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TMI Blog2018 (9) TMI 1620X X X X Extracts X X X X X X X X Extracts X X X X ..... d other expenditure'. The Assessing Officer called upon the assessee to show-cause as to why the interest on reserve fund should not be treated as appropriation of profit and added to the total income. The assessee submitted before the Assessing Officer that the amount of Rs. 26, 10, 443/- was claimed as an expenditure at par with the interest payable to the deposit holders as it belong to the members of the society. The Assessing Officer did not accept the explanation of the assessee and made the addition of Rs. 26, 10, 443/- by making the following observations:- "The submissions of the A. R of assessee have been considered but the same are not acceptable. In this regard, it is submitted that Interest on Reserve Fund is clubbed under the head 'Provisions and Other Expenditure' and hence, the Interest on Reserve Fund is treated as appropriation of profit. As already stated above, for examining whether an expense claimed is allowable or not, we have to examine its nature and whether the expenditure has already been incurred or it is only notional. Interest on reserve fund is not paid on a day to day basis. In fact, no payment has been made on account of this interest. Mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, he found that Assessing Officer is justified in making the impugned disallowance and confirmed the order of the Assessing Officer. 7. On appeal before us, ld. counsel for the assessee has relied on the ground of appeal. 8. Ld. Departmental Representative supported the orders passed by the authorities below. 9. We have heard both the parties, perused the material available on record and the orders of the authorities below. 10. We find that the assessee has made a provision of Rs. 26, 10, 443/- in the profit & loss account as 'interest on reserve fund'. This provision is made by the assessee on notional basis and not accrued liability, therefore, Assessing Officer has made addition on this count and the ld. CIT(A) confirmed the same on the ground that it is a provision on notional basis and does not ascertain to be accrued liability. We find no infirmity in the order passed by the ld. CIT(A). Thus, this ground of appeal raised by the assessee is dismissed. 11. Ground No. 3 relates to addition of Rs. 7, 72, 033/- on account of interest on deficit cover fund. 12. In the assessment order, the Assessing Officer has noted that the assessee had claimed an amount of Rs. 7, 72, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is regard, it is requested the assessee to show-cause why the above amount should not be disallowed and added back to the total income as the gratuity fund has not yet been approved by the Commissioner of Income Tax. It was submitted before the Assessing Officer that the Board had obtained gratuity insurance policy during the year 2011-12 and in fact the amount was paid to LIC of India on behalf of the employees as per the agreement. In fact, the assessee has submitted an application to the Commissioner of Income Tax dated 08/11/2011 which is yet to be approved and submitted that it is a legal responsibility to pay the liability on account of employees and expenditure incurred exclusively for the purpose of business under section 36(v) of the Act, such expenditure has to be allowed. The Assessing Officer after considering the explanation of the assessee disallowed the same by observing that the Commissioner of Income Tax not approved the staff gratuity scheme of the assessee. 17. In the appellate proceedings, the ld. CIT(A) has discussed this issue in detail at page No. 13 to 17 in his order and finally held that the payment made by the assessee towards unapproved gratuity fund is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot made any provision and made the payment before filing the return of income. On happening the event, the assessee bank is receiving the gratuity payment from the LIC which is being paid to the employee concerned and no further deduction is being claimed by the assessee as expenditure. Thus no double deduction is claimed. The expenditure claimed by the assessee under group gratuity scheme to LIC of India was allowed in the earlier years prior to 2007-08. During the previous year relevant to the assessment year 2007-08, the A. O. disallowed the same since the payment made to LIC of India towards group gratuity scheme is not covered by section 36(1)(v), 40A(7)(b) & 40A(9) of the Act because the assessee has not satisfied the conditions. The argument of the assessee is that since the payments were made to LIC of India in Master policy scheme, the premiums contributed to the LIC of India is allowable deduction and relied on the decisions of coordinate bench of Hyderabad in the case of Capital IQ Information Systems (India) Pvt. Limited (supra). The Hon'ble ITAT Hyderabad Bench while deciding the issue on similar facts held as under: "8. We have heard the arguments of the parties, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention of the Revenue is that under sec. 36(1)(v), the payment made by the assessee as employer could be allowed only in respect of approved gratuity fund. Since the Group Gratuity Scheme is not approved by the CIT, according to the Revenue, it cannot be allowed. However, the contention of the assessee is that in view of the judgment of the Madras High Court in the case of Premier Spinning Mills Ltd. (supra) and the judgment of the jurisdictional High Court in the case of Warner Hindustan Ltd. (supra), it has to be allowed. 5. We have carefully gone through the judgment of the jurisdictional High Court in the case of Warner Hindustan Ltd. (supra). In the case before the jurisdictional High Court, the Provident Fund was not approved by the CIT. The Andhra Pradesh High Court after referring to the judgment of the Bombay High Court in Tata Iron & Steel Co. Ltd. v. D. V. Bapat, ITO (1975) 101 ITR 292, and the judgment of the Supreme Court in Metal Box Company of India Ltd. vs. The Workmen (1969) 73 ITR 53, held that the amount paid towards an unapproved gratuity fund can be deducted under sec. 37 of the I. T. Act, though not under sec. 36(1)(v). In view of this judgment of the juris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 40A(7) (b) (i) on account of gratuity actually deposited in fund created by it - Whether such a claim could only have been disallowed if it had been proved that gratuity, in respect of which said payment had been made, had not become payable during previous year - Held, yes - Whether in absence of such a case made out by revenue, Tribunal was right in holding that grant of approval of gratuity fund was not relevant for purpose of instant case as said deduction was not being claimed on account of any provision and amount of gratuity was an allowable deduction - Held, yes". 5. Considering the above aspects, we do not find any infirmity in the order of the learned CIT(A) in deleting the addition. There is no merit in the departmental appeal. Same is accordingly dismissed. " 10. In the case of Verizon Data Services India Pvt. Ltd. (supra) the coordinate bench of Madras held that payment made to gratuity fund maintained with LIC has no control over the irrevocable trust created exclusively for the benefit of employees and deduction shall be allowed. The coordinate bench of Madras while deciding the appeal relied on the decision of Hon'ble Madras High court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer has considered the explanation given by the assessee and the same is not accepted on the following reasons:- "All such claim of the assessee are considered and the facts submitted in the written submission have been considered. Income Tax Act has specific provisions embedded for computing deductions in the case of business reorganization of cooperative banks. Section 44DB deals with the details of such computation in case of deduction under section 32, section 35D, section 35DD or section 35DDA. Similarly, section 72AB deals with the carry forward and set off of the accumulated loss and unabsorbed depreciation in case of business reorganization of cooperative banks. Sub-section(7) of section 72AB of the IT Act states as under: (a) accumulated loss" means so much of loss of the amalgamating cooperative bank or the de-merged cooperative bank, as the case may be, under the head profits and gains of business or profession" (not being a loss sustained in a speculation business) which such amalgamating cooperative bank or the de-merged cooperative bank, would have been entitled to carry forward and set off under the provisions of section 72 as if the business reorganization h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Palakol Cooperative Urban Bank on 20/01/2010 with RBI approval and as per proceedings of the Commissioner and Registrar of Cooperative Societies. It was further submitted that the accounts of the Palakol Cooperative Urban Bank finalized upto 20/01/2010 as audited by the Chartered Accountant; and that as on 20/01/2010, the liabilities were more than the assets for Rs. 2, 89, 00, 058/- and the same were reflected in the assets side of the balance sheet and submitted that an amount of Rs. 2, 89, 00, 058/- was incurred for acquisition of Palakol Cooperative Urban Bank. The assessee claimed amortization over a period of 05 years, as per section 35DD read with section 44DB of the Act. It was submitted that acquisition of the said bank, the assessee took advantage of the banking licence held by the Palakol Cooperative Urban Bank. It is contended that assessee is entitled to relief of amortization. 27. Alternatively, it was submitted before the ld. CIT(A) that the assessee may be granted relief under section 32 towards acquisition of commercial rights representing licence and the business. He relied on the decision of the Hon'ble Bombay High Court in the case of Chowgule & Company Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main condition which needs to be fulfilled is that the said loss should have been allowable in the hands of Palakol Bank as per the provisions of the Act. The entitlement as to allowance of such loss in the hands of Palakol Bank or its eligibility otherwise to be carried forward under the provisions of section 72 was not proved. Therefore once this condition is not fulfilled the acquirer bank is not eligible to carry forward the said losses/ unabsorbed depreciation as per the provisions of section 72AB. Therefore as observed by AO, Palakol Bank, whose losses are not determined as per the provisions of Income-tax Act, 1961, does not satisfy the conditions laid down by the Act, hence the AO rightly disallowed the amortization of losses claimed by the assessee. Coming to the issue of RBI guidelines with regard to amortization of losses it is settled principle that the specific provisions of Income-tax Act override the general provisions of cooperative society's act/RBI guidelines. In view of the specific provisions of Income-tax Act the assessee is not eligible to the allowance of brought forward losses or unabsorbed depreciation of Palakol Bank either in amortized form over a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. CIT(A) has considered the decision of coordinate bench of the Tribunal in the case of Visakhapatnam Cooperative Bank Ltd. in ITA Nos. 444, 445, 449 & 450/VIZ/2012 & ITA No. 726/VIZ/2013 and ITA Nos. 2 & 38/VIZ/2014 dated 30/09/2016, the claim made by the assessee was rejected. The relevant portion of the order is extracted as under:- "So far as alternative ground raised by the assessee is concerned, according to the Ld. Counsel for the assessee, the excess of liabilities over the assets of Bobbili bank should be treated as the price paid for acquisition of a commercial I business asset which is a depreciable asset and it has to be treated as a goodwill. We find there is no merit in the argument of Ld. Counsel for the assessee. Goodwill means it is an intangible asset that arises as a result of acquisition of one company by another for a premium value. In this case, the assessee has not paid any amount to amalgamating company. The assessee has only taken losses of amalgamating company i. e. Bobbili Co-operative bank. Therefore, the assessee has not acquired any goodwill. The Ld. CIT(A) by considering the entire facts of the case has passed a detailed order by considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Indian company, claim of the assessee under section 35DD is denied. On appeal, ld. CIT(A) confirmed the order of the Assessing Officer. Before us, ld. counsel for the assessee has submitted that section 44DB refered section 35DD, therefore, claim of the assessee has to be considered under section 35DD of the Act. It is relevant to examine the provisions of section 35DD, which are extracted as under:- "35DD. (1) Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place. (2) No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act. " 35. On plain reading of the above, it is very clear that assessee company being an Indian company can only make a claim under section 35DD of the Act. The Income Tax Act, 1961 has defined what is an Indian company, as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tute 'goodwill' and on which depreciation can be considered. He also considere3d the decision of the ITAT, Hyderabad Bench in the case of SKS Micro Finance Ltd. , , in turn which is followed the above Supreme Court judgement and observed that excess price paid over and above the value of the net asset was held to be a goodwill. Similar issue has been considered by the coordinate bench of the Visakhapatnam tribunal in the case of Visakhapatnam Co-operative Bank Ltd. Vs. Addl. CIT in ITA No. 444/VIZ/2012, by order dated 30/09/2016, the same has been considered by the ld. CIT(A) and rejected the alternative ground raised by the assessee. For the sake of convenience, the relevant portion of the order is extracted as under:- "9. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The first argument raised by the assessee in respect of claim made by the assessee of Rs. 1, 56, 70, 500/- as amortized loss on account of the merger of Bobbili branch with the assessee. In the course of the assessment proceedings, the A. O. has asked the assessee what is the basis for the claim. Before the A. O. , the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and unabsorbed depreciation of amalgamating co-operative bank i. e. Bobbili Co-operative bank can be set off against the income of successor co-operative bank i. e. amalgamated co-operative bank (assessee) if the amalgamation is within the meaning of section 72AB of the Act. In the present case, the amalgamating company i. e. Bobbili Co-operative bank not filed return of income as required u/s 72AB of the Act. Therefore, the claim of the assessee cannot be allowed. We find that the Ld. CIT(A) has correctly decided the issue and disallowed the claim of the assessee. 10. So far as alternative ground raised by the assessee is concerned, according to the Ld. Counsel for the assessee, the excess of liabilities over the assets of Bobbili bank should be treated as the price paid for acquisition of a commercial/business asset which is a depreciable asset and it has to be treated as a goodwill. We find there is no merit in the argument of Ld. Counsel for the assessee. Goodwill means it is an intangible asset that arises as a result of acquisition of one company by another for a premium value. In this case, the assessee has not paid any amount to amalgamating company. The assessee has onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No. 4 raised by the assessee relates to deferred revenue expenditure or as depreciation. The assessee has not raised this ground neither before the ld. CIT(A) nor before us as an additional ground. Therefore, the same cannot be considered and is dismissed. ITA No. 326/VIZ/2017 47. Ground No. 1 & 12 are general in nature, no adjudication is required, therefore, same are dismissed. 48. Ground Nos. 2 to 4 relate to interest on share capital paid towards bank. During the course of assessment proceedings, the Assessing Officer has noted that assessee had debited an amount of Rs. 61, 58, 437/- for Assessment Year 2012-13 towards interest on share capital. The Assessing Officer called upon the assessee to show-cause as to why the said interest amount should not be treated as an appropriate of profit and added to the total income. In response, assessee submitted before the Assessing Officer that the assessee bank collects deposits from deposit holders, who are admitted as members and the deposits were given to the members as a loan under the A. P. Mutually Aided Cooperative Societies Act 1995, supports payment of interest on share capital as per section 16(1) of the Act. The Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the coordinate bench of the Tribunal in the case of Visakhapatnam Cooperative Urban Bank Ltd. vs. Addl. CIT in ITA No. 449/VIZ/2012 for Assessment Year 2008-09 and requested that same may be followed. 52. On the other hand, ld. Departmental Representative relied on the grounds of appeal raised. 53. The present issue involved in this appeal is whether interest paid on share capital is allowable deduction or not. According to the assessee, it is allowable and as per Assessing Officer the interest on share capital to the members, amounts to appropriation of profits and such interest is paid out of surplus of profits and cannot be charged on income and hence cannot be allowed. The ld. CIT(A) has considered the order of the ITAT, Visakhapatnam in the case of Visakhapatnam Cooperative Urban Bank Ltd. for the Assessment Year 2007-08 in ITA No. 19/VIZ/2011 dated 29/08/2011 and came to a conclusion that interest on share capital paid to the members is an allowable deduction. The very same issue has been considered by the ITAT, Visakhapatnam Bench in ITA No. 449/VIZ/2012 (supra) by following the case of Visakhapatnam Co-operative Bank for the Assessment Year 2007-08 upheld the view take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s clearly mentioned that the provisions of section 194(1) shall not apply to such income credited or paid by a cooperative society. The Assessing Officer has considered the explanation of the assessee and observed that a plain reading of section 194(3)(i)(b) clearly mandates that the requirement to deduct TDS and therefore the claim of the assessee is covered by exemption under section 194A(3)(v) was rejected and accordingly addition was made. 57. On appeal, ld. CIT(A) has considered the order of the Tribunal in the case of Visakhapatnam Cooperative Bank for the Assessment Year 2007-08 in ITA No. 5 & 19/VIZ/2011 dated 29/08/2011 and also CBDT Circular No. 9/282 dated 11/09/2002 and directed the Assessing Officer to delete the disallowance. The relevant portion of the order is extracted as under:- "5. 6 I have considered the submissions made in this regard. The issue to be resolved is whether the interest paid to members exceeding Rs. 10, 000/- by the assessee, a co-operative bank would not attract liability to TDS in view of the exemption available in Sec. 194A(3)(v) of the I. T. Act. The Hon'ble ITAT, Visakhapatnam, in the case of The Visakhapatnam Cooperative Bank Ltd. for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee being a cooperative society engaged in the banking business is under obligation to deduct the TDS on interest payment exceeding ` 10, 000/- in view of the specific provision u/s 194A(3)(i)(b) of the Act and the assessee has failed to deduct TDS. Therefore, the A. O. has disallowed the claim of the assessee. The Ld. CIT(A) initially confirmed the order of the A. O. Subsequently, the assessee has filed a rectification u/s 154 of the Act dated 14. 12. 2013 and submitted that the very same issue has been considered by the CIT(A) as well as ITAT for earlier years and decided in favour of the assessee. The Ld. CIT(A) has considered the submissions of the assessee and directed the A. O. to delete the addition by observing as under: 5. 2 I have considered the submissions. The issue considered in the above appellate order was whether the assessee, a cooperative bank is required to effect TDS on payment of interest made to its members, when the amounts exceed Rs. 10, 000/-. A view was taken that in the above order dtd. 22. 10. 2013 that if the interest amount exceeds Rs. 10, 000/- then the appellant is required to deduct TDS even if the payment was made to the members. Such a view wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trict Central Co-operative Bank, in its appeal for A. Y. 2007-08, which has been discussed and considered by the learned CIT(A) while deciding the assessee's appeal for A. Y. 2007-08. The relevant extract of the CIT(A) order has been referred and discussed in the Hon'ble ITAT's order for A. Y. 2007-08, (copy of which submitted as part of paper-book in the original appeal). Therefore, it cannot be said that this aspect was not considered by the Hon'ble ITAT while passing order in the assessee's appeal for A. Y. 2007-08. 5. 4 In view of the above discussion, I am convinced that the appellate order dtd. 22. 10. 2013 suffers from mistake apparent from record and the mistake is rectified by substituting the following operative para in the place of the para 6. 3, 6. 4 & 6. 5 of the appellate order dtd. 22. 10. 2013. 6. 3 I have considered the submissions made. In view of the clarification given in the CBDT circular No. 9/2002, it is held that the assessee is not required to effect TDS on the interest payment made to its members even if it exceeds Rs. 10, 000/-. The impugned disallowance made in the assessment is not in accordance with the clarification given in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eply, it becomes clear that it is only contingent in nature. The expenditure which is deductible for income tax purpose is towards a liability actually existing at the time, but setting apart money which might became expenditure on the happening of an event is not an expenditure. For determining whether there is an expenditure, it is necessary to see whether there is an existing liability to pay irretrievably. The expenditure may be allowed in the year in which it is actually accrued or incurred by the assessee. Such provisions are not allowable to section 36 or 37 of the Act, hence, the same is disallowed and added to the total income of the assessee. 66. On appeal, ld. CIT(A) by following the CBDT Instruction No. 17/2008, dated 26/11/2008 directed the Assessing Officer to delete the addition. For the sake of convenience, the relevant portion of the order is extracted as under:- "During the appeal hearing, the AR submitted that the assessee is required to invest the government securities, and in pursuance of the same, the assessee had acquired government securities for which it had paid price more than the face value; the excess price paid over the face value was amortized over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is submitted that the premium paid was claimed as an expenditure on basis of amortization for Rs. 2, 68, 790/- as it was a loss to the assessee bank and further assessee bank was required to offer as income whenever securities were sold for more than the purchase price paid and the amortization of expenditure is not a contingent liability since it was already incurred and the excess premium paid over fair value of the securities were amortized over a period of time of unexpired period of securities and the same has to be allowed. However, the Assessing Officer is of the view that it is only a contingent liability, which may become payable at a future date, hence, disallowed the same. On appeal, ld. CIT(A) by following the CBDT Instruction (supra) has observed that in view of the CBDT instruction in respect of investments classified under HMT category, the premium should be amortized over the period of remaining to maturity. From the details filed, it is seen that the securities were held under HTM category and the premium paid over the cost of acquisition have been amortized over a period of maturity and claimed as allowance. He found that assessee's claim is in accordance with t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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