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TMI Blog2023 (5) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... and allow deduction within such limit. We order accordingly. We also direct the assessee to provide necessary information/calculation to Ld. AO to enable him to make such verification. These grounds are, thus, allowed in terms indicated here. Disallowance in respect of various provisions claimed by assessee - Appropriation of profits - Whether CIT(A) has erred in deleting the impugned disallowance ignoring the fact that they were provisions and not real expenditure; therefore the same were allowable to the extent of 20% of profit of business in terms of section 36(1)(viii) - HELD THAT:- The provisions/transfer to funds are allowable as deduction u/s 37(1) only if at least one of the conditions exists i.e. (i) there is an over-riding statute by which the amounts transferred to funds do not remain with / under the control of assessee; or (ii) if the assessee has actually spent moneys for the relevant purposes during the previous year. In the present case, the provisions of section 43A of MP/CG co-operative Societies Act relied upon by Ld. AR talks of appropriate of profits only. There is no material available on record by which it can be verified that either of the two c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such that the assessee is a registered cooperative society engaged in banking business. The assessee is governed by the provisions of its parent law relating to co-operative societies as well as Banking Regulations Act. The assessee filed return of income of the relevant AY 2014-15, which was subjected to scrutiny-assessment by issuing statutory notices u/s 143(2) and 142(1). Finally, the Ld. AO completed assessment after making certain disallowances. Being aggrieved, the assessee went in first-appeal and succeeded partly. Now, the revenue has come in this appeal assailing the order of first-appeal. We proceed to decide various grounds, as reproduced earlier, in seriatim. Ground No. 1 and 2: 4. In ground No. 1, the revenue claims that the CIT(A) has erred in deleting the disallowance of Rs. 5,00,00,000/- made by AO in respect of provision for bad-debts . Thereafter, in ground No. 2, the revenue claims that the CIT(A) has erred in deleting the impugned disallowance even though no details were filed by assessee during assessment or appellate proceedings. Both of these grounds relate to the same issue; therefore considered together for adjudication. 5. During assessment-p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision for standard-assets (Para No. 4 and 10 of the ITAT order). He further relied upon following decisions wherein such deduction has been allowed: (i) ITAT Amritsar Bench in DCIT Vs. The Nawansahar Central Cooperative Bank Ltd, ITA No. 61/Asr/2017 order dated 03.01.2018 (ii) ITAT Mumbai Bench in Model Co-operative Bank Vs. DCIT, ITA No. 5522/Mum/2017 order dated 24.07.2019 (iii) ITAT Indore Bench in Vikramaditya Nagarik Sahakari Bank Vs. ACIT, Ujjain, ITA No. 36/Ind/2017 order dated 20.03.2018 9. We have considered the rival contentions raised by both sides and perused the material held on record in the light of section 36(1)(viia) and the judicial decisions cited above. After a careful consideration, we observe that it has been loudly held in all of the decisions cited above that the provision made by a banking company in respect of standard assets, as per RBI guidelines, is very much allowed as deduction u/s 36(1)(viia). Ld. DR is not able to point out any contrary decision on this issue. We extract below the decision of ITAT Indore Bench itself in Vikramaditya Nagarik Sahakari Bank Vs. ACIT (supra) : 6. We have heard the rival contentions and perused th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head Profits and gains of business or profession. Explanation. For the purposes of this sub-clause, relevant assessment years means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005 7. On perusal of the above provision and in the given facts of the case, wherein the assessee, which is a cooperative bank carrying on banking business, we find that the assessee is eligible to claim provision for bad and doubtful debts to the extent of 7.5% of the total income before making any deduction under this clause and under Chapter VIA. Further in the profit and loss account except for the alleged provision for Rs. 2 lacs, no other provision for bad and doubtful debts has been claimed. We find force in the contention of the learned counsel for the assessee that the phrase contingency provision for standard assets is basically a provision for bad and doubtful debts only which is in general a regular feature of the banking business. It is also pertinent t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,958/- in respect of various provisions claimed by assessee. Thereafter, in ground No. 4, the revenue claims that the CIT(A) has erred in deleting the impugned disallowance ignoring the fact that they were provisions and not real expenditure; therefore the same were allowable to the extent of 20% of profit of business in terms of section 36(1)(viii). Both of these grounds relate to the same issue; therefore considered together for adjudication. 12. During assessment-proceeding, Ld. AO observed that the assessee has claimed deduction in respect of following provisions made in accounts, aggregating to Rs. 11,30,00,000/-: Then, the Ld. AO invoked section 36(1)(viii) and observed that the assessee was eligible to claim maximum deduction upto 20% of the eligible profit as mentioned in that section; accordingly Ld. AO made a mathematical working of 20% limit at Rs. 5,54,05,042/-; finally disallowed excess deduction of Rs. 5,75,95,958/- [Rs. 11,30,00,000 (-) Rs. 5,54,05,042]. 13. During first-appeal, the assessee made a detailed submission which is reproduced in Para No. 3.1 to 3.3 of the order of Ld. CIT(A). Finally, Ld. CIT(A) accepted the assessee s claim and deleted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed only excess provision; hence there is no fallacy in AO s action. He submitted that there is nothing wrong in the disallowance of excess deduction made by AO because the provision/transfer to funds made by assessee can be allowed only to the extent of limit permitted in the Income-tax law and not beyond that. With these submissions, Ld. DR submitted that the relief given by CIT(A) is grossly wrong and deserves to be reversed. 15. Per contra, Ld. AR defended the order of CIT(A) and made two-fold contentions as summed up below: (i) The first contention raised by Ld. AR is such that the assessee is governed by the MP/CG Co-operative Societies Act, 1960, whose section 43A(1)/(1A) prescribes as under: 43-A. Appropriation of profits.- (1) A society earning profit shall calculate the net profit by deducting from thegross profits for the year the following: (a) all overdue interest accrued on loan accounts, (b) management charges; (c) interest payable on loans and deposits; (d) audit fee; (e) working expenses, including repairs, rent, taxes; (f) depreciation; (g) bonus payable to employees under the Payment of Bonus Act,1965 (No.21 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain purposes by a law, but that does not mean that Income-tax law will allow deduction. Ld. DR also submitted that the decisions relied upon by Ld. AR or even Ld. CIT(A) during first-appeal are not applicable on the facts of present case. 17. We have considered rival submissions of both sides and perused the material held on record. At first, we would like to analyse the decisions relied upon by Ld. AR before us / Ld. CIT(A) in first-appeal: (i) Hon ble Madhya Pradesh High Court - Keshkal Co-operative Marketing Society Ltd. Vs. CIT 165 ITR 437: In this case, the Hon ble Court was concerned to decide the following issue: (ii) Under the facts and circumstances of the case, whether the amount of Rs. 1,66,763 required to be transferred to the reserve fund under section 43(2) of the Madhya Pradesh Co-operative Societies Act, 1960, was an allowable deduction either as a business expenditure or as having been diverted by an overriding title? While adjudicating it in favour of assessee, the Hon ble Court made following observations: As far as the second point is concerned the finding reached by the Tribunal that the apportionment of profit for capital redemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the said amount of Rs. 1,66,763 does not comprise income of the assessee, because the said amount has been diverted under section 43(2) of the Societies Act. In support of his contention, learned counsel relied upon the principle enunciated in Poona Electric Supply Co. Ltd. v. CIT (1965) 57 ITR 521 (SC) wherein it has been held that the reserve fund formed in accordance with the statutory provisions by the amount credited by the appellant during the accounting year to the Consumers Benefit Reserve Account , being a part of the excess amount paid to it and reserved to be returned to the consumers, did not form part of the appellants real profits and to arrive at the taxable income of the appellant from the business under section 10(1) of the Indian Income-tax Act, 1922, which is in parimateria to sections 28, 37 of the Income-tax Act, 1961, the said amount is liable to be deducted. Relying upon the ratio laid down in Poona Electric Supply Co.s case (1965) 57 ITR 521 (SC), learned counsel for the assessee argued that the reserve fund has been created under the statutory provisions of section 43(2) of the Societies Act and the said amount having been diverted under the statu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test for such sum to be deductible is that if by making statutory deposits, the assessee loses control over the said amount, being not available for its use, then such amount is certainly deductible from the income as contemplated under section 36 and 37 of the Income-tax Act, 1961 . On behalf of the Revenue, Shri B. K. Rawat, learned counsel relying upon the decision in Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559 (SC), argued that the said amount is not liable to deduction. In Vazir Sultan Tobacco Co.s case (1981) 132 ITR 559 (SC), the main question raised was whether amounts retained or appropriated or set apart by the concerned assessee company by way of making provision(a) for taxation, (b) for retirement gratuity, and (c) for proposed dividends from out of profits and other surpluses, could be considered as other reserves within the meaning of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, for inclusion in the capital computation of the company for the purpose of levying super tax. Their Lordships of the Supreme Court remanded Vazir Sultan Tobacco Co.s case as it was found that there was no sufficient material on record regarding whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee-co-operative bank that during the previous year relevant to assessment year under consideration, while adding back the provisions of contribution made to (a)Common Good Fund, (b)Special Assistance Fund, (c)Payment to PACS/DCCB Fund and (d)Rural Farmers Socio Economic Development Fund, the assessee-co-operative bank had claimed deduction of actual amounts spent out of provision created . It was submitted that it was a statutory obligation to spend money for the above purposes as the provisions of the Karnataka Co-operative Societies Act stipulates that certain percentage of profits should be spent towards the specified purposes. The amounts are spent only as a statutory obligation and it was also further submitted that the amounts were spent only to promote the business interest of the assessee-co-operative bank and therefore, they should be allowed as deduction under the provisions of sec.37(1) of the Act. As regards the additional claim of deduction on account of loss of securities of Rs.8,28,65,052/- it was submitted that it was not a fresh claim but only re-adjustment of the already made claim in the original proceedings. Therefore, the ratio of the decision of the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 37 of the Act. This court in Karnataka State Co-operative Apex Bank Ltd. Case (supra), of assessee in respect of Assessment Year 2009-10 has allowed the payments made to Primary Agricultural Cooperative Societies and District Central Co-operative Banks as an admissible expenditure under section 37 of the Act. The other amounts are expended for the purposes of business of the assessee and therefore, the same are allowable expenditure under section 37 of the Act. The decisions relied upon by learned counsel for the respondent pertain to cases of reserve fund, which are not applicable to the fact situation of the case. For the aforementioned reasons, the substantial question of law framed in the appeal is answered against the revenue and in favour of the assessee. Thus, the Hon ble High Court approved the finding of ITAT that the funds contributed by assessee neither remained with the assessee nor came back to assessee in any manner. Again it can be seen that the Hon ble High Court turned down the reliance of revenue on the decisions against assessee on the footing that those decisions dealt with cases of reserve fund which do not apply to the facts of assessee. (iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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