Loading judgment…
Facts
The assessee, a co-operative society, claimed deduction under Section 80P(2)(a)(i). The AO disallowed the claim and added back excess provision for interest, pension fund, bad debts, and stamp duty, citing hybrid accounting. The CIT(A) allowed the disallowance of interest income but confirmed other additions. The assessee appealed.
Held
The Tribunal held that the provision for interest expenses is eligible for deduction as the assessee followed the accounting method prescribed under the Karnataka Co-operative Societies Rules. The Tribunal also deleted the addition made in respect of the excess provision of interest. For other provisions (bad debts, pension fund, registration), the matter was remitted to the AO for consideration of CBDT Circular No. 37/2016.
Key Issues
Whether the provision for interest expenses and other provisions (bad debts, pension fund, registration) are eligible for deduction. Whether CBDT Circular No. 37/2016 applies to enhance profits for Chapter VI-A deductions.
Sections Cited
80P(2)(a)(i), 40A(7), 40A(3), 43B, 32, 40(a)(ia), 80-IB, 40A(7)(b)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, SMC-‘B’ BENCH : BANGALORE
Before: SHRI LAXMI PRASAD SAHU & SHRI SOUNDARARAJAN K.
ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER
This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 01/04/2024 in respect of the A.Y. 2017-18 on the following grounds : “
1. Whether the appellate authority was justified in sustaining the addition in respect of - (a) differential provision for interest payable on deposits of Rs. 3,00,176/- on the ground that appellant was following Hybrid system of accounting; and (b) debits found in the audited Profit & Loss A/c of the appellant, viz: N.P.A. provision Rs. 1,50,000/-, Pension Fund Rs. 85,000/- and Stamp Duty provision Rs. 19,000/- aggregating to Rs. 5,54,176/- in the impugned order;
2. Whether or not the addition sustained in appeal opposed to Sec. 40A(7) and Sec. 43(2) of the Act and run contrary to : (a) CBDT Circular No. 37/2016 dated 02-11-2016 which gives the relief in respect of any disallowance of business expenditure by way of deduction under Chapter VI A of the Act to the extent profits so enhanced by such disallowance; and (b) the decision of Hon. Bombay High Court in C.I.T. vs. M/s. Gem Plus Jewellery India Ltd. and also the decision of this Tribunal in in Shreerama Credit Co-op. Society Ltd. Kundapura vs. ACTT, Circle 1, Udupi.
3. The appellant craves leave to add, to amend, modify and / or to alter any of the foregoing grounds and also urge such other grounds at the time of hearing.”
2. The assessee is a co-operative society and filed its return of income on 24/10/2017 and claimed a deduction u/s. 80P(2)(a)(i) of the Act. The AO not accepted the deduction for the reason that the assessee had mostly dealt with the non-members. Similarly, the AO had added the excess provision of interest since the assessee had followed the hybrid system of accounting. The provision for registration, pension fund and provision for bad debts were also disallowed and added to the total income. As against the said order, the assessee filed an appeal before the Ld.CIT(A) and contended that the nominal members are also members of the society and therefore dealing with them could not be treated as dealing with the public and the benefit should not be denied on that basis. The assessee further contended that the excess provision of interest is also eligible for deduction since the assessee had followed the accounting method mandated under the provisions of Karnataka Co-operative Societies Act. In respect of the other provisions, the assessee submitted that even after this addition, the net profits gets increased and in effect the entire profit will again qualify for deduction and therefore prayed to allow the appeal. The assessee also relied on section 40A(7)(b) of the Act. The Ld.CIT(A) considered the grounds raised by the assessee insofar as the disallowance of interest income earned by the assessee and allowed the same by holding that the business carried on with the nominal members would not be a reason for allowing the disallowance claimed u/s. 80P(2)(a)(i) of the Act. In coming to the said conclusion, the Ld.CIT(A) relied on the orders of the Coordinate Bench of this Tribunal as well as the judgment of the Hon’ble Jurisdictional High Court. Insofar as the excess provision of interest is concerned, the Ld.CIT(A) had confirmed the addition for the reason that dual accounting system could not be followed. In respect of the other provisions, the Ld.CIT(A) had confirmed the said disallowance for the reason that the assessee had not provided any evidence to show that the provisions are ascertained liabilities. As against the additions confirmed by the Ld.CIT(A), the assessee has filed this present appeal before this Tribunal.
3. At the time of hearing, the Ld.AR brought to our notice Rule 22 of the Karnataka Co-operative Societies Rules and contended that the method adopted by the assessee is in accordance with the said Rules and therefore the addition made is not correct. The Ld.AR also relied on the order of the Coordinate Bench of this Tribunal in dated 10.06.2024 in the case of Kavradi Co-operative Agricultural Bank vs. ITO in support of his submission. Insofar as the other provisions, the assessee relied on section 40A(7)(b) of the Act and prayed to allow the appeal. The Ld.DR relied on the orders of the lower authorities and prayed to dismiss the appeal.
We have heard the arguments of both sides and perused the materials available on record.
We have also perused the order of the Coordinate Bench of this Tribunal relied on by the Ld.AR in support of his contention that the assessee had followed the method prescribed under Rule 22 of the Karnataka Co-operative Societies Rules in which it was held as follows:
7. The third issue raised by the assessee is that whether the provision made for the interest expenses is eligible for deduction u/s 80P of the Act. We perused the provision and the other financial statements filed by the assessee and found that the assessee made provisions for interest expenses on an accrual basis which is in accordance with the accounting policies as prescribed under Karnataka Co-operative Societies Act. The Rule 22 of the Karnataka Co-operative Societies Rules specifies that interest income should be accounted for on an actual receipts basis while interest expenses should be recognized on an accrual basis. Therefore, the assessee, a registered society registered under the Karnataka Act, have to follow Rule 22 of the Karnataka Co-op. Societies Rules and therefore the method of accounting is in accordance with the Karnataka Rules and therefore the ld AO’s allegation that they are employing hybrid system of accounting one for the interest income and the other for the interest expenses is not correct. We therefore held that the disallowance of the Provision for Net Interest Expenses is not correct. Further, the coordinate bench of this Tribunal in the case of Sumangala Credit Co-operative Society, Bantwal Vs. ITO in dated 7.9.2023 had held as follows: “6. We have heard the rival submissions and perused the materials available on record. Admittedly, in the assessment year under consideration, the assessee made gross provisions of Rs.1,77,20,374!-. Out of this, assessee deducted earlier assessment year provisions up to 31.3.2016 of Rs.1,40,63,514!-. Thus, additional provision charged to P&L account was Rs.36,56,860!-. This provision cannot be treated as unascertained liability as the provision has been made on the basis of regular method of accounting consistently followed by the assessee. In the present case, it is not disputed that assessee has been following mercantile system of accounting and interest accrued on deposit but not due as on date of 31.3.2017 to be provided in the books of accounts of the assessee and there was no question of mutuality, which cannot be applied herein and the interest accrued, which has been provided by the assessee in the books of accounts by following the mercantile accounting system of book keeping, the claim of assessee cannot be denied. Accordingly, we allow the claim of the assessee.
7.1 We therefore, find that this issue is in favour of the assessee and we allow the appeal of the assessee in so far as the provision made for the interest expenses are concerned.”
6. In view of the above said finding given by the Coordinate Bench of this Tribunal, we are also following the principle laid down in that order and thereby delete the addition made in respect of the excess provision of interest. In so for as the other provisions made and claimed u/s 40A(7) (b) of the Act is concerned, we will first consider the relevant provision which reads as follows: “Expenses or payments not deductible in certain circumstances. 40A. ………….. ………….. …………. (7) (a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason. (b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year. Explanation.—For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.”
Insofar as the addition made in respect of the provision for bad debts, pension fund and registration, the assessee relied on section 40A(7)(b) of the Act. Further there is a clarification issued in Circular No. 37/2016 dated 02/11/2016 which reads as follows:
In the above said circular, the Board had clarified that how the disallowances made under the provisions could be claimed under Chapter VIA of the Act since the disallowances would result in enhancement of profits of the eligible businesses and therefore the deduction under Chapter VIA is admissible on the profits so enhanced by the disallowance. The above said circular was not considered by the AO while disallowing the expenses and therefore we are remitting this issue to the file of AO to consider the circular to the facts and circumstances of the case and thereafter decide the
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 10th January, 2025.