Interest on business deposits qualifies for co-operative credit society deduction when funds support member credit facilities.

Interest earned by a co-operative credit society on bank deposits of surplus funds maintained for its credit-facility business is described as business income deductible under section 80P(2)(a)(i). A society providing credit facilities only to members, without an RBI banking licence, is not treated as a co-operative bank excluded by section 80P(4). The note distinguishes Totgar's as limited to interest on members' sale proceeds temporarily retained by an agricultural produce marketing society. Accordingly, interest on the society's own business funds is treated as attributable to its credit-facility business rather than income from other sources.

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Issues: Whether interest earned by a co-operative credit society from bank deposits of surplus funds maintained in connection with its credit-facility business is deductible under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The assessee was a co-operative credit society providing credit facilities exclusively to its members and was required under its governing regulatory framework to maintain deposits and reserve funds. The interest arose from funds connected with that business. The governing decisions establish that a credit society not holding an RBI banking licence is not a co-operative bank excluded by section 80P(4), and that income attributable to its credit-facility business qualifies for deduction. Interest on deposits of its own business funds retains its business character; the contrary treatment in Totgar's was confined to interest on members' sale proceeds temporarily retained by a society engaged principally in marketing agricultural produce.

Conclusion: The interest income of Rs.35,43,169 was business income eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, and not income from other sources; the addition was directed to be deleted.

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