2016 (9) TMI 1182 - AT - Income Tax

Disallowance of business expenditure - scholarship to the children of members, payment to legal heirs of members and gifts to members - Held that - The volume of earning of the assessee bank are mainly made through its members. These expenses are incurred by the assessee bank to attract the members confidence and loyalty towards the bank in the prevailing competition so that the members place their deposits with the assessee bank and also continue to borrow funds from the assessee bank in order to improve the profit earning and income of the assessee bank. We have also considered that the amount spent on the aforesaid expenditures is very marginal compared to the amount of interest realized on the advances made to the members by the bank and amount of deposit made by the members with the bank. Under these circumstances the amount spent on scholarship to the children of members, payment to legal heirs of members and gifts to members could be said to be expenditure incurred wholly and exclusively for the purpose of business since the amount was spent for keeping alive its good image amongst its members and ensuring that goodwill and continuity of business with the members. In view of above mentioned facts and circumstances, we find that the assessee had incurred above stated expenditure for promoting the business, even though there is no legal obligation to incur these expenditure but the assessee had incurred it for preserving business connection and goodwill of the business. Therefore, in view of above findings, we allow the aforesaid expenditure as business expenditure under Section 37 of the Act.- Decided in favour of assessee Addition on the basis of Annual Information Return data - AO made this addition on the basis of AIR information pointing that assessee has received interest on securities from the party named Backbay Reclamation - Held that - The assessee had explained before the lower authorities that there cannot be any party such as Backbay Reclamation which indicates that details were incomplete and also incorrect. The ld.CIT(A) has not given consideration to the submission of the assessee that the Assessing officer was failed to point out the complete detail of the said transaction because of which the transactions remain unexplained. In view of the above stated facts and circumstances, we consider that the addition was made in absence of complete particulars of the transactions which could not identify any such income earned by the assessee. Because of incomplete information and particulars relating to source of interest payment supplied by the AO to the assessee, the transactions could not be traced out. In view of above stated facts and circumstances, the addition made by the Assessing Officer is not justified. - Decided in favour of assessee

Issues Involved:
1. Disallowance of business expenditure amounting to ?1,07,11,630.
2. Addition of ?2,25,617 based on Annual Information Return (AIR) data.
3. Non-adjudication of the ground relating to the initiation of penalty proceedings.

Detailed Analysis:

1. Disallowance of Business Expenditure:
The primary issue pertains to the disallowance of ?1,07,11,630 as business expenditure, which includes:
- Scholarships to students: ?5,05,741
- Payment to legal heirs of members: ?19,95,000
- Gifts to members: ?82,10,889

During the assessment proceedings, the assessee argued that these expenses were incurred for business expediency to maintain a cordial relationship with members, which in turn promoted banking services. The Assessing Officer (AO) disallowed these expenses, stating they were for the benefit of members and not attributable to the business of banking.

The CIT(A) upheld the AO's decision, concluding that the expenditures were of a gratuitous nature and constituted an appropriation of profit rather than business expenses. The CIT(A) noted that the gifts and payments were regular practices and not one-time events, distinguishing this case from precedents cited by the assessee, where such expenses were allowed for specific occasions like silver jubilee celebrations.

Upon appeal, the Tribunal considered the nature of the assessee's business, where the majority of income was from interest on advances to members. The Tribunal referred to the Gujarat High Court's judgment in the case of Karjan Co-operative Cotton Sales Ginning Pressing Society, which allowed similar expenses for maintaining goodwill among members. The Tribunal concluded that these expenses were necessary for business promotion and maintaining member loyalty, thus allowable under Section 37 of the Income-tax Act. Consequently, the Tribunal allowed the appeal, reversing the disallowance.

2. Addition Based on AIR Data:
The second issue involved the addition of ?2,25,617 based on AIR data. The AO added this amount as the assessee failed to explain the entries related to interest other than securities. The CIT(A) upheld the AO's decision, noting that the assessee did not provide satisfactory explanations during appellate proceedings.

The Tribunal, however, found that the assessee had contended the details provided by the AO were incomplete and incorrect, specifically mentioning a party named "Backbay Reclamation," which the assessee claimed did not exist. The Tribunal concluded that the addition was unjustified due to the incomplete particulars provided by the AO, which prevented the assessee from tracing the transactions. Therefore, the Tribunal allowed the appeal, reversing the addition.

3. Non-Adjudication of Penalty Proceedings:
The third issue was the non-adjudication of the ground relating to the initiation of penalty proceedings. This issue was not explicitly addressed in the Tribunal's order, indicating that it may not have been a significant point of contention in the appeal.

Conclusion:
The Tribunal allowed the assessee's appeal, reversing the disallowance of ?1,07,11,630 as business expenditure and the addition of ?2,25,617 based on AIR data. The judgment emphasized the necessity of these expenditures for business promotion and maintaining goodwill among members, aligning with the principles laid out in relevant case laws.

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