Banking income exemption for statutory securities interest upheld under section 80P where holdings were mandatory assets, not investments.

Interest earned by a co-operative bank on securities maintained in mandatory compliance with section 24 of the Banking Regulation Act, 1949 was attributable to its banking business because those securities formed part of the bank's statutory assets and circulating capital, not voluntary investments. The Revenue's distinction between investment income and banking income was rejected on the ground that the securities were held to satisfy a legal requirement of the banking law. The interest was therefore treated as income from the banking business and qualified for exemption under section 80P(2)(a)(i) of the Income-tax Act, 1961, in favour of the assessee.

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Issues: Whether interest earned by a co-operative bank on securities maintained in compliance with section 24 of the Banking Regulation Act, 1949, formed part of its banking income and was exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The income in question arose from securities held by the assessee-bank as part of the assets required to be maintained under the banking law. Such statutory securities were treated as an integral part of the bank's circulating capital and stock-in-trade, and the interest derived from them was therefore attributable to the banking . The distinction drawn by the Revenue between investment and banking assets was rejected because the securities were not voluntary investments but were maintained in compliance with the mandatory statutory requirement applicable to co-operative banks.

Conclusion: The interest on securities was held to be exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961, and the question was answered in favour of the assessee.

Ratio Decidendi: Interest earned on securities maintained by a co-operative bank in mandatory compliance with banking law forms part of its banking business income and qualifies for exemption under section 80P(2)(a)(i) of the Income-tax Act, 1961.

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