Banking income deduction covers regulatory reserve-fund investments held in the course of co-operative banking activity.

Interest earned by a co-operative bank on investments in Kisan Vikas Patras, Indira Vikas Patras, NABARD bonds and government securities, where the funds were reserve funds maintained in compliance with banking regulations, was treated as attributable to banking business and deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961. The analysis linked the investments to the statutory concept of banking under the Banking Regulation Act, the business powers of a banking co-operative society, and liquidity requirements, and rejected the narrower view that only circulating or working capital could qualify. Income from liquid investments held in the course of banking activity was therefore brought within the deduction.

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Issues: Whether interest earned by a co-operative bank on investments in Kisan Vikas Patras, Indira Vikas Patras, NABARD bonds and government securities, made out of reserve funds and maintained in compliance with banking regulations, is deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The investment activity was examined in the context of the definition of banking under section 5(b) of the Banking Regulation Act, 1949, the business powers of a banking co-operative society under section 6(1)(a), and the statutory liquidity requirements under section 24(2A). The funds invested were treated as reserve funds created in accordance with banking law and regulatory requirements, not as voluntary surplus divorced from banking operations. The income from such investments was therefore viewed as attributable to the banking business, and the earlier narrow view that only circulating or working capital could qualify was not accepted. The investment income from instruments capable of liquidation and held in the course of banking activity was held to fall within the statutory deduction.

Conclusion: The interest income was held deductible under section 80P(2)(a)(i), in favour of the assessee.

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