Cooperative society status upheld, dividend distribution tax under section 115-O ruled inapplicable, multiple matters remitted for verification

ITAT Kolkata ruled in favor of the appellant cooperative society on multiple grounds. The tribunal held that the assessee's status could not be changed from cooperative society to banking company, making section 115-O dividend distribution tax provisions inapplicable. Several matters were remitted to AO for verification including TDS disallowances under section 40(a)(ia), provident fund contributions, income tax provisions, and standard asset provisions. The tribunal partially allowed appeals on vehicle hire charges reducing disallowance from 15% to 10%, and confirmed donation additions where business purpose wasn't established. Most grounds were allowed for statistical purposes requiring AO re-examination.

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The core legal issues considered by the Tribunal across the appeals for assessment years 2014-15, 2015-16, and 2017-18 primarily revolve around the following questions:

1. Whether the status of the assessee should be treated as a "Co-operative Society" or as a "Banking Company" or "Domestic Company" for the purposes of the Income Tax Act, 1961, and the consequent applicability of dividend distribution tax under section 115-O and interest under section 115-P.

2. Whether the disallowances made by the Assessing Officer under section 40(a)(ia) of the Income Tax Act, 1961 for various expenses on account of non-deduction or non-submission of proof of tax deducted at source (TDS) are justified.

3. Whether the additions made on account of provisions for income tax and provisions on standard assets are justified or constitute double additions.

4. Whether the disallowance of employees' contribution to Provident Fund as income under section 2(24)(x) read with section 36(1)(va) is justified, considering the grace period allowed for deposit under the Provident Fund Act.

5. Whether the disallowance of donation and subscription expenses is justified, particularly when such expenses are claimed to be incidental and for the purpose of business.

6. Whether the additions made on estimated basis for vehicle hiring charges, entertainment, petrol, and mobile expenses are justified in the absence of supporting vouchers.

Issue 1: Status of the Assessee and Applicability of Dividend Distribution Tax

The relevant legal framework involves the classification of the assessee under the Income Tax Act, 1961, and the applicability of dividend distribution tax under section 115-O and interest under section 115-P, which are leviable only on domestic companies. Additionally, the Banking Regulation Act, 1949, and the Companies Act, 1956/2013, are relevant for determining the status of the assessee.

The Assessing Officer (AO) treated the assessee as a "Banking Company" (non-scheduled bank) for income tax purposes, applying provisions of the Income Tax Act applicable to banking companies, including levy of dividend distribution tax under section 115-O and interest under section 115-P. This was despite the assessee filing returns as a "Co-operative Society" and previous orders of the Tribunal and the Hon'ble Jurisdictional High Court holding the status as a cooperative society.

The Tribunal noted that the issue had been conclusively decided in the assessee's favor in earlier years (AYs 2007-08, 2009-10, and 2010-11) by coordinate benches of the Tribunal and confirmed by the High Court, where it was held that the AO's change of status from cooperative society to company was without basis and not permissible unless supported by cogent reasons. The Department had not challenged these findings before the High Court, and thus the issue attained finality.

The Tribunal held that the status of the assessee must be treated as a cooperative society and not a banking company or domestic company. Consequently, the levy of dividend distribution tax under section 115-O and interest under section 115-P was not justified. The Tribunal observed, "The change of status of the assessee from cooperative Society to cooperative bank is held to be not justified."

Therefore, Grounds relating to the change of status and levy of dividend distribution tax were allowed in favor of the assessee.

Issue 2: Disallowances under Section 40(a)(ia) for Non-Deduction of TDS

Section 40(a)(ia) of the Income Tax Act disallows expenses where tax is deductible at source but not deducted or paid to the government. The AO disallowed various expenses including law charges, audit fees, vehicle hiring charges, agents' commission, security expenses, and advertisement expenses on the ground of non-deduction or non-submission of proof of TDS.

The CIT(A) upheld these disallowances relying on the Supreme Court decision in Shree Choudhary Transport Co. vs Income Tax Officer, which clarified the applicability of TDS provisions.

The assessee contended that tax was deducted and deposited wherever applicable and that the disallowance was made without considering the tax audit report and other evidence filed. The assessee explained that due to demonetization and workload, documents could not be submitted timely but had since filed TDS returns and submitted ledger extracts and statements from the TRACES portal.

The Tribunal found that the CIT(A) had not adequately considered the evidence submitted by the assessee to prove compliance with TDS provisions. The Tribunal observed that the AO's disallowance was based on suspicion and surmise without rejecting the books of account or tax audit reports.

Accordingly, the Tribunal set aside the CIT(A) order confirming disallowances and remitted the matter to the AO for verification of the evidence regarding TDS deduction and deposit. The AO was directed to allow expenses where TDS was deducted and deposited or where TDS was not applicable, and disallow only where non-compliance was established.

This approach was applied mutatis mutandis to all the relevant assessment years.

Issue 3: Additions for Provision for Income Tax and Provision on Standard Assets

The AO made additions for provisions for income tax and provision on standard assets, treating them as disallowable expenses or duplicate additions.

The Tribunal noted that provision for income tax is not an allowable expense and the assessee had already excluded the provision in its computation of income, thereby making the AO's addition a duplicate. The CIT(A) had not adjudicated this ground, so the Tribunal remitted the issue to the AO for verification and deletion of duplicate additions.

Regarding provision on standard assets, the assessee claimed deduction under section 36(1)(viia) of the Act, submitting compliance with Reserve Bank of India (RBI) prudential norms on income recognition, asset classification, and provisioning. The Tribunal found that the CIT(A) had not adjudicated this issue and remitted it to the AO to verify eligibility under section 36(1)(viia) and relevant RBI guidelines. The assessee was to be treated as a non-scheduled bank for this purpose.

Issue 4: Disallowance of Employees' Contribution to Provident Fund

The AO disallowed employees' contribution to Provident Fund as income under section 2(24)(x) read with section 36(1)(va) for non-deposit within the due date. The assessee contended that the delay was within the grace period of five days allowed under the Provident Fund Act and supported this with circulars and judicial precedents including Hunsur Plywood Works Ltd. vs Deputy Commissioner of Income-Tax.

The CIT(A) upheld the disallowance without proper adjudication. The Tribunal, however, accepted the assessee's submission that the grace period was applicable up to December 2015 and amounts deposited within this period should be allowed as deduction. The Tribunal remitted the matter to the AO to verify challans and allow deduction for amounts deposited within the grace period, confirming disallowance only for amounts deposited beyond the grace period.

Issue 5: Disallowance of Donation and Subscription Expenses

The AO disallowed donation and subscription expenses on the ground that they were not allowable as business expenses under the Act. The assessee claimed these expenses were for advertisement, sponsorships, and business promotion, thus allowable under section 37.

The CIT(A) rejected the claim due to lack of evidence. The Tribunal noted that the assessee did not press this ground during hearing and failed to produce supporting evidence. Accordingly, the Tribunal confirmed the disallowance.

Issue 6: Additions on Estimated Basis for Vehicle Hiring, Entertainment, Petrol, and Mobile Expenses

The AO disallowed 15% of the total expenses on vehicle hiring, entertainment, petrol, and mobile expenses on an estimated basis due to absence of supporting vouchers, suspecting possible excessive claims.

The CIT(A) confirmed the addition without adjudicating the grounds of appeal. The Tribunal found that the AO's addition was arbitrary and not supported by material evidence. However, since the assessee could not produce the primary documents, the Tribunal reduced the disallowance from 15% to 10%, granting consequential relief to the assessee.

Other Issues

Grounds relating to denial of opportunity to produce documents, duplicate additions on account of donation and subscription, and provision for income tax were also considered. The Tribunal allowed these grounds for statistical purposes and remitted them to the AO for verification and appropriate action.

Significant Holdings:

"The change of status of the assessee from cooperative Society to cooperative bank is held to be not justified."

"The levy of dividend distribution tax under section 115-O and interest under section 115-P is not applicable to the assessee as it is not a domestic company."

"Disallowance under section 40(a)(ia) cannot be confirmed without verifying that tax was not deducted or deposited; mere non-submission of documents without rejection of books of account or tax audit reports is insufficient."

"Provision for income tax is not an allowable expenditure and if already excluded in computation, duplicate addition is not justified."

"Amounts deposited within the grace period allowed under the Provident Fund Act should be allowed as deduction under section 36(1)(va)."

"Disallowance of expenses on estimated basis without material evidence is arbitrary; however, absence of primary documents justifies partial disallowance."

In conclusion, the Tribunal partly allowed the appeals for all assessment years primarily by restoring the status of the assessee as a cooperative society, disallowing levy of dividend distribution tax, remitting issues of disallowance under section 40(a)(ia) for verification of TDS compliance, and directing verification of provisions and duplicate additions. Disallowances unsupported by evidence were either reduced or confirmed based on the facts and submissions. The appeals were disposed of with directions for further verification and compliance by the Assessing Officer.

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