Co-operative banking society interest on fixed deposits qualifies for deduction, and related expenditure is allowable if separately taxed.

Interest earned by a co-operative society engaged in banking and credit facilities on fixed deposits made from reserve and operational funds was held attributable to its business and therefore deductible under section 80P(2)(a)(i). The Tribunal treated the broader statutory phrase "attributable to" as covering deposits made under a statutory obligation and distinguished surplus-investment cases. It also held that, if such interest is assessed separately, the proportionate expenditure incurred to earn that income must be allowed, since taxation must reflect net income from the source. The additions were deleted and consequential relief on related expenditure followed.

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Issues: (i) whether interest earned on bank fixed deposits out of reserve and operational funds of a co-operative society engaged in banking and providing credit facilities to its members is deductible under section 80P(2)(a)(i); and (ii) whether proportionate and interest expenditure incurred for earning such bank interest is allowable when the receipts are assessed separately.

Issue (i): whether interest earned on bank fixed deposits out of reserve and operational funds of a co-operative society engaged in banking and providing credit facilities to its members is deductible under section 80P(2)(a)(i).

Analysis: The society was under a statutory obligation to transfer a portion of its profits to reserve funds and to maintain funds in permissible banking modes. The interest earned on such deposits was treated as having a nexus with the society's banking activity and not as a separate source disconnected from its business. The broader expression "attributable to" in section 80P(2)(a)(i) was applied, and the facts were distinguished from a case where surplus sale proceeds of a marketing society were invested. On that basis, the bank interest was held to form part of business income eligible for the deduction.

Conclusion: The issue was decided in favour of the assessee; the bank interest qualified for deduction under section 80P(2)(a)(i).

Issue (ii): whether proportionate expenses and interest expenditure incurred for earning such bank interest is allowable when the receipts are assessed separately.

Analysis: Once the bank interest was treated as taxable separately in the alternative, the corresponding expenditure incurred for earning that income had to be given effect to. The Tribunal accepted that disallowing such expenditure would be inconsistent with taxing only the net income from that source.

Conclusion: The issue was decided in favour of the assessee; the proportionate expenditure was directed to be allowed.

Final Conclusion: The appeals succeeded and the additions made on account of bank interest were deleted, with consequential relief on related expenditure.

Ratio Decidendi: Interest earned by a co-operative society engaged in banking and credit activities on deposits made from statutorily required reserve or operational funds is income attributable to its business and falls within section 80P(2)(a)(i), and if such interest is separately taxed, the related earning expenditure is allowable.

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