Statutory reserve fund deposits can qualify for section 80P deduction, but savings account interest may not.

ITAT Pune held that interest on fixed deposits created from statutory reserve funds, deposited with approval under the Maharashtra Co-operative Societies Act, had a sufficient business nexus with the assessee society's credit activity and was eligible for deduction under section 80P(2)(a)(i). The deposits were distinguished from idle surplus funds, so the ratio of Totgar's Co-operative Sale Society Ltd. did not apply on the facts. However, interest earned on savings account deposits was not treated as similarly linked to the society's business activity and was not allowed the same deduction.

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Issues: Whether interest earned on fixed deposits made out of statutory reserve funds with Bank of Maharashtra was eligible for deduction under section 80P(2)(a)(i), and whether interest on savings account deposits was also so eligible.

Analysis: The assessee society was under a statutory obligation under the Maharashtra Co-operative Societies Act, 1960 to transfer a prescribed portion of its profits to reserve fund, and the reserve fund was permitted to be invested in approved banking institutions. The deposits in question were found to be made not from idle surplus funds but from such reserve funds, with permission of the Registrar, and were therefore linked to the carrying on of the society's business of providing credit facilities to its members. The distinction was drawn between statutory reserve-fund investments and surplus funds lying idle, and the ratio of Totgar's Co-operative Sale Society Ltd. was held inapplicable on the facts. At the same time, the savings account interest was not treated as having the same statutory-business nexus.

Conclusion: Deduction under section 80P(2)(a)(i) was allowable on interest earned from fixed deposits with Bank of Maharashtra, but not on savings account interest.

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