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Issues:
Interpretation of deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 for interest on securities, subsidies, dividends, and interest from co-operative institutions as business income. Analysis: The case involved a cooperative society engaged in banking and credit facilities, claiming deduction under section 80P(2)(a)(i) of the Income Tax Act, 1961 for interest on securities, subsidies, dividends, and interest from co-operative institutions as business income for the assessment year 1980-81. The claim was initially rejected by the Income Tax Officer (ITO) but was allowed on appeal by the Commissioner of Income Tax (Appeals) (CIT(A)), which was upheld by the Tribunal. The High Court referred to previous decisions in similar cases involving the same assessee, where it was held that interest on securities forming part of liquid assets maintained as per regulatory requirements constituted circulating capital and were deductible under section 80P(2)(a)(i) of the Act. The Court emphasized that such investments were realizable whenever additional funds were needed, supporting the assessee's claim. However, the Revenue argued against the deduction based on a Supreme Court judgment involving a cooperative society's claim for deduction on interest earned from securities purchased from reserve funds. The Supreme Court held that securities from reserve funds, not readily encashable and usable only under specific circumstances, could not be considered circulating capital. The Court differentiated between investments easily withdrawable on short notice, which are part of banking business requirements, and those tied up in reserve funds. The High Court further cited Supreme Court decisions emphasizing that interest earned on investments not related to reserve funds but considered stock-in-trade or circulating capital qualifies as business income for a bank. The Court clarified that income derived from liquid assets like securities, not reserve funds, is part of banking business income and deductible under section 80P(2)(a)(i) of the Act. The judgment favored the assessee, ruling in their favor against the Revenue's contentions. In conclusion, the High Court answered the question in favor of the assessee, emphasizing that interest earned on investments in liquid assets like securities, forming part of circulating capital, qualifies as business income for a bank and is deductible under section 80P(2)(a)(i) of the Income Tax Act, 1961. The judgment highlighted the distinction between investments from reserve funds and those forming part of circulating capital, reaffirming the eligibility of the assessee for the claimed deductions.
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