Bank interest on permissible securities can qualify for section 80P deduction where it remains attributable to banking business.

Interest earned by a co-operative bank on investments in permissible, easily realisable securities from banking funds is treated as income attributable to the business of banking for deduction under section 80P(2)(a)(i). The normal computation provisions apply before Chapter VI-A deduction, and the phrase "business of banking" is not confined narrowly to section 5(b) of the Banking Regulation Act; investments forming part of circulating capital remain within the banking activity. The attributable nexus test supports deductibility, and the discussion rejects reading the voluntary-reserve issue contrary to the statutory scheme.

---

---

Issues: Whether interest income earned by a co-operative bank from investments in permissible securities, including funds described as voluntary reserves, is deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961 as income attributable to the business of banking.

Analysis: The scheme of the Income-tax Act requires income to be computed under the normal charging and computation provisions before Chapter VI-A deduction is considered, and the relevant deduction is of profits and gains of business attributable to the specified activity. The expression "business of banking" is not confined narrowly to the definition of banking in section 5(b) of the Banking Regulation Act, 1949; section 6(1) is enabling, and investments in permissible, easily realisable securities form part of normal banking activity and circulating capital. The Court also held that the Supreme Court's direction restoring the voluntary-reserve issue for fresh decision did not survive as an approved adverse finding, and could not be read contrary to the statutory scheme. Applying the attributable nexus test, income from such investments remained linked to banking business.

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

Final Conclusion: The Tribunal's view allowing the deduction was upheld and the tax appeals failed.

Ratio Decidendi: For a co-operative bank, interest earned on investments made in permissible and easily realisable securities from banking funds is attributable to the business of banking and qualifies for deduction under section 80P(2)(a)(i), and the scope of that deduction is not confined to a narrow reading of the Banking Regulation Act.

---