Banking business deduction applies to interest on non-SLR deposits when surplus funds remain part of circulating capital.

Interest earned by a co-operative bank on deposits of non-SLR funds is treated as income attributable to the business of banking where the funds represent surplus or idle circulating capital deployed in the course of banking operations. The document states that the character of the income does not change merely because the deposits are non-SLR, and the reasoning applied to SLR deposits extends to such investments when made as part of normal banking activity. On that basis, the interest is deductible under Section 80P(2)(a)(i) of the Income-tax Act, 1961, and the issue is stated to be in favour of the assessee.

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Issues: Whether interest earned by a co-operative bank on deposits of non-SLR funds is deductible as income attributable to banking business under Section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The income from deposits of surplus or idle funds is treated as part of the normal banking business where the funds remain circulating capital employed in the banking activity. The earlier decisions relied upon for SLR deposits were held to apply equally to non-SLR deposits, because the source of the funds does not change the character of the income when the deposits are made in the course of banking operations. Interest earned from such investments is therefore attributable to the business of banking and not outside the scope of the deduction.

Conclusion: The interest earned on deposits of non-SLR funds is deductible under Section 80P(2)(a)(i) of the Income-tax Act, 1961, and the issue is decided in favour of the assessee.

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