2011 (11) TMI 367 - AT - Income Tax

Co-operative Bank engaged in banking business dis-allowance u/s 40(a)(ia) of clearing house charges and service/maintenance charges of Furniture &Fixture addition made of accrued interest on NPA Held that - Assessee was only a sub-member of the clearing house. However the clearing agent is Bhagyodaya Co-op. Bank Ltd. The MICR clearing charges of the assessee were therefore recovered from the said clearing agent by the clearing house. The said agent has duly deducted TDS on payment of MICR charges. Consequent thereupon the assessee was required to reimburse the bank MICR charges to Bhagyodaya Bank. The said reimbursement charges were inclusive of TDS as well. Therefore since the MICR charges were merely reimbursed by the assessee and that there was no payment by member of the bank to clearing agent as far as the assessee is concerned therefore the assessee was not required to deduct the TDS on payment of reimbursement. Otherwise also it would tantamount to double deduction of TDS on the same payment of MICR bank charges Decided in favor of assessee. Services Charges claimed by assessee stated to be in the nature of building maintenance and furniture and fixture charges Held that - Since the payment being connected to the part of the fixtures of the rented property therefore the assessee was required to deduct the tax on payment of service charges as it was held by the Revenue Authorities as rent Decided against the assessee. Accrued interest on NPA Revenue contending that since the assessee being not covered by Section 43D therefore accrued interest should have been offered to tax - Held that - By the insertion of a special provision to tax interest income in the case of public financial institution etc. section 43-D has to be applied in its letter and spirit. In the case of UCO Bank (1999 - TMI - 5746 - SUPREME Court) it was held in respect of interest income on sticky advances to be taxed only when actually received as prescribed by CBDT Circular Decided in favor of assessee.

Summary

Issues Involved:
1. Disallowance of Clearing House Charges
2. Disallowance of Service Charges of F&F
3. Accrued Interest on Non-Performing Assets (NPA)

Detailed Analysis:

1. Disallowance of Clearing House Charges:

The primary issue was the disallowance of Rs. 2,56,309 under the head "Clearing House Charges." The Assessing Officer (AO) noted that the assessee, a Co-operative Bank, paid these charges to Bhagyodaya Co-op. Bank Ltd. without deducting tax at source (TDS), invoking section 40(a) of the I.T. Act. The assessee argued that these were reimbursement charges and TDS was already deducted by Bhagyodaya Co-op. Bank Ltd. The CIT(A) upheld the AO's decision, stating that the MICR Centre's services fell under managerial services as per section 194J, requiring TDS deduction. However, the Tribunal reversed this finding, concluding that the charges were merely reimbursements and not subject to TDS, thus allowing the assessee's claim.

2. Disallowance of Service Charges of F&F:

The assessee claimed an expenditure of Rs. 1,46,079 for building maintenance and furniture and fixture charges. The AO disallowed this claim due to non-deduction of TDS. The CIT(A) upheld the AO's decision, noting that the payments were part of rent and exceeded Rs. 50,000, thus requiring TDS deduction. The Tribunal agreed with the CIT(A), stating that the payments were connected to rented property fixtures and were rightly disallowed for non-deduction of TDS.

3. Accrued Interest on Non-Performing Assets (NPA):

The AO added Rs. 18,35,338 as accrued interest on NPA to the assessee's income, arguing that the assessee followed a mercantile system of accounting and should have credited this interest to the Profit & Loss account as per section 5 and section 43D of the I.T. Act. The CIT(A) upheld this addition, stating that the assessee, a cooperative bank, was not covered by the provisions applicable to scheduled banks and should have offered the accrued interest for taxation. The Tribunal, however, sided with the assessee, referencing section 43D and CBDT Circulars, which allow interest on NPA to be taxed only when actually received or credited. The Tribunal concluded that the assessee was not required to credit the accrued interest to its Profit & Loss account, thus reversing the CIT(A)'s decision.

Conclusion:

The Tribunal allowed the appeal partly, reversing the disallowance of clearing house charges and accrued interest on NPA, but upheld the disallowance of service charges of F&F.