1 ta97.08 IN THE HIGH COURT OF JUDICATURE AT BOMBAY, BENCH AT AURANGABAD TAX APPEAL NO. 97 OF 2008 The Commissioner of Income Tax-I, Aayakar Bhavan, PMT Building, B-Wing, Shankar Seth Road, Swargate, Pune-37. Appellant versus The Ahmednagar District Central Co-op. Bank Ltd., Station Road, Ahmednagar. Respondent TAX APPEAL NO. 102 OF 2008 The Commissioner of Income Tax-I, Aayakar Bhavan, PMT Building, B-Wing, Shankar Seth Road, Swargate, Pune-37. Appellant versus The Ahmednagar District Central Bank Ltd., Station Road, Ahmednagar. Respondent TAX APPEAL NO. 105 OF 2008 The Commissioner of Income Tax-I, Aayakar Bhavan, PMT Building, B-Wing, Shankar Seth Road, Swargate, Pune-37. Appellant versus Nagar Urban Co-op. Bank Limited, Bank Road, Ahmednagar. Respondent ---------- Shri Alok Sharma, Asstt. Solicitor General for appellant. Shri A. P. Kolte, Advocate, for the Respondents. 2 ta97.08 Coram: Smt. Nishita Mhatre & M. T. Joshi, JJ. Judgment reserved on : 22.07.2011 Judgment pronounced on : 12.08.2011 Judgment (Per: Smt. Mhatre, J.) 01. The short question involved is whether the interest earned on investments out of voluntary reserves would qualify for deductions under Section 80P (2)(a)(i) of the Income Tax Act. In each of the tax appeals, the assessment year is different and the amount of interest earned on the voluntary reserves, varies. However, since the issue involved is the same, we have heard these appeals together. 02. All the assessees i.e. the respondents in the respective appeals are the cooperative banks engaged in the business of banking as regulated by the Banking Regulation Act. They had invested certain amounts in voluntary reserves and had earned interest on the amount. The Assessing Officer has found that the income on interest was being utilised for distributing dividend. It is held that the interest earned on investments made from the voluntary reserves of the bank is a part of the bank's profit from which it was distributing the dividend. It was further held that the distribution of dividend was not a part of the banking business. Therefore, the assessee's claim that such income from interest on investments made from voluntary reserves qualified for a deduction under Section 80P(2)(a)(i) was rejected. While doing so, the 3 ta97.08 Assessing Officer relied on the judgment of the Supreme Court in Mehsana District Central Cooperative Bank Ltd.vs. Income Tax Officer, (2001) 170 CTR (SC) 169. The Commissioner (Appeals) has confirmed the order by holding that the amount earmarked by the bank from the interest earned on voluntary reserves for distributing dividend to its members could not be considered as utilisation of the funds in the ordinary course of banking. 03. Reliance has been placed by the learned Assistant Solicitor General on the judgment of the Supreme Court in the case of M/s The Totgars Cooperative Sale Society Limited vs. Income Tax Officer, Karnataka, reported in [2010] 188 TAXMAN 282 (SC), in support of his submission that such interest earned cannot be considered to be a part of the banking business. He also submits that the judgment in the case of Mehsana District Central Co-operative Bank Ltd. vs. Income-tax Officer, (2001) 170 CTR (SC) 169, has not been followed by the Tribunal while allowing the appeal of the assessees. 04. The learned Advocate for the assessee has relied on various judgments of the Supreme Court, including in (i) Commissioner of Income Tax vs. Ramnathapuram Dist. Co-op. Central Bank Ltd. (2002) 175 CTR 175 (SC) 297, (ii) Commissioner of Income Tax vs. Nawanshahar Central Co-operative Bank Ltd. (2007) 208 CTR (ASC) 438, (iii) Commissioner of Income Tax vs. Karnataka State Cooperative Apex Bank (2001) 169 CTR (SC) 486, and the 4 ta97.08 judgments of this Court in Commissioner of Income Tax vs. Ratnagiri District Central Cooperative Bank Ltd. (2002) 174 CTR (Bom.) 160, and Commissioner of Income Tax vs. Solapur Nagri Audyogic Sahakari Bank Ltd. and ors. (2010) 229 CTR (Bom) 73, in support of his contention that the interest derived from the voluntary reserves qualified for deduction under Section 80P(2)(a)(i) of the Act. According to him, once that income qualifies for a deduction, the manner in which that income is applied matters little. Merely because the dividend is paid to the members of the bank from that interest income, it would not mean that the interest income did not qualify as a deduction under section 80P (2)(a)(i). He submits that the judgment in the case of Mehsana District Central Cooperative Bank (supra) has no application to the present case. According to him, the judgment in Ratnagiri Cooperative Bank squarely applies to the facts involved in the present case and, therefore, the decision of the Tribunal is correct. He submits that once the interest income earned from the investments from voluntary reserves or statutory reserves has a nexus to the assessees banking activities, the distribution of dividend out of income already earned by the assessee cannot alter the situation so as to deny the deduction under the aforesaid section. 05. In Mehsana District Cooperative Bank, one of the issues the Supreme Court was concerned, was whether the assessee bank is entitled to claim deduction under Section 80P(2)(a)(i) in respect of the income earned from utilisation of its voluntary reserves other than the statutory reserves. While considering this issue, the Court observed; 5 ta97.08 " To be able to answer the question, it is necessary to ascertain, as a fact, whether the income derived by the assessee from the investment of its voluntary reserves has been utilised by it in the course of its ordinary banking business. " Since no material was placed on record by the assessee and the issue was not considered at any stage, the court remanded the matter to the Commissioner (Appeals) for being decided afresh as the interest of justice required that the assessee should have an opportunity to lead evidence before that authority. Based on the aforesaid observations of the Supreme Court, the learned Assistant Solicitor General for the Revenue has contended that the Tribunal has committed an error by allowing the appeal. 06. The Tribunal in the present case has relied on the decisions of the Coordinate Benches of the Income Tax Appellate Tribunal and held that the disallowance of proportionate interest earned on the investments made out of voluntary reserves qualified for deductions as they were made in the course of assessee's banking activities. 07. The Tribunal, unfortunately, in all these cases, has passed a cryptic order relying on some of the judgments of the Supreme Court. However, the order does not indicate how the Tribunal has distinguished the judgment in the case of Mehsana District Central Cooperative Bank. There can be no doubt that the interest earned on investments or voluntary reserves would fall under the head "Profits and gains of business" and is thus deductible under Section 80P (2) (a) (i) of the Act. 6 ta97.08 However, the issue still remains as to whether this income can be applied for paying dividend to the members of the Coop. bank. The Tribunal has not dwelt upon this issue at all and, therefore, in our opinion, it would be necessary to remand the matters to the Tribunal to decide them afresh. 09. In these circumstances, the matters are remanded to the Tribunal to decide them afresh. 10. Appeals are disposed of, accordingly. (M. T. JOSHI, J.) (SMT. NISHITA MHATRE, J.) pnd/ta97.08