Compulsory deposit interest may qualify for business-linked deduction, with net relief under section 57 where facts support it.

Interest from deposits compulsorily maintained by a co-operative society with co-operative or nationalised banks can qualify as business income connected with its activities, so deduction under section 80P(2)(a)(i) is not to be denied merely because the funds are not circulating capital. If the deposits are not shown to be compulsory, the deduction claim must instead be examined on a net basis, and relief under section 57 may be available to the extent permissible. Because the nature of the deposits and the correct amount of eligible relief had not been verified, the matter required fresh examination and recomputation.

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Issues: Whether interest income from deposits kept with co-operative and nationalised banks, stated to be under compulsory deposit requirements, qualified for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, and, if not, whether deduction under section 57 of the Income-tax Act, 1961 was available, with the matter requiring verification of the nature of deposits and the quantum of eligible relief.

Analysis: Interest derived from funds placed under a compulsory deposit requirement is treated as income arising from the business carried on by the co-operative society and is not to be denied deduction merely because the funds are not circulating capital. At the same time, where the interest does not arise from compulsory deposits, the claim requires computation on a net basis and the assessee may be entitled to deduction under section 57 of the Income-tax Act, 1961 to the extent permissible. As the factual aspect whether the deposits were compulsory and the exact deductible amount had not been verified by the lower authorities, the issue required fresh examination by the Assessing Officer.

Conclusion: The assessee could not be denied deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961 for interest from compulsory deposits, but the matter was remitted for verification and recomputation, including consideration of relief under section 57 of the Income-tax Act, 1961 where applicable.

Ratio Decidendi: Interest earned from funds compulsorily parked with a bank in order to carry on the assessee's business can constitute business income eligible for deduction, and where eligibility is fact-dependent, the claim must be determined after verifying the nature of the deposit and the correct net amount of relief.

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