2018 (1) TMI 1431 - AT - Income Tax

Interest on share capital paid to the members of the bank - appropriation of profit and added to the total income - Held that - AO called upon the assessee to show cause as to why the said interest amount should not be treated as appropriation of profit and added to the total income. The assessee has submitted before the AO that the said interest was paid annually to all the members as, it is bound to pay such interest as per the A.P. Mutually Aided Co-operative Societies Act 1995. AO after considering the explanation of the assessee has observed that the interest on capital paid to its members amounts to appropriation of profits and such interest is paid out of the surplus of profits and cannot be a charge on income and hence cannot be allowed as deduction. The Assessing Officer further observed that the ITAT, Visakhapatnam Bench has decided this issue in favour of the assessee for the Assessment Year 2007-08, however, principle of res-judicata has no application and each year is separate and distinct and accordingly disallowed the claim of the assessee. Interest on share capital paid to the members of the assessee is allowable deduction - Held that - In assessee s own case, the facts are mutatis mutandis similar and therefore ld. CIT(A) by following the same, directed the Assessing Officer to delete the addition. Therefore, we find no infirmity in the order passed by the ld. CIT(A). Thus, these grounds of appeal raised by the revenue are dismissed. Disallowance of interest paid to the members of the bank under section 40(a)(ia) - Held that - As decided in favour of assessee clarification given in the CBDT circular No.9/2002, it is held that the assessee is not required to effect TDS on the interest payment made to its members even if it exceeds ₹ 10,000/-. The impugned disallowance made in the assessment is not in accordance with the clarification given in the CBDT Circular No.9/2002 and accordingly the AO is directed to delete the impugned disallowance made. Amortization of premium on government securities - Held that - Where the tribunal set aside the issue to the file of the Assessing Officer to decide the issue in accordance with law. In the present case, ld. CIT(A) by following the decision of the coordinate bench of the tribunal in the above referred to appeals in assessee s own case, directed the Assessing Officer to examine the issue and accordingly relied may be granted. Loss on account of merger of Ongole Cooperative Urban Bank and Ramachandrapuram Cooperative Urban Bank - Held that - As decided in assessee s own case the assessee has not paid any amount to amalgamating company. The assessee has only taken losses of amalgamating company i.e. Bobbili Co-operative bank. Therefore, the assessee has not acquired any goodwill. CIT(A) by considering the entire facts of the case has passed a detailed order by considering the provisions of law. Case laws relied by the Ld. Counsel for the assessee also decided in a different facts and circumstances and therefore, we find no application to the facts of the present case. We find no reason to interfere with the order passed by the Ld. CIT(A). This ground of appeal raised by the assessee is dismissed

Issues Involved:
1. Interest on share capital paid to members.
2. Disallowance of interest paid to members under section 40(a)(ia).
3. Amortization of premium on government securities.
4. Amortization of loss on account of merger of cooperative banks.

Detailed Analysis:

1. Interest on Share Capital Paid to Members:
The primary issue was whether the interest on share capital paid to the members of the bank is an allowable deduction. The Assessing Officer (AO) disallowed this deduction, treating it as an appropriation of profit rather than a charge on income. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) upheld the assessee’s claim, referencing previous ITAT decisions in the assessee's favor for earlier assessment years. The Tribunal reiterated that the issue had been consistently decided in favor of the assessee, thereby dismissing the revenue’s appeal on this ground.

2. Disallowance of Interest Paid to Members Under Section 40(a)(ia):
The AO disallowed the interest paid to members under section 40(a)(ia) due to non-deduction of TDS. The CIT(A) and ITAT, however, followed earlier decisions which clarified that cooperative banks are not required to deduct TDS on interest payments to their members as per section 194A(3)(v) of the Act. The Tribunal noted that the CBDT Circular No. 9/2002 supports this position, and thus upheld the CIT(A)’s order directing the AO to delete the disallowance.

3. Amortization of Premium on Government Securities:
The AO disallowed the amortization of premium on government securities, treating it as a contingent liability. The CIT(A) directed the AO to verify if the securities were held under the Held to Maturity (HTM) category, in which case the premium should be amortized over the period remaining to maturity as per RBI guidelines and CBDT Instruction No. 17/2008. The ITAT upheld this approach, finding no infirmity in the CIT(A)’s directive for verification and allowance of the claim if conditions are met.

4. Amortization of Loss on Account of Merger of Cooperative Banks:
The AO disallowed the amortization of loss claimed by the assessee on account of the merger of Ongole Cooperative Urban Bank and Ramachandrapuram Cooperative Urban Bank, as the losses were not allowable under the Income Tax Act. The CIT(A) and ITAT confirmed this disallowance, noting that the specific provisions of the Income Tax Act (sections 44DB and 72AB) override any general guidelines from the RBI. The Tribunal emphasized that the amalgamating banks had not filed returns and thus were not eligible to carry forward losses or unabsorbed depreciation, making the assessee’s claim untenable.

Conclusion:
The ITAT dismissed both the revenue's and the assessee's appeals, as well as the cross-objection filed by the assessee, thereby upholding the CIT(A)'s decisions on all issues. The Tribunal's decisions were consistent with prior rulings and statutory provisions, affirming the treatment of interest on share capital, TDS requirements, amortization of securities premium, and losses from bank mergers.

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