TaxTMI 
TaxTMI 
2023 (5) TMI 68
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....gh no details in this regard has been filed by the assesse either during the course of assessment proceedings or during the appellate proceedings. (3). The Ld. CIT(A) has erred in deleting the disallowance made in respect of provision claimed u/s 36(1)(viii) of the I.T. Act of Rs.5,75,94,958/-. (4). The Ld. CIT(A) has erred in deleting the addition of Rs.5,75,94,958/- by holding that the provisions made u/s 36(1)(viii) of the I.T. Act 1961 under various heads are allowable as deduction as the same has been used to promote the business interest of the assesse, ignoring the facts that there were provisions and not real expenditure, therefore the same was allowable only to the 20% of profit of the business." 2. Heard the learned Representatives of both sides at length and case records perused. 3. Briefly stated the facts are such that the assessee is a registered cooperative society engaged in banking business. The assessee is governed by the provisions of its parent law relating to co-operative societies as well as Banking Regulations Act. The assessee filed return of income of the relevant AY 2014-15, which was subjected to scrutiny-assessment by issuing stat....
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....Ld. CIT(A) accepted assessee's submission and allowed deduction. 7. Before us, Ld. DR representing the revenue argued that the "standard assets" are those assets which are adequately serviced by the borrowers; those assets can't be said to be "bad debts". Therefore, the assessee has wrongly characterized them as "bad debt", made provision and claimed deduction. Ld. DR claimed that in Nagaur Urban Co-operative Bank Ltd. (supra), deduction was allowed for NPA and not for standard-assets. Therefore, the reliance of CIT(A) on that decision is misplaced. Thus, Ld. DR submits, the CIT(A) has wrongly allowed the claim of assessee. 8. Per contra, Ld. AR supported the order of first-appeal and argued that a careful reading of the order of Nagaur Urban Co-operative Bank Ltd. (supra) clearly reveals that the ITAT has allowed deduction of "provision for standard-assets" (Para No. 4 and 10 of the ITAT order). He further relied upon following decisions wherein such deduction has been allowed: (i) ITAT Amritsar Bench in DCIT Vs. The Nawansahar Central Cooperative Bank Ltd, ITA No. 61/Asr/2017 order dated 03.01.2018 (ii) ITAT Mumbai Bench in Model Co-operative Bank Vs. DCIT....
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....ul assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year: Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words "five per cent", the words "ten per cent" had been substituted: Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government: Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession." Explanation. For the purposes of this sub-clause, "relevant assessment years" means the five....
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....nable to accept such a pleading of Ld. AR. Therefore, in the circumstance, though we agree in principle that the provision made for standard assets is also eligible for deduction yet we are of the view that there is a strong necessity to verify whether the claim made by assessee is within the permissible limit prescribed in section 36(1)(viia) or not; therefore it would be appropriate to refer this issue back to the file of Ld. AO for the limit purpose of such verification. The Ld. AO will verify the permissible limit and allow deduction within such limit. We order accordingly. We also direct the assessee to provide necessary information/calculation to Ld. AO to enable him to make such verification. These grounds are, thus, allowed in terms indicated here. Ground No. 3 to 4: 11. In ground No. 3, the revenue claims that the CIT(A) has erred in deleting the disallowance of Rs. 5,75,94,958/- in respect of various provisions claimed by assessee. Thereafter, in ground No. 4, the revenue claims that the CIT(A) has erred in deleting the impugned disallowance ignoring the fact that they were provisions and not real expenditure; therefore the same were allowable to the extent of 20% o....
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....ng/unverified finding that the amounts claimed by assessee were "actually spent". Ld. DR strongly contended that there is no material to indicate that the impugned amounts have been "actually spent" by assessee during the previous year relevant to assessment-year under consideration; in fact a cursory look of the P&L A/c and Balance-Sheet of assessee (copies thereof placed in the Paper-Book filed by assessee) itself demonstrates that these are mere provisions/transfer to funds made by assessee by means of accounting entries. Then, the Ld. DR submitted that the AO has rightly observed that the assessee has claimed deduction of mere provisions/transfer to funds which can be allowed only in terms of section 36(1)(viii). Ld. DR submitted that the AO has aptly computed the permissible limit as prescribed in section 36(1)(viii) and accordingly allowed deduction to the extent allowable and disallowed only excess provision; hence there is no fallacy in AO's action. He submitted that there is nothing wrong in the disallowance of excess deduction made by AO because the provision/transfer to funds made by assessee can be allowed only to the extent of limit permitted in the Income-tax law and ....
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.... (a) Hon'ble Madhya Pradesh HC in Keshkal Co-Operative Marketing Society Ltd. vs. CIT 165 ITR 437 (b) Hon'ble Karnataka HC in PCIT vs. Karnataka State Co-operative Apex Bank Ltd [2021] 130 taxmann.com 261 (c) Hon'ble Supreme Court in Rotork Controls India Pvt. Ltd. vs. CIT (2009) 314 ITR 62 (d) ITAT Surat in DCIT vs. Surat Dist. Co-Op Bank Ltd. ITA No. 16/AHD/2015 order dated 17.05.22. (ii) The second contention made by Ld. AR is that the assessee has not simply made provisions/transfer to funds; it has also incurred actual expenditure and those expenses were for business purposes. Therefore also, the deduction is allowable. 16. In rejoinder, Ld. DR submitted that the provisions of section 43A of MP/CG Co-operative Societies Act, 1960 relied upon by assessee simply prescribe for "appropriate of profits" which is nothing to do with Income-tax Act. Ld. DR submitted that an assessee may be required to appropriate profits for certain purposes by a law, but that does not mean that Income-tax law will allow deduction. Ld. DR also submitted that the decisions relied upon by Ld. AR or even Ld. CIT(A) during first-appeal are not applicable on the fac....
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.... certainly cannot be construed to be an income in the normal connotation of the term "income" as envisaged under section 2(24) of the Act. Therefore, income-tax is levied on the real income, i.e. profit received in mercantile trade, as prescribed under the Income-tax Act, 1961. In accordance with section 28 of the Act, profits and gains of business carried on by an assessee based on purely mercantile principles, should always be amenable to business profits, but not statutory profits. In sum and substance, only the real profits of business are to be taken into account for assessing income-tax, but not notional profits and, therefore, the statutory deposit (reserve fund) in the instant case, as contemplated under section 43(2) of the Societies Act, which after its creation comes within the domain of the Registrar under section 44(2) of the Societies Act, cannot be said to be profit in the real sense. On this background, learned counsel appearing for the assessee argued that the said amount of Rs. 1,66,763 does not comprise income of the assessee, because the said amount has been diverted under section 43(2) of the Societies Act. In support of his contention, learned counsel....
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....74) 97 ITR 334 and reiterated by the Supreme Court in CIT v. Travancore Sugars and Chemicals Ltd. (1973) 88 ITR 1. Further, in CIT v. Bombay State Road Transport Corporation (1977) 106 ITR 303 (Bom), it has been held that the contributions made under a legal obligation cast upon a statutory organisation under a statutory provision will have to be allowed as deduction in computing its profits. Therefore, in the instant case also, the deduction as claimed by the assessee-society amounting to Rs. 1,66,763 is an allowable deduction as the said amount does not comprise income of the assessee because the same having been diverted under the provisions of section 43(2) of the Societies Act, can only be invested or utilised in such manner and on such terms and conditions as may be laid down by the Registrar in this behalf as required under clause (2) of section 44 of the Societies Act. As such, the said amount is not available for the use of the assessee-society at its opinion. Therefore, the real test for such sum to be deductible is that if by making statutory deposits, the assessee loses control over the said amount, being not available for its use, then such amount is certainly....
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.... the beneficiary of the said reserve fund. Taking into account these peculiar facts, the Hon'ble Court applied the test of "real income" and then came to conclude that the income to the extent of transfer to reserve fund was not a "real income" of assessee in terms of regulatory provision; therefore the court allowed deduction of provision/transfer to funds made by assessee. (ii) Hon'ble Karnataka High Court - PCIT vs. Karnataka State Cooperative Apex Bank Ltd [2021] 130 taxmann.com 261: In this case, the assessee made contributions to (i) Common Good Fund [CGF], (ii) Special Assistance Fund, (iii) PACS/DCCB Fund, (iv) Rural Farmers Social Economic Fund and claimed deduction. When the matter travelled before ITAT, Bangalore in Katnataka State Co-operative Apex Bank Ltd. Vs. DCIT-3(1) ITA No. 1372/Bang/2014, the ITAT allowed deduction on some crucial findings, we extract below the relevant paragraphs of the order of ITAT: "6.1 During the course of hearing, it was submitted on behalf of the assessee-co-operative bank that during the previous year relevant to assessment year under consideration, while adding back the provisions of contribution made to (a)Common Good Fun....
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.... Court confirmed the order of ITAT by holding thus: "7. The tribunal while dealing with the claims of the assessee for allowance as an expenditure under section 37 of the Act, has held that the funds contributed by the assessee neither remains with the Apex Co-operative Bank nor comes back to the assessee bank in any other form. The amounts have been spent only out of the statutory obligation. It has further been held that Section 37(1) of the Act makes an exception in case of capital expenditure or personal expenditure of the assessee or expenditure of the nature described in other Sections of Chapter IV of the Act. The case of the revenue is not that the contribution made by the assessee to the fund is capital expenditure or is in the nature of personal expenses or expenditure described in any other Sections of Chapter IV of the Act. It has further been held that assessee has incurred the expenditure for the purposes of business and therefore, the same is an admissible expenditure under section 37 of the Act. This court in Karnataka State Co-operative Apex Bank Ltd. Case (supra), of assessee in respect of Assessment Year 2009-10 has allowed the payments made to Primary A....