Deduction for cooperative society interest income from bank deposits upheld, directing allowance of tax deduction on such interest.

Interest earned by a cooperative society from deposits in permitted banks retains its character as cooperative society income and qualifies for deduction under the cooperative society tax provisions; Kerala High Court precedent treating such interest as eligible was applied, leading the authority to direct allowance of deduction on interest from co-operative and nationalized banks. The assessing officer's view that the society should be treated as a cooperative bank and thus ineligible was rejected, and the assessee's claim for deduction on the said interest income was allowed.

---

---

Issues: (i) Whether interest income earned by a co-operative credit society from deposits with co-operative banks and nationalised banks is eligible for deduction under section 80P(2)(a) of the Income-tax Act, 1961.

Analysis: The matter concerns whether the assessee is to be treated as a co-operative bank or as a co-operative credit society and whether interest earned on deposits of surplus funds retains the character of profits and gains attributable to the business of providing credit to members. The decision applies statutory language of section 80P and relevant explanations, and follows binding and persuasive precedents holding that an entity is a bank only if it holds an RBI banking licence and that interest earned on permitted deposits of surplus profits does not lose its character as business income attributable to the specified activities. Authorities considering investments of surplus in permitted banks and the regulatory context under cooperative societies statutes were applied to conclude that interest on such deposits is attributable to the core lending business and falls within deduction under section 80P(2)(a).

Conclusion: The interest income earned by the assessee from co-operative banks and nationalised banks is eligible for deduction under section 80P(2)(a) of the Income-tax Act, 1961; conclusion in favour of the assessee.

---