Banking income from surplus fund deposits remains deductible where investment activity forms part of ordinary banking business.

Interest earned by a cooperative bank on deposits from non-SLR funds and voluntary reserves was treated as income attributable to banking business and therefore deductible under section 80P(2)(a)(i). The Court reasoned that banking includes not only lending and accepting deposits but also investment of circulating or surplus funds in the ordinary course of business. It further held that no real distinction exists, for this purpose, between SLR and non-SLR investments when the funds are employed as part of banking operations.

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Issues: Whether interest earned by a cooperative bank on deposits made out of non-SLR funds and voluntary reserves is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961 as income attributable to banking business.

Analysis: The Court held that a banking entity does not confine its business only to lending and receiving deposits, and that investment of funds is an integral incident of banking activity. Reliance was placed on the statutory framework of banking law, including the concept of banking under section 5(b) of the Banking Regulation Act, 1949 and the power to engage in investment-related business under section 6(1) of that Act. It was further noted that statutory liquidity ratio investments are made to safeguard the bank and depositors, and that there is no real distinction, for the purpose of section 80P(2)(a)(i), between SLR and non-SLR investments when the funds represent circulating capital or surplus funds employed in the ordinary course of banking. Interest earned from such deposits was treated as business income attributable to the banking business.

Conclusion: The interest income from deposits of non-SLR funds qualified for deduction under section 80P(2)(a)(i) and the issue was decided in favour of the assessee.

Final Conclusion: The Court upheld the view that interest earned by a cooperative bank from non-SLR deposits forms part of its banking profits and is deductible under the statutory exemption for banking business.

Ratio Decidendi: For a cooperative bank, interest earned on deposits made from surplus or working funds in the ordinary course of banking is income attributable to banking business and is eligible for deduction under section 80P(2)(a)(i).

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