Interest on surplus funds of a credit society can qualify for deduction when linked to credit business, not taxed as other sources.

Interest earned by a primary agricultural credit society on temporary investments of surplus funds with sub-treasuries and banks was treated as attributable to its credit business, because the society was engaged in providing credit facilities to members and was not shown to be a cooperative bank with an RBI licence. The Tribunal followed authority holding that such income, when generated from funds parked in the course of banking or credit operations, forms part of business income and qualifies for deduction under section 80P(2)(a)(i). It distinguished contrary Supreme Court authority on its different factual setting involving retained sale proceeds, and accepted that the interest was not taxable as income from other sources.

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Issues: Whether interest income earned by a primary agricultural credit society on investments made with sub-treasuries and banks is assessable as business income and eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, or taxable as income from other sources.

Analysis: The Tribunal noted that the assessee was engaged in providing credit facilities to its members and had not been shown to be a cooperative bank carrying on exclusive banking business with a Reserve Bank of India licence. It followed the line of authority that investments made in the course of banking or credit activity, including temporary parking of surplus funds with sub-treasuries and banks, are attributable to the business of the society. The Tribunal distinguished the Supreme Court decision relied on by the Revenue on the ground that it dealt with a different factual setting involving retained sale proceeds and not funds invested as part of the assessee's own banking or credit operations. It also relied on prior co-ordinate Bench decisions, jurisdictional and other High Court rulings, and the Board circular supporting the view that such interest forms part of business income.

Conclusion: The interest income was held to be eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, and not taxable as income from other sources.

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