Interest on surplus fixed deposits is taxable as income from other sources and not deductible under section 80P.

Interest earned by a co-operative credit society on fixed deposits of surplus funds is taxable as income from other sources, because it arises from deployment of idle funds and not from the provision of credit facilities to members. Although the society was found to be carrying on member-based lending activity and was not treated as a banking business for the purpose of exclusion under section 80P(4), the deposit interest did not qualify as business income attributable to its operations. Applying the Totgars principle, the interest was brought to tax under section 56 and no substantiated expenditure was shown against that income, so deduction under section 80P was denied.

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Issues: Whether interest earned on fixed deposits made out of surplus funds by a co-operative credit society is taxable as income from other sources and whether such interest qualifies for deduction under section 80P of the Income-tax Act, 1961.

Analysis: The assessee was engaged in accepting deposits only from its members and advancing loans to members, and was not carrying on banking business as defined in section 5(b) of the Banking Regulation Act, 1949. On that basis, section 80P(4) was held not to exclude the assessee from the benefit of section 80P(2)(a)(i). However, the interest in dispute arose from fixed deposits of surplus funds lying with banks and not from the provision of credit facilities to members. Applying the principle laid down in Totgars, such interest was treated as income from other sources under section 56 of the Income-tax Act, 1961 and not as operational business income attributable to the assessee's activities. No substantiated expenditure was shown to have been incurred for earning that interest.

Conclusion: The interest on fixed deposits was rightly assessed as income from other sources and was not eligible for deduction under section 80P.

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