M/S. DISTRICT CO-OPERATIVE BANK LTD.,SAHARANPUR vs. DCIT, SAHARANPUR

The brief facts of the case is that assessee is a society registered under the U.P. Co-Operative Society Act and derives income from banking. It filed its return of income on 26.09.2013 declaring income of Rs.4,18,13,620/-. The assessment u/s 143(3) of the Act was passed by the Assessing Officer by making a disallowance of Rs.3,55,92,239/- u/s 36(1)(viia) of the Act. Further disallowance of Rs.56,64,630/- was also made on account of non-deduction of tax at source on interest paid on fixed deposit receipts. The disallowance was made u/s 40(a)(ia) of Page | 1 the Act. The total income of the assessee was assessed at Rs.8,30,70,490/-. The assessee preferred appeal before the learned CIT (Appeals) who dismissed the same and, therefore, the assessee is in appeal before us.

At the time of hearing the assessee made an application for adjournment seeking further time. On identical ground the assessee has sought adjournment in the month of August, 2019. Therefore, there is no merit in the adjournment request of the assessee and the same is dismissed.

The first ground of appeal is against the addition of Rs.3,55,92,239/-. During the course of assessment proceedings the Assessing Officer noted that assessee has claimed deduction on provision for bad and doubtful debts under Section 36(1)(viia) of the Act being 10% of Incremental Advances of rural branches of Rs.2,97,86,800/- was claimed and 7.5% of income was claimed for provision for doubtful debt. Therefore, total deduction claimed by the assessee was Rs.3,55,92,239/-. The learned Assessing Officer noted that as per the annual accounts of the assessee that the provision for bad and doubtful debts was not provided and, therefore, he issued a show cause notice. The assessee submitted that the intention of the proviso is in the form of incentive provided to the assesses as engaged in banking business to promote rural banking. The assessee also relied upon Circular No. 258 dated 14.07.1979 wherein the intention to granting such deduction. It was further stated that assessee does not have to prove before making the above provision that same has become bad. It was, therefore, submitted that the claim of deduction is allowable as laid down in Rule 6ABA of the Income Tax Rules. The learned Assessing Officer noted that provisions of Section 36(1)(viia) is a restrictive clause limiting the deduction to the extent of 10% of advances and 7.5% of income. It was further held that the passing of entries are required to affect the profit and loss account. He further relied on the decision of the Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd. Thus the Assessing Officer disallowed the above deduction stating that Page | 2 assessee does not have right to claim the deduction under Section 36(1)(viia) of the Act by deducting the required sum from the total income without passing entries of provision through books of accounts. On appeal before the learned CIT (Appeals) the assessee reiterated the above submissions. He dismissed the claim of the assessee for the similar reasons. This is challenged as per ground No. 1 of appeal.

The second ground of appeal is that the Assessing Officer has made an addition of Rs.56,64,630/- on interest paid on FDRs. In the statutory audit report it was reported that assessee has not deducted tax at source amounting to Rs.5,66,461/- on payment of interest on fixed deposits to its customers as provided under section 194A of the Act. The assessee submitted that no tax is required to be deducted on fixed deposits made by agriculturists. It was stated that the branches could not file the requisite declaration forms in time to the office of the Commissioner of Income Tax, Muzaffar Nagar. However, before the Assessing Officer the assessee submitted the complete forms in Form No. 15H and 15G before the Assessing Officer. Assessee further submitted that income of the depositors are also below taxable limit. The Assessing Officer rejected the contention of the assessee for the reason that assessee did not submit any evidence whether Form No. 15G and 15H had been submitted or not. The AO also noted that the auditor of the assessee has also stated that tax had not been deducted to that extent. The Assessing Officer further held that there is no evidence that when the interest was credited to the accounts of the depositors whether such forms were available or not. Thus, considering that tax has not been deducted of Rs.5,66,461/- he disallowed the interest paid on FDRs of Rs.56,64,430/-. On appeal before the learned CIT (Appeals) assessee reiterated the same arguments. The learned CIT (Appeals) dismissed the claim of the assessee.

We have carefully considered the contentions of the lower authorities as apparent from the orders that assessee did file Form No. 15G and 15H before the Assessing Officer though the same might not have been filed before the learned Commissioner of Income Tax, Muzaffar Nagar or might have been filed late. The assessee has also stated that most of the fixed depositors are agriculturists and are having income below the taxable limit. Merely because the assessee did not file the requisite form before the learned CIT, Muzaffar Nagar, in time, it cannot be said that assessee has failed to deduct tax at source on such interest payment. Furthermore without examining those Form No. 15G and 15H the Assessing Officer also could not have held that the assessee should have deducted tax at source on interest paid to such persons who have furnished Form No. 15H and 15G to the assessee. Without examining the facts, no disallowance can be made in the hands of the assessee. Furthermore the learned CIT (Appeals) also did not carry out such an exercise. Therefore, in the interest of justice, we set asdide this ground of appeal that to the file of the Assessing Officer with a direction to the assessee to submit such Form No. 15H and 15G and prove before the Assessing Officer that no tax was required to be deducted on such sum. The assessee is also directed to show the break-up of failure to deduct tax at source of Rs.5,66,461/- before the Assessing Officer that such TDS was not required to be deducted. Assessee is at liberty to raise the claims for non-deduction of tax as well as inclusion of the interest income in the return of income of depositors for contesting the above disallowance. The Assessing Officer may examine the details so furnished and decide the issue afresh. Accordingly ground No. 2 of the appeal is allowed with above direction.

Accordingly appeal of the assessee is allowed, for statistical purposes.