2023 (7) TMI 1266 - AT - Income Tax

Disallowance of provision on standard assets - Addition on the ground that it pertains to provision for standard assets and not for bad and doubtful debts and deduction u/s 36(1)(viia) can be allowed only in respect of provisions which are made for bad and doubtful debts same is liable to be disallowed - HELD THAT - We are of inclined to agree with the contentions put forth by assessee on this issue. In the case of ACIT Vs Jila Sahakari Kendriya Bank 2023 (5) TMI 68 - ITAT INODRE ITAT held that provision for Standard Assets are allowable under Section 36(1)(viia). The ITAT in the case of Nagaur Urban Co-operative Bank Ltd. 2013 (11) TMI 1696 - ITAT JODHPUR also held that the provision for standard assets was held to be a provision for bad debts allowable u/s 36(1)(viia). Thus we too hold that the provision made by assessee qua standard assets is allowable u/s 36(1)(viia) of the Act. Disallowance on account of member s gift expenses - assessee had only made provision for gifts to members of the bank and hence it is not allowable as business expenditure - assessee did not furnish any documentary proof in support of the genuineness of the aforesaid expenses - HELD THAT - Similar expenses have been allowed in the immediately preceding assessment year in the interest of justice the matter is being set aside to the file of Ld. CIT(Appeals) to check the veracity/genuineness of expenses incurred for gifts to its members and the assessee may also give supporting evidence in support of genuineness of the claim. Golden/Diamond Jubilee expenses - Addition made as expenses as bogus and not incurred for the purpose of business - HELD THAT - Department has made a specific allegation that the assessee has not been able to establish the genuineness of the expenses and the fact that these expenses had in fact been incurred at all. Ld. CIT(Appeals) in the appellate order has made a specific noting that statement of account is not supported by any records and evidences. Accordingly in the interest of justice the matter is being set aside to the file of Ld. CIT(Appeals) to check the veracity/genuineness of expenses incurred. Disallowance u/s 14A r.w.r. 8D - assessee had earned a dividend income - HELD THAT - In the case of South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT held that where interest free funds available with assessee banks exceeded their investments in tax-free securities; investments would be presumed to be made out of assessee s own funds and proportionate disallowance was not warranted u/s 14A on ground that separate accounts were not maintained by assessee for investments and other expenditure incurred for earning tax-free income. In the case of UTI Bank Ltd. 2022 (10) TMI 613 - SC Orde held that where interest free funds available with assessee exceeded their investments in tax-free securities investments would be presumed to be made out of assessee s own funds and proportionate disallowance was not warranted u/s 14A.

Issues Involved:
1. Disallowance of Rs. 40 lakhs on provision for standard assets.
2. Disallowance of Rs. 23.25 lakhs on account of member's gift expenses.
3. Disallowance of Rs. 51.6 lakhs for Golden/Diamond Jubilee expenses.
4. Disallowance under section 14A of the Income Tax Act.

Summary of Judgment:

Ground Number 1: Disallowance of Rs. 40 lakhs on provision for standard assets
The issue involved the disallowance by the Assessing Officer (AO) of Rs. 40 lakhs on the grounds that it pertained to provision for standard assets and not for bad and doubtful debts, thus not allowable under section 36(1)(viia) of the Income Tax Act. The AO relied on the decision of the Ahmedabad Tribunal in the case of Bharuch District Central Cooperative Bank. The CIT(A) upheld the AO's decision, citing the Supreme Court's judgment in Southern Technologies Ltd.

The ITAT, however, agreed with the assessee's contention that the provision for standard assets is allowable under section 36(1)(viia), citing various ITAT decisions, including ACIT Vs Jila Sahakari Kendriya Bank and Nawanshahr Central Cooperative Bank. The ITAT allowed the appeal, holding that the provision made by the assessee for standard assets is indeed deductible under section 36(1)(viia).

Ground Number 2: Disallowance of Rs. 23.25 lakhs on account of member's gift expenses
The AO and CIT(A) disallowed the expenses for gifts to members, arguing that the assessee had only made a provision and had not furnished documentary proof of the expenses. The assessee argued that the expenses were permitted by the Registrar of Cooperatives in Gujarat State and were incurred on items like cookware, clothes, and footwear.

Given that similar expenses were allowed in the preceding assessment year, the ITAT set aside the matter to the CIT(A) to verify the genuineness of the expenses and allowed the appeal for statistical purposes.

Ground Number 3: Disallowance of Rs. 51.6 lakhs for Golden/Diamond Jubilee expenses
The AO and CIT(A) disallowed these expenses, considering them bogus and not incurred for business purposes. The assessee argued that the expenses were for purchasing and distributing school bags to the children of members, aimed at enhancing the bank's image and motivating members.

The ITAT noted that the Department had questioned the genuineness of the expenses and the lack of supporting evidence. The matter was set aside to the CIT(A) to verify the genuineness and actual payment of these expenses, and the appeal was allowed for statistical purposes.

Ground Number 4: Disallowance under section 14A of the Act
The AO worked out a disallowance of Rs. 2,67,436 under section 14A read with Rule 8D, while the CIT(A) restricted it to Rs. 1,99,749, equivalent to the exempt dividend income earned. The assessee argued that its tax-free funds exceeded the average investment, citing the Supreme Court's decisions in South Indian Bank Ltd and UTI Bank Ltd, which held that investments would be presumed to be made out of the assessee's own funds if interest-free funds exceeded the investments.

The ITAT, following the Supreme Court's settled proposition, allowed the appeal, holding that no disallowance was warranted under section 14A in the given facts.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific issues being remanded to the CIT(A) for further verification. The ITAT pronounced the order in the open court on 26-07-2023.

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