Proportionate Section 80P deduction allowed for member-based income, while bank interest and non-member income were excluded.

Profits attributable to dealings with regular members of a co-operative society remain eligible for proportionate deduction under section 80P(2)(a)(i), but income arising from transactions with nominal, associate, or other non-members is excluded. Applying the principle in Mavilayi Service Cooperative Bank Ltd. and the statutory restriction on nominal and associate membership, the deduction could not be denied in toto merely because some business was done with non-members. Interest earned from scheduled banks was also held not deductible under either section 80P(2)(a)(i) or section 80P(2)(d) on the facts considered. The matter was therefore confined to recomputation of eligible member-based income.

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Issues: (i) Whether the assessee was entitled to proportionate deduction under section 80P(2)(a)(i) in respect of income earned from regular members despite dealings with nominal or associate members; and (ii) whether interest income earned from scheduled banks was deductible under section 80P(2)(a)(i) or section 80P(2)(d).

Issue (i): Whether the assessee was entitled to proportionate deduction under section 80P(2)(a)(i) in respect of income earned from regular members despite dealings with nominal or associate members.

Analysis: The assessee had accepted and advanced loans to non-members or associate members. In view of the statutory limit on nominal and associate members under section 18 of the Karnataka Co-operative Societies Act, 1959, the income attributable to dealings with non-members could not qualify for deduction under section 80P(2)(a)(i). At the same time, the binding principle from the Supreme Court decision in Mavilayi Service Cooperative Bank Ltd. required that profits attributable to dealings with regular members remain eligible for deduction, and the deduction could not be denied in toto merely because some business was done with non-members.

Conclusion: The assessee was not entitled to deduction on profits attributable to non-members, but was entitled to proportionate deduction under section 80P(2)(a)(i) on income earned from regular members. The issue was remitted to the Assessing Officer for recomputation.

Issue (ii): Whether interest income earned from scheduled banks was deductible under section 80P(2)(a)(i) or section 80P(2)(d).

Analysis: Interest income from scheduled banks does not fall within the deduction available for business income under section 80P(2)(a)(i), and it also does not qualify under section 80P(2)(d) on the facts considered. The applicable jurisdictional precedent negatived the claim for deduction on such interest receipts.

Conclusion: The assessee was not entitled to deduction on the interest income earned from scheduled banks under either provision.

Final Conclusion: The appeal succeeded only to the extent of proportionate deduction on income attributable to regular members, while the claim relating to bank interest was rejected.

Ratio Decidendi: Under section 80P(2)(a)(i), deduction is available only to profits attributable to eligible member-based , and income attributable to non-members is excluded; interest from scheduled banks is not deductible under section 80P(2)(a)(i) or section 80P(2)(d) on the facts of the case.

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