Case Note & Summary
The Commissioner of Income Tax, Mumbai City III, filed an application under section 256(2) of the Income Tax Act, 1961, against the Maharashtra State Co-operative Bank Ltd. for the assessment year 1993-94. The respondent-bank had filed its return, which was initially processed under section 143(1)(a), allowing its claim for deduction under section 80P(2)(a)(i). Subsequently, the assessing officer, relying on the Supreme Court's decision in Madhya Pradesh Co-op. Bank Ltd. v. Addl. CIT (1996) 218 ITR 438, issued a notice under section 148 on 16/1/1997 for reassessment. The reassessment was completed on 21/2/1997 under section 143(3) read with section 148, disallowing the deduction claimed on interest received from Government securities earmarked against the statutory reserve fund. The respondent-bank appealed to the Commissioner of Income Tax (Appeals), who directed the assessing officer to restrict the disallowance only to interest relatable to Government securities forming part of the reserve fund. Dissatisfied, the bank further appealed to the Income Tax Appellate Tribunal (ITAT), which allowed the appeal, holding that the interest income was eligible for deduction under section 80P(2)(a)(i). The revenue then filed the present application under section 256(2) seeking a reference to the High Court. The court, after hearing the parties, dismissed the application, finding no question of law arose as the ITAT's decision was consistent with the Supreme Court's ruling in Madhya Pradesh Co-op. Bank Ltd. (supra) and other precedents. The court held that interest on Government securities held as part of the statutory reserve fund is income from the business of banking and thus deductible under section 80P(2)(a)(i).
Headnote
A) Income Tax - Deduction under Section 80P(2)(a)(i) - Co-operative Bank - Interest on Government Securities - The issue was whether interest income from Government securities earmarked against statutory reserve fund is deductible under section 80P(2)(a)(i) of the Income Tax Act, 1961. The court held that such interest is attributable to the business of banking and qualifies for deduction, following the principle that income from investments made as a statutory requirement is part of banking business. (Paras 1-5)
Issue of Consideration
Whether interest received on Government securities earmarked against statutory reserve fund by a co-operative bank is eligible for deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961
Final Decision
The High Court dismissed the application under section 256(2), holding that no question of law arose as the ITAT's decision was in accordance with the Supreme Court's ruling in Madhya Pradesh Co-op. Bank Ltd. v. Addl. CIT.
Law Points
- Deduction under section 80P(2)(a)(i) is allowable on interest income from Government securities earmarked against statutory reserve fund
- Reassessment notice under section 148 must be based on tangible material
- Section 256(2) application dismissed as no question of law arises
