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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
O R D E R
Per Beena Pillai, Judicial Member
The present appeal is filed by the assessee against the order dated 2/2/2023 passed by the NFAC for the assessment year 2018-19 on following ground of appeal:-
1. The CIT(A) erred in passing the order in the manner he did
2. On the facts and circumstances of the case, the ld.CIT(A) ought to have accepted the submissions of the appellant and allowed the deduction under the head `amortization of Premium `of Rs. 23,89,995/-as claimed by the appellant.
3. The ld. CIT(A) ought to have appreciated that the investment though classified as `held to maturity' for RBI purposes it was a part of business assets of the appellant bank and declared as such for income-tax purposes and the income there from was also assessed only under the head `income from banking business'. Accordingly, the ld. CIT(A) ought to have appreciated that the loss on account of investment by way of premium was required to be allowed as claimed by the appellant. In the alternative the id. CIT(A) ought to have considered the deduction on account of depreciation in respect of securities for the relevant assessment year. 4. The CIT(A) ought to have appreciated that the said issue is already allowed by the Hon'ble ITAT in the Appellant's own case. Thus, the claim of the Appellant on amortisation of premium has to be allowed. 5. The ld. CIT(A)ought to have appreciated that the deduction claimed of Rs. 22,88,250/- on account of Cooperative education Fund and the amount was required to be paid to registrar of Cooperative society and hence the same is an allowable expense. - Rs.6,86,475/- 6. The ld. CIT(A) ought to have appreciated the case laws referred by the Appellant on the similar issue. 7. The ld. AO erred in making addition of Rs.1,63,664/- as claimed leave encashment without appreciating the submission of the Appellant. 8. The learned CIT(A) erred in upholding the interest u/s 234D of the Act. 9. Without prejudice the disallowances as confirmed by the learned CIT (A) are arbitrary excessive and ought to be reduced substantially 10. For these and such other grounds that may be urged at the time of hearing the Appellant prays that the appeal may be allowed.”
The brief facts of the case are as under:- The assessee is a cooperative bank licensed by RBI and has declared income under the head ‘profit and gains from business or profession’ for the year under consideration. The assessee filed its return of income on 29/10/2018 declaring income of Rs.21,97,000,325/. The return was processed u/s 143(1) of the Act on 17/11/2019 at an income of Rs.22,37,00,780/-. Subsequently, the case was selected for scrutiny for following reasons:- 1) Claim of another amount allowable as deduction in Schedule BP 2) Refund claim 3) Expenses incurred for earning exempt income 2) Sales turnover/receipts. 2.1 The assessee was called upon to file various details in respect of above issues. The assessee filed reply in respect of the same on line. The Ld.AO after considering various submissions of the assessee, disallowed the claim on account of premium amortization amounting to Rs.23,89,995/-. The Ld.AO also disallowed deduction claimed on account of cooperative education fund amounting to Rs.22,88,250/-. The Ld.AO further disallowed the expenditure claimed on account of leave salary, as the same was not made before the due date amounting to Rs.10 lakhs.
3. Aggrieved by the order of the AO, the assessee filed appeal before the ld.CIT(A).
The ld.CIT(A) upheld the order of the AO by observing as under:- “5. I have perused the assessment order and the submissions of the appellant. 5.1 Grounds No.1 & 2: The above grounds relate to the addition made by the AO of Rs.23,89,995/- on account of disallowance of claim of amortization premium on purchase of Govt. Securities. The AO found that the assessee had not furnished any details of the investments held by the assessee nor the calculation to arrive at the amortization premium. The AO also found that the assessee failed to submit any details as to how the premium had been amortized in accordance with the RBI Circular. In reply, during the appeal proceedings, the appellant has not furnished any submission on this issue. I have perused the submissions made by the assessee during assessment proceedings wherein the assessee has stated that this issue has been decided in assessee's favour by the CIT(A), Bengaluru, while deciding the case of the assessee for A.Y. 2012-13. That being so, I find that the reasons on which the AO has made addition in the assessment order has not been addressed even during appeal proceedings. The appellant has failed to submit any details of investment, whose premium is sought to be amortized. Neither has the assessee furnished calculation of the premium which has been amortized nor has it furnished any details as to how the premium has been amortized in pursuance to the Circular of the RBI. In the Tax Audit Report, the auditor has stated that this expenditure is capital in nature. In view of the above discussion. the addition made by the AO of Rs.23,89,995/- is upheld. Grounds No.1 & 2 are dismissed. 5.2 Ground No.3: This ground relates to disallowance of deduction on account of Co-operative Education Fund of Rs.22,88,250/-. The AO has disallowed the above sum as the assessee failed to submit any evidence with respect to the above expenditure. In reply, during appeal proceedings, the appellant has stated that the above expenditure is not a voluntary payment but it is a statutory obligation of the appellant under the Karnataka Co-operative Act to make such a contribution which is directly related to the carrying out of its banking business and hence an allowable deduction. The appellant has relied on the decision of the Hon'ble Bombay High Court in the case of Krishna Sahakari Sakhar Kharkhana Ltd. vs. CIT (1998) 229 ITR 577(Bom). I have perused the above case law and the submissions of the appellant. The reason for which the AO has made the above addition has not been addressed during appeal proceedings also. The appellant has failed to submit any evidence in support of the above amount paid to Co-operative Education Fund. The assessee has also failed to even furnish copy of the bank statement or any other details substantiating the above expenditure, as has been pointed out by the AO. In view of the above reasons, the disallowance of claim of deduction of Rs.22,88,250/- made by the AO is upheld. Ground No.3 is dismissed.
In the result, the appeal is dismissed.”
Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before this Tribunal.
6. The Ground No.1 to 4 raised by the assessee is in respect of addition on account of premium amortization amounting to Rs.23,89,995/-. 6.1 The ld.AR submitted that, the amortization of premium on purchase is made in accordance with the prudential norms of RBI. He submitted that the amount has already been added under the intimation passed u/s 143(1) of the Act. The ld.AR further submitted that this issue has been considered by the co-ordinate bench of this Tribunal in assessee’s own case for the assessment year 2012-13 in vide order dated 23/3/2018. The ld.AR also relied on another decision of co-ordinate bench of this Tribunal in the case of M/s National Cooperative Bank Ltd., Vs. JCIT in ITA No.1090/Bang/2010 and 07/Bang/2010 for assessment year 2007-08 and 2008-09 by order dated 11/5/2012, wherein similar issue has been considered. 6.2 The ld.DR on the contrary relied on the order passed by the authorities below. 6.3 We have perused the submissions. For the year under consideration, the assessee had claimed Rs.23,83,995/- towards amortization of premium. These are held for long term investments and cannot be treated as stock in trade which is available for sale or held for trading. There is nothing on record brought by the revenue to establish that the stock in trade is held by the assesee for the purposes of trading. This Tribunal in assessee’s own case, as well as in the case of National Cooperative Bank Ltd., (Supra) observed that the amortization of premium paid for acquisition of security is allowable expenditure by relying on various decisions of co-ordinate bench of this Tribunal as well as Hon’ble Supreme Court in the case of United Commercial Bank Vs. CIT reported in (1999) 249 ITR 355. 6.4 The relevant observation of the coordinate bench of this Tribunal in assessee’s own case is as under:- “2. During the course of hearing, the learned counsel for the assessee has contended -at CIT(A) has adjudicated the issue following order of the Tribunal in the assessee's own case for the assessment year 2007-08. Therefore, there is no infirmity in the order of the CIT(A). The learned DR on the other hand has submitted that the Revenue has not accepted the order of the Tribunal and has gone in appeal before the Hon'ble High Court of Karnataka on the same issue for assessment year 2009-10.
Having carefully examined the order of authorities below in the light of rival submissions, we find that CIT(A) has adjudicated the impugned issue following the order of the Tribunal for the assessment year 2007-08. Nothing has been brought before us as to whether the order of the Tribunal has ever been reversed by the Hon'ble High Court. Mere filing of appeal before the appellate forum does not amount to the stay of the order unless and until the order of the Tribunal is reversed by the Apex Court i.e., either by the High Court or by the Supreme Court, the order of the Tribunal hold the field and subordinate authorities are required to follow the same. In the instant case, CIT(A) has adjudicated the issue following the order of the Tribunal for the assessment year 2007-08 which has not been reversed so far till date. For the sake of reference, we extract the order of the CIT(A) as under: "5. I have considered the above grounds of appeal, statement of facts and oral submissions made by the appellant and also gone through the assessment order passed by the Assessing Officer. The AR of the appellant during the appellate Proceedings furnished the copy of the order of Hon'ble ITAT in the appellant's own case for A. Y.2007-08 wherein it was held as under: '08...we have carefully considered the rival submission and perused the relevant facts and materials on record. We have also considered the findings of the various benches of the Tribunal as under:
(i,t Catholic Syrian Bank Ltd. Vs ACIT-38 SOT 553(Coch). An identical issue to that of the subject matter under consideration had arisen before the Cochin Benc. After analyzing to amortization of premium on purchase of Govt. securities, it was clarified that this was made as per the prudential norms of the RBI. Following the Tribunal decision in the assessee's own case and considering that the assessee bank is following consistent and regular method of accounting system, there is no justification in interfering with order of the CIT(A) on this issue of amortization of premium on government securities. United Commercial Bank Vs. CI T(1999) 156 CTR (SC) 380; (1999) 240 ITR 355 (SC) and South Indian Bank Ltd. (ITA No.126/Coch/2004, dated Sept, 2005 followed." ('ii,) The Khanapur Co-Op. Bank Ltd. Vs ITO- ITANo.141/PNJ/2011, dated 08/09/2011: The Hon'ble Bench of Panaji Tribunal had recorded its findings that "6. Likewise, the premium amortized at Rs. 1,78,098/- is claimed to be in respect of 'securities held under the category 'held to maturity'. The Assessing Officer has taken them as long term investments. In other words, he has accepted the assessee 's claim that the securities are 'held to maturity`.- That being so and having regard to the CBOT Instruction No I7of 2008 dated 26/11/2008 as reproduced herein above, the premium paid on such government securities is required to be amortized over the period remaining to maturity.......... (iii) In the case of Corporation Bank Vs ACIT, M'lore in I TA No.112/Bang/2008(Bang), for the assessment year 2004- 05, the earlier bench had also held a similar view. In the light of the above discussion and the case laws discussed supra, taking into account the totality of the facts and materials, we are of the considered view that the assessee is entitled to claim this deduction and hence we allow the grounds of the assessee relating to this issue.
Now turning to the second issue relating to disallowance of the claim of bad debt, the relevant ground read as under: 'The learned CIT(A) ought to have appreciated that the provisions for Bad and Doubtful Debts was allowable and ought not to have made any disallowance much less the amount of Rs. 5, 52, 319/-.
The brief fact of this issue are that the Assessing Officer notices that the assessee claimed excess amount of Rs. 6,52,319/- (difference of amount paid as per P&L account of Rs. 36,00,000-deduction claimed under provision for Bad and Doubtful debts of Rs.42,52,319/-). Hence, he disallowed Rs.6,52,319/- keeping in view of the decision in the case of State Bank of Patiala Vs CIT(2005) 272 ITR 54 (P&H) Aggrieved the assessee moved the matter in appeal before the first appellate authority.
After considering the facts of the case and the submissions made before him in the light of the Sec.36(1)(viiia) of the Income Tax Act 1961, the first appellate authority was of the view that the deduction allowable u/s. 36(1)(viiia) is in respect to provision made. According to him, making of a provision for bad and doubtful debts equal to the amount mentioned in the section is a must for claiming such deduction. He noticed that an amount of Rs.36 lakhs is debited to the P&L account under the head "Provisions, for bad and doubtful debts" and however, the assessee had claimed deduction of Rs.42,52,319/- while computing the taxable income. Thus, he found that in the books of account, provisions were made only for Rs.36 lakhs. Hence, relying on the decision of the P&H High Court cited supra, he was of the view that the Assessing Officer was justified in restricting the provision for bad and doubtful debts to the extent of Rs.36 lakhs and disallowed the balance of Rs. 6, 52, 319/-. Thus, the assessee failed before the Jirst appellate authority. Aggrieved, this issue is brought before us for adjudication with ground extracted elsewhere in this order. 12.... The learned counsel for the assessee however, conceded that this issue is against the assessee. The learned DR supported the orders of the authorities below. 13.....After considering the facts and materials in the light of the submissions made before-us; we do not find-any infirmity-in the order of the C-1T(Appeals) who has -- elaborately- discussed-and followed the decision of the Punjab & Haryana High Court in dismissing the claim of the assessee. Thus, this ground of appeal of the assessee is dismissed. Respectfully following the jurisdictional Tribunal 's order in the appellant's own case, I hereby allow the appeal. "
4. Since there is no infirmity in the order of the CIT(A), we confirm the same.” 6.5 Respectfully following the above view, we direct the AO to delete the disallowance made on account of amortization of premium. Accordingly ground No.1-4 raised by the assessee stands allowed. 7. Ground No.5 – 6 is in respect of addition made on account of cooperative education fund. The Ld.AR submitted that it is statutory obligation that the assessee has to pay to the Registrar of the Cooperative Society towards the Government Education Fund. The Ld.AO disallowed the same for the reason that, no details were furnished relating to expenditure along with documentary evidences. It is the statement of the Ld.AR that, it is not voluntary payment but has a statutory obligation of the bank under Karnataka Cooperative Societies Act, and that such expenditure falls within the ambit of sec. 37 of the Act. He placed reliance on the decision of Hon’ble Karnataka High Court in the case of CIT Vs. Pandavapura Sakare Karkane reported in (1998) 174 ITR 475. The Ld.AR submitted that Hon’ble High Court dealt with the scheme of Society’s Act and referred to various decision of Hon’bel Supreme Court in the case of Pune Electrical Company Ltd., reported in (1965) 57 ITR 521 and held that, payment of contribution by Cooperative Society is diversion of profit and source on account of overriding charge credited under the Act which is the statutory obligation on the society. The Hon’ble Court thus held it to be eligible for deduction. 7.1 On the contrary, the Ld.DR relied on the orders of the lower authorities. The ld.DR submitted that the assessee has not filed any evidence in support of its claim. 7.2 We have perused the submissions advanced by both the sides. We note that an identical disallowance was considered by coordinate bench of this Tribunal in the case of Karnataka State Cooperative Federation Vs. ACIT reported in 123 Taxman.com 390 for assessment year 2013-14 and 2015-16, wherein this Tribunal observed as under:- 6. We have heard both the parties and perused the on record. The assessee is a registered co-operative society under Karnataka Societies Act, 1959 under section 57(2A) of Co-operative Societies Act, every co-operative society shall contribute 2% of its net profits to co- operative education fund to be administered by the assessee i.e. Karnataka State Co-operative Federation Ltd. As per section 57A of the Karnataka Societies Act, 1959, he said amount has to be expended in such manner as may be prescribed. We reproduce the relevant provisions of section 57(2A) and 57A of the Karnataka Societies Act, 1959 as under :
57A - Co-operative Education and Training (1) The co-operative education fund shall be utilised for the purpose of promotion of the co-operative movement in the State and for providing education to the members, directors and co- operators of the co-operative societies and the general public and training to the employees of the co-operative societies. (2) Every co-operative society shall pay its contribution to the Karnataka State Co operative Federation within thirty days form the date of its annual general meeting (3) All contributions made by the co-operative societies towards co-operative education fund, grants received from the Government of India or the State Government and donations, if any, made by any person shall be credited to the co- operative education fund. (4) The co-operative education fund shall be maintained and administered by the Karnataka State Co-operative Federation Limited for such programmes and in such manner as may be prescribed. (5) No expenditure out of the co-operative education fund shall be incurred without the approval of an advisory board constituted for the purpose of as prescribed.
57 (2A) A Co-operative Society shall, from out of the balance of its net profits, contribute two percent to the Co- operative Education Fund to be administered by the Karnataka State Co-operative Federation Limited, Bangalore. Provided, Urban Co-operative Banks shall contribute one per cent of its net profit to the Karnataka State Co-operative Urban Banks Federation in addition to the two per cent as prescribed in sub-section. Provided further that out of the total contribution made by a Co- operative society to the account of the Co-operative Education Fund, every year one fourth shall be remitted to the account of the Sahakara Academy (Reg), Mysore, registered under the Karnataka Societies Registration Act, 1960 and sponsored by the State Government for the purpose of carrying out Co- operative Education, Training and Research. At this time, it is appropriate to go through the Rule 20 of the Karnataka Co-operative Societies Rules which read as follows :
(20) Co-operative Education and Training.- (1) Every co-operative society shall remit its contribution towards co- operative education fund to the account of the Karnataka State Co-operative Federation Limited, Bangalore within thirty days from the date of its annual general meeting. (2) The co-operative education fund shall be maintained and administered by the Karnataka State Co-operative Federation Limited and shall be utilized on the advice of an advisory committee consisting of the following members, namely.- (a) President, Chairperson of the State Co-operative Federation Chairperson (b) Four apex societies' president/chairpersons i.e. Karnataka State Co-operative Apex Bank Ltd., Karnataka Co- operative Milk Federation Ltd., Karnataka State Co- operative Urban Banks Federation Ltd., and Karnataka State Credit Co-operative Societies Federation Ltd., Member are the members. (c) The Director, Regional Institute of Co-operative Management, Bangalore. Member (d) The Registrar of Co-operative Societies or his Nominee Member (e) The chief executive officer of the State co-operative Federation. Member Secretary (3) The quorum for a meeting of the advisory committee shall be five. The advisory committee shall be convened at least once in three months.
(3A) No decision shall be taken by the Board of the Karnataka State Co-operative Federation Limited which contravenes the decision of the advisory committee, (4) The Karnataka State Co-operative Federation shall maintain this fund in a separate account and all income by way of interest or otherwise accruing from the contribution towards this fund shall be credited to this fund. (5) No expenditure out of the co-operative educationfund shall be incurred without the approval of this advisory committee. The auditor of the State Co-operative Federation shall verify the utilization of the fund and certify the same. (6) Subject to such directions as the advisory committee may give from time to time, the fund may be utilized for any of the following purposes 1. Rules 20 substituted by Notification No. CO 14 CLM 2013, dated 10-7-2013, w.e.f. 10-7-2013 connected with the co-operative education, training and human resource development of the co-operative societies, namely:- (a) education of the members, directors including office-bearers and employees of the co-operative societies and the general public in the principles and practice of cooperation; (b) human resource development in the co-operative societies; (c) development of co-operative societies; (d) capacity building and business management; (e) professionalization; (f) technical up gradation; (g) education, training, research, man power and power and related infrastructure; (h) research and development; (i) development of the co-operative movement in general; (j) co-operative propaganda and publicity; (k) publication of the books and journals relating to the co- operative movement; (l) conduct of research, case studies and (7) The State Co-operative Federation shall prepare annual budgets and formulate training and education programmes for the development of co-operatives and co-operative movement particularly in matters such as financial and business management in the co-operative societies, member education, awareness buildings on co-operative principles and values etc., according to the overall guidelines issued by the advisory committee and be responsible for implementation of the same. (8) The State Co-operative Federation and the District Co- operative Unions shall submit returns to the Registrar once in a year showing the details of the training programmes conducted. (9) The board of every co-operative society shall also include in its annual budget provision for expenses on member and potential member education and training of its directors and employees. It shall ensure that the members, directors and employees are well informed and trained about the theory, principles and practice of co-operation. It shall also aim at ensuring that the transparency, the levels of awareness, member participation and member control expected of any good co- operative society are reached out to the members, the directors and the employees of the co-operative society.] 6.1 As rightly pointed out by the learned Authorised Representative, the above provisions show that Federation does not have control over the funds and is required to spend the amount only as provided in the statute. S.57A mandates that the co-operative fund shall be utilized for the purpose of promotion of co-operative movement and providing education to members and others. It also requires that the amount contributed under section 57(2A) should be credited to a fund account and the fund shall be administered as prescribed in the Rules. It also states that no expenditure can be incurred without the approval of the advisory board. Rule 20(4) states that the Federation must maintain a separate account and all income by way of interest or otherwise that accrue from the contribution towards education fund shall be credited to this fund account. This means that the Federation cannot utilize the education fund (both the principal and interest) as if it is its own funds. It is also mandatory to spend the education fund only towards the purposes mentioned in rule 20(6). Under rule 20(6), the funds have to be utilized for education of members, human resource development, development of co-operative societies, activity building and business management, professionalization etc. the above provision makes it very clear that the assessee has statutory liability to utilize the education fund only for specified purpose and hence, it is diverted at source by over-riding title. Further it is clear from the following judgments of the Hon'ble Supreme Court in the case of Sitaldas Tirathdas (supra) wherein it was held as under : "In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it I the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Whereby the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow." 6.2 Further the jurisdictional Karnataka High Court decision in the case of Karnataka Urban Infrastructure Development and Finance Corpn. (KUIDFC) (supra) held that interest accrued on deposits held in the name of KUIDFC, it has to be applied only for the purpose of welfare of the Nation/State as provided in the guidelines. It was held that such interest never reached KUIDFC as income and it was diverted at source. Therefore, the interest earned was not taxable. Further in the case of Karnataka State Agricultural Produces Processing and Export Corporation Ltd. (supra) held that the interest earned from bank deposits made out of grants received for the Government is not income in any sense of the term. Since the Govt. of Karnataka specifically directed that the interest earned by the fixed deposit grants pending utilisation should be treated as additional grant of the scheme and not to be treated as income of the company held that such interest is not income. Since the amount received cannot be diverted for any other purpose for which it was received, it cannot be treated as income of the assessee since it was diverted at source.
6.3 Further the Hon'ble Supreme Court in the case of Bijli Cotton Mills (P.) Ltd. (supra) wherein it was held that the amount collected from customers by way of Dharmada which was charged in invoice is not income as it came with an obligation to spend the money so collected for charitable purposes. 6.4 In the present case, the contribution received by the assessee from co-operative societies towards specific purpose and the assessee has not discretion to spend the amount and utilize above fund is decided by the Advisory Board consists of different persons as per the direction of the Government of Karnataka. The donations received by the assessee were for specific purpose. The donations which are for specific purposes do not belong to the assessee. Such donation do not form its income of the assessee. This donation is for specific purposes would only mean that the assessee, as agreed to act as a trustee for this amount received from various co-operative societies and it cannot be treated as assessee's normal income. In this case, the assessee is acting as an independent trustee for that donation received from various societies as per the provisions of section 57A r.w.s. 57(2A) of Karnataka Societies Act, 1959 and it cannot be considered for taxing the same. However, we observe that the assessee should have actually kept the said donation in separate account and any amount spent against that donation should have been debited to the separate account without bringing the same into 'income and expenditure' account. In other words, the incoming and outgoing need not be reflected in the 'income and expenditure' account of the assessee and this donation to be taken out of the 'income and expenditure' account. Similarly, the relevant expenditure spent out of the donation go out from the expenses side in the 'income and expenditure' account. The expenses expended out of this donation will be deducted from the said donation by not charging the same into Income & Expenditure Account. 7.3 From the above, it is clear that Hon’ble Karnataka High Court referred to sec.57(4)(a) of the Karnataka Societies Act and noted that, the expenditure incurred towards education fund is to be made with reference to the profits not exceeding ½% of the net profit. Thus, it is the statutory obligation and, therefore, has been held to be an allowable deduction. 7.4 In the present facts of the case also, the revenue is not disputing that such contribution need not be made. However, the only reasons for disallowance is that no evidence has been filed by the assessee in respect of payment which have been actually made. The assessee has filed before us, the income expenditure on account and the profit and loss account as on 31/3/2018. We note that the assessee has made provision for the education fund amounting to Rs.22,88,250/- during the year under consideration. We, therefore, remand the issue to the Ld.AO to verify the claim of the assessee in accordancae to the principles laid down by Hon’ble Karnataka High Court in the case of CIT Vs. Pandavapura Sakare Kharkhane (Supra). The Ld.AO is directed to allow the claim of the assessee that has been actually paid towards Co-operative Education Fund by the assessee pertaining to the year under consideration. The assessee is directed to establish by way of evidence the payment having made towards such fund. 7.5 Needless to say that proper opportunities of being heard must be granted to the assessee in accordance with law.
Accordingly, the grounds raised by the assessee stands allowed for statistical purpose.