2021 (7) TMI 594 - HC - Income Tax

Contribution made to the funds as expenditure u/s 37(1) - HELD THAT - Funds contributed by the assessee neither remains with the Apex co-operative bank nor comes back to the assessee bank in any other form. The amounts have been spent only out of the statutory obligation. It has further been held that Section 37(1) of the Act makes an exception in case of capital expenditure or personal expenditure of the assessee or expenditure of the nature described in other Sections of Chapter IV of the Act. The case of the revenue is not that the contribution made by the assessee to the fund is capital expenditure or is in the nature of personal expenses or expenditure described in any other Sections of Chapter IV of the Act. It has further been held that assessee has incurred the expenditure for the purposes of business and therefore, the same is an admissible expenditure under Section 37 of the Act. This court in case of assessee in respect of Assessment Year 2009-10 2021 (3) TMI 528 - KARNATAKA HIGH COURT has allowed the payments made to Primary Agricultural Cooperative Societies and District Central Co-operative Banks as an admissible expenditure under Section 37 - Decided in favour of assessee.

Summary

Issues:
1. Allowability of funds expended by a cooperative bank as a deduction under Section 37(1) of the Income Tax Act, 1961.

Analysis:

Issue 1: Allowability of funds expended by a cooperative bank as a deduction under Section 37(1) of the Income Tax Act, 1961

The case revolved around the question of whether the contribution of funds by a cooperative bank, totaling ?10,86,43,785, was eligible as expenditure under Section 37(1) of the Income Tax Act. The Revenue contended that such appropriations from net profits could not be considered as expenditure under Section 37 and were merely applications of income, with no diversion of income by overriding title. The Revenue argued that certain payments made by the bank were statutory liabilities and therefore not allowable as expenditure. Reference was made to Section 57 of the Karnataka Co-operative Societies Act, 1959, and various legal precedents to support this position.

On the other hand, the Assessee argued that the contributions made towards various funds were in accordance with the bank's bye-laws and were not distributions of profits. The Assessee highlighted that appropriation of net profits could only be done in an Annual General Meeting as per Section 27 of the Act. It was emphasized that the expenditure was incurred for the business purpose of the bank and was in line with its bye-laws. Legal precedents were cited to support the Assessee's position, including a previous decision in favor of the Assessee by a division bench of the court.

The Court analyzed the submissions and held that the funds contributed by the bank were spent out of a statutory obligation and for the purpose of business, making them admissible as expenditure under Section 37 of the Act. The Court distinguished the case from those involving reserve funds cited by the Revenue, stating that they were not applicable to the current scenario. Relying on a previous judgment related to a similar issue, the Court ruled in favor of the Assessee, concluding that the amounts expended for the business purposes were allowable deductions under Section 37 of the Act.

In conclusion, the Court dismissed the appeal, finding no merit in the Revenue's arguments and ruling in favor of the Assessee regarding the allowance of funds expended by the cooperative bank as deductions under Section 37(1) of the Income Tax Act.