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TMI Blog2018 (2) TMI 507X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that there is no due and proper application of mind by the AO. The AO having reproduced the entries of general and education reserve as appearing in the profit/loss appropriation account, should have applied his mind to determine firstly, whether the entries in the profit/loss appropriation account, which are below-the-line entries in the accounting parlance, are allowable at first place in the hands of the assessee and secondly, what is the nature and purpose of these reserve and how the same are allowable and under what provisions of the Act. We donot find anything on record to suggest that the issue has been examined in the past from the perspective of section 40A(9). Hence, the above said contention of the ld AR regarding rule of consistency cannot be accepted. As we refer to the provisions of section 263 which provides that the ld Pr CIT may call for and examine the record of any proceedings under this Act in the instant case, it is not disputed that the revenue audit memo is part of the records. CIT has examined the assessment records as well as revenue audit memo available on record and after examining the same and providing a detailed reasoning in the revision order come ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diction u/s 263 of the Act and hence, the same kindly be quashed. 3. The ld. Pr. CIT, Ajmer erred in laws as well as on the fact of the case in misinterpreting the provision of u/s 40A(9) of the Act by holding that the claim of the assessee by transferring the funds to the General Reserve, Education Reserve and towards Gratuity Fund (which were paid to comply with the specific requirement of the relevant law, governing the appellant Cooperative Society), were not allowable claims. The deduction so claimed was fully allowable u/s 40A (9) and/or, in any case, u/s 37 (1) of the Act and hence, were rightly allowed by the Assessing Officer in the assessment order dated 13.12.2013. Therefore, the disallowance so made by the ld. Pr. CIT in the impugned order u/s 263 of the Act being contrary to the provisions of law and facts kindly be deleted full." 2. Briefly stated, the facts of the case are that assessee is a Co-operative Society registered under the Rajasthan Co-operative Society Act, 2001. The assessment was completed u/s 143(3) vide order dated 05.12.2013 and declared income of ₹ 54,920/- was accepted by the Assessing Officer. Subsequently, the revenue audit raised an ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individual, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except, where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (iva) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force." The point of the assessee that the reserves created u/s 43 & 48 of the Rajasthan Cooperative Societies Act 2001, qualify for deduction in the Income Tax Act, is not tenable because section 40A(9) specifies the funds contribution to which by the assessee as an Employer can qualify for deduction. As per section 40A(9) any some paid/contributed by a Society registered under the Society Registration Act, 1860 shall only be allowable as a deduction where such some is so paid, for the purpose mentioned in clause (iv) or (iva) or (v) of sub-section 1 of section 36 (1) (iv), or as required by or under any other law for the time being in force. Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 10,55,05,974/-. The transactions are certified by the Local Audit and assessed by Sales Tax Authorities as per VAT annual return furnished in Form No. 10A on 15.03.2013. On the above sales a Gross Profit of ₹ 28,86,098/- and Net Profit of ₹ 15,10,265/- has been shown. On P&L Appropriation Account ₹ 377,566/- transferred to General Reserve and ₹ 15,103/- has been transferred to Education Reserve account as per by laws of Society Act, thereafter income eligible for income tax shown at ₹ 11,17,596/-. In the P&L Account income tax of ₹ 68,808/- has been debited which has been added back for computation of income. Thus a sum of ₹ 701,331/- has been shown as business income for the year." 7. The ld AR further submitted that the assessee has been claiming these deductions towards transfer to reserves since its inception and the same has been allowed and reference was drawn to the assessment order passed for immediately preceding year 2006-07 wherein the similar deduction has been allowed. It was submitted that the ld. Pr CIT has not shown any special reason or a new ground or material change in the legal and factual position, which prevaile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wards the setting up for formation or a contribution to any fund, trust, company etc but two exception carved out are as under: (a) Where such sum if so paid for the purposes and to the extent provided u/s 36(i),(iv),(v) (vi)(i.e. contribution towards recognized provident fund) etc. approved gratuity fund (b) …….or as required by/or under any other law for the time being in force" 3.3 The entire stress of the ld. Pr CIT has been on the upper part of Sec.40A(9). Though she took note of the second exception but however, she failed to apply the same on the facts of the present case. It is pertinent to note that the ld. Pr CIT has nowhere denied that by virtue of Sec.43 and Sec.48 of The Rajasthan Cooperative Societies Act, 2001, the appellant society was obliged to transfer every year, 25% of its profits to General Reserve Fund and 1% to Education Reserve Fund as per by laws of the Society, failing which the Registrar of Society would take necessary action against the defaulter Society. Accordingly, this year the assessee was directed to transfer such funds as required by the Deputy Registrar Cooperative Society, Beawar vide order dated 27.04.2014 permitting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses of the business. 5.1 Diversion of income by overriding title: It is submitted that the transfer to General Reserve, Education Reserve and Provisions for Gratuity, are in fact a charge upon the income/ profit of the assessee in as much as by/under the relevant law, it has been made binding upon the appellant society to transfer its contributions as required in the relevant law without which they may lose their status of being a cooperative society and thus, such contributions are a essential part of the cost and the income to that extent is diverted before it reaches to the assessee. Therefore, even such contributions are made out of the profit yet however, the same are statutory liabilities and had and overriding charge over the income/profit of the assessee. Looking the matter from this angle, it seems that such contribution were rightly reduced and claimed out of the taxable profit of the society. In fact, such contributions are not essentially expenditure but the income to that extent does not at all become the income of the assessee society and therefore, has to be essentially reduced from its income. In support, reliance was placed on CIT vs. Pandavapura Sahakara Sakka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 016) 179 TTJ 0017 (UO)(Asr) Jaswinder Singh vs. CIT (2013) 31 taxmann.com 80 (Chandigarh- Trib) 9. The ld DR has vehemently argued the matter and relied upon the order of the ld Pr CIT. 10. We have heard the rival contentions and perused the material available on record. Firstly, regarding the contention of the ld AR that the AO has examined the matter after various enquiries and investigation and therefore, it is a case of change of opinion, we have gone through the query letter issued by the AO dated 14.10.2013 to which our attention was drawn and available at APB Pg 28-29 and also the response of the assessee dated 28.10.2013 available at APB Pg 30- 32 and we find that there is no specific query and consequent submission regarding general and education reserves as well as provision for gratuity which has been claimed by the assessee. Secondly, our attention was drawn to the assessment order passed by the AO wherein it is mentioned that "On P&L Appropriation Account ₹ 377,566/- transferred to General Reserve and ₹ 15,103/- has been transferred to Education Reserve account as per by laws of Society Act." To our mind, the AO has merely reproduced the accounting en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO has failed in the instant case. It is clearly a case of non-examination and non-application of mind by the AO and the order of the AO is clearly erroneous to this extent. 12. Now coming to another contention of the ld AR that the ld. Pr CIT has not shown any special reason or a new ground or material change in the legal and factual position, which prevailed for a long period of 6 years where the assessee has been claiming these deductions towards transfer to reserves since its inception and the same has been allowed and reference was drawn to the assessment order passed for assessment year 2006-07 wherein the similar deduction has been allowed. In this regard, we find that the ld Pr CIT has given a clear reasoning and finding in her order as to why the provisions of section 40A(9) are not attracted in the instant case and her findings are reproduced as under: "The point of the assessee that the reserves created u/s 43 & 48 of the Rajasthan Cooperative Societies Act 2001, qualify for deduction in the Income Tax Act, is not tenable because section 40A(9) specifies the funds contribution to which by the assessee as an Employer can qualify for deduction. As per section 40A(9) any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the assessment records as well as revenue audit memo available on record and after examining the same and providing a detailed reasoning in the revision order come to a conclusion that the assessment order passed under section 143(3) is erroneous and prejudicial to the interest of the Revenue. It is therefore not a question of borrowed satisfaction on the part of the ld Pr CIT wherein merely on account of revenue audit memo, she has initiated the proceedings under section 263. Rather she has examined the records and independently applied her mind and has come to a conclusion that the assessment order is erroneous and prejudicial to the interest of the revenue. The decisions relied upon by the ld AR are rendered in the peculiar facts of the case and are distinguishable. 15. Regarding the arguments of the ld AR on merit regarding allowability under section 40A(9), section 37(1) and diversion by overriding title, we believe that the same can be examined by the AO and the assessee shall be free to raise the same before the AO. To this extent, we modify the directions of the ld Pr CIT and the same should be read to the effect that claim of the assessee regarding the claim of the ded ..... X X X X Extracts X X X X X X X X Extracts X X X X
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