Co-operative society interest on surplus deposits qualifies for deduction under section 80P(2)(a)(i) when attributable to business activity.

Interest earned by a co-operative society from deposits of idle funds and statutory reserves with co-operative banks was held eligible for deduction under section 80P(2)(a)(i) because the funds were surplus amounts not immediately required for lending, and not liabilities payable to members. The decision in Totgars was treated as inapplicable since it concerned retained sale proceeds belonging to members with a corresponding liability. Following the jurisdictional High Court, the interest was treated as attributable to the society's business and not assessable merely as income from other sources. Deduction under section 80P(2)(a)(i) was therefore allowed.

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Issues: Whether interest earned by a co-operative society on deposits of idle funds and statutory reserves with co-operative banks is eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The society was carrying on credit activities with members, and the funds invested in co-operative banks were not members' liabilities or amounts payable to members. The interest arose from deployment of surplus funds and statutory reserves that were not immediately required for lending. On these facts, the decision in Totgars was held inapplicable because that case dealt with retained sale proceeds belonging to members and a corresponding liability. The jurisdictional High Court view that such interest is attributable to the business of the co-operative society was followed, and the alternative revenue reliance on treatment as income from other sources was not accepted.

Conclusion: The interest income was held eligible for deduction under section 80P(2)(a)(i) of the Income-tax Act, 1961, in favour of the assessee.

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