Banking income from securities held for liquidity requirements qualifies as business income and remains exempt under section 80P(2)(a)(i).

Interest earned by a co-operative bank on securities held to satisfy banking liquidity and statutory reserve requirements is treated as business income when those securities form part of the bank's circulating capital and normal banking operations. The fact that the income may be assessed under a separate head for computation under the Income-tax Act does not alter its character if it arises from banking activity. On that basis, such interest qualifies for exemption under section 80P(2)(a)(i), and the assessee is entitled to the benefit.

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Issues: Whether interest on securities held by a co-operative bank constituted business income and was exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: A banking institution must maintain liquid and readily realisable assets to meet liabilities and statutory liquidity requirements. Securities held in compliance with banking requirements are part of the normal banking activity and may form stock-in-trade, even if they are not traded in daily course. The character of the income does not change merely because it may fall under a separate head for computation under the Income-tax Act; what matters is whether it arises from the banking business. Interest earned from such securities is therefore business income when the securities are held as part of the bank's circulating capital and business operations.

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

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