Cooperative bank interest qualifies for deduction, while scheduled bank interest disallowance is limited to net income

Interest derived from deposits with cooperative banks was held deductible under Section 80P(2)(d) because a cooperative bank was treated as a cooperative society for that purpose, and the claim was allowed on a net basis. Interest from scheduled banks was not eligible for deduction, but the Tribunal required the disallowance to be confined to the net interest income where the claim had been made on that basis. The matter on scheduled bank interest was remitted to the Assessing Officer for limited verification and fresh decision, while the cooperative bank interest claim was accepted.

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Issues: (i) Whether interest earned from cooperative banks was deductible under Section 80P(2)(d) of the Income-tax Act, 1961. (ii) Whether disallowance of interest income from scheduled banks was required to be restricted to net interest income after considering related expenditure.

Issue (i): Whether interest earned from cooperative banks was deductible under Section 80P(2)(d) of the Income-tax Act, 1961.

Analysis: The Tribunal followed the view that a cooperative bank falls within the expression cooperative society for the purpose of Section 80P(2)(d). Interest derived from deposits with cooperative banks was therefore treated as eligible for deduction. The Tribunal directed allowance of the claim in respect of the interest derived from the cooperative banks on a net basis.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether disallowance of interest income from scheduled banks was required to be restricted to net interest income after considering related expenditure.

Analysis: Interest from SBI and IDBI was held not eligible for deduction under Section 80P(2)(d), but the Tribunal noted that the assessee had claimed deduction only on net interest income and not on the gross amount. The matter was therefore sent back to the jurisdictional Assessing Officer to verify the net interest income and disallow only that portion, if any, relatable to the scheduled bank interest.

Conclusion: The issue was remitted to the Assessing Officer for limited verification and fresh decision.

Final Conclusion: The appeal succeeded in part and the matter concerning scheduled bank interest was restored for limited verification, while the claim relating to cooperative bank interest was accepted.

Ratio Decidendi: Interest derived from deposits with cooperative banks is deductible under Section 80P(2)(d) as such banks are treated as cooperative societies for that purpose, and disallowance of bank interest must be confined to net interest income where the claim is so made.

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