2023 (1) TMI 1227 - AT - Income Tax

Additions on account of special reserve - amount transferred to the capital reserve account - AR submits that the amount transferred to capital reserve fund represents the entrance fees collected from its shareholders, unclaimed deposit represents capital receipts, cannot be taxed as income - HELD THAT - We are of the considered opinion that the entrance fees or subscription fees received by the members is on capital account does not form part of the revenue receipts. Similarly, as regards to the old balance of DD payable to sundry creditors, there is no cessation of liability and mere write off of the DD payable to sundry creditors etc and never the unilateral act on the part of the appellant by writing off of the amount and credit to Profit Loss Account neither amount to cessation of liability or income. In the circumstances, we direct the Assessing Officer to allow this ground of appeal no.1. Allowability of deduction u/s 36(1)(viii) - The appellant bank had derived income on lending money for the purpose of purchase construction of houses. There is no dispute that the appellant is specified entity being the cooperative bank as per sub-clause (4) of section 36(1)(viii) of the Act. The term long term finance has been defined under clause (h) to mean any loan or advance provided for a period for not less than 5 years. We do not perceive any distinction between term development of housing in India and purchase construction of housing in India for residential purposes. Thus, we are of the considered opinion that the claim made by the appellant clearly falls within the exemption under the provisions of section 36(1)(viii) of the Act and the assessee bank is entitled for deduction. Accordingly, the ground of appeal no.2 stands allowed.

Summary

Issues:
1. Addition of special reserve u/s 36(1)(viii)
2. Taxability of amount transferred to capital reserve account

Analysis:

Issue 1: Addition of special reserve u/s 36(1)(viii)
The appellant, a cooperative society engaged in banking, filed an appeal against the order of the ld. CIT(A) for the assessment year 2013-14. The Assessing Officer made several additions to the total income, including disallowances under different heads. The ld. CIT(A) confirmed the addition on account of special reserve u/s 36(1)(viii) but granted relief on other additions. The appellant contended that it is entitled to exemption under section 36(1)(viii) for interest earned on housing loans. The Assessing Officer rejected the claim, stating the appellant was not engaged in providing long-term finance for the development of housing in India. The appellant argued it met all conditions under the provision and that the term "development of housing in India" was misconstrued by the lower authorities. The Tribunal held that the appellant, being a specified entity, was entitled to the deduction under section 36(1)(viii) for income derived from lending for purchase and construction of houses, allowing the ground of appeal related to this issue.

Issue 2: Taxability of amount transferred to capital reserve account
The appellant challenged the addition of an amount transferred to the capital reserve account. The Assessing Officer treated this amount as income, while the appellant argued it represented capital receipts and should not be taxed. The Tribunal held that the entrance fees collected and unclaimed deposits, being capital receipts, did not form part of revenue receipts. It was determined that there was no cessation of liability regarding old balances, and the mere write-off did not amount to income. Citing the Supreme Court's ruling in a relevant case, the Tribunal allowed this ground of appeal, directing the Assessing Officer to exclude the amount from total income. The Tribunal emphasized that there was no estoppel against law, even if the ground was not pressed during the first appellate stage.

In conclusion, the Tribunal allowed the appeal filed by the assessee, providing relief on both the addition related to special reserve u/s 36(1)(viii) and the taxability of the amount transferred to the capital reserve account.