Interest attribution to business activity: interest on liquidity FDs treated as deductible from cooperative banking income, not other sources.

Whether interest on fixed deposits held for liquidity and operational needs by a cooperative society is attributable to its banking/credit activity and deductible was examined; applying the principle that investments made from operational or working-capital funds maintained to meet deposit obligations and regulatory liquidity norms are attributable to the society's banking/credit business, the interest qualifies for deduction under the cooperative-exemption regime and is not taxable as income from other sources; the addition under the other-sources head was set aside and the appeal allowed in favour of the appellant.

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Issues: Whether interest income of Rs. 48,77,959 earned on fixed deposits maintained for liquidity/operational purposes by a cooperative society is eligible for deduction under section 80P(2)(a)(i) / 80P(2)(d) of the Income-tax Act, 1961 or is exigible to tax as income from other sources under section 56 of the Income-tax Act, 1961.

Analysis: Legal framework: Section 80P(2)(a)(i) and section 80P(2)(d) of the Income-tax Act, 1961 provide exemption for profits and gains attributable to banking business or providing credit facilities to members of a cooperative society; section 56 of the Income-tax Act, 1961 deals with income from other sources. Factual matrix: the society accepts deposits from members and advances to members, maintains liquid funds/short-term deposits to meet deposit repayment obligations and regulatory liquidity requirements, and the contested interest arose from fixed deposits held for such liquidity/operational purposes. Precedential context: a coordinate bench decision addressing identical facts treated such interest as business income eligible for deduction under section 80P, distinguishing the Supreme Court decision in Totgars on the basis that Totgars involved surplus funds arising from non-banking activities. Application: where funds invested are operational/working capital or maintained to meet deposit repayment obligations and regulatory liquidity norms, interest thereon is attributable to the society's banking/credit-providing activity and not to surplus/unrelated funds; thus the interest qualifies for deduction under section 80P(2)(a)(i) and/or 80P(2)(d) rather than being taxable under section 56.

Conclusion: The interest income of Rs. 48,77,959 is eligible for deduction under section 80P(2)(a)(i) / 80P(2)(d) of the Income-tax Act, 1961; the addition under section 56 is set aside and the appeal is allowed in favour of the appellant.

Ratio Decidendi: Interest earned on investments made from operational funds or maintained as liquidity/working capital by a cooperative society engaged in banking/credit activities for its members constitutes business income and is eligible for deduction under section 80P(2)(a)(i) / 80P(2)(d) of the Income-tax Act, 1961 rather than being taxable under section 56.

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