Income earned by a co-operative society engaged in banking activities, whether from members or non-members, is eligible for exemption under Section 80P(2)(a)(i) of the Income-tax Act.

Satish Kumar Mittal, J.

1. The instant appeal filed by the Revenue under Section 260 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), is directed against the order dated July 31, 2006, passed by the Income-tax Appellate Tribunal, Chandigarh Bench "B", Chandigarh (hereinafter referred to as "the HAT"), in I. T. A. No. 550/Chandi/2005 in the case of the respondent - assessee for the assessment year 1999-2000 by raising the following substantial question of law:

Whether, on the facts and circumstances of the case, the honble Income-tax Appellate Tribunal was right in law in holding that income earned from banking business with nominal members is eligible for deduction under Section (2)(a)(i) of the Income-tax Act, 1961?

2. The brief facts of the case are that the respondent-co-operative bank (hereinafter referred to as "the assessee"), is a registered society under the Punjab Co-operative Societies Act, 1961 (hereinafter referred to as "the Societies Act"). The assessee is a co-operative society carrying on the business of banking and extending the credit facilities to its members and nominal members. The assessee being carrying on the business of banking, claimed exemption Under Section 80P(2)(a)(i) of the Act and filed its return of income declaring its income at nil for the assessment year 1999-2000.

3. The Assessing Officer vide its order dated October 16, 2002, framed the assessment for the present assessment year under Section 143(2) of the Act whereby the assessees income was determined at Rs. 1,64,79,254 by also adding interest income to the tune of Rs. 68,56,901 which was derived from the loans advanced to the nominal members as income from other sources and disallowed the claim of the assessee that this should be treated as income derived from banking business which is eligible for exemption under Section 80P(2)(a)(i) of the Act. The Assessing Officer held that this interest income could not be claimed as deduction as the same did not pertain to the banking business being conducted by the assessee with members of the co-operative bank, but was earned with the business activity with non-members. The Assessing Officer was of the view that a cooperative society engaged in the business of banking is exempt from tax from interest income if it earns the interest by banking activities with its members alone.

4. Aggrieved against the aforesaid order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income-tax (Appeals), who vide its order dated March 16, 2005, deleted the abovesaid addition while holding that the co-operative society engaged in the business of banking was entitled to deduction under Section 80P(2)(a)(i) of the Act. It was held that the banking activity, which was carried on by the assessee with non-share members, who became the nominal members after some time, was the activity of the business of banking covered under Section 80P(2)(a)(i) of the Act.

5. The Revenue feeling not satisfied with the order of the Commissioner of 5 Income-tax (Appeals) preferred an appeal before the Income-tax Appellate Tribunal, who vide its order dated July 31, 2006, dismissed the appeal of the Revenue and confirmed the view taken by the Commissioner of Income-tax (Appeals) while holding that the deduction under Section 80P(2)(a)(i) of the Act is available to the assessee as the loans advanced to various loanees was income related to banking activity. Against the said order, the present appeal has been filed by the Revenue raising the aforesaid substantial question of law.

6. Learned Counsel for the appellant submitted that a co-operative society carrying on the business of banking and earning interest income by providing credit facilities only to its members, is entitled to exemption under Section 80P(2)(a)(i) of the Act. If such society is earning interest income from the credit facilities provide to non-members the said income is not exempt under the said clause. Learned