Interest on sub-treasury deposits qualifies as banking income for co-operative credit societies under Section 80P deduction rules.

Interest earned by a primary agricultural credit society on sub-treasury deposits was treated as attributable to its banking activity and eligible for deduction under Section 80P(2)(a)(i). The Tribunal explained that Section 80P(4) is aimed at excluding only co-operative banks exclusively carrying on banking business, not primary agricultural credit societies or similar societies covered by Section 80P(2)(a)(i). It also distinguished Totgars, noting that the deposits here arose from the society's banking operations rather than surplus sale proceeds. The income was therefore not assessed as income from other sources.

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Issues: Whether interest earned on deposits made with the sub-treasury by a co-operative society carrying on credit and banking activities is assessable as business income and eligible for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961, or as income from other sources outside the deduction.

Analysis: The assessee was a primary agricultural credit society engaged in providing credit facilities to its members and had no Reserve Bank of India banking licence. The Tribunal held that the legislative intent behind Section 80P(4) was to exclude only co-operative banks exclusively carrying on banking business, and not primary agricultural credit societies or similar societies covered by Section 80P(2)(a)(i). It further held that the interest from treasury deposits formed part of the banking activity of the assessee and was distinguishable from the surplus funds considered in Totgars, which arose from retained sale proceeds and were not part of the same banking activity. The Tribunal followed the reasoning in the jurisdictional and coordinate bench decisions that such interest is attributable to the business of banking for members.

Conclusion: The interest on sub-treasury deposits was held to be eligible for deduction under Section 80P(2) and not taxable as income from other sources.

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