Operational funds of a co-operative credit society can generate deductible business income from bank deposit interest under section 80P(2)(a)(i).

Interest earned by a co-operative credit society on bank deposits made out of operational funds was treated as business income and held eligible for deduction under section 80P(2)(a)(i). The Tribunal followed its earlier coordinate bench view and applied the principle of consistency, distinguishing the Supreme Court decision relied on by the Revenue because the deposits arose from business-related funds of the society and not from unrelated surplus activity. The disallowance was therefore set aside in favour of the assessee.

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Issues: Whether interest income earned by a co-operative society from bank deposits out of operational funds is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The assessee was a co-operative society engaged in providing credit facilities to its members. The Tribunal noted that the issue was covered by its earlier coordinate bench decision, which had held that interest earned on surplus funds kept in deposits, where the funds were part of the society's business operations and not immediately required for day-to-day use, qualified as business income eligible for deduction. The Tribunal also noted that the facts were distinguishable from the Supreme Court ruling relied upon by the Revenue, because the present case involved operational funds of a credit society and not surplus funds arising from an unrelated activity. Following the binding coordinate bench view and the principle of consistency, the Tribunal accepted that the interest income was derived from the assessee's business activity.

Conclusion: The interest income from the deposits was held eligible for deduction under section 80P(2)(a)(i), and the disallowance was set aside in favour of the assessee.

Ratio Decidendi: Interest earned by a co-operative society on deposits made out of operational funds connected with its credit business is assessable as business income and qualifies for deduction under section 80P(2)(a)(i).

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