Interest on bank deposits of a credit co-operative society qualifies for deduction when funds are linked to member lending activity.

Interest earned by a members' credit co-operative society on bank deposits was treated as attributable to the business of providing credit facilities to members because the funds were not immediately required for lending. On those facts, the income qualified for deduction under section 80P(2)(a)(i) of the Income-tax Act, and the disallowance was reversed. The ruling in Tumkur Merchants Souharda Credit Co-operative Ltd. was applied on identical facts, while the later decision concerning interest from co-operative banks was distinguished as arising under section 80P(2)(d) and on different facts.

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Issues: Whether interest income earned from bank deposits by a members' credit co-operative society is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, and whether such income can be denied deduction under section 80P(2)(d).

Analysis: The assessee was a members' credit co-operative society and the interest earned from bank balances represented funds not immediately required for lending to members. On the facts, the income was held to be attributable to the business of providing credit facilities to members and, therefore, eligible for deduction under section 80P(2)(a)(i). The decision in Tumkur Merchants Souharda Credit Co-operative Ltd. was found to apply on identical facts, while the later decision concerning interest from co-operative banks was distinguished as turning on section 80P(2)(d) and on different facts.

Conclusion: The interest income was held deductible under section 80P(2)(a)(i), and the disallowance was reversed in favour of the assessee.

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