2014 (9) TMI 508 - AT - Income Tax

Tribunal remands appeal for re-examination, stresses adherence to legal provisions.

Northern Railway Primary Cooperative Bank Ltd. Versus Asstt. Commissioner of Income Tax

The Tribunal partly allowed the appeal, remanding specific issues for re-examination. It emphasized adherence to legal provisions and guidelines for the ... Allowances paid to Directors relating to business u/s 40(b)/40(ba) – Held that:- On the basis of the Auditor’s report, the AO has made disallowance of payment as Director’s allowance - the assessee is a Co-operative Bank Ltd. registered under the Societies Act - The AO though was required to examine the claim of the assessee in the light of the legal provisions of the Act, but he has made disallowance relying upon the Auditor’s report - the AO was required to examine the claim of the assessee on merit also, but it was not done and the claim was disallowed on the basis of the Auditor’s report - the AO is required to assess the income as per law in the right hands - the objection raised by the Auditor in this regard is not in accordance with law and the disallowance was made solely on the basis of the Auditor’s objections - this issue requires to be re-adjudicated by the AO in the light of the relevant provisions of the Act and also the details of payments prepared by the assessee – thus, the matter is to be remitted back to the AO for re-examination – Decided in favour of assessee. Interest to depositors & payment to contractors – Failure to comply with permission of Chapter XVII B – Held that:- The AO has made disallowance paid as interest, having noted that TDS was not deducted on the payments in the light of the provisions of section 40(a)(ia) of the Act, which was later on confirmed by the ld. CIT(A) – relying upon ACIT vs. Visakhapatnam Cooperative Bank Ltd. [2011 (8) TMI 319 - ITAT VISAKHAPATNAM] - if the co-operative society makes payment of interest on deposits received from its members only and it was not required to deduct TDS in view of the provisions of section 194A(3)(v) of the Act - This aspect was not examined by the CIT(A) while confirming the disallowance though the assessee has contended that interest was paid only to the members of the assessee-society in the light of the fact that no other person except the members of the society can open an account with the assessee-bank - this aspect cannot be examined in the absence of relevant information, this issue requires a proper adjudication by the AO – thus, the matter is remitted back to the AO for re-adjudication – Decided in favour of assessee. Restriction of election expenses at 30% – Held that:- AO as well as CIT(A) was rightly of the view that the election expenses can only be allowed from the declaration of election process till declaration of results which is of not more than 30-40 days - disallowance of 30% of the total claim of election expenses is rightly decided as the assessee could not place the details of expenditures incurred for election purpose – Decided against assessee. Investment depreciation reserve disallowed – amount debited to P&L account – Held that:- Following the decision in NORTHERN RAILWAY PRIMARY COOPERATIVE BANK LTD Versus ACIT [2014 (2) TMI 460 - ITAT LUCKNOW] - as per advice of the RBI provision of the investment amount is possible during the first three years i.e. financial years relevant to the assessment years and thereafter its provision cannot be allowed without any further instruction of the RBI - The assessee has claimed provision during the AY without any advice of the RBI against the provisions of the Income-tax Act - CIT(A) is justified in disallowing – Decided against assessee. Issues Involved:1. Disallowance of Rs. 200,000 as Directors' allowances.2. Disallowance of Rs. 11,000,000 on estimated basis for payment of interest to depositors and contractors.3. Disallowance of Rs. 324,002 being 30% of total election expenses.4. Disallowance of Rs. 11,868,000 in respect of amount invested with City Cooperative Bank.5. Charging of interest under section 234B of the Income Tax Act, 1961.6. Adequacy of opportunity provided by the CIT(A) for compliance.Issue-wise Detailed Analysis:1. Disallowance of Rs. 200,000 as Directors' Allowances:The Assessing Officer disallowed Rs. 200,000 paid as Directors' allowances based on the Auditor's Report, invoking provisions of section 40(b)/40(ba) of the Income-tax Act, 1961. However, these provisions apply to firms, AOPs, or bodies of individuals, not to co-operative societies. The assessee, being a Co-operative Bank registered under the Societies Act, argued that the Auditor's observation was incorrect. The Tribunal found that the Assessing Officer relied solely on the Auditor's report without examining the legal provisions. The Tribunal set aside the CIT(A)'s order and remanded the matter to the Assessing Officer for re-examination in light of the relevant provisions.2. Disallowance of Rs. 11,000,000 for Payment of Interest to Depositors and Contractors:The Assessing Officer disallowed Rs. 11,000,000 due to non-deduction of TDS on payments to depositors and contractors. The assessee argued that as a primary co-operative bank, it was not required to deduct TDS under section 194A(3) of the Act, as interest paid to members was below Rs. 10,000. The Tribunal noted that the assessee did not furnish relevant details before the lower authorities. Citing the case of ACIT vs. Visakhapatnam Cooperative Bank Ltd., the Tribunal remanded the issue to the Assessing Officer for proper adjudication, considering the provisions of section 194A(3)(v).3. Disallowance of Rs. 324,002 as Election Expenses:The Assessing Officer disallowed 30% of the election expenses, noting that such expenses should be limited to the election period, typically 30-40 days. The assessee argued that the expenses were incurred over nine months due to the spread of the electoral college across the state. The Tribunal found no specific defects in the accounts but upheld the disallowance, agreeing with the lower authorities' view that the expenses were excessive and a reasonable disallowance was justified.4. Disallowance of Rs. 11,868,000 for Investment with City Cooperative Bank:The Assessing Officer disallowed Rs. 11,868,000 debited as investment depreciation reserve, following the order for the assessment year 2006-07. The Tribunal referred to its earlier decision for the assessment year 2008-09, which confirmed the disallowance based on RBI guidelines and judicial pronouncements. The Tribunal noted that the provision should have been made within three years as advised by the RBI, and since the provision was made in the assessment year 2008-09 without further RBI instructions, the disallowance was justified.5. Charging of Interest under Section 234B:This ground was noted as consequential and did not require independent adjudication.6. Adequacy of Opportunity Provided by CIT(A):This ground was considered general in nature and did not require independent adjudication.Conclusion:The appeal was partly allowed for statistical purposes, with remands for re-examination on specific issues. The Tribunal emphasized proper adherence to legal provisions and guidelines in reassessing the disputed disallowances. The order was pronounced in the open court on 21.8.2014.