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The Asst. Commissioner of Income-tax, Circle-7(1) Hyderabad vs. M/s. Mahaveer Co-op. Urban Bank Ltd., Hyderabad Appellant Respondent a
October, 14th 2013


                       ITA No. 1011/Hyd/2013
                      Assessment year 2004-05

The Asst. Commissioner of        vs.   M/s. Mahaveer Co-op. Urban
Income-tax, Circle-7(1)                Bank Ltd., Hyderabad
Hyderabad                              PAN: AACCM7104Q
Appellant                              Respondent

                    Appellant by: Sri Bhanu Prasad Reddy
                  Respondent by: Sri A.V. Raghuram

                 Date of hearing: 01.10.2013
         Date of pronouncement: 01.10.2013



      This appeal by the Revenue is directed against the order of
the CIT(A), Vijayawada dated 22.03.2013 for A.Y. 2004-05.

2.    The Revenue raised the following ground:

      (2)    The learned CIT(A) erred in allowing the
             claim of exemption u/s. 80P(2)(a) of the IT
             Act, 1961 on interest income earned on
             investment out of SLR/Non SLR surplus
             funds which fall under the provisions of
             section 80P(2)(d) and not section 80P(2)(a).

3.    Brief facts of the case are that with regard to the exemption
u/s. 80P of the Act, the Assessing Officer has found that the assessee
has declared net income of Rs. 35,88,673/- and claimed exemption
u/s. 80P of the Act. The income stated to be interest income is
earned out of the surplus funds beyond the SLR covered funds i.e.,
invested in UTI Mutual funds of Rs. 1,40,00,000/- and Rs.
80,00,000/- invested in fixed deposits. The income claimed
                                  2                 ITA No. 1011/Hyd/2013
                                      M/s. Mahaveer Co-op. Urban Bank Ltd.

exemption of Rs. 35,88,673/- is nothing but the income earned
through the deposits/ investments made in various mutual funds and
concerns but not carrying on the business of banking or providing
credit facilities to its members or as illustrated u/s. 80P(2) of the
Act. As seen from the profit and loss account, the assessee himself
treated the interest income earned on surplus funds as 'other
income'.   In the Profit and Loss A/c., the assessee has admitted
income from other sources to the tune of Rs. 40,54,810/- under the
head 'other receipts', which clarifies that the income earned and
admitted under the head 'other receipts' is not from the operations
carried out by the assessee the manner laid down u/s. 80P during
the year 2003-04.    Further, it is clear that the income admitted
under the had 'other receipts' of Rs 40,54,810/- does not attract
provisions of section 80P of the Act. Accordingly, the AO has
rejected the claim of the assessee u/s. 80P of the Act.      On appeal,
the CIT(A) decided the issue in favour of the assessee. Against this,
the Revenue is in appeal before us.

4.    The learned DR submitted that in this case, the issue involved
is whether section 80P(2)(a) or 80P(2)(d) is applicable to the case of
the assessee. The AO held that the profits derived by the assessee
with its deposits under SLR/CRR category only are eligible for
deduction u/s. 80P(2)(a). The assessee had deposited Rs. 1.4 crores
in mutual funds and Rs. 80 lakhs in fixed deposits. The AO held that
the returns on these deposits were not exempt as they had no been
derived from core banking activity.     The CIT(A) allowed the plea
taken by the assessee. In the light of the Supreme Court's decision
in the case of CIT vs. Karnataka State Co-operative Apex Bank (251
ITR 194), only interest income on SLR funds has to partake the
character of business income. Thus, the assessee's income by way
of deposit in non-SLR funds in mutual funds and fixed deposits is not
exempt under the provisions of section 80P of the Act.
                                  3                 ITA No. 1011/Hyd/2013
                                      M/s. Mahaveer Co-op. Urban Bank Ltd.

5.    On the other hand, the learned AR relied on the judgement of
jurisdictional High Court in the case of CIT vs. Andhra Pradesh State
Co-operative Bank Ltd. (336 ITR 516) (AP).

6.    We have heard both the parties and perused the material on
record.   We find the same issue was considered by the Andhra
Pradesh High Court in the case of CIT vs. Andhra Pradesh State Co-
operative Bank Ltd. (cited supra) wherein the High Court held as

      "The provisions of section 80P of the Income-tax Act,
      1961 do not make any distinction between the interest
      earned by deposit in a bank and interest earned on the
      compulsive deposit made as required under the
      relevant statute. All the income from banking business
      referred to under section 80P(2)(a)(i) of the Act would
      qualify for deduction under the Act. The income earned
      by the co-operative bank either by deposit of the
      prescribed percentage of its reserves or by deposit of
      their surplus funds is exempted. The income from
      either category of the deposits is certainly attributable
      to the business of banking. As long as the deposit of the
      surplus funds in other banks for the purpose of earning
      interest is not unauthorized or not barred by any of the
      applicable statutes, the income is certainly attributable
      to the business of banking. There is no concept of
      voluntary or non-statutory reserves. When the reserve
      fund of the society exceeds 25 per cent. of its working
      capital, the excess could be utilized in the business of
      the society with the sanction of the Registrar of Co-
      operative Societies. Further, when a society is
      prohibited by its bye-laws from borrowing either from
      its members or others, the whole of its reserve fund
      may be utilized in its business. If a co-operative bank
      derives income by lending money to its members, it
      being business of banking, is eligible for deduction. The
      statutory liquidity ratio, cash reserve or reserve fund
      required to be maintained by a scheduled bank or a co-
      operative bank under the provisions of the Reserve
      Bank of India Act, 1934, or the Banking Regulation Act,
      1949, are all activities which are part of the business of
      banking. If section 80P(2)(a) of the Act is given a
      restrictive meaning as including the interest earned
      only on the statutory deposits made by a co-operative
      society, it would amount to supplying a casus omissus
                                 4                 ITA No. 1011/Hyd/2013
                                     M/s. Mahaveer Co-op. Urban Bank Ltd.

      and has to be avoided by the court. Investment of funds
      by banks including the non-reserves is part of banking
      activities since no bank: would like its reserve funds to
      remain idle and not earn any interest. Therefore, the
      interest earned on such deposits is directly attributable
      to the business of banking and, therefore, exempt
      under section 80P(2)(a)(i) the Act."

7.    In view of the above discussion, we are inclined to decide the
issue in favour of the assessee and the order of the CIT(A) is

8.    In the result, appeal of the Revenue is dismissed.

     Order pronounced in the open court on 1st October, 2013

            Sd/-                             Sd/-
       (SAKTIJIT DEY)                  (CHANDRA POOJARI)

Hyderabad, dated 1st October, 2013

Copy forwarded to:
1.   The Asst. Commissioner of Income-tax, Circle-7(1), 2         Floor,
     B-Block, IT Towers, AC Guards, Hyderabad.
2.   M/s. Mahaveer Co-op. Urban Bank Ltd., 15-1-503/3,
     Feelkhana, Hyderabad.
3.   The CIT(A), Vijayawada.
4.   The CIT-VI, Hyderabad.
5.   The DR ­ 'B' Bench, ITAT, Hyderabad
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