Statutory reserve fund interest qualifies for co-operative bank deduction as banking income and, with another co-operative society, also under section 80P(2)(d).

Interest earned by a co-operative bank on deposits made from statutory reserve funds is attributable to its banking business where the placement of those funds is required by law and the money can be invested only in prescribed modes. On that basis, such interest is deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961. The text also states that where the deposits are made with another co-operative society, the same interest income falls within section 80P(2)(d). The stated principle is that compulsory investment of reserve funds does not break the link with the banking activity, and interest from a co-operative society investment also qualifies for the separate deduction.

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Issues: Whether interest earned on deposits made out of statutory reserve funds by a co-operative bank is deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961, and whether such income is also covered by section 80P(2)(d) of the Income-tax Act, 1961 when the deposits are made with another co-operative society.

Analysis: The assessee was required by section 57 of the H. P. Co-operative Societies Act, 1968 to maintain reserve funds and to invest or deposit the non-utilised portion only in prescribed modes. The funds were placed with the H. P. State Co-operative Bank, which is itself a co-operative society. The governing principle applied was that where placement of funds is statutorily required for carrying on banking activities, the interest arising from such compulsory investment is income attributable to the banking business and is deductible under section 80P(2)(a)(i). The Court also noted that income by way of interest from investments with another co-operative society falls within section 80P(2)(d).

Conclusion: The interest income was deductible under section 80P(2)(a)(i), and alternatively also supported by section 80P(2)(d); the Revenue's challenge failed.

Ratio Decidendi: Interest earned on investments made from funds statutorily required to be parked by a co-operative bank forms part of income from banking business and is deductible under section 80P(2)(a)(i); where the investment is with another co-operative society, section 80P(2)(d) also applies.

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