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2017 (11) TMI 1645 - AT - Income TaxBad debts - allowability - general provision of 25% on standard assets - Held that - The amount is not available to the assessee for its business purpose. The assessee has extended its meaning by interpreting net worth and the Companies Act. Therefore we are unable to accept the argument of the assessee that the bad debts reserve is allowable as a deduction and this ground of appeal of the assessee Reserve for bad and doubtful debts - Held that - We agree with the assessee s argument that if the expenditure is debited to the P&L account bank would incur a loss therefore the assessee has rightly debited the expenses to the customer s account. Hence the same should be included in the outstanding balance of the debts and while creating the provision the debt should be included by the expenses incurred by the bank. The Cooperative bank is eligible for deduction u/s 36(1)(viia) of the APCS Act @ 7.5% of the profits and 10% of its rural advances. The deduction claimed by the assessee as a provision for doubtful debts or NPA is within the limit provided by the Income Tax Act u/s 36(1)(viia) inclusive of the expenses. Therefore the above sums are allowable u/s 36(1)(viia) of the Act accordingly we uphold the order of the Ld. CIT(A) and dismiss the appeal of the revenue on this ground. Reserve created for sundry debtors - Held that - The assessee is a Cooperative Bank following the mercantile system of accounting. The subsidy released to PACS was not a loan it was the assistance of funds in lieu of expected subsidy. Therefore the order of the Ld. CIT(A) on this issue cannot be sustained hence set aside and the order of the A.O. is restored and the addition is upheld. DCCB s share of 35% of waiver of penal interest and interest on overdue deposits - Held that - Though the subject expenditure does not fall u/s 36(2) or 36(1)(viia) of the Act undoubtedly the same is business loss and the aggregate amount of overdue interest and penal interest and the NPA provision did not exceed the limit for allowing the deduction u/s 36(1)(viia) or 36(1)(vii) of the Act. Since the expenditure is genuine and incurred in the ordinary course of business we hold that the IOD interest and the penal interest should be allowed as business loss and accordingly the appeal of the revenue is dismissed and the order of the Ld. CIT(A) is upheld. Over due interest - Held that - Since the issue involve verification with regard to the true and correct nature of the overdue interest both the parties have agreed to remit the matter back to the file of the A.O. to verify the true and correct nature of interest whether it is relating to bad and doubtful debts or NPA or on performing assets. Therefore we direct the A.O. to verify the true nature of the overdue interest and decide the issue afresh on merits. This ground of appeal of the revenue is allowed for statistical purposes. Provision of NPA - Held that - AO did not dispute the fact that the sum represented the interest on advance which was categorized as NPA. The AO did not bring any evidence to show that the same was not NPA and not covered by the prudential norms of RBI. The Ld. D.R did not controvert that the provision for Bad and doubtful inclusive of NPA provision crossed the limit provided in section36(1)(viia). Since the deduction claimed by the assessee is within the limit of section 36(1)(viia) of the Act the same is allowable as per the provisions of section 36(1)(viia) of the Act therefore we do not find any infirmity in the order of the CIT(A) and the same is upheld. 3% interest on agricultural stabilization fund - Held that - Since the amount is interest paid on the deposits of the co-operative societies relating to fund called agricultural credit stabilization fund the same is a business expenditure and the CIT(A) has allowed the same correctly. There is no dispute with regard to the genuineness of the expenditure and we agree with the Ld. CIT (A) that it was not an appropriation of the profits and it was the interest paid on the deposits of PACS. The appeal of the revenue on this ground is dismissed. Reserve for Co-operative Educational fund for the assessment year 2010-11 - Held that - The assessee submitted that the payment was made to A.P. State Cooperative union to give training to their staff but not the contribution to the Union. Therefore as rightly held by the CIT(A) the payment or contribution to co-operative educational fund is diversion of profits at source by over riding title under the Act. Hence we do not find any reason to interfere with the order of the Ld. CIT(A) and the same is upheld.
Issues Involved:
1. Deduction of statutory reserve created under Section 46(e) of the Andhra Pradesh Co-operative Societies Act, 1964. 2. Deduction of reserve for bad and doubtful debts for the assessment year 2007-08. 3. Deduction of reserve created for sundry debtors due to Government for the assessment year 2007-08. 4. Deduction of DCCB’s share of 35% of waiver of penal interest and interest on overdue deposits for assessment years 2007-08, 2008-09, and 2010-11. 5. Deduction of overdue interest for assessment years 2007-08 and 2008-09. 6. Deduction of provision for NPA for the assessment year 2008-09. 7. Deduction of 3% interest on agricultural stabilization fund for the assessment year 2008-09. 8. Deduction of reserve for Co-operative Educational fund for the assessment year 2010-11. Detailed Analysis: 1. Deduction of Statutory Reserve Created under Section 46(e) of the APCS Act: The assessee claimed deductions for statutory reserves created under Section 46(e) of the APCS Act for assessment years 2007-08, 2008-09, and 2010-11. The A.O. disallowed the deductions, arguing that Section 46(e) was omitted w.e.f. 25.4.2001 and thus no longer applicable. The CIT(A) allowed the deductions, but the Tribunal found that Section 46 deals with the investment of funds and not the appropriation or diversion of income, thus rejecting the assessee's claim. The Tribunal held that the reserve creation was not a diversion of income by overriding title and dismissed the assessee's argument. 2. Deduction of Reserve for Bad and Doubtful Debts for A.Y. 2007-08: The assessee claimed deductions for reserves created for sundry debtors, arguing that these were provisions for bad and doubtful debts in compliance with RBI norms. The A.O. disallowed these claims, but the CIT(A) allowed them, stating these were legitimate business expenditures. The Tribunal upheld the CIT(A)'s decision, noting that the deductions were within the limits provided by Section 36(1)(viia) of the Income Tax Act. 3. Deduction of Reserve Created for Sundry Debtors Due to Government for A.Y. 2007-08: The assessee created a reserve for interest subsidy receivable from the Government, which was disallowed by the A.O. but allowed by the CIT(A). The Tribunal sided with the A.O., stating that the subsidy receivable from the Government cannot be treated as a bad and doubtful debt unless the Government repudiates its obligation. Thus, the Tribunal restored the A.O.'s order and upheld the addition. 4. Deduction of DCCB’s Share of 35% of Waiver of Penal Interest and Interest on Overdue Deposits: The assessee claimed deductions for its share of waiver of penal interest and interest on overdue deposits for assessment years 2007-08, 2008-09, and 2010-11. The A.O. disallowed these claims, but the CIT(A) allowed them, stating that the waivers were genuine business expenditures. The Tribunal upheld the CIT(A)'s decision, agreeing that the waivers were incurred in the ordinary course of business and were allowable as business losses. 5. Deduction of Overdue Interest for A.Y. 2007-08 & 2008-09: The A.O. disallowed overdue interest, arguing that it should not be recognized as income. The CIT(A) allowed the deduction, citing previous decisions. The Tribunal remitted the matter back to the A.O. for verification of whether the overdue interest related to bad and doubtful debts or performing assets, thus allowing the appeal for statistical purposes. 6. Deduction of Provision for NPA for A.Y. 2008-09: The assessee claimed a deduction for NPA provision, which the A.O. disallowed. The CIT(A) allowed the deduction, stating it was within the limits of Section 36(1)(viia). The Tribunal upheld the CIT(A)'s decision as the deduction was within the statutory limits. 7. Deduction of 3% Interest on Agricultural Stabilization Fund for A.Y. 2008-09: The A.O. disallowed the interest, treating it as an investment rather than an expenditure. The CIT(A) allowed the deduction, stating it was interest paid to depositors. The Tribunal agreed with the CIT(A), confirming that it was a business expenditure and dismissing the revenue's appeal. 8. Deduction of Reserve for Co-operative Educational Fund for A.Y. 2010-11: The A.O. disallowed the reserve, treating it as an appropriation of profits. The CIT(A) allowed the deduction, stating it was a statutory obligation. The Tribunal upheld the CIT(A)'s decision, agreeing that the payment was a statutory obligation and thus allowable. Conclusion: The Tribunal's decision was a mix of upholding and reversing the CIT(A)'s orders, with several issues remitted back to the A.O. for further verification. The appeals were partly allowed for statistical purposes.
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