2014 (12) TMI 1217 - AT - Income Tax

Assessee's Appeal Allowed on Amortization & Staff Payments, Revenue's Appeal Dismissed

The Satara District Central Co. Op. Bank Ltd. Versus Dy. Commissioner of Income Tax & Asstt. Commissioner of Income Tax

The Tribunal allowed the assessee's appeal on the amortization of Government Securities and staff voluntary payments, remanded the issue of study tour ... Disallowance of amortization expenditure on purchase of ' Govt. Securities and paid as premium - Held that:- The assessee is entitled to the claim of deduction on account of amortization of premium paid on Government securities held in HTM category. See Commissioner of Income Tax-2, Mumbai Versus HDFC Bank Ltd. [2014 (8) TMI 119 - BOMBAY HIGH COURT ] - Decided in favour of assessee Disallowance being donation and subscription - Held that:- We find no merit in the claim of the assessee, where only a provision for donation and subscription to the extent of ₹ 5,00,000/- had been made in the books of account and no actual expenditure has been incurred by the assessee. Merely because the Board of the a- Bank had passed a resolution for incurring the said expenditure, does not entitle the assessee to the said claim in the absence of having incurred any expenditure on donation and subscription - Decided against assessee Disallowance on account of staff voluntary payment - Held that:- Where the assessee in recognition of the services provided to its retiring employees make certain ex-gratia payments in recognition of their services, which are not based on any scheme or instruction formulated by the employer assessee, then the same partakes the nature of profit in lieu of salary. The relationship between the assessee and retiring employees was admittedly as of employer and employee and the remuneration paid to such employees is part of the salary due to the said employee. Even the ex-gratia payment made by the assessee over and above the remuneration due to the employees partakes the character of profits in lieu of salary to such employee and is duly allowable as an expenditure in the hands of the assessee under section 37(1) of the Act. We find no merit in the stand of the CIT(A) that such expenditure is capital in nature. Reversing the order of the CIT(A), we direct the Assessing Officer to allow the expenditure - Decided in favour of assessee Disallowance invoking the provisions of section 40(a)(ia) - Non TDS on expenditure on study tour programme of directors - Held that:- First step to be taken into consideration is whether the expenditure incurred by the assessee is relatable to the business carried on by the assessee and after verifying the nature of the expenditure, the second step is whether the said expenditure is subject to deduction of tax at source. Merely because the assessee on its own motion had deducted tax at source, though in succeeding year, does not warrant the disallowance of said expenditure in the captioned assessment year. After going through the details furnished by the assessee, we are of the view that the plea of the assessee in this regard needs to be looked into i.e., the Assessing Officer should first examine the nature of the expenditure and its allowability i.e., being incurred for the purpose of carrying of the business and thereafter adjudicate whether the same should be subject to tax deduction at source. In view thereof, we set aside this issue back to the file of the Assessing Officer to re-adjudicate the same - Decided in favour of assessee for statistical purposes. Disallowance of directors and staff for training programme - Held that:- Where the expenditure has not been identified then the provision made for directors and staff training programme, even in cases where the assessee was following mercantile system of accounting, the same being unascertained liability, is not allowable under section 37(1). - Decided against assessee Addition made on account of unpaid amount out of provisions - CIT(A) delted the addition - Held that:- D.R. has failed to controvert the finding of the CIT(A) except for stating that the provision made cannot be allowed as deduction. We find no merit in the plea of the Revenue in this regard and uphold the order of the CIT(A) - Decided against revenue Issues Involved:1. Disallowance of amortization expenditure on purchase of Government Securities.2. Disallowance of donations and subscriptions.3. Disallowance of staff voluntary payments.4. Verification of payment of outstanding bonus.5. Disallowance invoking provisions of Section 40(a)(ia) of the Income Tax Act.6. Disallowance of provision for Director's and staff training programme.7. Disallowance of unpaid amount out of provisions.Issue-wise Detailed Analysis:1. Disallowance of Amortization Expenditure on Purchase of Government Securities:The assessee claimed Rs. 31,73,359 as amortization expenses on the purchase of Government Securities, arguing that these were part of the banking business and should be treated as stock-in-trade. The Assessing Officer (AO) disallowed this claim, stating that HTM securities were capital assets and their amortization was not allowable under the Income Tax Act. The CIT(A) upheld the AO's decision, emphasizing that RBI guidelines could not override the Act's provisions. However, the Tribunal referred to the Pune Bench's decision in a similar case and the Bombay High Court's ruling in CIT v. HDFC Bank Ltd., which allowed such amortization as a business expenditure. Consequently, the Tribunal allowed the assessee's claim.2. Disallowance of Donations and Subscriptions:The AO disallowed Rs. 5,00,000 claimed by the assessee for donations and subscriptions as no actual expenditure was incurred. The CIT(A) upheld the disallowance, noting that a mere provision without actual spending does not qualify for deduction. The Tribunal found no merit in the assessee's claim and dismissed this ground of appeal.3. Disallowance of Staff Voluntary Payments:The assessee claimed Rs. 32,46,181 for ex-gratia payments to retiring employees. The AO disallowed this, stating it was not under any scheme formulated under Section 35DDA. The CIT(A) treated this expenditure as capital in nature, providing long-term benefits to the assessee. The Tribunal, however, held that such ex-gratia payments are allowable under Section 37(1) as they are in recognition of services rendered and reversed the CIT(A)'s decision, allowing the expenditure.4. Verification of Payment of Outstanding Bonus:The CIT(A) remanded the issue to verify whether the outstanding bonus of Rs. 4,19,12,834 was paid before the due date of filing the return. The Tribunal noted that the Assessing Officer had already given effect to the CIT(A)'s order, rendering this ground of appeal moot. Consequently, this ground was dismissed.5. Disallowance Invoking Provisions of Section 40(a)(ia):The AO disallowed Rs. 60,78,530 for study tour expenses of directors, citing failure to deduct TDS. The CIT(A) upheld this disallowance. The Tribunal noted that the nature of the expenditure had not been examined and remanded the issue back to the AO for re-adjudication, instructing to first verify the nature of the expenditure and its allowability, then determine the applicability of TDS provisions.6. Disallowance of Provision for Director's and Staff Training Programme:The AO disallowed Rs. 75,00,000 as it was a provision for an unascertained liability, which the CIT(A) upheld. The Tribunal found no merit in the assessee's claim, noting that unascertained liabilities are not allowable under Section 37(1), and dismissed this ground of appeal.7. Disallowance of Unpaid Amount Out of Provisions:The AO disallowed Rs. 38,63,446, stating it was a mere provision. The CIT(A) deleted the disallowance, noting that the provision was made following the mercantile system of accounting and substantial amounts were utilized in the succeeding year. The Tribunal upheld the CIT(A)'s decision, finding no merit in the Revenue's appeal.Conclusion:The Tribunal allowed the assessee's appeal on the amortization of Government Securities and staff voluntary payments, remanded the issue of study tour expenses back to the AO, and dismissed the remaining grounds of appeal. The Revenue's appeal was dismissed in its entirety.