Banking income deduction under section 80P applies to interest on surplus fund deposits by a co-operative society.

A co-operative society engaged in banking business was entitled to deduction under section 80P(2)(a)(i) on interest earned from deposits made with a private limited company. The Court treated banking activity with reference to section 5(b) of the Banking Regulation Act, 1949, and held that deployment of surplus funds in deposits formed part of the society's banking operations. Following Grain Merchants Co-operative Bank Ltd., the interest income was held eligible for the statutory deduction, and the question of law was answered in favour of the assessee.

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Issues: Whether a co-operative society engaged in banking business is entitled to deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961 in respect of interest earned on deposits made with a private limited company.

Analysis: Section 80P(2)(a)(i) grants deduction to a co-operative society carrying on the business of banking or providing credit facilities to its members. The expression "banking" was understood with reference to section 5(b) of the Banking Regulation Act, 1949, which treats acceptance of deposits for the purpose of lending or investment as banking activity. The Court held that interest earned from deployment of surplus funds by the co-operative society in deposits formed part of its banking activity. Relying on the earlier decision in Grain Merchants Co-operative Bank Ltd., the Court accepted that such interest income remained eligible for the statutory deduction.

Conclusion: The deduction under section 80P(2)(a)(i) was held to be available to the assessee for the interest earned on the deposits, and the answer to the question of law was in favour of the assessee.

Ratio Decidendi: Interest earned by a co-operative society engaged in banking business from deployment of surplus funds in deposits constitutes income from banking activity and is deductible under section 80P(2)(a)(i).

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