2014 (7) TMI 1176 - AT - Income Tax

Assessees' appeals dismissed, Revenue's appeal denied, some appeals partially allowed. Tribunal decision on 31.7.2014.

Pinarayi Service Co-Operative Bank Ltd. Versus Income Tax Officer Ward-2, Kannur & others

The Tribunal dismissed the appeals filed by the assessees, except for a few appeals partially allowed for statistical purposes. The Revenue's appeal was ... Allowability of deduction u/s. 80P(2) and 80P(2)(d) - Held that:- As decided in Kunnamangalam Co-operative Bank case [2014 (10) TMI 350 - ITAT COCHIN ] the deposits accepted are used by the Assessee co-operative society for lending or investment - This fact has not been denied - Even out of the deposits so received, the loans have been given to the members of the society in accordance with the objects - it cannot be said that the Assessee society was not carrying on banking business as it was accepting deposits from the persons who have no voting right - the paid up share capital and reserves in the case of the Assessee is more than ₹ 1 lac - all the three conditions in the case of the assessee for becoming primary cooperative bank stand complied with - the assessee is not entitled for deduction u/s. 80P of the Act on any reasoning – Decided against assessee. Deduction of 7.5% provision for bad and doubtful debts u/s. 36(1)(viia) - Held that:- Section 5(cci) of Banking Regulation Act though has brought in definition of co-operative bank, virtually every bank which is not a scheduled bank would fall under the definition of non-scheduled bank. Reading of definition of non-schedule bank along with meaning of rural branch under Explanation to Section 36(1) of the Act, clearly indicate that cooperative bank also falls under the category of non-schedule bank for the purpose of this Section. Therefore, reading of entire Section 36(1)(viia)(a) along with explanation would mean two kinds of deductions referred to in the section will be allowed to all those banks only if they satisfy the terms and conditions referred to in the provision.Therefore, we are of the opinion, authorities below were justified in opining that benefit of deduction of 10% of the aggregate average advances is applicable to co-operative bank also provided their rural branches have advanced such amounts.– Decided against assessee. Disallowance of interest paid without deducting tax to non members u/s. 40(a)(ia) - Held that:- In view of the admitted fact that the taxpayer is maintaining savings account, current account and providing cheque facility to its customers, it is obvious that the taxpayer is engaged itself in the business of banking apart from other trading activities. Exemption u/s. 194A(3)(viia) is applicable only in respect of agricultural cooperative societies. The agricultural cooperative banks are bound to deduct tax. In this case, admittedly, the tax payer is engaged in the banking activity and maintaining savings bank account, current account and providing cheque facility to its customers. Therefore, the taxpayer is bound to deduct tax in respect of interest on the deposits.– Decided against assessee. Disallowance of contribution to the employees pension fund/gratuity fund - Held that:- A similar issue came up for consideration of this Bench of the Tribunal in the case of Kadachira Service Cooperative Bank [2013 (2) TMI 208 - ITAT COCHIN ] wherein the issue was remitted back to the file of the Assessing officer to offer one more opportunity to the assessee to prove that the payment made to approved gratuity fund or LIC Pension Fund was within the time limit for filing return of income u/s. 139(1) of the Act. On the similar line, we are inclined to remit the issue back to the file of the Assessing officer for fresh examination. - Decided in favour of assessee for statistical purposes. Disallowance of unrealised interest on overdue loans - Held that:- As we have decided the issue against the assessee which deciding the ground relating to deduction of provision for bad and doubtful debts u/s. 36(1)(viia) of the Act. More so, the judgment of the Delhi High Court in the case of CIT vs. Talangang Co-op Group Housing Society Ltd. [2010 (7) TMI 83 - DELHI HIGH COURT ] is also against the assessee. Issues Involved:1. Allowability of deduction under Section 80P(2) and 80P(2)(d) of the Income Tax Act.2. Deduction of 7.5% provision for bad and doubtful debts under Section 36(1)(viia) of the Income Tax Act.3. Disallowance of interest paid without deducting tax to non-members under Section 40(a)(ia) of the Income Tax Act.4. Disallowance of contribution to the employees' pension fund/gratuity fund.5. Disallowance of unrealized interest on overdue loans.Detailed Analysis:1. Allowability of Deduction under Section 80P(2) and 80P(2)(d) of the Income Tax Act:The primary issue in all these appeals was whether the assessees, being cooperative societies, were eligible for deductions under Section 80P(2) and 80P(2)(d). The lower authorities denied the claims on the grounds that the assessees were engaged in banking business and were thus treated as cooperative banks, not primary agricultural credit societies (PACS). The Tribunal analyzed the definitions and provisions under the Banking Regulation Act and Income Tax Act, concluding that the assessees were indeed primary agricultural credit societies, not cooperative banks. The Tribunal referred to various case laws and concluded that the assessees were eligible for deductions under Section 80P(2)(a)(i) as they were primarily engaged in providing credit facilities to their members for agricultural purposes.2. Deduction of 7.5% Provision for Bad and Doubtful Debts under Section 36(1)(viia) of the Income Tax Act:The assessees claimed deductions for bad and doubtful debts under Section 36(1)(viia). The Tribunal referred to the jurisdictional High Court's decision in the case of Kannur Co-operative Bank Ltd., which held that cooperative banks are entitled to such deductions provided their rural branches have advanced the amounts. The Tribunal upheld the lower authorities' decisions, denying the assessees' claims for deductions beyond the specified limits.3. Disallowance of Interest Paid without Deducting Tax to Non-Members under Section 40(a)(ia) of the Income Tax Act:The Tribunal addressed the issue of disallowance of interest paid to non-members without deducting tax under Section 40(a)(ia). Referring to the case of Karivelloor Service Co-operative Bank Ltd., the Tribunal found that the assessees were engaged in banking activities and were thus required to deduct tax on interest payments. The Tribunal upheld the lower authorities' decisions, disallowing the interest payments.4. Disallowance of Contribution to the Employees' Pension Fund/Gratuity Fund:The Tribunal considered the issue of disallowance of contributions to the employees' pension fund or gratuity fund. Referring to previous decisions, the Tribunal remitted the issue back to the Assessing Officer for fresh examination, allowing the assessees an opportunity to prove that the payments were made to approved funds within the time limit for filing returns under Section 139(1).5. Disallowance of Unrealized Interest on Overdue Loans:The Tribunal addressed the disallowance of unrealized interest on overdue loans. Referring to its earlier decision and the Delhi High Court's judgment in the case of CIT vs. Talangang Co-op Group Housing Society Ltd., the Tribunal upheld the disallowance, deciding the issue against the assessees.Conclusion:The Tribunal dismissed all the appeals filed by the assessees and the Cross Objection, except for a few appeals which were partly allowed for statistical purposes. The appeal filed by the Revenue was also dismissed. The Tribunal's decision was pronounced on 31.7.2014.