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Issues: Whether interest income earned by a co-operative society from fixed deposits made out of its own surplus funds with a co-operative bank is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, and whether the revisionary order under section 263 of the Income-tax Act, 1961 disallowing such deduction could be sustained.
Analysis: The deduction claim was examined in the light of the jurisdictional High Court's view that where a co-operative society invests its own surplus funds and earns interest, the character of the income remains attributable to the society's eligible activities for the purposes of section 80P(2)(a). The distinction drawn from the contrary line of authority was that interest on amounts belonging to members and retained as liabilities stands on a different footing, whereas interest derived from the society's own funds does not lose the benefit of the statutory exemption. On the facts recorded, the deposits were made from the assessee's own surplus funds and the society was engaged in eligible co-operative activities.
Conclusion: The interest income was held to be deductible under section 80P(2)(a)(i), and the revision under section 263 could not be sustained. The assessee succeeded and the assessment revision was quashed.
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