Co-operative bank interest on statutory investments and deposits remains deductible as banking income, with separate relief for inter-bank interest.

Interest earned by a co-operative bank on investments and deposits made as part of its statutory banking operations retains its character as business income eligible for deduction under section 80P(2)(a)(i). The investment of surplus funds in accordance with co-operative society law does not convert such income into non-business income when it forms part of ordinary banking activity. Interest received from other co-operative banks is separately treated as deductible under section 80P(2)(d). On this basis, the interest income was held deductible and the disallowance was unsustainable.

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Issues: Whether interest income earned by a co-operative bank from investments and deposits made in accordance with statutory requirements qualified for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, and whether interest from other co-operative banks was also deductible.

Analysis: A co-operative society engaged in banking is entitled to exemption in respect of profits and gains from its banking business under section 80P(2)(a)(i). The statutory meaning of banking includes accepting deposits and deploying funds by way of lending or investment, and the investment of surplus funds as mandated by the co-operative societies law remains part of banking operations. The Tribunal relied on the principle that investments made as part of ordinary banking activity do not lose their business character merely because they take the form of deposits or securities. It also accepted that interest from other co-operative banks falls within the separate exemption under section 80P(2)(d).

Conclusion: The assessee was entitled to deduction on the interest income in question and the disallowance was unsustainable.

Ratio Decidendi: Interest earned by a co-operative bank on investments and deposits made as part of its banking operations, including statutory deployment of surplus funds, is income from banking business eligible for deduction under section 80P(2)(a)(i), and interest from other co-operative banks is separately covered by section 80P(2)(d).

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