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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 ..... se either during the course of assessment proceedings or during the appellate proceedings. (3). The Ld. CIT(A) has erred in deleting the disallowance made in respect of provision claimed u/s 36(1)(viii) of the I.T. Act of Rs.5,75,94,958/-. (4). The Ld. CIT(A) has erred in deleting the addition of Rs.5,75,94,958/- by holding that the provisions made u/s 36(1)(viii) of the I.T. Act 1961 under various heads are allowable as deduction as the same has been used to promote the business interest of the assesse, ignoring the facts that there were provisions and not real expenditure, therefore the same was allowable only to the 20% of profit of the business." 2. Heard the learned Representatives of both sides at length and case records perused. 3. Briefly stated the facts are 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 assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . DR representing the revenue argued that the "standard assets" are those assets which are adequately serviced by the borrowers; those assets can't be said to be "bad debts". Therefore, the assessee has wrongly characterized them as "bad debt", made provision and claimed deduction. Ld. DR claimed that in Nagaur Urban Co-operative Bank Ltd. (supra), deduction was allowed for NPA and not for standard-assets. Therefore, the reliance of CIT(A) on that decision is misplaced. Thus, Ld. DR submits, the CIT(A) has wrongly allowed the claim of assessee. 8. Per contra, Ld. AR supported the order of first-appeal and argued that a careful reading of the order of Nagaur Urban Co-operative Bank Ltd. (supra) clearly reveals that the ITAT has allowed deduction of "provision 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 Sah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets shown in the books of account of the bank on the last day of the previous year: Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words "five per cent", the words "ten per cent" had been substituted: Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government: 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 give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the view that there is a strong necessity to verify whether the claim made by assessee is within the permissible limit prescribed in section 36(1)(viia) or not; therefore it would be appropriate to refer this issue back to the file of Ld. AO for the limit purpose of such verification. The Ld. AO will verify the permissible limit 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. Ground No. 3 to 4: 11. In ground No. 3, the revenue claims that the CIT(A) has erred in deleting the disallowance of Rs. 5,75,94,958/- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year relevant to assessment-year under consideration; in fact a cursory look of the P&L A/c and Balance-Sheet of assessee (copies thereof placed in the Paper-Book filed by assessee) itself demonstrates that these are mere provisions/transfer to funds made by assessee by means of accounting entries. Then, the Ld. DR submitted that the AO has rightly observed that the assessee has claimed deduction of mere provisions/transfer to funds which can be allowed only in terms of section 36(1)(viii). Ld. DR submitted that the AO has aptly computed the permissible limit as prescribed in section 36(1)(viii) and accordingly allowed deduction to the extent allowable and disallowed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dist. Co-Op Bank Ltd. ITA No. 16/AHD/2015 order dated 17.05.22. (ii) The second contention made by Ld. AR is that the assessee has not simply made provisions/transfer to funds; it has also incurred actual expenditure and those expenses were for business purposes. Therefore also, the deduction is allowable. 16. In rejoinder, Ld. DR submitted that the provisions of section 43A of MP/CG Co-operative Societies Act, 1960 relied upon by assessee simply prescribe for "appropriate of profits" which is nothing to do with Income-tax Act. Ld. DR submitted that an assessee may be required to appropriate profits for certain 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 Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mercantile principles, should always be amenable to business profits, but not statutory profits. In sum and substance, only the real profits of business are to be taken into account for assessing income-tax, but not notional profits and, therefore, the statutory deposit (reserve fund) in the instant case, as contemplated under section 43(2) of the Societies Act, which after its creation comes within the domain of the Registrar under section 44(2) of the Societies Act, cannot be said to be profit in the real sense. On this background, learned counsel appearing for the assessee argued that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also, the deduction as claimed by the assessee-society amounting to Rs. 1,66,763 is an allowable deduction as the said amount does not comprise income of the assessee because the same having been diverted under the provisions of section 43(2) of the Societies Act, can only be invested or utilised in such manner and on such terms and conditions as may be laid down by the Registrar in this behalf as required under clause (2) of section 44 of the Societies Act. As such, the said amount is not available for the use of the assessee-society at its opinion. Therefore, the real 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Apex Bank Ltd [2021] 130 taxmann.com 261: In this case, the assessee made contributions to (i) Common Good Fund [CGF], (ii) Special Assistance Fund, (iii) PACS/DCCB Fund, (iv) Rural Farmers Social Economic Fund and claimed deduction. When the matter travelled before ITAT, Bangalore in Katnataka State Co-operative Apex Bank Ltd. Vs. DCIT-3(1) ITA No. 1372/Bang/2014, the ITAT allowed deduction on some crucial findings, we extract below the relevant paragraphs of the order of ITAT: "6.1 During the course of hearing, it was submitted on behalf of the 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case of capital expenditure or personal expenditure of the assessee or expenditure of the nature described in other Sections of Chapter IV of the Act. The case of the revenue is not that the contribution made by the assessee to the fund is capital expenditure or is in the nature of personal expenses or expenditure described in any other Sections of Chapter IV of the Act. It has further been held that assessee has incurred the expenditure for the purposes of business and therefore, the same is an admissible expenditure under section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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