2016 (9) TMI 1078 - HC - Income Tax

TDS u/s 194A - Whether the interest paid to members of a Co-operative Bank above ₹ 10,000/- should be added to tax or not?? - Held that - The provisions of the section 194(3)(v) of the Income-tax Act have been amended so as to expressly provide that the exemption provided from deduction of tax from payment of interest to members by a co- operative society under Section 194A(3)(v) of the Income-tax Act shall not apply to the payment of interest on time deposits by the co-operative banks to its members. As this amendment is effective from the prospective dated of 1st June, 2015, the co-operative bank shall be required to deduct tax from the payment of interest on time deposits of its members, on or after the 1st June 2015. Hence, a cooperative bank was not required to deduct tax from the payment of interest on time deposits of its members paid or credited before 1st June 2015 Gratuity payable to its employees - availability for deduction - Held that - The counsel for the assessee would be quick to point out that even if it is not permissible to make a deduction, in such an event, on making payment as provided under Section 43-B (b), it would be permissible if the actual payment is made and these sections are mutually exclusive and therefore, the Karnataka Electricity Board case is no longer relevant, by virtue of the amendment to Section 40-A(7). Under Section 43-B, the assessee had not merely made a provision but payment was actually made and therefore, was entitled to deduction, would also answer this question as to whether the payment made towards a gratuity fund could be deducted. Interest receivable from non-performing assets, bad and doubtful debts - the actual expression used is interest payable and not reflected in the profit and loss account, could be deducted? - Held that - the mere nomenclature adopted with reference to the bad loans and advances receivable, would refer to all non- performing assets of any nature, of whatever category it was placed as a non-performing asset and therefore, the decision of this court in Canfin Homes 2011 (8) TMI 178 - KARNATAKA HIGH COURT would squarely apply. Accordingly, the above question of law also stands answered

Summary

Issues:
1. Taxability of interest paid to members of a Co-operative Bank above ?10,000.
2. Deductibility of gratuity payable to employees.
3. Deductibility of interest receivable from non-performing assets, bad, and doubtful debts.

Analysis:

Issue 1:
The Court referred to a circular of the Government of India and a Division Bench judgment in a related case to rule that interest paid to members of a Co-operative Bank above ?10,000 should be added to tax. The circular clarified that the exemption from tax deduction on interest payments to members by a co-operative society does not apply to co-operative banks post an amendment effective from June 1, 2015. Therefore, the question of law regarding this issue was deemed settled.

Issue 2:
The Court cited precedents to address the deductibility of gratuity payable to employees. It discussed the interpretation of Section 36(1)(v) of the Income Tax Act and emphasized that even if a contribution does not fall under this section, the assessee can claim deduction under Section 37(1) if requirements are met. The Court highlighted cases where provisions for gratuity funds were allowed as deductions under Section 37. The discussion also touched upon amendments to Section 40(A)(7) and Section 43-B, clarifying the conditions for claiming deductions related to gratuity funds.

Issue 3:
Regarding the deductibility of interest receivable from non-performing assets, the Court referred to a judgment involving Canfin Homes Ltd. to explain the treatment of income under the mercantile system of accounting. It emphasized that income should be recognized only when actually received, especially in the case of non-performing assets. The Court elaborated on the definition of non-performing assets and asset classification norms, indicating that all categories of non-performing assets, including bad loans and doubtful debts, should be treated similarly for tax purposes. The decision in the referenced case was applied to answer the question on the deductibility of income from non-performing assets.

In conclusion, the judgment in the referenced case, ITA No.200002/2015, provided guidance for resolving the substantial questions of law raised in the present appeal. The Court disposed of the appeal based on the decisions made in the connected appeals, ensuring consistency in the application of tax laws to the specific issues discussed in the judgment.