Co-operative society interest income denied deduction under section 80P, but cost of funds remanded for verification.

Interest earned by a credit co-operative society on surplus investments with a co-operative bank was treated as income not attributable to its credit business, so deduction under section 80P(2)(a)(i) was denied. The same receipt also failed under section 80P(2)(d) because that provision applies only to interest from investments with another co-operative society, and a co-operative bank covered by section 80P(4) does not meet that condition. The matter was remitted only to verify the cost of funds and allow appropriate relief against the taxable interest income.

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Issues: (i) whether interest income earned by a credit co-operative society on investments made with a co-operative bank is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961; (ii) whether such interest income qualifies for deduction under section 80P(2)(d) of the Income-tax Act, 1961; and (iii) whether the assessee is entitled to deduction of cost of funds against such interest income and a remand is warranted for that purpose.

Issue (i): Whether interest income earned by a credit co-operative society on investments made with a co-operative bank is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The interest income was held to be earned on investment surplus and not as income attributable to the main credit business of the assessee. The character of the receipt did not change merely because the deposits were made pursuant to statutory liquidity or reserve requirements. Income that is not operational or attributable to business activity does not qualify for deduction under this provision.

Conclusion: The deduction under section 80P(2)(a)(i) was denied.

Issue (ii): Whether such interest income qualifies for deduction under section 80P(2)(d) of the Income-tax Act, 1961.

Analysis: Section 80P(2)(d) applies only where interest or dividend is derived from investments with another co-operative society. A co-operative bank functioning under banking regulation and falling within the exclusion in section 80P(4) is not treated as a co-operative society for this purpose. Interest received from the co-operative bank therefore did not satisfy the statutory requirement for deduction.

Conclusion: The deduction under section 80P(2)(d) was denied.

Issue (iii): Whether the assessee is entitled to deduction of cost of funds against such interest income and a remand is warranted for that purpose.

Analysis: Since the interest income was assessed as taxable income from other sources, only the net income after allowing expenditure incurred for earning such income could be brought to tax. The record required verification of the cost of funds attributable to earning the interest income, and that exercise was not completed by the lower authorities.

Conclusion: The matter was remitted to the assessing officer to determine the cost of funds and grant appropriate relief accordingly.

Final Conclusion: The assessee did not succeed on the claim for deduction of interest income under sections 80P(2)(a)(i) and 80P(2)(d), but obtained a remand limited to determination of cost of funds.

Ratio Decidendi: Interest earned by a co-operative society on investments with a co-operative bank is not deductible under section 80P(2)(a)(i) when it is not attributable to the society's business operations, and it is not deductible under section 80P(2)(d) where the payer is a co-operative bank falling within section 80P(4).

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