Bank interest on non-SLR deposits remains attributable to banking business and qualifies for deduction under section 80P(2)(a)(i).

Interest earned by a co-operative bank on deposits of non-SLR surplus or idle funds remains attributable to its banking business when such funds are deployed as circulating capital and remain readily available for banking needs. The distinction between SLR and non-SLR funds does not change the character of the income for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961. On that principle, the interest from such deposits qualifies as business income of the co-operative bank and is deductible under the provision.

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

Analysis: The Court applied the principle that a bank's funds, including surplus or idle funds temporarily placed in deposits, remain part of its circulating capital when invested in a manner that is readily available to meet banking needs. Relying on the settled view that income arising from such deposits is attributable to the business of banking, the Court held that the distinction between SLR and non-SLR funds does not alter the character of the income for the purpose of section 80P(2)(a)(i). The earlier authorities were treated as supporting the broader proposition that interest earned from investments of banking surplus is business income of the co-operative bank.

Conclusion: The interest earned on deposits of non-SLR funds is eligible for deduction under section 80P(2)(a)(i) and the issue is decided in favour of the assessee.

Final Conclusion: The appeal failed and the Revenue's questions of law were answered against it, leaving the co-operative bank entitled to the claimed deduction.

Ratio Decidendi: Interest earned by a co-operative bank on deployment of surplus or idle funds in deposits remains attributable to its banking business and is deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961.

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