Business nexus for temporary bank deposit interest kept by a co-operative credit society qualifies for deduction under section 80P(2)(a)(i).

Interest earned by a co-operative credit society on temporary bank deposits of funds not immediately required for lending was treated as having a sufficient business nexus with its credit-facility activity. The Tribunal followed the jurisdictional High Court's view that, where the society is engaged solely in providing credit facilities to members and parks funds only temporarily as part of business operations, the resulting interest is attributable to the principal business and does not become separate investment income. The interest income was therefore held eligible for deduction under section 80P(2)(a)(i).

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

Analysis: The applicable statutory framework grants deduction of the whole of the profits and gains of business attributable to the activity of carrying on the business of banking or providing credit facilities to members. The competing lines of authority were examined, including the distinction between interest on surplus funds temporarily parked as part of business operations and interest on amounts retained as liabilities not immediately required for business purposes. The Tribunal followed the jurisdictional High Court's view that, where a co-operative society is engaged solely in providing credit facilities to its members and parks funds temporarily because they are not immediately required for lending, the resulting interest retains a sufficient business nexus and is attributable to the society's principal activity. On that basis, the Tribunal held that the interest income in question could not be treated as independent investment income outside the ambit of the deduction.

Conclusion: The interest income from bank deposits was held eligible for deduction under section 80P(2)(a)(i), and the assessee succeeded on the issue.

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