2018 (11) TMI 1918 - AT - Income Tax

Assessee wins on Provident Fund deduction, interest income addition denied.

Gujarat State Co-op. Fruit and Vegetable Marketing Federation Ltd. Versus Deputy Commissioner of Income-Tax, Circle – 2 (3), Surat

The Tribunal ruled in favor of the Assessee on both grounds. Firstly, the deduction of Provident Fund expenses was allowed as the Assessee's fund, ... Claim of deduction on account of Provident Fund - CIT (A) upheld the action of the AO on the ground that the assessee has not got approved the Provident Fund approved from Chief CIT/Pr.CIT, so any approval granted by the Provident Fund Commissioner is not relevance as per provisions of section 36(1)(iv) - HELD THAT:- We find that the perusal of the definition given in section 2(38) of the Act as above shows that a provident fund which has been or continues to be recognized by the Chief Commissioner or the Commissioner in accordance with the rules contained in Part A of the Fourth Schedule is said to be a 'recognized provident fund' as per the first limb of the definition given in section 2(38). As per the second limb of the definition, a recognized provident fund also includes a provident fund established under a scheme framed under the Employees' Provident Fund Act, 1952. The definition given in section 2(38) thus is an inclusive definition and as per the second limb of the said definition which is independent of the first limb, it includes a provident fund established under a scheme framed under the Employees' Provident Fund Act, 1952. The condition of recognition of the fund by the Chief Commissioner or Commissioner as stipulated in the first limb is consciously absent in the second limb which clearly depicts that such recognition is not a condition precedent for a provident fund established under a scheme framed under the Employees' Provident Fund Act. 1952 to be a 'recognized provident fund' within the meaning of section 2(38) - We, therefore, observe that Section 2 (38) of the Act, itself specifically provides a Provident Fund established under a Scheme framed under the Employees' Provident Fund Act, 1952 to be a recognized Provident fund there is no reason for the claim of the assessee to be denied. In view of this matter, respectfully following the above decision and decision cited therein of Hon`ble High Courts, this grounds of appeal is allowed in favour of the assessee. Addition of interest received from other than co-operative societies and thereby not granting the proportionate deduction of expenses as claimed by the assessee - HELD THAT:- We find that that CIT (A) viewed that interest expenses has been claimed against business income and same stands allowed is not logical as the said business income is exempt under section 80P of the Act. Therefore, on the logic of disallowance of interest expenses u/s. 14A as against exempt income the expenses for income from other source as shown under the head interest income is also required to be allowed. We find that in case Shree Dhansobhavak Co-operative Credit Society Ltd. [2018 (8) TMI 2098 - ITAT AHMEDABAD] have held that proportionate interest expenses are allowable from interest income. In view of this matter, we delete the addition in which interest expenses component is also included. Accordingly, Ground No. 2 of appeal is allowed. Issues Involved:1. Deduction of Provident Fund expenses.2. Addition of interest income and denial of proportionate deduction of expenses.Detailed Analysis:1. Deduction of Provident Fund Expenses:The primary issue concerns whether the Assessee is entitled to a deduction of Rs. 2,45,017 on account of Provident Fund expenses. During the assessment proceedings, the Assessee submitted a revised computation of income, including the Provident Fund expenses. However, the Assessing Officer (AO) disallowed the deduction, citing the lack of approval from the Chief Commissioner of Income Tax (CCIT) or Commissioner of Income Tax (CIT) as per a letter dated 05.05.1982.The Assessee appealed to the CIT (A), who upheld the AO's decision, stating that approval from the Provident Fund Commissioner was irrelevant under Section 36(1)(iv) of the Income Tax Act, 1961, without the necessary approval from the CCIT or CIT.The Assessee then appealed to the Tribunal, arguing that under Section 2(38) of the Act, a recognized Provident Fund includes one established under a scheme framed under the Employees' Provident Fund Act, 1952, independent of recognition by the CCIT. The Assessee cited the case of Voxiva India Pvt. Ltd. v. ITO, where it was held that either condition (recognition by CCIT or establishment under the Employees' Provident Fund Act) suffices for a Provident Fund to be recognized.The Tribunal reviewed the relevant material and found that the definition of 'recognized provident fund' under Section 2(38) includes two independent conditions: recognition by the CCIT or establishment under the Employees' Provident Fund Act. The Tribunal concluded that the Assessee's Provident Fund, established under the Employees' Provident Fund Act, satisfied the condition for recognition, making the deduction allowable. Therefore, the Tribunal allowed Ground No. 1 in favor of the Assessee.2. Addition of Interest Income and Denial of Proportionate Deduction of Expenses:The second issue pertains to the addition of Rs. 1,32,341 of interest income received from sources other than co-operative societies and the denial of proportionate deduction of expenses. The AO disallowed Rs. 3,43,524 as interest income from banks other than co-operative societies, while the Assessee had offered Rs. 2,11,183 after deducting proportionate interest expenses in the original return. In the revised computation, the Assessee offered Rs. 3,43,524 as interest income and claimed Rs. 65,819 as proportionate expenses, resulting in a net taxable interest income of Rs. 2,77,205.The CIT (A) acknowledged that the AO made a double addition by considering the original return, thus directing the deletion of Rs. 2,11,183. However, the CIT (A) denied the deduction of proportionate expenses, arguing that the Assessee already claimed these expenses against business income, which would amount to double deduction.The Assessee appealed to the Tribunal, arguing that the proportionate expenses should be allowed, referencing cases where net interest income was considered taxable. The Tribunal found the CIT (A)'s logic flawed, as the business income was exempt under Section 80P, and expenses related to income from other sources should be allowed. The Tribunal cited precedents from similar cases where proportionate interest expenses were deemed allowable.Consequently, the Tribunal deleted the addition of Rs. 1,32,341, including the interest expenses component of Rs. 65,819, and allowed Ground No. 2 in favor of the Assessee.Conclusion:The Tribunal allowed the appeal of the Assessee on both grounds, granting the deduction of Provident Fund expenses and the proportionate deduction of interest expenses. The judgment was pronounced in the open court on 01.11.2018.