP is crucial, rather than whether they originate from statutory or voluntary reserves. It is highlighted that the investments in KVP/IVP by a Cooperative Bank are considered part of permissible banking business activities. The judgment clarifies that as long as the funds used for investments are generated from banking business, the nature of reserves, whether statutory or voluntary, is irrelevant for availing the deduction under section 80P(2)(a)(i) of the Act.

Furthermore, the court rejects the revenue's argument that investing surplus amounts from voluntary reserves in long-term instruments like KVP/IVP is not part of banking business. The judgment underscores that the phraseology of the relevant section does not limit its applicability to income derived solely from working or circulating capital. It is established that interest income received from investments in KVP/IVP made from surplus funds kept in voluntary reserves is indeed considered income from banking business eligible for the deduction under section 80P(2)(a)(i) of the Act.

In conclusion, the court upholds the Tribunal's decision that interest income received by Cooperative Banks from investments in KVP/IVP made out of funds in voluntary reserves, which were generated from banking business, qualifies for the deduction under section 80P(2)(a)(i) of the Act. The judgment dismisses the appeals accordingly, with costs as ordered.

This detailed analysis of the judgment provides a comprehensive overview of the legal interpretation and application of relevant provisions in determining the tax treatment of interest income from investments made by Cooperative Banks in KVP/IVP out of voluntary reserves.