2018 (3) TMI 1626 - HC - Income Tax

Court upholds income addition under Income Tax Act. Apex Bank contribution allowed. Appeal dismissed.

The court upheld the addition of Rs. 1,18,99,651/- to the income of the appellant under Section 41(1) of the Income Tax Act, 1961, as the provisions were ... Additions u/s 41(1) - additions in the years of transfer to the Reserve Fund of the excess provisions made for establishment and other expenses in earlier years - withdrawal of exemption by insertion of section 80P(4) by Finance Act, 2006 w.e.f 1-4-07. - ITAT confirmed the additions - assessee contended that this exemption of income and entries already made are only to rectify the book entry - His further contention that for different assessment years 2003-04, 2004-05, 2005-06 & 2006-07, the entries could not have been made as on 31.3.2006 and the same has been made for the A.Y. 2007-08. Held that:- case is covered by provisions of Section 41(1) - in our considered opinion, at the relevant time, the said contention would have been valid because the total income was exempted but when the entries were made in the books of account, the said income was not totally exempted. In that view of the matter, the view taken by all the authorities is required to be upheld. - Decided against the assessee. Issues Involved:1. Justification of the addition of Rs. 1,18,99,651/- to the income of the appellant under Section 41(1) of the Income Tax Act, 1961.2. Allowability of contribution by the Apex Bank for PAC Managers salary as a statutory liability.Detailed Analysis:Issue 1: Justification of the Addition of Rs. 1,18,99,651/- Under Section 41(1) of the Income Tax Act, 1961Background:The appellant, an apex Co-op. Bank of Rajasthan, had its income exempt under Section 80P(2) of the Income Tax Act in previous years. However, from the assessment year 2007-08, the exemption was withdrawn. The original assessment included a disallowance of Rs. 1,18,99,651/- on account of transfer to statutory reserve from the provision for expenses, treating it as taxable under Section 41(1).Arguments:- The appellant argued that the provisions were made from exempted profits of earlier years and thus should not be taxed when transferred to the reserve fund.- The respondent contended that since the provisions were not added back in earlier years' computations, transferring them to the reserve fund in the current year amounts to cessation of liability and is taxable under Section 41(1).Court's Observations:- The court referred to multiple precedents, including decisions from the Kerala High Court, Allahabad High Court, and the Supreme Court, to understand the principles behind the cessation of liability and its taxation.- The court noted that the provisions were indeed not added back in earlier years' computations, thus confirming the AO's stance that the transfer amounts to cessation of liability.Conclusion:The court upheld the addition of Rs. 1,18,99,651/- to the income of the appellant under Section 41(1) of the Income Tax Act, 1961, as the provisions were not added back in previous years, making the transfer to reserve fund taxable.Issue 2: Allowability of Contribution by the Apex Bank for PAC Managers Salary as a Statutory LiabilityBackground:The appellant made a provision for PAC Managers salary amounting to Rs. 1,00,21,000/-, which was disallowed by the AO, treating it as a contingent liability.Arguments:- The appellant argued that the contribution was a statutory liability crystallized at the end of each year, and once made, it was at the disposal of the Registrar of Co-operative Societies.- The respondent maintained that the liability was contingent as no disbursement was made from the provision.Court's Observations:- The court reviewed the statutory requirements and rules governing the contribution, confirming that it was a statutory liability and not contingent.- The CIT(A) and the Tribunal had previously accepted the appellant's contention, directing the AO to allow the deduction.Conclusion:The court upheld the allowability of the contribution by the Apex Bank for PAC Managers salary as a statutory liability, directing that the disallowance by the AO was incorrect.Final Judgment:The court dismissed the appeal, upholding the addition of Rs. 1,18,99,651/- to the income of the appellant under Section 41(1) and confirming the allowability of the contribution for PAC Managers salary as a statutory liability. The issues were answered in favor of the department and against the assessee.