Deduction under section 80P(2)(a) for interest from co-operative banks upheld by Supreme Court precedent; AO directed to allow it

Deduction under section 80P(2)(a) concerning interest earned from co-operative banks was treated as finally settled by a higher-court decision in favour of the assessee, leading to direction that the assessing officer must allow the deduction and delete the corresponding addition. The tribunal recorded that the Supreme Courts ruling created finality on the issue, and accordingly set aside the assessment adjustment and allowed the grounds of appeal challenging the disallowance of the interest deduction.

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

Analysis: Section 80P(2)(a)(i) permits deduction of the whole of the amount of profits and gains of business attributable to specified activities, including providing credit facilities to members. The dispute centers on whether interest earned on deposits (surplus funds) retains the character of profits and gains attributable to the credit-providing business. Relevant judicial authorities distinguish the Supreme Court decision in Totagar's Co-operative Sale Society on their facts, and subsequent High Court decisions (including Andhra Pradesh & Telangana and Kerala) have held that interest on deposits of surplus funds, when arising from monies generated by the specified credit activities and deposited in permitted banks as regulated by the Co-operative statutes, remains attributable to the business and is deductible. The Supreme Court decision in Annasaheb Patil (reported) affirmed entitlement to exemption for co-operative credit societies on similar facts, thereby providing finality to the principle that such societies can claim the deduction. Applying these precedents and the statutory text focusing on income "attributable to" the specified activities, the addition disallowing interest as not deductible is not sustainable.

Conclusion: The appeal is allowed in favour of the assessee; deduction under section 80P(2)(a)(i) is to be allowed for the interest of Rs. 9,17,453 and the addition deleted.

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