Member-based credit society interest income from deposits held eligible for deduction under Section 80P, with partial disallowance set aside.

Interest earned by a primary agricultural credit society on deposits placed with sub-treasuries and a district co-operative bank was treated as attributable to its credit activity and not as income from other sources. The Tribunal applied the distinction that such a society, which lends to its members without an RBI banking licence, is not barred by Section 80P(4) merely because it carries on member-based lending. On that basis, the interest from the identified deposits was held eligible for deduction under Section 80P(2)(a)(i), and the corresponding disallowance was set aside in part. The ground relating to interest from scheduled banks was not pressed.

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Issues: Whether interest earned on deposits placed with sub-treasuries and a district co-operative bank by a primary agricultural credit society was assessable as business income so as to qualify for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The assessee was a primary agricultural credit society engaged in providing credit facilities to its members and did not possess a banking licence from the Reserve Bank of India. Applying the distinction drawn in the authorities relied upon, the Tribunal held that a society of this nature is not hit by Section 80P(4) of the Income-tax Act, 1961 merely because it carries on lending activity to its members. It further followed the view that interest earned on deposits made as part of the banking or credit activity of such a society is attributable to business and not assessable as income from other sources. The Tribunal also noted that the ground relating to interest from scheduled banks was not pressed.

Conclusion: The interest received from sub-treasuries and the Trivandrum District Co-operative Bank was held eligible for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961, and the disallowance was set aside in part.

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