Interest income deduction for credit co-operative societies upheld where surplus funds arise from business activities and no RBI banking licence exists.

Interest earned by a credit co-operative society on surplus funds invested with co-operative banks and other banks remained deductible under section 80P(2)(a)(i) because it was attributable to the society's credit facilities business. Section 80P(4) did not bar the deduction, as that exclusion applies only to co-operative banks and not to every co-operative society; in the absence of an RBI banking licence, the society was not treated as a co-operative bank. The Revenue's challenge therefore failed, and the interest-related addition was not sustained.

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Issues: (i) Whether interest earned by a credit co-operative society from investments with co-operative banks and other banks was eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961. (ii) Whether section 80P(4) applied so as to deny the deduction in the absence of a banking licence from the RBI.

Issue (i): Whether interest earned by a credit co-operative society from investments with co-operative banks and other banks was eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The assessee was a credit co-operative society engaged in accepting deposits and advancing loans to members. The interest income was derived from investments of surplus funds generated in the course of its business. Following the principle that income attributable to the business of providing credit facilities remains within the scope of section 80P(2)(a)(i), and relying on precedent holding that such interest income is deductible, the claim was accepted.

Conclusion: The interest income was held eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Issue (ii): Whether section 80P(4) applied so as to deny the deduction in the absence of a banking licence from the RBI.

Analysis: Section 80P(4) excludes co-operative banks, not every co-operative society. A co-operative society becomes a co-operative bank only if it carries on banking business with the requisite RBI licence. As no such licence was shown, the assessee was not treated as a co-operative bank, and the exclusion did not apply.

Conclusion: Section 80P(4) was held inapplicable to the assessee.

Final Conclusion: The Revenue's challenge to the deduction failed, and the assessment addition on interest income was not sustained.

Ratio Decidendi: A credit co-operative society's interest income from deployment of surplus business funds remains deductible where it is attributable to its credit activities, and the exclusion in section 80P(4) applies only to co-operative banks holding an RBI banking licence.

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