Law:

Section:

Section 80P of the Income-tax Act, 1961 - Deductions - Income of co-operative societies - Assessment years 1989-90 and 1995-96 - Whether income earned by assessee, a co-operative bank, by way of interest on provident fund amount of employees and rent from house property, could be treated as income attributable to banking business and would qualify for deduction under section 80P(2)(a)(i) - Held, no FACTS The assessee was a co-operative bank. In the relevant assessment years, it had income from interest on provident fund amount of the employees as also rental income from the house property. It claimed deduction of both the incomes under section 80P(2)(a)( i). The Assessing Officer disallowed the assessee's claims. On appeal, the Commissioner (Appeals) and the Tribunal upheld the disallowance. The Tribunal observed that the interest earned on the investment of the provident fund money was not eligible for exemption under section 80P(2)(a)(i) because the said income had not been earned from regular business of banking. It also observed that the interest earned on investment of the provident fund amount did not form part of either the stock-in-trade or the circulating capital. For those reasons, the Tribunal disallowed the deduction of the rental income also. On appeal to the High Court : HELD In the case of a bank, the business normally consists of dealing with money and credit. Depositors place their money with the bank and receive a small rate of interest. The bank advances loans to the borrowers from a large part of the deposits at somewhat higher rates of interest. The banker has always to keep enough cash or easily realizable securities to meet any probable demand by the depositors. In the instant case, the provident fund amount belonged to the employees and it could not be said to be stock-in-trade or circulating capital of the assessee and, hence, could not be said that the interest earned was derived from the banking business or was attributable to the same. Only that interest, which is earned on deposits necessary for the purpose of carrying on the banking business, is to be treated as income attributable to the banking business. In that circumstance, it…

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