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Issues: Whether interest income earned from fixed deposits placed with banks by a co-operative society, being investments linked to statutory reserve and other mandated funds, was eligible for deduction under section 80P(2)(a)(iii) of the Income-tax Act, 1961 and whether the disallowance based on Totgars Co-operative Sale Society Ltd. was sustainable.
Analysis: The society was required to maintain a statutory reserve fund and the Revenue did not dispute that the investments were made in the context of that statutory mandate. A prior co-ordinate bench decision, dealing with the same statutory setting and similar investments, had held that interest earned from such investments is attributable to the main activities of the co-operative society and cannot be treated as mere surplus income within the meaning of Totgars. Following that view, the interest on the fixed deposits could not be denied deduction merely by characterising it as income from surplus funds.
Conclusion: The interest income was held to be deductible, and the disallowance was not sustainable.
Final Conclusion: The assessee succeeded on the taxability issue, and the addition made on account of interest from fixed deposits was directed to be deleted.
Ratio Decidendi: Interest earned from investments made pursuant to statutory reserve or other mandatory funds of a co-operative society is attributable to its eligible business activity and cannot be disallowed as surplus income solely on the basis of Totgars.
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