Own-fund fixed deposit interest of a co-operative society qualifies for deduction under section 80P(2)(a)(i), distinguishing Totgars.

Interest earned by an employees' co-operative society from fixed deposits made out of its own surplus funds was held deductible under section 80P(2)(a)(i), because the income remained attributable to the society's eligible activities. The ruling distinguished Totgars on the basis that Totgars concerned members' monies retained by the society, whereas the present deposits represented the society's own funds. Following the jurisdictional High Court in Vavveru Co-operative Rural Bank Ltd., the disallowance was deleted and the deduction claim was allowed.

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Issues: Whether an employees' co-operative society is entitled to deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961 on interest earned from fixed deposits of its own surplus funds placed with a scheduled bank.

Analysis: The interest income arose from deposits made out of the assessee's own surplus funds and not from monies retained on behalf of members. The governing principle applied was that where a co-operative society engaged in activities covered by section 80P(2)(a) invests its own funds and earns interest, such income retains the character of income attributable to those activities. The distinction drawn in Totgars was held not to apply because that case concerned monies belonging to members, whereas here the investment was of the society's own funds. The jurisdictional High Court's view in Vavveru Co-operative Rural Bank Ltd. was followed.

Conclusion: The assessee is entitled to deduction under section 80P(2)(a)(i) on the interest earned from the scheduled bank deposits, and the disallowance was liable to be deleted.

Final Conclusion: The appeal succeeded and the deduction claim was allowed in full on the issue decided.

Ratio Decidendi: Interest earned by a co-operative society from fixed deposits made out of its own surplus funds is deductible under section 80P(2)(a)(i) where the income is attributable to the society's eligible activities; the Totgars principle does not apply to own-fund deposits.

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