2012 (8) TMI 1006 - AT - Income Tax

Deduction u/s.80P(2) - Held that - AO observed that this deduction cannot be claimed without filing a revised return. Neither in the original return nor in the revised return the assessee claimed deduction u/s.80P(2). Therefore, he disallowed the deduction u/s.80P(2). Without prejudice to this, AO also took the view that the principal object of the assessee bank is to finance co-operative societies in Jamnagar district affiliated to bank and generally to carry on banking business. One of the objects (clause vii) is to advance loans to agriculturist admitted as ordinary or nominal member, the principal object therefore cannot be said to provide for long term credit to agriculturist and rural development. Therefore, the assessee is not entitled to deduction u/s.80P(2). Deduction claimed u/s.36(1)(viia) - Held that - It can be made from profit of earlier years as ultimately the profit is transferred to reserve account. Admittedly, the assessee has made provision in the books of account of this year which has been duly audited by the authorized auditor. As per provision contained in sec.36(1)(vii) read with Rule-6ABA, the provisions for bad and doubtful debt are allowable to the extent mentioned in this section. Before the AO, the assessee has not furnished the working. Same was furnished before the ld. CIT(A). We therefore, set aside the order of ld. CIT(A) and direct him to verify the working submitted before the ld. CIT(A) and allow the deduction u/s.36(1)(viia) in respect of provisions for bad and doubtful debts whether from the current year profit or from the earlier year s profit after verifying the calculation and allow the same. Disallowed the overdue interest reserve - Held that - It is pertinent to note that AO has not considered the fact that overdue interest amounting to ₹ 1,15,00,000/- which is credited into profit and loss account was debited as per RBI guidelines and there is no ultimate credit in P/L. A/c. in this respect. Thus, there is no income accrued and no addition on this account can be made. Distribution of gift by assessee-Co-operative Society to its member at AGM is allowable as business expenditure

Summary

Issues Involved:
1. Deduction under Section 36(1)(viia) for bad and doubtful debts.
2. Deduction under Section 80P(2) for cooperative societies.
3. Disallowance of overdue interest reserve.
4. Disallowance of gift expenditure.

Detailed Analysis:

1. Deduction under Section 36(1)(viia) for Bad and Doubtful Debts:

The assessee, a Co-operative Bank, claimed deductions under Section 36(1)(viia) of the Income-tax Act, 1961, for provisions made for bad and doubtful debts. Initially, the assessee claimed Rs. 2,31,67,667/- in its original return and later revised the claim to Rs. 26,00,52,236/-. The Assessing Officer (AO) limited the deduction to the provision made in the books of accounts, i.e., Rs. 2,31,67,667/-, citing that the deduction under Section 36(1)(viia) is allowable only to the extent of the provision made in the books. The AO relied on the Kerala High Court decision in CIT vs. Malayala Manoorama & Co. and other precedents. The assessee argued that the provision need not be restricted to the current year's profit but could be made from earlier years' profits as well. The Tribunal directed the CIT(A) to verify the working submitted by the assessee and allow the deduction accordingly.

2. Deduction under Section 80P(2) for Cooperative Societies:

The assessee claimed that its income was exempt under Section 80P(2) as it was a primary agricultural credit society. The AO disallowed this claim, stating that the principal object of the assessee was to finance cooperative societies and carry on banking business, not primarily to provide long-term credit to agriculturists. The AO also noted that the deduction could not be claimed without filing a revised return. The CIT(A) upheld this view, and the Tribunal dismissed the ground as not pressed by the assessee.

3. Disallowance of Overdue Interest Reserve:

The AO disallowed Rs. 1,15,00,000/- claimed as overdue interest reserve, stating it was a provision. The assessee argued that this amount was credited to the profit and loss account and debited back as per RBI guidelines, resulting in no real income. The Tribunal, relying on the ITAT Ahmedabad Bench decision in Karnavati Co-op. Bank Ltd. and the Supreme Court judgment in UCO Bank vs. CIT, deleted the disallowance, holding that no income accrued and no addition could be made.

4. Disallowance of Gift Expenditure:

The AO disallowed Rs. 16,00,000/- spent on gifts to members of the cooperative society, stating no evidence was provided to show that the business of the bank increased due to this expenditure. The CIT(A) upheld this disallowance. The Tribunal, however, allowed the expenditure, citing the Gujarat High Court judgments in CIT vs. Dascroi Taluka Co-operative Purchase and Sales Union Ltd. and Karjan Co-operative Cotton Sales vs. CIT, which held that such expenditure is allowable as business expenditure.

Conclusion:

For the assessment year 2007-08, the Tribunal partly allowed the appeal, directing the CIT(A) to verify the working for the deduction under Section 36(1)(viia) and allow it accordingly. For the assessment year 2008-09, the Tribunal allowed the appeal, directing the AO to allow the deduction for overdue interest reserve and gift expenditure.