Interest on surplus funds is “other income” and not eligible for deduction U/s. 80P of Income Tax Act, 1961

The assessee, a co-op credit society, was engaged in providing credit facilities to its members and also marketing the agricultural produce of its members. The assessee had surplus funds which it invested in short-term deposits with banks and govt securities. The question arose whether the said interest earned on the said deposits was “business profits” and eligible for deduction u/s 80P(2)(a)(i).

The assessee argued that its activity of providing credit facilities to its members was an “eligible activity” u/s 80P(2)(a)(i) and that as the investments were made as per statutory requirement, the benefit was allowable from the gross total income. HELD deciding against the assessee:

(i) S. 80P(2)(a)(i) allows a deduction in the case of a co-op society engaged in carrying on the business of providing credit facilities to its members of the whole of the amount of profits and gains of business attributable to such activity. The words “profits and gains of business” means “business profits” and not “Income from other sources”;

(ii)The interest on surplus invested in short-term deposits, not being attributable to the business of providing credit facilities to the members or marketing of agricultural produce of the members, is assessable as “other income” and not as “business profits”;

(iii) The words “the whole of the amount of profits and gains of business” attributable to one of the activities specified in s. 80P (2)(a) mean that the source of income is relevant and that the income must be “operational income”.

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