Income Tax Appellate Tribunal - Panji
M/S Krishna District Co.-Op.Central ... vs Dy. Cit, Circle - 2(1),, Vijayawada on 8 November, 2017
ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016
C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017
M/s.The Krishna District Co-operative Central Bank, Machilipatnam
आयकर अपील य अ धकरण, वशाखापटणम पीठ, वशाखापटणम
IN THE INCOME TAX APPELLATE TRIBUNAL,
VISAKHAPATNAM BENCH, VISAKHAPATNAM
ी वी. दग
ु ाराव, या यक सद य एवं
ी ड.एस. सु दर "संह, लेखा सद य के सम%
BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER &
SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER
आयकर अपील सं./I.T.A.Nos.120&121/Vizag/2013
( नधारण वष / Assessment Years: 2007-08 & 2008-09)
DCIT, Circle-2(1), M/s. The Krishna District
Vijayawada Co-operative Central Bank Ltd.,
Machilipatnam
[PAN No.AABTT0343E]
(अपीलाथ' / Appellant) (()याथ' / Respondent)
आयकर अपील सं./I.T.A.No.200/Vizag/2016
( नधारण वष / Assessment Years: 2010-11)
JCIT (OSD), M/s. The Krishna District
Vijayawada Co-operative Central Bank Ltd.,
Machilipatnam
(अपीलाथ' / Appellant) (()याथ' / Respondent)
C.O. Nos.68 & 69/Vizag/2013
(Arising out of I.T.A.Nos.120&121/Vizag/2013)
( नधारण वष / Assessment Years: 2007-08 & 2008-09)
M/s. The Krishna District DCIT, Circle-2(1),
Co-operative Central Bank Ltd., Vijayawada
Machilipatnam
(अपीलाथ' / Appellant) (()याथ' / Respondent)
1
ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016
C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017
M/s.The Krishna District Co-operative Central Bank, Machilipatnam
C.O. No.2/Vizag/2017
(Arising out of I.T.A.No.200/Vizag/2016)
( नधारण वष / Assessment Years: 2010-11)
M/s. The Krishna District DCIT, Circle-2(1),
Co-operative Central Bank Ltd., Vijayawada
Machilipatnam
(अपीलाथ' / Appellant) (()याथ' / Respondent)
अपीलाथ क ओर से / Appellant by : Shri T.S.N. Murthy, DR
याथ क ओर से / Respondent by : Shri K. Siva Ram Kumar,
AR
सुनवाई क तार ख / Date of hearing : 17.10.2017
घोषणा क तार ख / Date of Pronouncement : 08.11.2017
आदे श / O R D E R
PER D.S. SUNDER SINGH, Accountant Member:
These appeals filed by the revenue are directed against order of the Commissioner of Income Tax (Appeals) {CIT(A)}, Vijayawada vide Appeal No.207/MTM/CIT(A)/VJA/2009-10 dated 19.12.2012, ITA No.406/VJA/CIT(A)/VJA/2010-11 dated 19.12.2012 and ITA No.78/CIT(A)/VJA/2013-14 dated 12.1.2016 for the assessment years 2007-08, 2008-09 & 2010-11. The cross objections filed by the assessee are in support of the order passed by Ld. CIT(A).
2. The first issue in this case is related to the statutory reserve created u/s 46(e) of the Andhra Pradesh Co-operative Societies Act, 2 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam 1964 (hereinafter called as the APCS Act). The assessee has created reserve of ` 88,58,130/- for the assessment year 2007-08, ` 60,71,208/- for the assessment year 2008-09 and ` 30,40,970/- for the assessment year 2010-11. The assessee claimed the same as deduction before the A.O. u/s 36(1)(viia) of the Income Tax Act, 1961 (hereinafter called as 'the Act') and argued that the reserve is similar to the Non-Performing Asset (NPA). The assessee also argued before the A.O. that the creation of reserve is mandatory in accordance with the provisions of section 46 sub-section (e) of APCS Act 1964. The A.O. considered the submissions made by the assessee and also considered section 46 of APCS Act and observed that since the section 46 deals with the investment of funds, the Ld. A.O. held that it is the reserve created for appropriation but not the expenditure. The Ld. A.O. relied on the decision of Hon'ble ITAT 'A' Bench, Hyderabad in the case of Andhra Bank Vs. DCIT, Circle-1(1) in ITA Nos.615 to 619/H/2007 and ITA No.711/H/2008, wherein Hon'ble coordinate bench has rejected the claim of the assessee with regard to the general provision of 25% on standard assets. The coordinate bench further observed that the Act has given option to the assessee to make provision for bad and doubtful debts or loss of assets and while agreeing with the assessee that the bank has to follow the Reserve Bank of India 3 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam guidelines but the income has to be computed as per the provisions of the Act.
3. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) allowed the appeal of the assessee and observed that the reserve was created as per section 46(e) of the APCS Act and the said amount being not available for the assessee for the use at its option, it is excludible from the total income liable to tax under the Income Tax Act. Accordingly, the Ld. CIT(A) held that the same is deduction by overriding title and accordingly, allowed the appeal of the assessee. As stated earlier, this issue is involved for the assessment years 2007-08, 2008-09 & 2010-11.
4. Aggrieved by the order of the Ld. CIT(A), the revenue filed appeal before this Tribunal. Appearing for the revenue, the Ld. D.R. argued that though the assessee claimed that the statutory reserve was created as mandated by section 46(e) of the APCS Act, the sub-section (e) of section 46 was omitted w.e.f. 25.4.2001 and it is no more in existence. Therefore, the D.R submitted that the reliance placed by the assessee as well as the Ld. CIT(A) while deleting the appeal on section 46(e) of the APCS Act is misplaced. The Ld.D.R further submitted that as per proviso to section 46 of the APCS act 1964, the assessee required to invest its funds @ 0.25% in securities as specified in section 46 in 4 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam Postal savings Banks, Nationalised Banks , or in shares of any other societies etc.. (as bad debts Reserve) of the amounts granted by it as short term loans and medium term loans to its members, out of the funds borrowed by it from Co-operative Financial Institutions for granting such loans. Further, it was also submitted by the Ld. D.R. that it is not necessary to make any such investments, once the bad debts reserve becomes equal to the total amounts of the bad debts of the society. The Ld. D.R. argued that firstly, section 46 deals with the investment of its funds i.e. the investments of available funds by the society. It is not dealing with appropriation or diversion of the income of society. Section very clearly specifies that society to invest it's surplus funds for the business of the society. Though the assessee argued that the funds invested in bad debts reserve cannot be used by the assessee society in specified securities. There is no such restriction placed in the said section. Since section 46 deals with the investment of funds, it has no relation with the appropriation or distribution or diversion of the profits. It is merely sources of funds and application of funds, therefore, it has no impact on the income of the assessee and no deduction required to be allowed and it is not diversion by overriding title as held by the Ld.CIT(A).
5
ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam
5. The second proposition submitted by the Ld.D.R is, as per section 46 of APCS Act, though the assessee required to invest 0.25% of its short term and medium term loans, out of the funds borrowed from Co- operative Finance Institutions, the assessee has not submitted the amounts borrowed from Co-operative Finance Institutions and the loans granted out of the funds borrowed by the assessee's society. The assessee society has received the deposits from public amounting to ` 404.56 crores and the borrowings of ` 356.89 crores. The assessee has not given the details of the short term and medium term loans granted out of the borrowings made from the Co-operative Financial Institutionssociety. Instead, the assessee has created reserve on total amount of borrowings and claimed the deduction which is incorrect computation. Thirdly, as per proviso to section 46 of the APCS Act, the bad debts reserve required to be created to the extent bad debts of the society and thereafter no reserve required to be created. The assessee has not furnished the details of bad debts as per section 36(1)(vii) & 36(1)(viia) of the Act, bad debts and provision for bad and doubtful debts are allowed as deduction, therefore, no separate deduction required to be allowed under bad debts reserve. If the same is allowed as deduction, it amounts to double deduction of the same amount. Therefore, the Ld. D.R. argued that the A.O. has rightly made the 6 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam addition and the CIT(A) has committed an error in deleting the addition, accordingly, requested to restore the order of the A.O.
6. On the other hand, the Ld. A.R. argued that bad debts reserve is created as mandated u/s 46 of the APCS Act. It is a statutory reserve and provision of section 46 is binding on the assessee. The bad debts reserve created is not freely available to the assessee and it is a charge on profits but not appropriation of profits and the investments are to be made irrespective of profits or losses. The Ld. D.R. further argued that the assessee has no domain over the amount or the bad debts reserve and it is not being treated as society's "Net worth". The Ld. A.R. further argued that "net worth" as defined in section 12A(13) explanation (b) of APCS Act reads as follows:
"NET WORTH" means the sum total of the paid up capital and free reserves after deducting the provisions of expenses as may be prescribed.
"FREE RESERVES" means all reserves created out of profits and share premium account but does not include reserve created out of revaluation of assets, write back of depreciation provisions and amalgamation".
BAD DEBTS RESERVE IS NOT FREE RESERVE, FREE RESERVE IS WHAT WAS SET APART OUT OF PROFITS/GENERAL RESERVE To illustrate, S.2(43), Companies Act, 2013 defined Free Reserves as those reserves, which, as per the latest available Balance sheet are available for distribution as Dividend.
7. The Ld. A.R. relied on the decision of Keshkal Co-operative Marketing Society Limited Vs. CIT reported in (1987) 165 ITR 437 (MP) 7 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam and various other decisions and argued that the assessee is entitled for deduction of the statutory reserve by diversion of income by overriding title and accordingly requested to allow the same and uphold the order of the Ld. CIT(A).
8. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. We have also gone through the APCS Act referred to by the assessee. Before the A.O. and the Ld. CIT(A), the assessee has argued that the statutory reserve was created as per section 46(e) of APCS Act. On careful verification of the APCS Act, section 46(e) was omitted w.e.f. 25.4.2001, therefore, reliance placed by the assessee as well as the Ld. CIT(A) while allowing the appeal on section 46(e) is misplaced and , the Ld. CIT(A) has not examined the issue properly and has not correctly applied the provisions of section 46(e) of the APCS Act.
9. Section 46 of the APCS Act deals with investment of funds. The section 46 of the APCS Act suggests the investment of surplus funds, which are not immediately required for the business of the society to make investments in various types of securities such as postal savings banks, any other securities specified in section 20 of the Indian Trust Act, shares and securities of the Society or with nationalized bank or scheduled banks. Proviso to section 46 deals with the investment of 8 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam 0.25% of short term and medium term loans granted by the bank out of the funds borrowed from the co-operative financial institutions for creation of reserve towards bad debts. Further, the proviso also provides for not to make any investment once the bad debts reserve becomes equal to the total amount of bad debts. For ready reference we extract relevant section 46 of the APCS Act, which reads as under:
46. Investment of funds: - [A Society may by a resolution of majority of committee with due care and diligence, invest or deposit its funds which ate not immediately required for the business of the society,]-
(a) in the Postal Savings Banks ;
(b) in any of the securities specified in Section 20 of the Indian Trust Act, 1982 ;
(c) in the shares of securities of any other society ;
[(d) with any Nationalised Bank or Scheduled Bank ;] [or the concerned District Co- operative Central Bank.]
(e) [x x x] [Provided that every primary agricultural credit society and every Co-operative Central Bank shall invest or deposit in each co-operative year towards the bad debts reserve of the said society or bank, a sum equal to one-fourth per centum of the amount granted by it as short term loans or medium term loans to its members during the co-operative year from out of the amounts borrowed by it from other co- operative financial institutions for granting such loans ; so however that no such investment or deposit shall be necessary when the total amount so invested or deposited towards bad debts reserve becomes equal to the total amount of bad debts of the society as estimated by the auditor appointed under Section 50.] Explanation: - For the purposes of this section, sub-section (3) of Sections 47 and 71, the expression 'primary agricultural credit society' means the society referred to in clause (i) of Explanation to Section 36.
10. Plain reading of section 46 of the APCS Act clearly shows that the section deals with the sources of funds and it's application of funds. The section mandates the society to create bad debts reserve out of its sources of funds equalient to bad debts. It does not give any direction 9 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam or any mandate to the assessee society to divert the income towards the bad debts reserve. Section 45 of the APCS Act deals with the disposal of profits, section 44 deals with funds other than net profits not to be divided among the members. Therefore, the bad debts reserve is created not out of the profits but out of the funds other than the profits of the society. When specific section is provided to dispose of profits, there is no need to interpret the investments required to be made as per the proviso to section 46 of the APCS Act as income by over riding title. Therefore, we hold that section 46 of the APCS Act deals with the investment of available funds of the society such as Share capital, Loans, Deposits etc. in specified assets in the form of postal savings bank, nationalized bank etc.. but not distribution of profits or diversion of income by over riding title. Hence this argument of the assessee is that the reserve is created by diversion of income by over riding title is incorrect and accordingly rejected.
11. The next argument of the assessee was that creation of bad debts reserve as per proviso to section 46. As per proviso the bad debts reserve required to be created @ 0.25% of the medium term loans and short term loans granted by the society out of the borrowings made from the co-operative financial institutions. The assessee has not given the details of the short term and medium term loans granted by it out of 10 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam the borrowings made from the co-operative financial institutions. The assessee has common kitty of funds consisting of reserves, the share capital deposits and borrowings. It is necessary to ascertain what was the amounts advanced for short term and long term loans out of the borrowings of the society and other sources required to be ascertained and the correct amount of statutory reserve should be created. The same was not furnished by the assessee. The bad debts reserve need not be created once the bad debts reserve becomes equal to the total amount of bad debts. The assessee has not furnished the outstanding bad debts as at the end of the year and the accumulated amount of bad debts reserve created and the balance to be created.The assesse is creating the reserve year after year without furnishing the details. Further, as per the provisions of section 36(1)(vii) & 36(1)(viia) of the income Act, the bad debts as well as the provision for bad and doubtful debts are allowed as a deduction. Therefore, no separate deduction is required to be allowed towards the bad debts reserve. In case if the bad debts as well as the bad debts reserve is allowed as deduction, the same would be amount to double deduction, once as bad debts and secondly as bad debts reserve. Therefore, the deduction claimed by the assessee on account of bad debts reserve is not allowable. The assessee relied on the decision of Keshkal Co-operative Marketing 11 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam Society Limited (supra). The issue with regard to the bad debts and bad debts reserve was not dealt with by the Hon'ble High Court of M.P. in its order. The issue with regard to the double deduction of the bad debts and the bad debts reserve was also not considered by the Hon'ble High court, therefore the facts of the Hon'ble M.P. High Court's decision in the cited case law is distinguishable hence not applicable. Further, the section does not place any restriction as argued by the Ld. A.R. that the amount is not available to the assessee for its business purpose. The assessee has extended its meaning by interpreting net worth and the Companies Act. Therefore, we are unable to accept the argument of the assessee that the bad debts reserve is allowable as a deduction and this ground of appeal of the assessee for the assessment years 2007-08, 2008-09 & 2010-11 are dismissed.
12. The second issue is with regard to the reserve for bad and doubtful debts relating to the A.Y. 2007-08. The assessee has claimed the reserve for bad and doubtful debts as under:
S.No. Issue Amount (`)
A.Y. 2007-08
1. Reserve created for Sundry 62,61,426
Debtors - due to
2. Reserve created for Sundry 45,88,706
Debtors - due to Indvls.
3. Reserve created for Sundry 36,15,339
Debtors - due to Instns.
4. NPA Provision
Total 1,44,65,471/-
12
ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam
13. The assessee claimed deduction of ` 1,44,65,471/- under the provision of sundry debtors. The assessee submitted that out of the total amount of provision of sundry debtors, ` 1,68,61,426/- a sum of ` 1.06 crores was NPA at branch level and the sum of ` 62,61,426/- was related to the charges recoverable from the borrowers such as legal notice charges, notice charges etc.. incurred by the Head office. The A.O. disallowed the deduction claimed by the assessee with a reason that the assessee should have claimed the same as expenditure instead of bad and doubtful debts. The Ld. A.R. submitted that the debt includes principal amount plus all sums receivable from the assessee. Therefore, the Ld. A.R. argued that the Ld. A.O. misunderstood the term debt and disallowed the sum of Rs. 62,61,426/-. Similarly the AO disallowed the sums of Rs. 45,88,706/- Reserve created for Sundry Debtors - due to Indvls, Rs. 36,15,339/- Reserve created for Sundry Debtors - due to Instns for the A.Y.2007-08.
14. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) allowed the appeal of the assessee stating that the A.O. required to allow the deduction either as NPA or as expenditure to the profit & loss account. For the sake of clarity, we reproduce the relevant paragraphs of the Ld. CIT(A)'s order: 13
ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam 6B. Second issue is a common issue, comprising (i) reserve created for sundry debtors due to accounts amounting to Rs.62,61,426 (ii) provision on sundry debtors-individuals amounting to Rs. 45,88,706 and (iii) provision on sundry debtors- institutions amounting to Rs. 36,15,339, which were debited to the profit and loss account. It is explained that all these were provisions for bad and doubtful debts created in compliance to the Prudential Norms of the Reserve Bank of India, to be strictly observed by all the Banks in the country, as per the RBI Act and the Banking Regulation Act. The Income Tax Act,1961 has also carved out a deduction towards Provision for bad and doubtful debts and also spelt out the monetary limits within which Banks are entitled to the said deduction. It was also argued that the over-all provision for bad and doubtful debts created by the bank was well within the limits set out in Sec.36 (1)(viia), as amended from time to time. The appellant's AR has drawn attention to the amendment made by the Finance Act, 2007 whereby the aggregate provision available under this Section to all the Banks including the non-scheduled Co-operative banks like the appellant -- bank is 7.5% of the Net Profit before making the deduction under this statutory provision plus 10% of the aggregate average rural advances. The restriction of the same to 7.5% of the Net Profit before making this deduction, as canvassed by the AO was stated as not the correct legal position. It was also argued that alternatively, the above three items of debit to the profit and loss account be allowed as deductions in computing the profits and gains of the appellant's business, as the AG himself admitted that the three items represent legal and other expenses incurred by them during the curse of their business', which have to be allowed. The appellant's AR relied on the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg.co Ltd vs. CIT (Central), reported in (1971) 82 ITR 363 (SC), wherein it has been held that where liability exists in presenti, the claim for the same cannot be denied merely because it has been disputed, where the appellant maintains his book of account on the mercantile system of accounting. I find force in the submissions made by the AR and I hold that the three items aforementioned merit deduction in the light of the categorical finding of the AG that the debits represented expenditure incurred in the course of the appellant's business. It may be noted here that the appellant incurred the expenditure and debited the same to the Profit and Loss Account, but under a different head. The AG has also given a finding that the debit represented business expenditure. In the circumstances, I am inclined to allow the appellant's claim duly following the Hon'ble SC decision, which mandated the allowance of the expenditure once there was a finding of incurrence of legitimate business expenditure, no matter even when there was a defect in the accounting procedures or other technicalities. Hence, the A.O. is directed to allow the above three items of expenditure debited to the profit and loss account."14
ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam
15. Aggrieved by the order of the A.O., the revenue is in appeal before this Tribunal.
16. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee has created reserve for sundry debtors due to accounts amounted to ` 62,61,426/-. Provision for sundry debtors individuals -- amounting to ` 45,88,706/- and provision for sundry debtors institutions amounting to ` 36,15,339/-, which was debited to the Profit & loss account under the head 'reserves others'. The amount relating to sundry debtors due to accounts represent other receivables from the debtors as stated by the assessee. This fact was not disputed by the A.O. The contention of the A.O. was that this was an expenditure which should have been debited to the profit & loss account. The deduction of sundry debtors individuals amounting to ` 45,88,706/- was also admittedly the legal and other expenses incurred by the assessee during the course of recovery of the loan. The last one is sundry debtors institutions, which was disallowed by the A.O. holding that the amount of ` 36.15 lakhs was related to the expenditure incurred by the assessee for recovery of loan. According to the A.O., since the above sums represent the expenses incurred by the assessee in the process of 15 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam recovery of loans and advances the same should have been claimed as expenditure instead of bad and doubtful debts. According to the A.O., it is not covered u/s 36(2) or 36(1)(viia) of the income tax Act. However, it is established fact that the debt includes the principal amount as well as the other receivables/expenses incurred by the assessee due from the borrower. The assessee has to collect the entire amount of the principal amount as well as the expenses incurred for collection of the amounts advanced, therefore, the fact that the amounts are due from the customers of the bank was not disputed by the A.O. The A.O. accepted the genuineness of the expenditure and also did agree that the assessee should have written off the entire amount by debiting the P&L account. The assessee's argument was that if the entire amount was debited to the P&L account, the same cannot be collected from the customers. Therefore, the assessee has debited the same amount to the account of the customers. It is normal practice of the Banks to debit the expenses relating to the customer to their account so as to enable the bank to collect the entire outstanding along with the expenses incurred in the process of recovery of loans. Therefore, we agree with the assessee's argument that if the expenditure is debited to the P&L account, bank would incur a loss, therefore, the assessee has rightly debited the expenses to the 16 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam customer's account. Hence the same should be included in the outstanding balance of the debts and while creating the provision the debt should be included by the expenses incurred by the bank. The Co- operative bank is eligible for deduction u/s 36(1)(viia) of the APCS Act @ 7.5% of the profits and 10% of its rural advances. The deduction claimed by the assessee as a provision for doubtful debts or NPA is within the limit provided by the Income Tax Act u/s 36(1)(viia) inclusive of the expenses. Therefore, the above sums are allowable u/s 36(1)(viia) of the Act, accordingly, we uphold the order of the Ld. CIT(A) and dismiss the appeal of the revenue on this ground.
17. The next issue in the assessment year 2007-08 is reserve created for sundry debtors Government amounting to ` 1,49,00,971/-. This amount represents the interest subsidy receivable from the Government of India for the earlier years. The bank gives advances to the Primary Agricultural Cooperative Society (PACS) at certain rates prescribed by the Andhra Pradesh Central Co-operative Bank (APCOB). The Government reimburses certain percentage of such interest on the loans given to farmers by such PACS. Interest over and above 6% on the loans taken by farmers from the PACS would be reimbursed by the Government to the Primary Agricultural Co-operative Societies (PACS). 17
ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam The assessee bank has released the sum equal to subsidy receivable from the Government to PACS to enable the PACS to have sufficient liquidity and function effectively since the District Co-operative Central Bank (DCCB) is a regulator of PACS in the District and all of them are affiliated to the DCCB. The subsidy due to PACS from the Government would be made over to bank as and when the same is received by them from the Government. Since the subsidy of the earlier year was not received by the end of the relevant previous year, a provision was made for the subsidy receivable and claimed as deduction. The assessee had received the subsidy in the subsequent financial year, which was offered to income. The A.O. disallowed the said sum holding that the amounts receivable from Government cannot be treated as a doubtful debt at any stretch of imagination and placed reliance on Hon'ble Madras High Court decision in the case of South India Surgical Company Limited Vs. ACIT 287 ITR 62.
18. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) allowed the appeal of the assessee holding that the assessee is justified in creation of a provision in the first place and reversal of the same subsequently and on receipt of the subsidy the assessee had offered the same to the income. 18
ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam
19. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. At the outset, the amount of ` 1,00,49,971/- was interest subsidy receivable from the Government and the same is relatable to PACS. Without waiting for the interest subsidy by the PACS, the bank has released funds to the PACS and to bolster the liquidity. However, since the interest subsidy was not received before the end of the financial year, the assessee has created reserve for sundry debtors and claimed as deduction, which is incorrect approach. The subsidy is receivable from the Government which should be reimbursed to the PACS and in turn PACS required to remit to the District Co-operative Central Bank. Till such time, it was neither an expenditure nor an obligation on the part of the DCCB. Though with an enthusiasm the DCCB has released the subsidy amount to improve the liquidity of the PACS, the DCCB cannot create a reserve and claim it as a bad and doubtful debt without waiting for the reply from the Government. In this case, the Government has not repudiated its obligation. In Government debts, unless the Government repudiates its liability, banks cannot treat the same as bad and doubtful debt and categorize as non performing asset and claim it as a deduction. This view is supported by the Master Circular - Prudential Norms on Income Recognition, Asset Classification 19 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam of Reserve Bank of India vide RBI/2015-16/101 DBR.No.BP.BC.2/21.04.048/2015-16.
The Ld. A.R argument that on receipt of the subsidy the same was offered to the income in subsequent year is not tenable because the income of each assessment year has to be assessed independently and the assessee cannot postpone the income to the next assessment year. The assessee is a Cooperative Bank following the mercantile system of accounting. The subsidy released to PACS was not a loan, it was the assistance of funds in lieu of expected subsidy. Therefore, the order of the Ld. CIT(A) on this issue cannot be sustained, hence set aside and the order of the A.O. is restored and the addition is upheld. The appeal of the revenue on this issue is allowed.
20. The next issue is DCCB's share of 35% of waiver of penal interest and interest on overdue deposits. This issue is involved for the A.Y.s 2007-08, 2008-09 and 2010-11 as follows:
S.No. Issue Amount (`) Amount (`) Amount (`)
A.Y. 2007-08 A.Y. 2008-09 A.Y. 2010-11
1. DCCB Share of 1,74,22,643/- 95,61,180/- 2,90,75,132/-
35% of waiver (1,12,36,487+ (86,88,231+9,22,019+
and penal interest 61,86,165) 1,94,64,882)
and IOD
21. These amounts related to the DCCB share of 35% waiver of penal interest and interest on overdue deposits. The assessee is lending 20 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam agency to PACS and PACS lends the monies to farmers. Unless the monies lent by PACS are recovered, the same cannot be repaid to the bank. APCOB is the main lending agency of the DCCB. Therefore, there is direct interconnection of lending to farmers with the APCOB, DCCB and the PACS. As per the directions of the APCOB, the PACS was to collect the dues of loan and interest from small and marginal borrowers and the PACS charges the overdue interest and the penal interest for defaults in payments. On the directions of the APCOB the assessee has directed the PACS to waive the overdue interest and penal interest subject to payment of the principal along with the interest. In the process the PACS would loose the over due interest and the penal interest which will be shared between the APCOB, the assessee and the PACS. As per the direction of APCOB, the assessee has to bear 35% of the overdue interest and penal interest as its share on loans collected by the PACS along with the interest. The assessee has explained that it was the reimbursement of the loss incurred by the PACS on account of loss of overdue interest and penal interest as per the directions of the APCOB. Once the loans are collected along with interest, the bank is benefitted and bank has to share the loss of PACS. The Ld. A.R. submitted that the waivers are factual and incurred in the course of business. It was a business expenditure, which required to be allowed 21 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam as deduction. The Ld. A.R. relied on the decision of Nizamabad District Co-operative Central Bank Vs. ITO Ward-2. Not being convinced with the explanation of assessee, the A.O. made the addition.
Aggrieved by the order of the A.O. the assessee went on appeal before the CIT(A) and the Ld. CIT(A) deleted the addition observing that the waivers were made pursuant to bank's Board resolution and the Government orders. For the sake of clarification and convenience, we extract the relevant paragraph of the Ld. CIT(A)'s order which reads as under:
"6C. Third issue relates to the disallowance of the claim towards 'Waiver of Penal Interest and 100 amounting to Rs. 95,61,810/- for financial year 2006- 07'. During the proceedings before me, the waivers were submitted as factual and were made in the course of appellant's business. They were also not made out of any earlier provisions, as provisions for bad and doubtful debts are made by all banks in respect of "Principal" part of the loans only and not on the 'Interest" portion. The waiver was made in pursuance of the appellant- bank's Board Resolution and was "written-off" in the appellant's books of account and shown in the Profit and Loss Account. It was also submitted that these waivers are common in the Co-operative sector, where governments order for waivers or write-offs for the benefit of farmers. I have examined the claim with reference to its genuineness and the compliance with Sec.36(2) and hold that the claims made by the appellant satisfy the requirements of law inasmuch as the same is complied with the dictum of write-off in the books and not being out of any earlier provisions and allow the same as complying with the Act. The Hon'ble Supreme Court also held that the write-offs made by banks not forming part of earlier provisions need to be allowed as business expenditure, in the case of City Union Bank's case."
22. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The 22 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam assessee has waived the interest on short term and long term loans given to the farmers. This is evidenced by page no.28 of paper book submitted before us. As per the scheme of waiver 35% of the interest relating to waiver of penal interest and Interest on deposits (IOD) is borne by the assessee. There is no dispute that 35% of the share was borne by the bank relating to IOD and penal interest. This is on repayment of the loans collected along with interest. Waiver of over due interest and the penal interest is an incentive to the borrowers to make them to repay the loan granted by the bank. There is no dispute regarding the genuineness of the waiver. The Ld. A.R. submitted that it is on account of reimbursement given to PACS on complete repayment of loans. The similar issue was considered by the coordinate bench of ITAT,Hyd in Nizamabad Co-operative Society and held the same as allowable. For ready reference, we extract the relevant paragraphs of the coordinate bench of ITAT, Hyderabad in Nizamabad District Co- operative Central Bank Vs. ITO Ward-2, ITQA No.905 & 906/H/2013 which reads as under:
1. Waivers of Penal Interest and IOD as per the APCOB - circulars were explained during the assessment. OUR LETTER DT. 24.12.2009 shows our submission on the issue and reference to our earlier submissions vide our letter dt.15.9.2009. The procedure of waiver amounts passed on to PACSs was also explained. AS PER THE APCOB CIRCULARS AND OUR OWN CIRCULARS TO PACSs, THE PACSs were to collect the dues of loans and interest from small and marginal-farmer-
borrowers and the balance of IOD and Penal interest are borne by 23 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam CONCERNED PACS,CONCERNED DCCB and APCOB in the ratio of 25%, 35% and 40% respectively. IT WAS NOT OUT OF ANY EARLIER PROVISION AND LAID OUT WHOLLY AND EXCLUSIVELY FOR BUSINESS.
2. It was held by the Hon'ble ITAT , Hyderabad A Bench in the case of Nizamabad Dist. Co-op Central Bank Ltd vs. ITO,Ward-2, Hyd (ITA Nos. 905/H/13,906/H/13), the same amount of waiver was held as allowable u/s.37(1).
3. The reimbursement of waivers on penal interest and IOD were explained by way of Circular dt. 7.3.2006 (Copy of the Circular in Telugu is filed in the Material paper Book for AY:2007-08 at page No. 28 and its Translation is enclosed herein as page Nos.61-63, which shows that the impugned waiver was in fact a reimbursement to PACSs by DCCB and APCOB. It got crystallized and quantified only in the relevant previous year and hence the respondent-assessee made the claim for deduction rightly in the relevant previous year, which was duly allowed by the learned CIT- Appeals.
4. The learned AO-Appellant's objection as to the non-allowability of the impugned amount as an expenditure of the relevant previous year as the same relates to earlier assessment years is submitted as not correct, as the concept of "prior period expenditure " enunciated in Acc.Std.5 of ICAI defines the same as " expenditure incurred in a preceding year but omitted to be recorded therein", which is not the case here. All waivers or write-offs invariably relate to earlier years and they can't be disallowed on that ground.
5. THE NATURE OF THE EXPENDITURE WAS SUCH THAT THE SAME HAD TO BE INCURRED IN THE RELEVANT PREVIOUS YEAR ONLY ON FULFILMENT OF THE CONDITIONS LAID OUT IN THE SCHEME OF WAIVER. WE ENCLOSE A TRANSLATION OF OUR CIRCULAR NO. ADM/PENAL INTEREST/ 2005/06 DT.7.3.2006 WHICH POSTULATES THAT A PACS IS ENTITLED TO GET REIMBURSEMENT OF PENAL INTEREST AND IOD , ONLY ON ITS REALISATION OF THE OVERDUE LOANS FROM FARMERS IN FULL WITH PRINCIPAL AND INTEREST. AS THE SAID CONDITIONS WERE FULFILLED IN THE RELEVANT PREVIOUS YEAR, WE INCURRED THE EXPENDITURE ALSO IN THE SAME PREVIOUS YEAR, DEBITED THE SAME AND CLAIMED DEDUCTION, WHICH IS SUBMITTED AS APPROPRIATE. We submitted that as the expenditure for reimbursement of penal interest hOD was laid out /expended irretrievably during the relevant previous year, the same was claimed as expenditure in the previous year and the said claim is in accordance with the language of Sec. 37( 1).
6. There can't be an insistence for claim of expenditure at a different point of time, because we submit that we were instructed by APCOB to implement a waiver scheme, the expenditure was claimed in the relevant previous year only when we irretrievably spent the amount towards reimbursement of penal interest and IOD , in pursuance of the scheme and on fulfilment of the scheme conditions by eligible farmer-borrowers (for a moment, if the APCOB resolves differently, as per any modification 24 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam in Govt. instructions on waiver, claim of expenditure by us on mere resolution would have been unfair and would have been without actual incurrence of the expenditure.)
7. We rely on "Saurashtra Cement & Chemicals Industries Ltd. vs. CIT"( 213 ITR 523 Guj HC), wherein it was held that even for an assessee following mercantile system of accounting, an expenditure shall be allowed under Sec.37(1) on the actual incurrence of the expenditure on its crystallization . This decision was cited by us before the learned CIT(Appeals) too.
Though the subject expenditure does not fall u/s 36(2) or 36(1)(viia) of the Act, undoubtedly, the same is business loss and the aggregate amount of overdue interest and penal interest and the NPA provision did not exceed the limit for allowing the deduction u/s 36(1)(viia) or 36(1)(vii) of the Act. Since the expenditure is genuine and incurred in the ordinary course of business, we hold that the IOD interest and the penal interest should be allowed as business loss and accordingly the appeal of the revenue is dismissed and the order of the Ld. CIT(A) is upheld.
23. The next issue for all the assessment years is overdue interest. This issue is involved for the assessment year 2007-08 & 2008-09. The A.O. disallowed overdue interest stating that this interest was due but not realized. The assessee has credited the interest and the equal amount was debited to the P&L account. The A.O. held that the overdue interest need not be recognised as income in the first place as 25 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam even the accrual system accounting prescribed that the income doubtful of recovery need not be recognised as income. The assessing officer was of the view that the interest income which was credited to the P&L account cannot be claimed as set off immediately and accordingly added back to the income.
24. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) allowed the appeal of the assessee, placing reliance in the case of Durga Co-operative and Urban Bank Ltd. ITAT Visakhapatnam, ITA No.511/Vizag/2010 the decision of Delhi High Court in the case of M/s. Vasisht Chai Vyapar Ltd. 196 Taxmann 169 (Delhi) wherein it was held that absence of sureness of recovery does not make the interest accrue in the real sense. In this case, during the appeal hearing, the Ld. A.R. did not furnish the details with regard to what was the exact nature of overdue interest created for reserve. As per the RBI guidelines, the assessee need not recognize the interest on bad and doubtful debts. Such interest neither credited to the profit & loss account nor offered as income. The assessee requires to record such accrued interest in a Memorandum of account in their books. It is not known whether the interest related to the overdue interest is on NPA advances or not. In case the interest is 26 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam related to the non performing assets (NPA) as claimed by the assessee, the same required to be allowed as a deduction since the same cannot be recognised as income and the treatment given by the assessee in the profit & loss account appears to be correct. Since the issue involve verification with regard to the true and correct nature of the overdue interest, both the parties have agreed to remit the matter back to the file of the A.O. to verify the true and correct nature of interest whether it is relating to bad and doubtful debts or NPA or on performing assets. Therefore, we direct the A.O. to verify the true nature of the overdue interest and decide the issue afresh on merits. This ground of appeal of the revenue is allowed for statistical purposes.
25. The next issue for the assessment year 2008-09 is provision for NPA amounting to ` 2,84,11,535/-. The assessing officer in the assessment order stated that the assessee had offered a sum of Rs.72.05 crores as interest income and claimed a sum of Rs.2,84,11,535/- relating to the interest on NPA advances. The assesse claimed the same as mandatory reserve as per the RBI guidelines. The assessing Officer viewed that when the assessee earns income on non performing assets, such asset cannot be treated as non performing asset and the income on such asset required to be taxed and relied on 27 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam the decision of Hon'ble ITAT, Hyderabad A bench in the case of Andhra Bank Vs. DCIT Circle-1(1) in ITA No.615 to 619/H/2007 and ITA No.711/H/2008.
26. Aggrieved by the order of the A.O., the assessee went on appeal before the CIT(A) and the Ld. CIT(A) allowed the appeal of the assesse holding that the deduction is allowable u/s 36(1)(viia) of I.T.Act. We extract the relevant paragraph of the Ld.CIT(A) order which reads as under:
"6B. Second issue relates to provision for NPA at Rs. 2,84,11,535/-, which was debited to the profit and loss account. It is submitted that as a Bank, the appellant is entitled to claim deduction in respect of provision for bad and doubtful debts, as per Sec.36 (1)(viia), Income tax Act, 1961. The disallowance was made by the AO without any deliberations on the same during the assessment proceedings. The AO disallowed the impugned deduction on the sole ground that the RBI's directions can't override the provisions of IT Act, 1961. Thus, the contention of the appellant has been that the provision for bad and doubtful debts as debited to its profit and loss account, is clearly covered by Sec.36 (1) (viia) on one hand and that the limits for the allowance with effect from A.Y.2007-08 for all banks including co- operative banks is the aggregate of 7.5% of the net profit before making the deduction under this statutory provision and 10% of the aggregate average rural advances on the other. It is submitted that the memorandum explaining the provisions of Finance Bill, 2007 clearly brought out the scope of the amendment made to Sec.36(1)(viia), which supports the impugned claim. The ITAT decision referred to by the AO was explained as regarding the provision made on standard assets by the banks © 0.25% as ordained by the RBI's Prudential Norms. The ITAT held that to get a deduction under the IT Act, the provision shall be on bad and doubtful debts and though the RBI stipulated provision on standard assets, the Bank can't make a claim for deduction under section 36(1)(viia), which deals with a provision on bad and doubtful debts. The A.R. argued that the decision is inapplicable to this issue. In the circumstances, it is held that the rejection of the appellant's claim is patently unjust, since the provision created satisfies the 28 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam requirements of law and also is well within the maximum amount of deduction prescribed under Sec.36(1)(viia) and accordingly, the A0 is directed to allow the same."
27. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee is entitled for deduction u/s 36(1)(viia) of the Act to the extent of 7 ½% of total income and 10% of rural advances as NPA. The assessee has categorized the interest of ` 2,84,11,535/- as NPA provision. The assessee argued that it is an interest part of the advances which was categorized as NPA. The ld.AO did not dispute the fact that the sum represented the interest on advance which was categorized as NPA. The AO did not bring any evidence to show that the same was not NPA and not covered by the prudential norms of RBI. The Ld. D.R did not controvert that the provision for Bad and doubtful inclusive of NPA provision crossed the limit provided in section36(1)(viia). Since the deduction claimed by the assessee is within the limit of section 36(1)(viia) of the Act, the same is allowable as per the provisions of section 36(1)(viia) of the Act, therefore, we do not find any infirmity in the order of the CIT(A) and the same is upheld.
28. The next issue for the assessment year 2008-09 is 3% interest on agricultural stabilization fund amounting to ` 44,61,929/-. Before the 29 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam AO the assesse submitted every Bank and PACs shall transfer a part of their profits to Agri. Credit Stabilisation Fund as per the stipulations of NABARD Act, 1981 and invest them in the prescribed modes. PACs shall invest the Fund in DCCBs. The Primary Agri. Co-operative Societies in the District keep their Agrl. Credit Stabilization Fund by way of Deposits with the bank. (The bank also transfer a portion of it's profits to Agri. Credit Stabilization Fund). The funds so invested by the PACS shall bear interest @3% p.a., which is paid by debiting to "Interest on Deposits" and credit an equal amount to Agri. Credit Stabilization Fund of PACSs (which is in the nature of customers' Deposits with the bank). However, during the year under consideration the particular amount of Rs.44,61,929/- representing interest on Credit Stabilsation Fund of PACSs, was debited to 'Loss" account instead of to "Interest on Deposits". It was actually incurred as business expenditure and was really an item of debit to the P&L Account. Not being convinced with the explanation the AO disallowed the interest and added back to the income.
30
ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam Aggrieved by the order of the AO, the assesse went on appeal before the CIT(A) and the Ld.CIT(A) allowed the claim of the assesse stating that item represents the interest paid by assessee to the depositors, who are the Primary Agricultural Co-operative Societies (PACSs). The PACSs in the District have deposited a part of their profits with the assessee bank and interest of Rs. 44,61,929/- was paid by them to the various PACSs. The relevant account copy was furnished by the assessee during the assessment on 23.12.2010 and the Ld. CIT(A) found that the said expenditure was akin to any Interest paid on depositors by the Bank.
29. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. disallowed the above expenditure under the impression that the said amount was not an expenditure but it was related to the investments. However, during the appeal hearing, before the CIT(A) and before us, the assessee argued that the item represents the interest paid by the bank to the depositors. Since the amount is interest paid on the deposits of the co-operative societies relating to fund called 31 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam agricultural credit stabilization fund, the same is a business expenditure and the CIT(A) has allowed the same correctly. There is no dispute with regard to the genuineness of the expenditure and we agree with the Ld. CIT (A) that it was not an appropriation of the profits and it was the interest paid on the deposits of PACS. The appeal of the revenue on this ground is dismissed.
30. The next issue is related to the reserve for Co-operative Educational fund for the assessment year 2010-11. During the previous year relevant to the assessment year, the assessee had created a fund within a sum of ` 2 lakhs as A.P. State Co-operative Union educational fund. The A.O. noted that the assessee had incurred an expenditure of ` 1,60,000/- towards training fee and ` 60,000/- towards A.P. State Co- operative Union, Hyderabad. Since the payment was made to A.P. State Co-operative Union, the Ld. A.O. viewed that the said sum was not in the nature of expenditure, accordingly disallowed balance amount of ` 40,000/- as appropriation of expenditure and not a statutory obligation. Aggrieved by the order of the A.O., the assessee went before the CIT(A) and the Ld. CIT(A) allowed the expenditure holding that the said sum was not a contribution to union as understood by the Ld. A.O. and the said sum was paid to the A.P. State Co-operative Union for providing 32 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam training to the staff. The Ld. CIT(A) relied on the decision of Hon'ble Karnakata High Court in the case of CIT Vs. Pandavpura Sahakara Sakkera Kharkhana Ltd. 174 ITR 475 ( Karnataka) and allowed the deduction.
31. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. As per section 45(1) of A.P. Co-operative Societies Act, 1964, the society was subject to such limits as may be prescribed credit of 1% of gross profit or gross income in a year as the case may be to the Co-operative Educational fund. As per the A.P. C-operative Societies Act, it is mandatory to the bank to create educational fund and Hon'ble M.P. High Court in the case of Keshkal Co-operative Marketing Society cited (supra) held that the payment to the reserve fund was an obligation created under the statute. In the instant case, the assessee had created the educational fund as mandated by the co-operative credit society. The assessee submitted that the payment was made to A.P. State Co- operative union to give training to their staff but not the contribution to the Union. Therefore, as rightly held by the CIT(A), the payment or contribution to co-operative educational fund is diversion of profits at source by over riding title under the Act. Hence, we do not find any 33 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam reason to interfere with the order of the Ld. CIT(A) and the same is upheld.
32. In the result, all the appeals filed by the revenue for the assessment years 2007-08, 2008-09 & 2010-11 are partly allowed for statistical purposes.
33. The cross objections filed by the assessee are in support of the orders of Ld. CIT(A). In view of the preceding paragraphs, the cross objections filed by the assessee also allowed partly for statistical purposes.
34. In the result, the appeals of the revenue are partly allowed for statistical purposes and the cross objections are partly allowed for statistical purposes.
The above order was pronounced in the open court on 8th Nov'17.
Sd/- Sd/-
(वी. दग
ु ाराव) ( ड.एस. सु दर "संह)
(V. DURGA RAO) (D.S. SUNDER SINGH)
या यक सद य/JUDICIAL MEMBER लेखा सद य/ACCOUNTANT MEMBER #वशाखापटणम /Visakhapatnam:
'दनांक /Dated : 08.11.2017 VG/SPS 34 ITA Nos.120&121/Vizag/2013, ITA 200/Vizag/2016 C.O. Nos.68&69/Vizag/2013 & CO No.2/Vizag/2017 M/s.The Krishna District Co-operative Central Bank, Machilipatnam आदे श क त)ल#प अ*े#षत/Copy of the order forwarded to:-
1. अपीलाथ / The Appellants - The DCIT, Circle-2(1), Vijayawada & The JCIT, Circle- 2(1), Vijayawada
2. याथ / The Respondent - M/s. Krishna District Co-operative Central Bank Ltd., 11/717, Jagannathapuram, Machilipatnam.
3. आयकर आयु+त / The CIT, Vijayawada
4. आयकर आय+ ु त (अपील) / The CIT (A), Vijayawada
5. #वभागीय त न.ध, आय कर अपील य अ.धकरण, #वशाखापटणम / DR, ITAT, Visakhapatnam
6. गाड फ़ाईल / Guard file आदे शानुसार / BY ORDER // True Copy // Sr. Private Secretary ITAT, VISAKHAPATNAM 35