Cooperative bank interest on surplus and non-SLR deposits qualifies as banking income deductible under section 80P(2)(a)(i).

Section 260A appeals were maintainable because the substantial question of law regarding surplus and non-SLR investment income had been raised before the appellate authorities and considered by the Tribunal. For section 80P(2)(a)(i), interest earned by a cooperative bank on investments of surplus funds, including statutory reserves and non-SLR deposits, was held attributable to the business of banking. The Court treated the distinction between SLR and non-SLR investments as immaterial for this purpose and held that such interest formed part of banking profits. The revenue's challenge failed and the deduction claim was allowed.

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Issues: (i) Whether the revenue's appeals under section 260A of the Income-tax Act, 1961 were maintainable when the question of law was said not to have arisen before the Tribunal; (ii) Whether interest income earned by cooperative banks from investments of surplus funds, including statutory reserves and non-SLR deposits, was deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Issue (i): Whether the revenue's appeals under section 260A of the Income-tax Act, 1961 were maintainable when the question of law was said not to have arisen before the Tribunal.

Analysis: Section 260A permits an appeal only on a substantial question of law arising from the Tribunal's order. The record showed that the issue regarding income from non-SLR or surplus reserve investments was specifically raised before the appellate authorities and was considered by the Tribunal. The objection that the question was outside the scope of the appeal was therefore unsustainable.

Conclusion: The appeals were held maintainable.

Issue (ii): Whether interest income earned by cooperative banks from investments of surplus funds, including statutory reserves and non-SLR deposits, was deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: Section 80P(2)(a)(i) grants deduction for profits and gains of business attributable to the business of banking. The expression "attributable to" is wider than "derived from" and includes income from banking investments and deposits. Reading the Income-tax Act with the Banking Regulation Act, 1949 and the cooperative societies law, the Court held that deposits made out of statutory reserves, surplus funds, or non-SLR funds remain part of the banking business so long as they are not prohibited by law. The Court rejected any distinction between SLR and non-SLR investments for the purpose of section 80P(2)(a)(i), and held that interest on such deposits is part of banking profits.

Conclusion: The interest income from the investments in question was deductible and the claim was allowed in favour of the assessee.

Final Conclusion: The revenue's challenge failed, and the Tribunal's view that the income was attributable to banking business was affirmed, resulting in dismissal of the appeals.

Ratio Decidendi: For a cooperative bank, interest earned on deposits of surplus funds, whether made out of statutory reserves or other non-SLR funds, is income attributable to the business of banking and is deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961.

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