TaxTMI 
TaxTMI 
2016 (4) TMI 871
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....ot considering the Appellant's claim Rs. 5,27,50,000/- towards PACS/DCCB Fund. 4. The Learned Appellate Authority erred in confirming action of Learned Assessing Officer in not considering the Appellant's claim Rs. 5,00,00,000/- towards Special Assistance Fund. 5. The Learned Appellate Authority erred in confirming action of Learned Assessing Officer in not considering the Appellant's claim Rs. 8,28,65,052/- towards loss on sale of GOI securities. On the above and such other grounds as may be urged at the time of hearing your appellant prays your Honour to consider the facts and circumstances of the case and render justice." 3. Brief facts of the case are that the assessee is a co-operative society registered under the provisions of the Karnataka State Cooperative Societies Act, 1959 and under the Banking Regulation Act, 1939. It is engaged in the business of banking. The main object for which the assessee-co-operative bank was established was to serve as a State Co-operative Bank. Return of income for the assessment year 2007-08 was filed on 31/10/2007 declaring income of Rs. 40,77,27,150/-. The said return of income was processed u/s 143(....
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....its and therefore not allowable as deduction. a) Common Good Fund Rs. 25,00,000/- b) Special Assistance Fund Rs.5,00,00,000/- c) Payment to PACS/DCCB Fund Rs.5,27,50,000/- d) Rural Farmers Socio Economic Development Fund .... Rs. 33,93,782/- Rs.10,86,43,782/- The AO also disallowed the additional claim on account of loss on sale of securities of Rs. 8,28,65,052/- made in the return of income filed in response to notice u/s 148 by holding that the re-assessment proceedings are only for the benefit of the revenue. In support of this proposition, reliance was placed by the AO on the decision of the Hon'ble Supreme Court in the case of Sun Engineering Works (198 ITR 297). 5. Being aggrieved by the above order, an appeal was filed before the ld. CIT(A) who, vide impugned order, confirmed the additions made by the AO. The ld. CIT(A) concurred with the reasoning of the AO and upheld the additions made on account of amounts spent on contribution to various funds. In respect of deduction in respect of additional claim on account of loss on sale of securities, the ld. CIT(A) ....
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....e is capital in nature. The lower authorities had disallowed the above expenditure solely on the ground that it is only appropriation out of profits and not expenditure. The approach of the lower authorities cannot stand the test of law laid down by the Privy Council in the case of Indian Radio Cable Communications Co. Ltd. Vs. CIT (5 ITR 270) wherein it is laid down that when the assessee makes a payment which is computed in relation to profits, it is still an item of expenditure though ascertained by reference to the profits. The payment is not allowable as deduction only in the case of division of profits. Lord Maugham, speaking for the Privy Council held as follows: "It is not universally true to say that a payment the making of which is conditional on profits being earned cannot properly be described as an expenditure incurred for the purpose of earning such profits. The typical exception is that of a payment to a director or a manager of a commission on the profits of a company. It may, however, be worth pointing out that an apparent difficulty here is really caused by using the word 'profits' in more than one sense. If a company having made an apparent net p....
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.... f) Of the remaining balance a sum not less than 15% to the Special Assistance Fund to the members of the Bank. g) Of the remaining balance a sum not less than 15% to the Primary Agricultural Credit Societies Development Fund. h) Of the remaining balance a sum not less than 2% to the Dividend Equalisation Fund. i) Of the remaining balance not less than 5% shall be contributed to the Farmers' Welfare Fund and j) The remaining balance shall be transferred to Reserve Fund of the Bank." 8.2 Pursuant to the above by-law, during the year under consideration, assessee-co-operative bank has spent the above sum. From perusal of the scheme of the above funds, it is clear that the fund contributed neither remains with the Apex Co-operative Bank nor comes back to the assessee-co-operative bank in other form. The amounts are spent only out of statutory obligation. The provisions of section 37(1) provides for deduction of any expenditure laid down or expended wholly and exclusively for the purpose of business in computing the income chargeable under the head 'profits and gains business or profession'. The only exception is the capital expenditure or....
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....ision of the Hon'ble Apex Court in the case of CIT vs. Rajendra Prasad Moody (115 ITR 519). It may be further stated that one of the objects of the assessee-co-operative bank is to develop or assist and co-operative the member district central co-operative banks and other co-operative societies and therefore the contribution was only made in further pursuance of the objects of the bank for which it was established and therefore it cannot be said that there is a business interest in incurring those expenditure and the law laid down by the Hon'ble Supreme Court in the case of S.A.Builders vs. CIT (288 ITR 1) is squarely applicable. 8.4 The Hon'ble Bombay High Court in the case of CIT vs. State Bank of India (261 ITR 82), while dealing with the issue of allowability of subsidy granted by it to its subsidiary banks, held that by grant of subsidies it has got the business advantage and therefore, allowed deduction by holding as under: "Lastly, by giving subsidy to the State Bank of Patiala, the State Bank of Saurashtra, etc., for opening branches, assets were created, but these assets belonged to the subsidiaries. The assets did not belong to the State Bank of India. Similar....