Banking income from approved securities qualifies for exemption where co-operative bank investments form part of normal banking operations.

For a co-operative bank, income from investments in Government and other approved securities is treated as attributable to banking business where the investments form part of normal banking operations, so the resulting interest is exempt under section 80P(2)(a)(i). The note further states that the Banking Regulation Act, 1949 governs such banking activity for co-operative banks, and that the absence of Registrar's sanction under the Co-operative Societies Act does not change the character of income earned from approved securities. The stated effect is that banking-law requirements prevail for determining the tax treatment of such investment income.

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Issues: (i) Whether income from investment of a co-operative bank's funds in Government and other approved securities is attributable to banking business and exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961. (ii) Whether investment of reserve and other funds required the Registrar's sanction under the Co-operative Societies Act so as to treat the resulting income as non-banking income.

Issue (i): Whether income from investment of a co-operative bank's funds in Government and other approved securities is attributable to banking business and exempt under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The expression "banking business" was taken to have the meaning assigned by the Banking Regulation Act, 1949. That Act applies to co-operative banks with overriding force, and its scheme recognises accepting deposits for lending or investment and dealing in securities and investments as part of banking. Approved securities under the banking law include securities in which a trustee may invest under section 20 of the Indian Trusts Act, 1882. The investments in Government securities therefore formed part of the bank's normal banking operations and the income from such securities was attributable to, and derived from, banking business.

Conclusion: The income from interest on securities was exempt under section 80P(2)(a)(i) and the finding was in favour of the assessee.

Issue (ii): Whether investment of reserve and other funds required the Registrar's sanction under the Co-operative Societies Act so as to treat the resulting income as non-banking income.

Analysis: The banking statute was treated as controlling for a co-operative bank carrying on banking business, and the reserve and liquidity requirements were also regulated under the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934. Since the investments in question were part of the bank's lawful banking operations and were in approved securities, the absence of Registrar's sanction under the Co-operative Societies Act did not alter the character of the income as banking income.

Conclusion: Registrar's sanction was not required for the purpose of denying exemption, and the objection of the Revenue failed.

Final Conclusion: The appeals were rejected because the security investments of the co-operative bank were held to be part of its banking business, making the related income exempt under the Income-tax Act.

Ratio Decidendi: For a co-operative bank, investments in approved securities that form part of the banking activity are attributable to banking business, and the special banking law prevails over inconsistent co-operative society requirements for determining tax exemption.

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