Co-operative bank deductions upheld for compulsory reserve investment interest and leasing income under banking law.

A co-operative bank's interest on compulsory investments of reserve funds in Government securities was treated as business income and allowed as a deduction under section 80P, because the investment was statutorily mandated and formed part of the banking activity. Income from leasing immovable property was also held deductible under section 80P, since leasing is recognised as a banking business under the governing banking statute and applies to co-operative banks through the statutory scheme. On that basis, the assessment and appellate orders were set aside and exemption was allowed on both heads of income.

---

---

Issues: (i) Whether interest earned by a co-operative bank on compulsory investment of reserve funds in Government securities qualified for deduction under section 80P of the Income-tax Act, 1961. (ii) Whether income derived from leasing of immovable property by the co-operative bank qualified for deduction under section 80P of the Income-tax Act, 1961.

Issue (i): Whether interest earned by a co-operative bank on compulsory investment of reserve funds in Government securities qualified for deduction under section 80P of the Income-tax Act, 1961.

Analysis: The appellant was bound by the Bihar Co-operative Societies Act, 1935 to keep part of its reserve fund invested in specified securities. That compulsory placement of funds was part of the banking activity and not an independent source of income divorced from business. The later Supreme Court view held that income arising from funds so placed is income from the banking business and is not confined to circulating capital alone. The earlier contrary view had been overruled.

Conclusion: The interest on compulsory investment of reserve funds in Government securities was deductible under section 80P and the issue was decided in favour of the assessee.

Issue (ii): Whether income derived from leasing of immovable property by the co-operative bank qualified for deduction under section 80P of the Income-tax Act, 1961.

Analysis: The Banking Regulation Act, 1949 recognises leasing as one of the forms of business that a banking company may engage in. Since a co-operative bank is brought within the statutory scheme by section 56, income from lease of immovable property formed part of the recognised banking business and was therefore eligible for exemption.

Conclusion: The rental income from immovable property was deductible under section 80P and the issue was decided in favour of the assessee.

Final Conclusion: The assessment order and the appellate orders were set aside, and the assessee was held entitled to exemption on both the disputed heads of income with consequential refund relief.

Ratio Decidendi: Where a co-operative bank is statutorily required to invest reserve funds in approved securities, the interest on such compulsory investments is business income eligible for deduction, and leasing income is also deductible where leasing is a recognised form of banking business under the governing banking statute.

---