Section 80P deduction for bank-deposit interest is unavailable to co-operative credit societies; revision can be sustained for non-examination.

Interest earned by a co-operative credit society on surplus funds placed with a commercial bank is not treated as income attributable to the business of providing credit facilities to members, so deduction under section 80P(2)(a)(i) is unavailable for that income. The note also explains that section 80P(2)(d) applies only to interest from investments with another co-operative society, not a bank. It further states that revision under section 263 is sustainable where the assessment order fails to examine the tax treatment of such bank-deposit interest and the assessee's claim is not properly bifurcated.

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Issues: (i) Whether interest earned on deposits placed with State Bank of India by a co-operative credit society was deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961 as profits and gains attributable to the business of providing credit facilities to members. (ii) Whether the Commissioner of Income Tax was justified in invoking revisionary jurisdiction under section 263 of the Income-tax Act, 1961 and the Tribunal was justified in upholding that exercise.

Issue (i): Whether interest earned on deposits placed with State Bank of India by a co-operative credit society was deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961 as profits and gains attributable to the business of providing credit facilities to members.

Analysis: The relevant inquiry was whether the interest on bank deposits had a direct and proximate nexus with the society's activity of providing credit facilities to its members. The Court applied the principle stated in Totgars that interest on funds not immediately required for business purposes and invested as surplus does not constitute operational income attributable to the specified activity. It distinguished banking business from a credit society's limited business of lending to members, and held that investment of surplus funds with a commercial bank is not part of that business. The Court also noted that section 80P(2)(d) applies only to interest from investments with another co-operative society, not a bank.

Conclusion: The interest income from deposits with State Bank of India was not deductible under section 80P(2)(a)(i) and was not exempt on that basis; the issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether the Commissioner of Income Tax was justified in invoking revisionary jurisdiction under section 263 of the Income-tax Act, 1961 and the Tribunal was justified in upholding that exercise.

Analysis: The Court held that the assessee had claimed deduction under section 80P generally, without clear bifurcation of income from member lending and income from bank deposits. The show-cause notice under section 263 was directed to the assessee's claim to exempt interest from State Bank of India, and the assessee's response itself asserted that the fixed-deposit interest was business income eligible for deduction under section 80P. On that footing, the Court found no breach of natural justice or excess of jurisdiction in the revision proceedings. Since the assessment order had failed to examine the tax treatment of the bank-deposit interest, it was erroneous and prejudicial to the interests of the Revenue.

Conclusion: Invocation of section 263 was valid and the Tribunal rightly upheld the revision order; this issue was decided against the assessee and in favour of the Revenue.

Final Conclusion: The appeals failed in their entirety. The revised assessment on the interest income from bank deposits was sustained, and the assessee was denied deduction under section 80P(2)(a)(i) in respect of such income.

Ratio Decidendi: Interest earned by a co-operative credit society on surplus funds invested with a non-co-operative bank is not income attributable to the business of providing credit facilities to its members and is therefore outside section 80P(2)(a)(i) of the Income-tax Act, 1961.

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