2017 (4) TMI 961 - AT - Income Tax

Exemption u/s 80P(2) eligibility - Addition u/s 41 - transfer to Reserve Fund of the excess provisions made for establishment and other expenses in earlier years when the business income of assessee bank was totally exempt u/s 80P of I.T. Act, 1961 amounts to cessation of liabilities - Held that - Unless and until there is one to one correlation between the expenses disallowed earlier and benefit obtained now by way of reversal of such provision for expenses, it cannot be held that the provisions of section 41(1) are not applicable. Therefore, the above said contention of the ld AR in respect of deemed disallowance of the provisions of expenses by way of a note in the computation of income and hence, not applicability of section 41(1) cannot be accepted. Whether allowance/deduction in section 41(1) means that the same are made while computed taxable income but when whole income of assessee bank is exempt then they cannot be inferred any allowance/deduction having made while computing exempt income? - Held that - We have given a careful consideration to the said contention raised by the ld. AR but we are unable to accept the same. Section 41(1) talks about allowances/deductions which has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The said allowance/deduction u/s 41(1) has not been made subject to deduction under Chapter-VIA of the Act as claimed ld. AR. If the contention raised by the ld. AR is accepted, then it leads to the situation where no allowance or deduction will have be claimed by the assessee and further, in such circumstances, provisions of section 41(1) cannot be invoked where an assessee is eligible for deduction under Chapter-VI-A of the Act. In our view, the said contention of the ld AR will make section 41(1) infructous in such cases. The income that is eligible for deduction under section 80P has to be computed in accordance with the provisions of Act and which includes section 41(1) of the Act. Therefore, firstly the income has to be computed taking into consideration the provisions of section 41(1) of the Act and thereafter, the deduction under Section 80P has to be determined. It may so happen that the whole of the income so computed in accordance with the provisions of the Act is held eligible for deduction under section 80P of the Act however, the same cannot be a basis to hold that provisions of section 41(1) are not applicable. There could also be situations where the business which is eligible for section 80P is no more in existence and the assessee has obtained some benefit, provision of section 41(1) continues to apply. Where the assessee continues to carry on the same business but in the later years, it is not eligible for section 80P due to amendment in the law as has happened in the instant case, it cannot be held that the provisions of section 41(1) are not applicable. The provisions of the Act, therefore, have to be read harmoniously and in such a manner that none of the provisions are rendered infructuous. No infirmity in the order of the AO who has rightly followed the directions of the Coordinate Bench and the order of the ld. CIT(A) which is hereby confirmed. - Decided against assessee .

Summary

Issues Involved:
1. Confirmation of addition of ?1,18,99,651/- to the income of the appellant.
2. Applicability of Section 41(1) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Confirmation of Addition of ?1,18,99,651/- to the Income of the Appellant:

The assessee, an apex Co-operative Bank of Rajasthan, had its income exempt under Section 80P(2) of the Income Tax Act in earlier years. For the assessment year 2007-08, the entire income became taxable due to the withdrawal of exemption by the insertion of Section 80P(4) by the Finance Act, 2006. The original assessment included a disallowance of ?1,18,99,651/- on account of transfer to statutory reserve from carried forward provisions, treating it as taxable under Section 41 of the Act. The CIT(A) deleted this addition, but the ITAT restored the issue to the AO for re-examination. The AO reconfirmed the addition, and the CIT(A) upheld this decision, leading to the present appeal.

2. Applicability of Section 41(1) of the Income Tax Act, 1961:

The AO examined the nature of provisions written back and found that the provisions for establishment expenses were claimed as expenditure in the profit and loss account in preceding years but were not added back in the computation of income. The AO concluded that the transfer of liability of expenses directly to reserve amounted to cessation of liabilities and was taxable as income under Section 41(1).

The assessee contended that the provisions of Section 41(1) apply only if an allowance or deduction had been made in the computation of profits in respect of loss, expenditure, or trading liability, and subsequently, any benefit is obtained by way of remission or cessation thereof. The assessee argued that since the entire income was exempt under Section 80P(2), the provisions for expenses should be deemed to have been disallowed, and thus, Section 41(1) should not apply.

The Tribunal referred to the provisions of Section 41(1) and relevant case laws, including the decision of the Hon'ble Gujarat High Court in CIT vs. Bharat Iron and Steel Industries, which emphasized that the allowance or deduction must have been made in the assessment for any year in respect of loss, expenditure, or trading liability. The Tribunal held that the provisions of Section 41(1) are applicable irrespective of the exemption under Section 80P(2). The Tribunal concluded that the income eligible for deduction under Section 80P must be computed in accordance with the provisions of the Act, including Section 41(1).

The Tribunal found no infirmity in the AO's order, which followed the directions of the Coordinate Bench, and confirmed the CIT(A)'s order. The appeal filed by the assessee was dismissed, and the addition of ?1,18,99,651/- was upheld.

Conclusion:

The Tribunal dismissed the appeal filed by the assessee, confirming the addition of ?1,18,99,651/- to the income of the appellant under Section 41(1) of the Income Tax Act, 1961. The Tribunal held that the provisions of Section 41(1) are applicable irrespective of the exemption under Section 80P(2), and the income eligible for deduction under Section 80P must be computed in accordance with the provisions of the Act.