The Supreme Court held today that a cooperative bank is exempted from payment of tax on any income derived from funds placed in the Reserve Bank of India or State Bank of India. A three-judge bench clarified this point regarding Section 80-P(2)(a)(i) of the Income Tax Act because there was a conflict of views between two judgments of the Supreme Court delivered by two-judge benches.
According to the provision, in the case of cooperative societies engaged in banking or providing credit facilities, "the whole of the amount of profits and gains of business attributable to any one or more of such activities" shall be deducted in computing the total income of the assessee.
In 1996, the Supreme Court held in the MP Cooperative Bank Ltd case that cooperative banking institutions would not be eligible for exemption on the interest on government securities placed with the State Bank of India or the Reserve Bank.
The two-judge bench reasoned that a cooperative bank was legally obliged to place certain government securities with the two banks and those securities could not be withdrawn by the bank at its will.
They could be withdrawn only under certain contingencies. Therefore, those funds were not circulating capital or stock-in-trade.
In 1998, another two-judge bench took a contrary view in the case involving Bangalore District Cooperative Central Bank Ltd.
That bench held that the investments which were compulsory under several laws were part of the business activities of the assessee-bank and therefore, they would qualify for exemption under the provision.
The larger bench, consisting of Justice SP Bharucha, Justice YK Sabharwal and Justice Ashok Bhan tended to agree with the latter view. "The placement of such funds being imperative for the purpose of carrying on the banking business, the income derived therefrom would be income from the assessee's business," the judgment explained, resolving the conflict of views.
