Interest earned on short term deposits with bank made by Co-operative societies engaged in banking activities to meet any eventuality in its business is eligible for deduction u/s 80P(2)(a)(i) and it can’t be taxed u/s 56:

Assessee is a Co-operative Society maintaining certain “Operations funds” and to meet any eventuality towards repayment of deposits, it maintains some liquated funds as “short term deposits with bank”. It claimed deduction u/s 80P(2)(a)(i) which was denied by AO by invoking S.80P(4) since he was of the view that assessee is a only “Primary credit society” and not a “Primary agriculture credit society”. Ld. CIT(A) held that assessee was eligible for deduction u/s 80P(2)(a)(i) but certain interest income earned from bank out of surplus invested was taxable u/s 56. Hon’ble ITAT observed that the entire funds were utilized for the purposes of business and there were no surplus funds. Further, to meet any eventuality in its business, assessee was required to maintain some liquid funds for which the assessee made investments in short term deposits. It was held that since such investments were not made out of any surplus funds, interest arising on the same can’t be taxed u/s 56 and the assessee was eligible for claiming deduction u/s 80P(2)(a)(i).

[Dhanlaxmi Credit Co-Operative Society Ltd. vs. ITO – ITA No.2342/Ahd/2012]