Statutory reserve investments by a co-operative bank can qualify for deduction of bond interest as banking income

Interest earned by a co-operative bank on PSEB bonds acquired as a statutory investment and maintained as part of statutory reserves was treated as attributable to banking business and deductible under section 80P(2)(a)(i). The court held that, where the investment is made in compliance with statutory requirements and forms part of statutory reserves, the character of the funds used is immaterial; it does not matter whether the money came from surplus funds or circulating capital. The distinction drawn in later authority concerning voluntary reserves was inapplicable because the investment here was not from voluntary reserves.

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Issues: Whether interest earned by a co-operative bank from investment in PSEB bonds, made as a statutory investment towards reserves, was deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The investment in the bonds was treated as a statutory investment, being a specified security under section 20 of the Indian Trusts Act, 1882 and made in accordance with section 44 of the Punjab Co-operative Societies Act, 1961. The Court held that, once the investment is made as part of statutory reserves, the source of funds, whether surplus or circulating capital, is immaterial for the purpose of section 80P(2)(a)(i). The distinction drawn in later authority regarding voluntary reserves did not apply because the present investment was not from voluntary reserves but from statutory reserves.

Conclusion: The interest income from the PSEB bonds was deductible under section 80P(2)(a)(i), and the assessee succeeded.

Ratio Decidendi: Interest from a co-operative bank's statutory investment forming part of statutory reserves is attributable to its banking business and qualifies for deduction under section 80P(2)(a)(i), irrespective of whether the invested funds were surplus funds or working capital.

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