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TMI Blog2017 (11) TMI 1645X X X X Extracts X X X X X X X X Extracts X X X X ..... jections filed by the assessee are in support of the order passed by Ld. CIT(A). 2. The first issue in this case is related to the statutory reserve created u/s 46(e) of the Andhra Pradesh Co-operative Societies Act, 1964 (hereinafter called as the APCS Act). The assessee has created reserve of Rs. 88,58,130/- for the assessment year 2007-08, Rs. 60,71,208/- for the assessment year 2008-09 and Rs. 30,40,970/- for the assessment year 2010-11. The assessee claimed the same as deduction before the A.O. u/s 36(1)(viia) of the Income Tax Act, 1961 (hereinafter called as 'the Act') and argued that the reserve is similar to the Non-Performing Asset (NPA). The assessee also argued before the A.O. that the creation of reserve is mandatory in accordance with the provisions of section 46 sub-section (e) of APCS Act 1964. The A.O. considered the submissions made by the assessee and also considered section 46 of APCS Act and observed that since the section 46 deals with the investment of funds, the Ld. A.O. held that it is the reserve created for appropriation but not the expenditure. The Ld. A.O. relied on the decision of Hon'ble ITAT 'A' Bench, Hyderabad in the case of Andhra Bank Vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its funds i.e. the investments of available funds by the society. It is not dealing with appropriation or diversion of the income of society. Section very clearly specifies that society to invest it's surplus funds for the business of the society. Though the assessee argued that the funds invested in bad debts reserve cannot be used by the assessee society in specified securities. There is no such restriction placed in the said section. Since section 46 deals with the investment of funds, it has no relation with the appropriation or distribution or diversion of the profits. It is merely sources of funds and application of funds, therefore, it has no impact on the income of the assessee and no deduction required to be allowed and it is not diversion by overriding title as held by the Ld.CIT(A). 5. The second proposition submitted by the Ld.D.R is, as per section 46 of APCS Act, though the assessee required to invest 0.25% of its short term and medium term loans, out of the funds borrowed from Cooperative Finance Institutions, the assessee has not submitted the amounts borrowed from Co-operative Finance Institutions and the loans granted out of the funds borrowed by the assessee's so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the latest available Balance sheet are available for distribution as Dividend. 7. The Ld. A.R. relied on the decision of Keshkal Co-operative Marketing Society Limited Vs. CIT reported in (1987) 165 ITR 437 (MP) and various other decisions and argued that the assessee is entitled for deduction of the statutory reserve by diversion of income by overriding title and accordingly requested to allow the same and uphold the order of the Ld. CIT(A). 8. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. We have also gone through the APCS Act referred to by the assessee. Before the A.O. and the Ld. CIT(A), the assessee has argued that the statutory reserve was created as per section 46(e) of APCS Act. On careful verification of the APCS Act, section 46(e) was omitted w.e.f. 25.4.2001, therefore, reliance placed by the assessee as well as the Ld. CIT(A) while allowing the appeal on section 46(e) is misplaced and , the Ld. CIT(A) has not examined the issue properly and has not correctly applied the provisions of section 46(e) of the APCS Act. 9. Section 46 of the APCS Act deals with investment of funds. The sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication of funds. The section mandates the society to create bad debts reserve out of its sources of funds equalient to bad debts. It does not give any direction or any mandate to the assessee society to divert the income towards the bad debts reserve. Section 45 of the APCS Act deals with the disposal of profits, section 44 deals with funds other than net profits not to be divided among the members. Therefore, the bad debts reserve is created not out of the profits but out of the funds other than the profits of the society. When specific section is provided to dispose of profits, there is no need to interpret the investments required to be made as per the proviso to section 46 of the APCS Act as income by over riding title. Therefore, we hold that section 46 of the APCS Act deals with the investment of available funds of the society such as Share capital, Loans, Deposits etc. in specified assets in the form of postal savings bank, nationalized bank etc.. but not distribution of profits or diversion of income by over riding title. Hence this argument of the assessee is that the reserve is created by diversion of income by over riding title is incorrect and accordingly rejected. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee for its business purpose. The assessee has extended its meaning by interpreting net worth and the Companies Act. Therefore, we are unable to accept the argument of the assessee that the bad debts reserve is allowable as a deduction and this ground of appeal of the assessee for the assessment years 2007-08, 2008-09 & 2010-11 are dismissed. 12. The second issue is with regard to the reserve for bad and doubtful debts relating to the A.Y. 2007-08. The assessee has claimed the reserve for bad and doubtful debts as under: S.No. Issue Amount (`) A.Y. 2007-08 1. Reserve created for Sundry Debtors - due to 62,61,426 2. Reserve created for Sundry Debtors - due to Indvls. 45,88,706 3. Reserve created for Sundry Debtors - due to Instns. 36,15,339 4. NPA Provision Total 1,44,65,471/- 13. The assessee claimed deduction of Rs. 1,44,65,471/- under the provision of sundry debtors. The assessee submitted that out of the total amount of provision of sundry debtors, Rs. 1,68,61,426/- a sum of Rs. 1.06 crores was NPA at branch level and the sum of Rs. 62,61,426/- was related to the charges recoverable from the borrowers such as legal not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore making this deduction, as canvassed by the AO was stated as not the correct legal position. It was also argued that alternatively, the above three items of debit to the profit and loss account be allowed as deductions in computing the profits and gains of the appellant's business, as the AG himself admitted that the three items represent legal and other expenses incurred by them during the curse of their business', which have to be allowed. The appellant's AR relied on the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg.co Ltd vs. CIT (Central), reported in (1971) 82 ITR 363 (SC), wherein it has been held that where liability exists in presenti, the claim for the same cannot be denied merely because it has been disputed, where the appellant maintains his book of account on the mercantile system of accounting. I find force in the submissions made by the AR and I hold that the three items aforementioned merit deduction in the light of the categorical finding of the AG that the debits represented expenditure incurred in the course of the appellant's business. It may be noted here that the appellant incurred the expenditure and debited th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for collection of the amounts advanced, therefore, the fact that the amounts are due from the customers of the bank was not disputed by the A.O. The A.O. accepted the genuineness of the expenditure and also did agree that the assessee should have written off the entire amount by debiting the P&L account. The assessee's argument was that if the entire amount was debited to the P&L account, the same cannot be collected from the customers. Therefore, the assessee has debited the same amount to the account of the customers. It is normal practice of the Banks to debit the expenses relating to the customer to their account so as to enable the bank to collect the entire outstanding along with the expenses incurred in the process of recovery of loans. Therefore, we agree with the assessee's argument that if the expenditure is debited to the P&L account, bank would incur a loss, therefore, the assessee has rightly debited the expenses to the customer's account. Hence the same should be included in the outstanding balance of the debts and while creating the provision the debt should be included by the expenses incurred by the bank. The Cooperative bank is eligible for deduction u/s 36(1)(vii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered the same to the income. 19. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. At the outset, the amount of Rs. 1,00,49,971/- was interest subsidy receivable from the Government and the same is relatable to PACS. Without waiting for the interest subsidy by the PACS, the bank has released funds to the PACS and to bolster the liquidity. However, since the interest subsidy was not received before the end of the financial year, the assessee has created reserve for sundry debtors and claimed as deduction, which is incorrect approach. The subsidy is receivable from the Government which should be reimbursed to the PACS and in turn PACS required to remit to the District Co-operative Central Bank. Till such time, it was neither an expenditure nor an obligation on the part of the DCCB. Though with an enthusiasm the DCCB has released the subsidy amount to improve the liquidity of the PACS, the DCCB cannot create a reserve and claim it as a bad and doubtful debt without waiting for the reply from the Government. In this case, the Government has not repudiated its obligation. In Government debts, unless the Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich will be shared between the APCOB, the assessee and the PACS. As per the direction of APCOB, the assessee has to bear 35% of the overdue interest and penal interest as its share on loans collected by the PACS along with the interest. The assessee has explained that it was the reimbursement of the loss incurred by the PACS on account of loss of overdue interest and penal interest as per the directions of the APCOB. Once the loans are collected along with interest, the bank is benefitted and bank has to share the loss of PACS. The Ld. A.R. submitted that the waivers are factual and incurred in the course of business. It was a business expenditure, which required to be allowed as deduction. The Ld. A.R. relied on the decision of Nizamabad District Co-operative Central Bank Vs. ITO Ward-2. Not being convinced with the explanation of assessee, the A.O. made the addition. Aggrieved by the order of the A.O. the assessee went on appeal before the CIT(A) and the Ld. CIT(A) deleted the addition observing that the waivers were made pursuant to bank's Board resolution and the Government orders. For the sake of clarification and convenience, we extract the relevant paragraph of the Ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad Co-operative Society and held the same as allowable. For ready reference, we extract the relevant paragraphs of the coordinate bench of ITAT, Hyderabad in Nizamabad District Cooperative Central Bank Vs. ITO Ward-2, ITQA No.905 & 906/H/2013 which reads as under: 1. Waivers of Penal Interest and IOD as per the APCOB - circulars were explained during the assessment. OUR LETTER DT. 24.12.2009 shows our submission on the issue and reference to our earlier submissions vide our letter dt.15.9.2009. The procedure of waiver amounts passed on to PACSs was also explained. AS PER THE APCOB CIRCULARS AND OUR OWN CIRCULARS TO PACSs, THE PACSs were to collect the dues of loans and interest from small and marginal-farmerborrowers and the balance of IOD and Penal interest are borne by CONCERNED PACS,CONCERNED DCCB and APCOB in the ratio of 25%, 35% and 40% respectively. IT WAS NOT OUT OF ANY EARLIER PROVISION AND LAID OUT WHOLLY AND EXCLUSIVELY FOR BUSINESS. 2. It was held by the Hon'ble ITAT , Hyderabad A Bench in the case of Nizamabad Dist. Co-op Central Bank Ltd vs. ITO,Ward-2, Hyd (ITA Nos. 905/H/13,906/H/13), the same amount of waiver was held as allowable u/s.37(1). 3. The reimburse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme conditions by eligible farmer-borrowers (for a moment, if the APCOB resolves differently, as per any modification in Govt. instructions on waiver, claim of expenditure by us on mere resolution would have been unfair and would have been without actual incurrence of the expenditure.) 7. We rely on "Saurashtra Cement & Chemicals Industries Ltd. vs. CIT"( 213 ITR 523 Guj HC), wherein it was held that even for an assessee following mercantile system of accounting, an expenditure shall be allowed under Sec.37(1) on the actual incurrence of the expenditure on its crystallization . This decision was cited by us before the learned CIT(Appeals) too. Though the subject expenditure does not fall u/s 36(2) or 36(1)(viia) of the Act, undoubtedly, the same is business loss and the aggregate amount of overdue interest and penal interest and the NPA provision did not exceed the limit for allowing the deduction u/s 36(1)(viia) or 36(1)(vii) of the Act. Since the expenditure is genuine and incurred in the ordinary course of business, we hold that the IOD interest and the penal interest should be allowed as business loss and accordingly the appeal of the revenue is dismissed and the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he overdue interest and decide the issue afresh on merits. This ground of appeal of the revenue is allowed for statistical purposes. 25. The next issue for the assessment year 2008-09 is provision for NPA amounting to Rs. 2,84,11,535/-. The assessing officer in the assessment order stated that the assessee had offered a sum of Rs. 72.05 crores as interest income and claimed a sum of Rs. 2,84,11,535/- relating to the interest on NPA advances. The assesse claimed the same as mandatory reserve as per the RBI guidelines. The assessing Officer viewed that when the assessee earns income on non performing assets, such asset cannot be treated as non performing asset and the income on such asset required to be taxed and relied on the decision of Hon'ble ITAT, Hyderabad A bench in the case of Andhra Bank Vs. DCIT Circle-1(1) in ITA No.615 to 619/H/2007 and ITA No.711/H/2008. 26. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) allowed the appeal of the assesse holding that the deduction is allowable u/s 36(1)(viia) of I.T.Act. We extract the relevant paragraph of the Ld.CIT(A) order which reads as under: "6B. Second issue relates to prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest part of the advances which was categorized as NPA. The ld.AO did not dispute the fact that the sum represented the interest on advance which was categorized as NPA. The AO did not bring any evidence to show that the same was not NPA and not covered by the prudential norms of RBI. The Ld. D.R did not controvert that the provision for Bad and doubtful inclusive of NPA provision crossed the limit provided in section36(1)(viia). Since the deduction claimed by the assessee is within the limit of section 36(1)(viia) of the Act, the same is allowable as per the provisions of section 36(1)(viia) of the Act, therefore, we do not find any infirmity in the order of the CIT(A) and the same is upheld. 28. The next issue for the assessment year 2008-09 is 3% interest on agricultural stabilization fund amounting to Rs. 44,61,929/-. Before the AO the assesse submitted every Bank and PACs shall transfer a part of their profits to Agri. Credit Stabilisation Fund as per the stipulations of NABARD Act, 1981 and invest them in the prescribed modes. PACs shall invest the Fund in DCCBs. The Primary Agri. Co-operative Societies in the District keep their Agrl. Credit Stabilization Fund by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -operative Educational fund for the assessment year 2010-11. During the previous year relevant to the assessment year, the assessee had created a fund within a sum of Rs. 2 lakhs as A.P. State Co-operative Union educational fund. The A.O. noted that the assessee had incurred an expenditure of Rs. 1,60,000/- towards training fee and Rs. 60,000/- towards A.P. State Cooperative Union, Hyderabad. Since the payment was made to A.P. State Co-operative Union, the Ld. A.O. viewed that the said sum was not in the nature of expenditure, accordingly disallowed balance amount of Rs. 40,000/- as appropriation of expenditure and not a statutory obligation. Aggrieved by the order of the A.O., the assessee went before the CIT(A) and the Ld. CIT(A) allowed the expenditure holding that the said sum was not a contribution to union as understood by the Ld. A.O. and the said sum was paid to the A.P. State Co-operative Union for providing training to the staff. The Ld. CIT(A) relied on the decision of Hon'ble Karnakata High Court in the case of CIT Vs. Pandavpura Sahakara Sakkera Kharkhana Ltd. 174 ITR 475 ( Karnataka) and allowed the deduction. 31. We have heard both the parties, perused the materials ..... X X X X Extracts X X X X X X X X Extracts X X X X
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