Banking business income test applies to Indira Vikas Patra interest, allowing deduction where investments form part of banking operations.

Interest on Indira Vikas Patra investments made by co-operative banks was treated as attributable to banking business where the funds formed part of circulating capital or stock-in-trade and had a direct nexus with banking operations. Income from deployment of mere surplus or idle funds would not qualify, but on the facts recorded the investments were made from funds generated in the course of banking activity and were capable of conversion into liquid funds for use in banking. The interest was therefore regarded as income from banking business and deductible under section 80P(2)(a)(i) in favour of the assessee.

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Issues: Whether interest accrued on investments in Indira Vikas Patra by co-operative banks was income arising from banking business and entitled to deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The deduction under section 80P(2)(a)(i) applies where the income is attributable to the business of banking and has a direct and proximate nexus with that business. Interest on investments made out of funds forming part of the bank's circulating capital or stock-in-trade can qualify, whereas income from deployment of mere surplus or idle funds outside banking activity would not. The available record showed that the investments in Indira Vikas Patra were made from funds generated in the course of banking business and were capable of being converted into liquid funds for use in banking operations. On the facts found by the Tribunal and, in some cases, the appellate authority, the investments were treated as part of the banking activity and not as a separate non-banking deployment of surplus assets.

Conclusion: The interest on Indira Vikas Patra investments was held to be income from banking business and was deductible under section 80P(2)(a)(i); the finding was in favour of the assessee and against the Revenue.

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