Cooperative bank investment income retains business character, and later parking of sale proceeds in non-approved deposits does not defeat deduction.

A cooperative bank's income from investments made out of statutory funds and from the sale of approved securities was treated as business income eligible for deduction under section 80P(2)(a)(i), because those investments were part of the banking business and retained that character. The deduction could not be denied merely because the sale proceeds were later parked with banks or institutions not approved under section 71 of the Gujarat Cooperative Societies Act, since the relevant inquiry was the character of the original income and not the later deployment of funds. The Tribunal's allowance of the deduction was therefore affirmed.

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Issues: (i) Whether income earned by the cooperative bank from investment of statutory funds and sale proceeds of approved securities was eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961. (ii) Whether deduction under section 80P(2)(a)(i) could be denied merely because the sale proceeds were subsequently parked with banks and institutions not approved under section 71 of the Gujarat Cooperative Societies Act.

Issue (i): Whether income earned by the cooperative bank from investment of statutory funds and sale proceeds of approved securities was eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The income in question arose from investments made in compliance with statutory requirements for carrying on banking business. The settled legal position is that funds placed as part of the banking business, including reserve funds and approved securities, retain the character of business income for the purpose of section 80P(2)(a)(i). Income derived from such investments is therefore not excluded merely because it is not generated from day-to-day lending activity.

Conclusion: The income from statutory and approved investments was entitled to deduction under section 80P(2)(a)(i) and the disallowance was not justified.

Issue (ii): Whether deduction under section 80P(2)(a)(i) could be denied merely because the sale proceeds were subsequently parked with banks and institutions not approved under section 71 of the Gujarat Cooperative Societies Act.

Analysis: The relevant inquiry was the character of the income sought to be taxed, namely the income from sale of approved securities, and not the tax treatment of any later deployment of those proceeds. The later placement of funds in deposits or securities not approved under section 71 did not alter the character of the income already earned from the sale of approved investments. The Tribunal had therefore correctly treated the claim as one arising from the sale proceeds of approved securities and not from the subsequent investments.

Conclusion: Deduction could not be denied on that ground, and the assessee remained entitled to the benefit claimed.

Final Conclusion: The Tribunal's view allowing deduction was affirmed, as the disputed income was treated as arising from banking activity and from sale of approved securities, and no substantial question of law arose.

Ratio Decidendi: Income derived by a cooperative bank from investments and sale proceeds of securities made in the course of banking business retains its business character for deduction under section 80P(2)(a)(i), and subsequent deployment of those proceeds in non-approved investments does not by itself defeat the deduction on the original income.

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