2016 (4) TMI 871 - AT - Income Tax

Appeal Partially Allowed: Deductions for Statutory Funds Allowed, Loss on Securities Dismissed

The Tribunal partially allowed the appeal, directing the AO to allow deductions for contributions made to various statutory funds while dismissing the ... Expenditure wholly and exclusively for the purpose of business - appropriation of profits versus revenue expenditure - payment computed with reference to profits remains expenditure unless division of profits - statutory obligation to expend under Co-operative Societies Act and bye laws - re assessment proceedings and limitation on raising fresh or concluded claimsPayment computed with reference to profits remains expenditure unless division of profits - expenditure wholly and exclusively for the purpose of business - statutory obligation to expend under Co-operative Societies Act and bye laws - Allowability as business expenditure of amounts contributed to various statutory funds by the Apex Co operative Bank. - HELD THAT: - The Tribunal found as a fact that the assessee actually spent the amounts on the specified funds and that the revenue did not contend that the payments were capital or personal. Relying on the principle that a payment whose quantum is computed by reference to profits does not cease to be expenditure (Privy Council in Indian Radio Cable Communications Co. Ltd. and subsequent Supreme Court authorities), the Tribunal held that such payments are not necessarily appropriation of profits. Examining section 37(1) and the bank's bye law framed under the Karnataka Co operative Societies Act, the Tribunal concluded that the contributions were statutory obligations incurred in furtherance of the bank's objects and conferred a business advantage akin to subsidies to subsidiaries considered revenue expenditure in precedent. The Hyderabad bench decision relied on by the revenue was distinguished as resting on a different factual premise (creation of a reserve that remained with the payer). On this basis the Tribunal directed the Assessing Officer to allow the claimed amounts as deductions while computing business income. [Paras 7, 8, 9]The contributions to the Common Good Fund, Special Assistance Fund, PACS/DCCB Fund and Rural Farmers Socio Economic Development Fund amounting to the claimed aggregate are allowable as deductions under section 37(1).Re assessment proceedings and limitation on raising fresh or concluded claims - re assessment under section 147/148 - Permissibility in reassessment proceedings of an additional claim for loss on sale of securities made only in the return filed after notice under section 148. - HELD THAT: - The Tribunal recorded that the additional claim for loss on sale of securities was not made in the original assessment and was first raised in the return filed in response to the notice under section 148. It held that issues concluded in the original assessment cannot be re agitated in the course of reassessment and that a re adjustment of claims cannot be permitted in reassessment proceedings; the ratio of Sun Engineering was applied. The Tribunal observed that the assessee may pursue other provisions of the Act for relief but cannot reopen a concluded matter in the reassessment framed under section 147/148. [Paras 10]The additional claim for loss on sale of securities raised only in the return filed pursuant to notice under section 148 is not allowable in the reassessment and the ground is dismissed.Final Conclusion: The appeal is partly allowed: the Tribunal directs allowance of the contributions to the specified statutory funds as deductions under section 37(1), but dismisses the assessee's ground seeking allowance of the additional claim for loss on sale of securities raised only in the reassessment return. Issues Involved:1. Legality of the appellate authority's order.2. Disallowance of Rs. 33,93,782 towards Rural Farmers Socio Economic Development Fund.3. Disallowance of Rs. 5,27,50,000 towards PACS/DCCB Fund.4. Disallowance of Rs. 5,00,00,000 towards Special Assistance Fund.5. Disallowance of Rs. 8,28,65,052 towards loss on sale of GOI securities.Issue-Wise Detailed Analysis:1. Legality of the Appellate Authority's Order:The appellant claimed that the order of the Learned Appellate Authority is 'bad in law.' However, the judgment does not provide a detailed analysis or specific arguments regarding the legality of the appellate authority's order.2. Disallowance of Rs. 33,93,782 towards Rural Farmers Socio Economic Development Fund:The assessee-co-operative bank argued that the contributions to various funds, including the Rural Farmers Socio Economic Development Fund, were statutory obligations under the Karnataka Co-operative Societies Act, 1959, and were made to promote the business interests of the bank. The Tribunal held that the amounts spent were not capital in nature and should be allowed as deductions under Section 37(1) of the Income-tax Act, 1961. The Tribunal emphasized that the contributions were statutory obligations and were expended wholly and exclusively for the purpose of business. The Tribunal directed the AO to allow the amount spent on the above fund as a deduction.3. Disallowance of Rs. 5,27,50,000 towards PACS/DCCB Fund:Similar to the Rural Farmers Socio Economic Development Fund, the contributions to the PACS/DCCB Fund were argued to be statutory obligations. The Tribunal reiterated that the amounts spent were not capital in nature and should be allowed as deductions under Section 37(1) of the Income-tax Act, 1961. The Tribunal directed the AO to allow the amount spent on this fund as a deduction.4. Disallowance of Rs. 5,00,00,000 towards Special Assistance Fund:The assessee-co-operative bank contended that the contributions to the Special Assistance Fund were made as a statutory obligation and were necessary for the business. The Tribunal held that the contributions were statutory obligations and were expended wholly and exclusively for the purpose of business. The Tribunal directed the AO to allow the amount spent on this fund as a deduction.5. Disallowance of Rs. 8,28,65,052 towards loss on sale of GOI securities:The assessee-co-operative bank made an additional claim for deduction on account of loss on sale of securities in the return of income filed in response to notice u/s 148. The Tribunal held that the re-assessment proceedings are only for the benefit of the revenue, and concluded issues in the original assessment proceedings cannot be re-agitated during the course of re-assessment proceedings. The Tribunal cited the decision of the Hon'ble Supreme Court in the case of Sun Engineering Works (198 ITR 297) to support this view. Consequently, the Tribunal dismissed this ground of appeal.Conclusion:The Tribunal allowed the appeal in part, directing the AO to allow the amounts spent on various funds as deductions while dismissing the ground related to the additional claim for loss on sale of securities. The order was pronounced in the open court on February 29, 2016.