Business-connected bank deposit interest qualifies for co-operative credit society deduction despite absence of a banking licence.

Interest on bank deposits maintained by a co-operative credit society in compliance with co-operative law and banking guidelines is analysed as business income attributable to providing credit facilities to members. The notes distinguish deposits connected with the society's core credit activity from temporarily retained sale proceeds in an agricultural marketing context. They state that a society lacking a banking licence is not excluded from the deduction merely because it places funds with banks. On this analysis, such interest is treated as eligible for deduction under Section 80P(2)(a)(i).

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Issues: Whether interest earned by a co-operative credit society on bank deposits maintained in connection with its business of providing credit facilities to members is eligible for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961.

Analysis: The society's deposits were maintained in compliance with requirements under the governing co-operative law and banking guidelines for carrying on its credit-facility business. Interest on funds so deposited retained the character of business income attributable to that activity. The principle concerning interest on sale proceeds temporarily retained by a society engaged in marketing agricultural produce was inapplicable, since the deposits here arose in the course of, and were connected with, the society's principal credit business. A co-operative credit society without a banking licence is not excluded from the deduction merely because it deposits its funds with banks.

Conclusion: Interest earned on the deposits is eligible for deduction under Section 80P(2)(a)(i) of the Income-tax Act, 1961; the issue is decided in favour of the assessee.

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