2015 (2) TMI 196 - AT - Income Tax

Disallowance u/s 40(a)(ia) - Non deduction of TDS - payment towards interest exceeding ₹ 10,000/- on time deposits - Held that - This issue is covered by the decision of the co-ordinate Bench of the Tribunal in the case of The Bagalkot District Central Co-op. Bank vs. JCIT 2015 (1) TMI 1005 - ITAT BANGALORE wherein it has been held that the assessee which is a co-operative society carrying on banking business, when it pays interest income to a member both on time deposits and on deposits other than time deposits, with such co-operative society, need not deduct tax at source u/s 194A by virtue of exemption granted vide clause (v) of sub-section(3) of the said section. - Decided in favour of assessee. Disallowance of gratuity paid to retired employees - Held that - Gratuity actually paid by the assessee cannot be disallowed u/s 36(1)(v) or u/s 40(a)(ia) of the Act. However, the assessee s contention that gratuity has been paid to the retired employees has not been verified by any of the authorities below. In view of the same, we deem it fit and proper to remit this issue to the file of the AO for limited purpose of verification as to whether gratuity has actually been paid to the employees. - Decided in favour of assessee for statistical purposes. Interest accrued on NPA but not credited to the profit and loss account - CIT(A) deleted the addition - Held that - In case of CIT vs. Canfin Homes Ltd. 2011 (8) TMI 178 - KARNATAKA HIGH COURT has laid down the law on accrual of income, particularly interest on sticky loans/NPA and has held that if in the account of the assessee, it is clearly stated that though a particular income is due to him but it is not possible to recover the same, then it cannot be said to have been accrued and the said amount cannot be brought to tax. Thus no reason to interfere with the order of the CIT(A). - Decided against revenue.

Summary

Issues involved:
1. Disallowance of interest paid to members for non-deduction of tax at source.
2. Disallowance of interest on NPA but not credited to profit and loss account.
3. Disallowance of gratuity paid to retired employees.

Analysis:

Issue 1: Disallowance of interest paid to members for non-deduction of tax at source
The Appellate Tribunal considered cross-appeals by the assessee and the Revenue against the CIT(A)'s orders for assessment years 2009-10 and 2010-11. The Assessing Officer disallowed interest paid to members exceeding Rs. 10,000 on time deposits for non-deduction of tax at source under sec.194A(3)(i)(b) of the Income-tax Act. The assessee argued that as a cooperative society engaged in banking, it was exempt from TDS under sec.194(3)(v). The Tribunal remitted the issue to the AO for verification and quantification of interest paid to members on different deposits, granting the assessee a fair hearing opportunity.

Issue 2: Disallowance of interest on NPA but not credited to profit and loss account
The Revenue's appeal focused on the deletion of addition by the AO regarding interest accrued on NPA but not credited to the profit and loss account. The CIT(A) followed a High Court decision stating interest is taxable only on receipt basis. The Tribunal upheld the CIT(A)'s decision, emphasizing that sec.43D, a provision for public financial institutions, did not apply to the assessee. Citing relevant case law, the Tribunal concluded that interest on NPA should be taxed on receipt basis, aligning with the High Court's ruling.

Issue 3: Disallowance of gratuity paid to retired employees
Regarding the disallowance of gratuity paid to retired employees, the Tribunal found that the actual payment of gratuity could not be disallowed under sec.36(1)(v) or sec.40(a)(ia) of the Act. However, verification was needed to confirm the payment to employees. The issue was remitted to the AO for verification, with a directive to consider the matter afresh based on the evidence provided.

In conclusion, the Tribunal allowed the assessee's appeals for both assessment years for statistical purposes and dismissed the Revenue's appeal on the interest accrued on NPA. The judgments were pronounced on 31st December 2014.