Bank interest on short-term deposits treated as business income where funds formed part of ordinary banking operations.

Interest earned by a co-operative bank on short-term fixed deposits placed with another bank was treated as part of the bank's ordinary banking business, because keeping surplus funds in readily realisable deposits was a normal mode of conducting banking operations and such funds remained circulating capital. The commentary distinguishes this from income arising from investments outside the ordinary business. As the residuary head applies only where income does not fall under a business head, the interest was characterised as business income and within the relevant exemption, rather than income from other sources.

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Issues: Whether interest earned by a co-operative bank on fixed deposits with another bank was income arising from its banking business and therefore exempt under the relevant notification, or assessable as income from other sources.

Analysis: The bank's ordinary business was dealing in money and credit, and placing funds in short-term deposits so that they remained readily available for banking needs was held to be a normal mode of conducting that business. Such deposits did not cease to form part of the bank's circulating capital merely because they also earned interest. The Court distinguished cases where the income arose from investments outside the ordinary business of the society. Since section 12 is residuary, it applies only when the income does not fall under the business head.

Conclusion: The interest on fixed deposits was income from the bank's business and was within the exemption; it was not taxable as income from other sources.

Final Conclusion: The assessee's appeal succeeded and the assessment of the impugned interest as non-business income could not stand.

Ratio Decidendi: For a bank, funds placed in readily realisable deposits as part of the ordinary conduct of banking remain part of its banking business, and the interest thereon is business profit rather than income from other sources.

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