Cooperative societies eligible for tax deduction under Section 80P(2)(a)(i) except for bank deposit interest.

The Tribunal held that a cooperative society is entitled to a deduction under Section 80P(2)(a)(i) for profits from providing credit facilities, as Section 80P(4) applies only to cooperative banks. However, interest income from bank deposits is taxable under Section 56, not eligible for the deduction. The decision affirmed that the cooperative society is entitled to the deduction except for interest income on bank deposits, which is taxable.

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Issues Involved:
1. Deduction under Section 80P(2)(a)(i) for profits derived from providing credit facilities.
2. Applicability of Section 80P(4) to cooperative societies.
3. Taxability of interest income on deposits with banks.

Issue-wise Detailed Analysis:

1. Deduction under Section 80P(2)(a)(i) for profits derived from providing credit facilities:
The revenue contended that the assessee, being a cooperative bank, is not entitled to the deduction under Section 80P(2)(a)(i) of the Act, as per Section 80P(4). The AO concluded that the assessee's activities, though registered as a credit cooperative society, are akin to a banking institution. The CIT(Appeals) allowed the deduction by following previous ITAT decisions, asserting that Section 80P(4) applies only to cooperative banks and not to credit cooperative societies. The Tribunal upheld this view, stating that the intention of the legislature was to bring cooperative banks on par with commercial banks, and since the assessee is a cooperative society and not a cooperative bank, it is entitled to the deduction under Section 80P(2)(a)(i).

2. Applicability of Section 80P(4) to cooperative societies:
The Tribunal, referencing the decision in ACIT v. M/s. Bangalore Commercial Transport Credit Co-operative Society Ltd., clarified that Section 80P(4) is applicable only to cooperative banks and not to credit cooperative societies. The Tribunal emphasized the distinction between cooperative banks and cooperative societies, noting that Section 80P(4) does not define "cooperative society" and is intended to exclude only cooperative banks from the deduction. This interpretation was supported by the CBDT Circular No.133/06/2007, which clarified that Section 80P(4) does not apply to entities that are not cooperative banks.

3. Taxability of interest income on deposits with banks:
The assessee claimed deduction under Section 80P(2)(a)(i) for interest earned on bank deposits, arguing that these deposits were made to ensure funds were available to meet members' demands. The AO and CIT(Appeals) rejected this claim, citing the Supreme Court's decision in The Totgars Co-operative Sale Society Ltd. v. ITO, which held that interest income from bank deposits is taxable under Section 56 as "Income from other sources" and not attributable to the business of providing credit facilities. The Tribunal upheld this view, stating that there must be a direct nexus between the interest income and the business of the society. Interest earned on bank deposits does not have such a nexus and is therefore taxable under Section 56, not eligible for deduction under Section 80P(2)(a)(i).

Conclusion:
The appeals by both the revenue and the assessee were dismissed, affirming that the assessee, being a cooperative society, is entitled to deduction under Section 80P(2)(a)(i) except for the interest income on bank deposits, which is taxable under Section 56.

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