Banking income from approved securities remains deductible when linked to statutory liquidity and banking operations.

Interest earned by a co-operative bank on government securities and other approved securities, including investments made out of reserve funds and excess statutory liquidity ratio holdings, was treated as attributable to the business of banking because the funds remained part of the bank's circulating capital and were deployed in the course of banking operations. Income from such statutory and approved investments was therefore not treated as a separate investment source, and deduction was allowed under section 80P(2)(a)(i) of the Income-tax Act, 1961. The assessee's entitlement to the deduction on this interest income was upheld.

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Issues: Whether interest income derived by a co-operative bank from investments in government securities and other approved securities, including investments made out of reserve fund and excess SLR holdings, is attributable to the business of banking so as to qualify for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The claim for deduction turned on whether the impugned interest formed part of the bank's banking operations or represented income from a separate source of investment. The investments were made by a co-operative bank in government securities and other approved securities in the course of maintaining statutory liquidity ratio requirements under section 24 of the Banking Regulation Act, 1949, and the income was used in the banking business. Such income was treated as arising from banking activity where the funds invested remained part of the circulating capital of the bank and did not lose their character as banking assets merely because they were placed in securities or short-term investments.

Conclusion: The interest income was held to be attributable to the business of banking and deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961, in favour of the assessee.

Final Conclusion: The appeal was rejected and the assessee's entitlement to deduction on the interest income from the banking investments was upheld.

Ratio Decidendi: Interest earned by a co-operative bank on investments made as part of its banking operations and statutory liquidity requirements remains income attributable to the business of banking for the purpose of deduction under section 80P(2)(a)(i).

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