Statutory-compulsion interest income may qualify as business income and support deduction under section 80P(2)(a)(i).

Interest from investments with a co-operative bank was generally treated as income from other sources and not eligible for deduction under section 80P, but the assessee's distinct claim was that the investments were compulsory under the Karnataka Co-operative Societies Act, 1959 and the relevant Rules. That statutory-compulsion question had not been examined by the first appellate authority. The Tribunal therefore restored the matter to the Assessing Officer to determine whether the investments were mandatory under the statutory scheme; if so, the interest may take the character of business income and deduction under section 80P(2)(a)(i) would be admissible.

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Issues: Whether interest income earned from investments made with a co-operative bank, where such investments are stated to be compulsory under the Karnataka Co-operative Societies Act, 1959 and the relevant Rules, is assessable as business income and eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The interest income from the Central District Co-operative Bank had been treated as income from other sources and denied deduction under section 80P. The Tribunal noted the jurisdictional High Court view that interest earned from a co-operative bank is ordinarily not eligible for deduction under section 80P(2)(a)(i) or section 80P(2)(d). However, the assessee had raised a distinct contention that the investments were not voluntary but were made under compulsion in compliance with the statutory scheme and the directions governing primary co-operative societies in Karnataka. The Tribunal found that this contention had not been adjudicated by the first appellate authority. It also noted the relevant circular and prior Tribunal decisions holding that where investments are made under a statutory compulsion, the resulting interest may assume the character of business income and may qualify for deduction under section 80P(2)(a)(i).

Conclusion: The issue was restored to the Assessing Officer for examination of whether the investments were made under compulsion under the Karnataka Co-operative Societies Act, 1959 and the relevant Rules. If so, the interest income is to be treated as business income and deduction under section 80P(2)(a)(i) is admissible.

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