THE KANAKAMAHALAKSHMI CO-OPERATIVE BANK LIMITED,,VISAKHAPATNAM vs. THE ACIT,, VISAKHAPATNAM

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM

BEFORE SHRI V. DURGA RAO, HON’BLE JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH, HON’BLE ACCOUNTANT MEMBER

ITA Nos. 299 & 300/VIZ/2017 (Asst. Year: 2012-13 & 2013-14)

The Kanaka Mahalakshmi vs. ACIT, Circle-1(1), Cooperative Bank Ltd., Visakhapatnam. 49-49-1/1, Santhipuram, Akkayyapalem, Visakhapatnam. PAN No. ARGPK 7204 D (Appellant) (Respondent)

ITA Nos. 326 & 327/VIZ/2017 (Asst. Year: 2012-13 & 2013-14)

ACIT, Circle-1(1), vs. The Kanaka Mahalakshmi Visakhapatnam. Cooperative Bank Ltd., 49-49-1/1, Santhipuram, Akkayyapalem, Visakhapatnam. PAN No. ARGPK 7204 D (Appellant) (Respondent)

Assessee by : Shri S. Rama Rao –Adv. Department By : Shri P.S. Murthy –Sr.DR

Date of hearing : 03/08/2018. Date of pronouncement : 05/09/2018.

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O R D E R PER V. DURGA RAO, JM:

These are the Cross appeals by the assessee and the Revenue are directed against the common order of Commissioner of Income Tax (Appeals)-1, Visakhapatnam, dated 20/03/2017 for the Assessment Years 2012-13 & 2013 & 14. ITA No. 299/VIZ/2007 2. Ground Nos. 1 & 7 are general in nature, no adjudication is required, therefore, same are dismissed. 3. Ground No.2 relating to addition of Rs.26,10,443/- on account of interest on reverse fund. 4. Facts of this issue in brief are that during the course of assessment proceedings, the Assessing Officer has noted that the assessee had claimed Rs. 26,10,443/- in the profit & loss account as interest on reserve fund under the category ‘provisions and other expenditure’. The Assessing Officer called upon the assessee to show-cause as to why the interest on reserve fund should not be treated as appropriation of profit and added to the total income. The assessee submitted before the Assessing Officer that the amount of Rs. 26,10,443/- was claimed as an expenditure at par with the interest payable to the deposit holders as it belong

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to the members of the society. The Assessing Officer did not accept the explanation of the assessee and made the addition of Rs. 26,10,443/- by making the following observations:- “The submissions of the A.R of assessee have been considered but the same are not acceptable. In this regard, it is submitted that Interest on Reserve Fund is clubbed under the head 'Provisions and Other Expenditure' and hence, the Interest on Reserve Fund is treated as appropriation of profit. As already stated above, for examining whether an expense claimed is allowable or not, we have to examine its nature and whether the expenditure has already been incurred or it is only notional. Interest on reserve fund is not paid on a day to day basis. In fact, no payment has been made on account of this interest. Moreover, this expenditure has not even accrued. It is only in the nature of a provision. The income tax act is very clear on this aspect. Any expenditure which is incurred or accrued can only be debited to the Profit and Loss Account. Provisions are not allowable as expenses. They only amount to appropriation of profit and reducing the income offered for taxation. When the actual expenses are incurred, the same can very well be claimed in the corresponding return of income for that year. However, in the present year it is not allowed. Accordingly, the same is added to the total income of the assessee.” 5. On being aggrieved, assessee carried the matter in appeal before the ld. CIT(A) and submitted as under:- “The appellant is a Mutual Aided Cooperative Society formed with members to support each other by depositing their surplus in bank and availing the said amount as loan by the needy members. The Bank has been registered under AP State Mutual Cooperative Society Act, Wherein, the Preamble of the Act narrates that the certain amount of interest is to be charged to ascertain the real net surplus in the operations of the bank. The Reserve Fund which was kept aside for future contingencies of the Appellant and same was used by the bank. The amount belonging to the members of the bank which is at par with the share capital. In the case of Cooperative Societies I Banks, the surplus I deficit would belong to them. If bank consider the reserve fund at par with the deposit, it would have to pay interest on such amount Hence the interest claimed

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on reserve funds is an expenditure to the Institution which should be allowed at par with interest on share capital and same would be transferred to Reserve Fund Account and no tax is leviable on the basis of mutuality and belong to all members. Since the Co-operative Act envisages real cost of funds to earn I arrive the real income. Hence the appellant appeal the Hon'ble Commissioner of Income tax (Appeals) to kindly delete the disallowance made by the respected Assessing Officer for Rs. 26,10,443/-.

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fund’. This provision is made by the assessee on notional basis and not accrued liability, therefore, Assessing Officer has made addition on this count and the ld. CIT(A) confirmed the same on the ground that it is a provision on notional basis and does not ascertain to be accrued liability. We find no infirmity in the order passed by the ld. CIT(A). Thus, this ground of appeal raised by the assessee is dismissed. 11. Ground No.3 relates to addition of Rs.7,72,033/- on account of interest on deficit cover fund. 12. In the assessment order, the Assessing Officer has noted that the assessee had claimed an amount of Rs. 7,72,022/- in the profit & loss account as ‘interest on deficit cover fund’. The Assessing Officer called upon the assessee to show-cause as to why the interest on deficit cover fund should not be treated as appropriation of profit and added to the total income. It was submitted before the Assessing Officer that the amount of Rs.7,72,022/- was claimed as an expenditure at par with the interest payable to deposit holders as it belong to the members of the society. The Assessing Officer did not accept the explanation of the assessee and observed that interest on deficit cover fund is clubbed under the head ‘provisions and other expenditure’, hence, interest on deficit cover fund is treated as appropriation of profit.

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As already stated with respect to the provision for interest on reserved fund, the interest on deficit fund is also not allowable expenditure. Accordingly, the same is added to the total income of the assessee. 13. On appeal before the ld. CIT(A), it was submitted that the interest on deficit cover fund, as it belong to the members of the society and the same had been borrowed from outside by way of deposits, interest would be paid to them and allowed as an expenditure, since it is at par with interest on share capital and also belong to the members, the same is to be allowed as expenditure. The ld. CIT(A) after considering the explanation of the assessee, confirmed the order of the Assessing Officer by observing that the said provision made by the assessee is notional and does not ascertain to be accrued liability. Mere provision made in the accounts would not be eligible for deduction and accordingly confirmed the order of the Assessing Officer. 14. We have heard both the sides and find that it is a provision made by the assessee on notional basis and it cannot be considered as an accrued liability. Mere provision made in the accounts would not be eligible for deduction. We find that ld.CIT(A) correctly confirmed the order of the Assessing Officer. Thus, this ground of appeal raised by the assessee is dismissed.

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argument of the assessee is that since the payments were made to LIC of India in Master policy scheme, the premiums contributed to the LIC of India is allowable deduction and relied on the decisions of coordinate bench of Hyderabad in the case of Capital IQ Information Systems (India) Pvt. Limited (supra). The Hon’ble ITAT Hyderabad Bench while deciding the issue on similar facts held as under: “8. We have heard the arguments of the parties, perused the material on record and have gone through the orders of the authorities below. We find that the issue is squarely covered by the decision of the ITAT, Hyderabad in the case of M/s. Sri Krishna Drugs Ltd. Vs. Department of Income-tax in ITA No.2126/Hyd/2011 for AY 2007.08 dated 11.4.2012, where the JM was one of the party. The Tribunal in the said case held as follows: 3. The second ground raised by the Revenue is as under: "The learned CIT(A) erred in holding that unrecognised gratuity fund is allowable u/s. 37(1),when the case is hit by the provisions of section 40A(9) and especially when the assessee failed to comply with the provisions of section 36(1)(v)." 4. After hearing both the sides, we find this issue is covered in favour of the assessee and against the Revenue in I.T.A. No. 198/Hyd/2011 in assessee's own case for A.Y. 2006- 07 order dated 16.12.2011 wherein this Tribunal held as follows: "3. After hearing both the parties, we are of the opinion that similar issue came up for consideration in assessee's own case for assessment year 2002-03 in I.T.A. No. 349/Hyd/2006. The Tribunal decided the issue in favour of the assessee vide its order dated :15.2.2008 by holding as follows: "4. We have considered rival submissions on either side and also perused the material available on record. Admittedly, the Group Gratuity Scheme was not recognised by the Commissioner of Income-tax. This fact is not in dispute. We have carefully gone through the provisions of sec. 36(1)(v) of the Income-tax Ac. Sec. 36(1)(v) reads as follows: "36. (1) The deductions provided for in the following clauses shall be allow d in respect of the matters dealt with therein, in computing the income referred to in section 28 - (v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust”.

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We have also carefully gone through the provisions of sec. 37 of the Income-tax Act. Sec. 37 provides for deduction of expenditure not being in the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee, but laid out and expended wholly and exclusively for the purposes of the business or profession, while computing income chargeable to tax. The main contention of the Revenue is that under sec. 36(1)(v), the payment made by the assessee as employer could be allowed only in respect of approved gratuity fund. Since the Group Gratuity Scheme is not approved by the CIT, according to the Revenue, it cannot be allowed. However, the contention of the assessee is that in view of the judgment of the Madras High Court in the case of Premier Spinning Mills Ltd. (supra) and the judgment of the jurisdictional High Court in the case of Warner Hindustan Ltd. (supra), it has to be allowed. 5. We have carefully gone through the judgment of the jurisdictional High Court in the case of Warner Hindustan Ltd. (supra). In the case before the jurisdictional High Court, the Provident Fund was not approved by the CIT. The Andhra Pradesh High Court after referring to the judgment of the Bombay High Court in Tata Iron & Steel Co. Ltd. v. D. V. Bapat, ITO (1975) 101 ITR 292, and the judgment of the Supreme Court in Metal Box Company of India Ltd. vs. The Workmen (1969) 73 ITR 53, held that the amount paid towards an unapproved gratuity fund can be deducted under sec. 37 of the I.T. Act, though not under sec. 36(1)(v). In view of this judgment of the jurisdictional High Court, in our opinion, even if any payment is made to an unapproved gratuity fund, it has to be allowed under sec. 37. By respectfully following the binding judgment of Andhra Pradesh High Court in the case of Warner Hindustan Ltd. (supra), we uphold the order of the CIT(A). In view of the above discussion, we dismiss the ground taken by the Revenue.” 5. In view of the above decision of this Tribunal, the ground raised by the Revenue is dismissed.” 9. Since the issue under consideration is materially identical to the one decided by the ITAT in the case of M/s. Sri Krishna Drugs Ltd. (supra), respectfully following the same, we set aside the order of the CIT(A) and allow the ground of appeal of the assessee.”

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fund maintained with LIC has no control over the irrevocable trust created exclusively for the benefit of employees and deduction shall be allowed. The coordinate bench of Madras while deciding the appeal relied on the decision of Hon’ble Madras High court in the case of Textool India Pvt. Limited (supra) (civil appeal No.447 of 2003). In the instant case the assessee has made the payments to the LIC towards group gratuity scheme directly in approved schemes. The assessee has also obtained the policy in favour of the bank. The assessee has no control over the funds contributed to LIC towards the gratuity. The assessee is receiving the gratuity payment directly from the LIC of India as per the scheme which is paid to the employee on happening of the event i.e. retirement or death or resignation. Therefore, the facts of the assessee’s case are squarely covered by the decisions cited supra. The coordinate bench of Hyderabad while delivering the ruling relied on the decision of jurisdictional High Court in the case of Warner Hindustan Ltd. Since the facts are identical, respectfully following the view taken by the coordinate benches, we hold that the assessee is entitled for the deduction for payment of gratuity to LIC and accordingly, we set aside the order of the lower authorities and allow the appeal of the assessee.

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submitted before the Assessing Officer that the cooperative bank is eligible for deduction under section 35DD, but it is to be worked out in accordance with the provisions of section 44DB. It was further submitted that the assessee has to be treated as a company for the purpose of section 35DD and the amounts allowable are, to be allowed to the assessee being a cooperative bank. Alternatively, it was argued that the assessee is eligible for claim under section 32 of the Act. It was further submitted that in the process of amalgamation, the assessee has acquired all the commercial rights and additional amount paid was towards acquisition of commercial right which represents licence. The Assessing Officer has considered the explanation given by the assessee and the same is not accepted on the following reasons:-

“All such claim of the assessee are considered and the facts submitted in the written submission have been considered. Income Tax Act has specific provisions embedded for computing deductions in the case of business reorganization of cooperative banks. Section 44DB deals with the details of such computation in case of deduction under section 32, section 35D, section 35DD or section 35DDA. Similarly, section 72AB deals with the carry forward and set off of the accumulated loss and unabsorbed depreciation in case of business reorganization of cooperative banks. Sub-section(7) of section 72AB of the IT Act states as under: (a) accumulated loss" means so much of loss of the amalgamating cooperative bank or the de-merged cooperative bank, as the case may be, under the head profits and gains of business or profession" (not being a loss sustained in a speculation business) which such amalgamating cooperative bank or the de-merged cooperative bank, would have been entitled to carry forward and set off under the provisions of section 72 as if the business reorganization had not taken place.

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(b)unabsorbed depreciation" means so much of the allowance for depreciation of the amalgamating cooperative bank or the demerged cooperative bank, as the case may be, which remains to be allowed and which would have been allowed to such bank as if the business reorganization had not taken place." It is not disputed that Palakol Co-operative Urban Bank got merged with assessee bank is done as per the approval of RBI. Even then, the allowance of brought forward losses/unabsorbed depreciation are covered by provisions of I.T.Act and not by RBI guidelines. As per sub-section(7) of section 72AB, the accumulated losses would have been entitled to carry forward and set off under the provisions of section 72. Similar is the case with the unabsorbed deprecation. Therefore the main condition which needs to be fulfilled is that the said loss should have been allowable in the hands of Palakol Co-operative Urban Bank as per the provisions of the Act. The fact which is undisputed is that these banks, prior to its merger have never filed its return of income and thus their loss is not otherwise eligible to be carried forward under the provisions of section 72. Therefore once this condition is not fulfilled, the acquirer bank is not eligible to carry forward the said losses/ unabsorbed depreciation as per the provisions of section 72AB. Coming to the issue of RBI guidelines with regard to amortizing of losses, the specific provisions of Income Tax Act override the general provisions of cooperative society's act/RBI guidelines. In view of the specific provisions of Income Tax Act the assessee is not eligible to the allowance of brought forward losses or unabsorbed depreciation of Palakol Co-operative Urban Bank either in amortized form over a period of five years or otherwise. As the losses of both the acquired banks pertain to the period during which the total income of both the banks were exempt u/s 80P, hence in view of the provisions of section 14A, such claim of Amortized loss by the assessee bank needs to be disallowed. Accordingly the AO took the view that the claim of the assessee amounting to Rs.57,81,211/- for the Asst. Yrs. 2012-13 & 2013-14 are not allowable as per the provisions of the Act and hence the impugned addition was made.”

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and Registrar of Cooperative Societies. It was further submitted that the accounts of the Palakol Cooperative Urban Bank finalized upto 20/01/2010 as audited by the Chartered Accountant; and that as on 20/01/2010, the liabilities were more than the assets for Rs. 2,89,00,058/- and the same were reflected in the assets side of the balance sheet and submitted that an amount of Rs.2,89,00,058/- was incurred for acquisition of Palakol Cooperative Urban Bank. The assessee claimed amortization over a period of 05 years, as per section 35DD read with section 44DB of the Act. It was submitted that acquisition of the said bank, the assessee took advantage of the banking licence held by the Palakol Cooperative Urban Bank. It is contended that assessee is entitled to relief of amortization. 27. Alternatively, it was submitted before the ld. CIT(A) that the assessee may be granted relief under section 32 towards acquisition of commercial rights representing licence and the business. He relied on the decision of the Hon'ble Bombay High Court in the case of Chowgule & Company Pvt. Ltd. vs ACIT [(153 TR(A) 810] and also the decision of the Bangalore ITAT in the case of Fibres & Fabrics International Pvt. Ltd. vs. DCIT [153 TR (A)

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75]. The ld. CIT(A) has considered the submissions of the assessee and passed a detailed order, which is as follows:- “10.4. I have considered the arguments of the assessee and have gone through the facts of the case and also the decisions relied upon by the assessee in support of its arguments. Income tax Act has specific provisions embedded for computing deductions in the case of business reorganization of cooperative banks. Section 44DB deals with the details of such computation in case of deduction under section 32, section 35D, section 35DD or section 35DDA. Similarly section 72AB deals with the carry forward and set off of the accumulated loss and unabsorbed depreciation in case of business reorganization of cooperative banks. Sub-section (7) of section 72AB states as under: (a) "accumulated loss" means so much of loss of the amalgamating cooperative bank or the demerged co- operative bank, as the case may be, under the head "profits and gains of business or profession" (not being a loss sustained in a speculation business) which such amalgamating cooperative bank or the demerged cooperative bank, would have been entitled to carry forward and set-off under the provisions of section 72 as if the business reorganization had not taken place. (b) "unabsorbed depreciation" means so much of the allowance for depreciation of the 'amalgamating cooperative bank or the demerged cooperative bank, as the case may be, which remains to be allowed and which would have been allowed to such bank as if the business reorganization had not taken place. It is not disputed that Palakol Bank got merged with assessee- bank is done as per the approval of RBI and Registrar of Co- operative Societies. The assessee has not made any claim as per the provisions of Sec.44DB and hence the claim of deduction u/s.35DDis prima-facie inadmissible. Therefore, the allowance of brought forward losses/unabsorbed depreciation are to be dealt as per the specific provisions of I.T.Act and not by RBI guidelines. As per sub-section (7) of section 72AB, the accumulated losses would have been entitled to carry forward and set off under the provisions of section 72. Similar is the case with the unabsorbed depreciation. Therefore the main condition which needs to be fulfilled is that the said loss should have been allowable in the hands of Palakol Bank as per the

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provisions of the Act. The entitlement as to allowance of such loss in the hands of Palakol Bank or its eligibility otherwise to be carried forward under the provisions of section 72 was not proved. Therefore once this condition is not fulfilled the acquirer bank is not eligible to carry forward the said losses/ unabsorbed depreciation as per the provisions of section 72AB. Therefore as observed by AO, Palakol Bank, whose losses are not determined as per the provisions of Income-tax Act, 1961, does not satisfy the conditions laid down by the Act, hence the AO rightly disallowed the amortization of losses claimed by the assessee. Coming to the issue of RBI guidelines with regard to amortization of losses it is settled principle that the specific provisions of Income-tax Act override the general provisions of cooperative society's act/RBI guidelines. In view of the specific provisions of Income-tax Act the assessee is not eligible to the allowance of brought forward losses or unabsorbed depreciation of Palakol Bank either in amortized form over a period of five years or otherwise. Therefore I uphold the disallowance made by AO. 10.5 In support of its without prejudice argument, the AR submitted that the decision taken by the assessee to accept takeover of the target banks having accumulated losses is nothing but the price agreed to be paid for acquiring a commercial or business right. It was represented that the customers of the target bank continue to be customers of the assessee-bank and the assessee-bank is in a position to expand its operations by functioning through branches taken over from the target bank and otherwise the assessee could not have been able to open branches as RBI was not granting license to open new branches during the relevant period. It was also represented that the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the business rights along with the tangible assets, the assessee got a running business and that the excess of liabilities over assets taken over is the price paid for acquisition of a commercial /business right the said amount is eligible for depreciation in terms of provisions of section 32(1)(ii) of the Income-tax Act, 1961. For the purpose the AR relied on the decision rendered by the Bombay High Court in the case of Chowgule & Co. Pvt. Ltd. Vs. Addl. CIT. 10.6 I have considered the submissions made. It is seen that the assessee has acquired the asset & liabilities of Palakol Bank. The assessee has not paid any consideration for the said acquisition, and has taken over accumulated loss of the target bank. It is pertinent to note that the assessee has not shown any amount

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towards goodwill in the depreciation schedule. The Hon'ble Supreme Court in the case of Smifs Securities Ltd has held that the amount paid in excess to the net asset acquired would constitute 'goodwill' and on which depreciation can be considered. The Hon'ble ITAT, Hyderabad in SKS Micro Finance Ltd has followed the above Supreme Court decision. Thus, the excess price paid over the value of net asset was held to be goodwill. However, in the assessee's case there was no consideration paid. Hence the loss amortized cannot be considered to constitute goodwill. In the circumstances, the claim of depreciation on the amortized loss is rejected as without basis.”

“So far as alternative ground raised by the assessee is concerned, according to the Ld. Counsel for the assessee, the excess of liabilities over the assets of Bobbili bank should be treated as the price paid for acquisition of a commercial I business asset which is a depreciable asset and it has to be treated as a goodwill. We find there is no merit in the argument of Ld. Counsel for the assessee. Goodwill means it is an intangible asset that arises as a result of acquisition of one company by another for a premium value. In this case, the assessee has not paid any amount to amalgamating company. The assessee has only taken losses of amalgamating company i.e. Bobbili Co-operative bank. Therefore, the assessee has not acquired any goodwill. The Ld.CIT(A) by considering the entire facts of the case has passed a detailed order by considering the provisions of law. In so far as case laws relied upon by the Ld. Counsel for the assessee particularly in the case of Cosmos Co- operative Bank Limited (supra) is entirely different facts and

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circumstances, therefore, we find no application to the facts of the present case. In so far as other case laws relied by the Ld. Counsel for the assessee also decided in a different facts and circumstances and therefore, we find no application to the facts of the present case. We find no reason to interfere with the order passed by the Ld.C1T(A). This ground of appeal raised by the assessee is dismissed.”

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b) Fibres & Fabrics International Pvt. Ltd. Vs. DCIT [(2016) 160 ITD 102 (Bang. – Trib.)] c) Areva T & D India Ltd. Vs. CIT [(2012) 345 ITR 421 (Delhi – HC) d) DCIT Vs. Cosmos Co-operative Bank Ltd. [(2014) 64 SOT 90 (Pune – Trib.) 33. We have heard both the sides, perused the material available on record and orders of the authorities below. 34. The assessee (acquirer) is a co-operative bank registered under the Co-operative Societies Act, 1964 and filed a return of income for the year under consideration, wherein it is claimed 1/5th of cost of acquisition of Palakol Co-operative Bank as an expenditure under section 35DD of the Act. The Assessing Officer after calling the explanation from the assessee, he has observed that as per the provisions of section 35DD, only assessee who is Indian company is eligible for deduction as the assessee is not an Indian company, claim of the assessee under section 35DD is denied. On appeal, ld. CIT(A) confirmed the order of the Assessing Officer. Before us, ld. counsel for the assessee has submitted that section 44DB refered section 35DD, therefore, claim of the assessee has to be considered under section 35DD of the Act. It is relevant to examine the provisions of section 35DD, which are extracted as under:- “35DD. (1) Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and

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exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place. (2) No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act.”

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have been entitled to be carried forward and set off under the provisions of section 72. Similar is the case with the unabsorbed depreciation. Therefore, the main condition which needs to be fulfilled is that the said loss should have been allowable in the hands of Palakol Bank (Amalgamated bank) as per the provisions of the Act. The entitlement as to allowance of such loss in the hands of Palakollu Bank or its eligibility otherwise to be carried forward under the provisions of section 72 was not proved. Therefore, once this condition is not fulfilled the acquirer bank (assessee) is not eligible to carry forward the said losses/unabsorbed depreciation as per the provisions of section 72AB of the Act. We find that the Assessing Officer has rightly denied the claim of the assessee and the same is confirmed by the ld. CIT(A). 38. So far as another argument of the assessee is that liability undertaken by the assessee by paying over and above the asset value has to be considered as a payment for acquiring commercial rights. This aspect has been considered by the ld. CIT(A) and observed that assessee has not paid any consideration for acquisition of Palakol Co-operative Bank, only has taken accumulated losses. He further observed that the assessee has not shown any amounts towards goodwill in the depreciation

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schedule. The ld. CIT(A) by following the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd., [(348 ITR 32 (SC)] has considered and observed that the amount paid in excess to the net asset acquired would constitute 'goodwill' and on which depreciation can be considered. He also considere3d the decision of the ITAT, Hyderabad Bench in the case of SKS Micro Finance Ltd.,, in turn which is followed the above Supreme Court judgement and observed that excess price paid over and above the value of the net asset was held to be a goodwill. Similar issue has been considered by the coordinate bench of the Visakhapatnam tribunal in the case of Visakhapatnam Co- operative Bank Ltd. Vs. Addl. CIT in ITA No. 444/VIZ/2012, by order dated 30/09/2016, the same has been considered by the ld. CIT(A) and rejected the alternative ground raised by the assessee. For the sake of convenience, the relevant portion of the order is extracted as under:- “9. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The first argument raised by the assessee in respect of claim made by the assessee of Rs. 1,56,70,500/- as amortized loss on account of the merger of Bobbili branch with the assessee. In the course of the assessment proceedings, the A.O. has asked the assessee what is the basis for the claim. Before the A.O., the assessee is not able to justify in respect of claim made by the company as per the provisions of section 44DB & 72AB of the Act. The A.O. has disallowed the same and added back to the total income of the assessee. On appeal, it was submitted before the Ld. CIT(A) that the merger of Bobbili bank with the assessee bank

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is as per the guidelines issued by the RBI, therefore, this loss has to be allowed. The Ld. CIT(A) by considering the RBI guidelines, he has observed that the Income Tax Act has a specific provision embedded for computing the deductions in the case of business re-organisation of Cooperative banks. Section 44DB of the Act deals with the details of such computation in the case of deduction under sections 32, 35D, 35DD or 35DDA of the Act. Similarly, section 72AB deals with the carry forward and set off of accumulated losses and depreciation in the case of business re- organization of the cooperative banks. He has observed that as per sub-section 7 of section 72AB of the Act, the accumulated losses would have been entitled to carry forward and set off under the provisions of section 72 of the Act, similar is the case with unabsorbed depreciation. Therefore, the main condition which needs to be fulfilled is that the said loss should have been allowable in the hand of Bobbili branch as per the provisions of the Act. The Bobbili bank never filed its return of income, thus, its loss is not otherwise eligible to be carry forward under the provisions of section 72 of the Act and he confirmed the order passed by the A.O. We find that the Bobbili Cooperative bank has not filed any return of income. The assessee also not brought anything on record to show that the Bobbili bank has filed the return of income. Once the Bobbili bank which is merged with assessee’s bank not filed any return of income, as per the provisions of section 72AB of the Act, the Bobbili bank is not eligible to carry forward any losses or unabsorbed depreciation. The same cannot be allowed in the hands of the assessee’s case. The Ld. CIT(A) correctly by considering the provisions of the Act disallowed the claim made by the assessee. So far as RBI guidelines with regard to the amortization of losses is concerned, in view of the specific provision provided by section 72AB of the Act, in our opinion, RBI guidelines cannot prevail over the Income Tax Act. We further observed that business losses and unabsorbed depreciation of amalgamating co-operative bank i.e. Bobbili Co-operative bank can be set off against the income of successor co-operative bank i.e. amalgamated co-operative bank (assessee) if the amalgamation is within the meaning of section 72AB of the Act. In the present case, the amalgamating company i.e. Bobbili Co-operative bank not filed return of income as required u/s 72AB of the Act. Therefore, the claim of the assessee cannot be allowed. We find that the Ld. CIT(A) has correctly decided the issue and disallowed the claim of the assessee. 10. So far as alternative ground raised by the assessee is concerned, according to the Ld. Counsel for the assessee, the

26 ITA No.299, 300 & 326/NAG/2017 (The Kanaka Mahalakshmi Co-op Bank Ltd.)

excess of liabilities over the assets of Bobbili bank should be treated as the price paid for acquisition of a commercial/business asset which is a depreciable asset and it has to be treated as a goodwill. We find there is no merit in the argument of Ld. Counsel for the assessee. Goodwill means it is an intangible asset that arises as a result of acquisition of one company by another for a premium value. In this case, the assessee has not paid any amount to amalgamating company. The assessee has only taken losses of amalgamating company i.e. Bobbili Co-operative bank. Therefore, the assessee has not acquired any goodwill. The Ld. CIT(A) by considering the entire facts of the case has passed a detailed order by considering the provisions of law. In so far as case laws relied upon by the Ld. Counsel for the assessee particularly in the case of Cosmos Co-operative Bank Limited (supra) is entirely different facts and circumstances, therefore, we find no application to the facts of the present case. In so far as other case laws relied by the Ld. Counsel for the assessee also decided in a different facts and circumstances and therefore, we find no application to the facts of the present case. We find no reason to interfere with the order passed by the Ld. CIT(A). This ground of appeal raised by the assessee is dismissed.”

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28 ITA No.299, 300 & 326/NAG/2017 (The Kanaka Mahalakshmi Co-op Bank Ltd.)

an additional ground. Therefore, the same cannot be considered and is dismissed.

ITA No. 326/VIZ/2017 47. Ground No. 1 & 12 are general in nature, no adjudication is required, therefore, same are dismissed. 48. Ground Nos. 2 to 4 relate to interest on share capital paid towards bank. During the course of assessment proceedings, the Assessing Officer has noted that assessee had debited an amount of Rs. 61,58,437/- for Assessment Year 2012-13 towards interest on share capital. The Assessing Officer called upon the assessee to show-cause as to why the said interest amount should not be treated as an appropriate of profit and added to the total income. In response, assessee submitted before the Assessing Officer that the assessee bank collects deposits from deposit holders, who are admitted as members and the deposits were given to the members as a loan under the A.P. Mutually Aided Cooperative Societies Act 1995, supports payment of interest on share capital as per section 16(1) of the Act. The Assessing Officer after considering the explanation of the assessee took a view that the interest on share capital to the members, amounts to appropriate of profits and such interest is paid out of surplus of profits and

29 ITA No.299, 300 & 326/NAG/2017 (The Kanaka Mahalakshmi Co-op Bank Ltd.)

cannot be charged on income and hence, cannot be allowed as a deduction and claim made by the assessee is disallowed. 49. On appeal before the ld. CIT(A) it was submitted that similar issue was decided by the Hon'ble ITAT in the case of Visakhapatnam Cooperative Urban Bank Ltd. in 19/VIZ/2011 for the Assessment Year 2007-08, dated 29/08/2011 and the Assessing Officer is not justified in making the addition. The ld.CIT(A) has considered the explanation given by the assessee and by following the order of the ITAT Visakhapatnam Bench in the case of Visakhapatnam Cooperative Urban Bank Ltd. (supra) came to a conclusion that interest on share capital paid to the members is an allowable deduction and directed the Assessing Officer to delete the impugned addition. The relevant portion of the order is extracted as under:-

“4.4 I have considered the submissions made. The issue to be resolved is whether interest on share capital would amount to appropriation of profit and not charge on income. I find that the Hon'ble ITAT, Visakhapatnam has examined this issue in detail in the case of Visakhapatnam Co.operative Bank for the Asst. Yr. 2007-08 in ITA No.19/Vizag/2011 dated 29.8.2011 and come to the ion that interest on share capital paid to members is an allowable on. The issue as to whether interest on share capital would amount to nation of profit arose again in the said case before the Hon'ble ITAT, 3patnam for Asst. Yrs. 2008-09, 2009-10 & 2010-11 in ITA No.444, 445,449 & 450/Vizag/2012 & ITA No.726/Vizag/2013 & ITA No.2&38/Vizag/2014 and the bench followed the co-ordinate bench decision for the Asst. Yr. 2007-08. Respectfully following the decision of Hon'ble ITAT in the case of Visakhapatnam Co-operative Benk for the A.Ys.

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2007-08 to 2009-10, the AO is directed to delete the impugned additions of Rs.61,58,437/- for the Asst. Yr. 2012-13 and Rs.69,95,000/- for the Asst. Yr. 2013-14.

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19/VIZ/2011 dated 29/08/2011 and came to a conclusion that interest on share capital paid to the members is an allowable deduction. The very same issue has been considered by the ITAT, Visakhapatnam Bench in ITA No. 449/VIZ/2012 (supra) by following the case of Visakhapatnam Co-operative Bank for the Assessment Year 2007-08 upheld the view taken by the ld.CIT(A). For the sake of convenience, the relevant portion of the order is extracted as under:- “22. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. In this case, the assessee has debited an amount of Rs.1,57,53,620/- towards interest on share capital. It was submitted that as per the section 16 of the A.P. Mutually Aided Cooperative Societies Act, 1995, it is an allowable expenditure. The A.O. has not accepted the explanation of the assessee and he has observed that the assessee has to allocate the interest on share capital only upon determination of the surplus arising from the business i.e. net profit. This is nothing but appropriation of profits but not an expenditure incurred for carrying on the business. The Ld. CIT(A) by following the decision of the coordinate bench of the Tribunal in assessee’s own case for the assessment year 2007-08 in ITA No.5/Vizag/2011 & 19/Vizag/2011 for A.Y. 2007-08 vide order dated 29.8.2011 has directed the A.O. to delete the addition made by him. It is submitted across the bar that the very same issue in the assessee’s own case is pending before the Hon’ble High Court. In view of the above, by following the coordinate bench of the Tribunal, in view of the doctrine of precedent, we dismiss this ground of appeal raised by the Department.”

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ld.CIT(A). Thus, these grounds of appeal raised by the revenue are dismissed. 55. Ground Nos. 5 to 8 relating to addition in respect of interest paid to the members of the cooperative bank under section 40A(i)(a) of the Act. 56. In the assessment order, the Assessing Officer has noticed that the assessee paid interest of Rs. 10,000/- and above to the various depositors, total amount of which computed, during the year was Rs. 4,13,56,451/-. The assessee has not deducted TDS on such interest payments. The Assessing Officer called upon the assessee to explain as to why the provisions of section 40(a)(ia) be not made applicable to the above interest payments. In response, the assessee has submitted that no deduction of TDS on interest accrued or paid to the members of the co-operative society on the deposits was required as per section 194(3)(v) as it was clearly mentioned that the provisions of section 194(1) shall not apply to such income credited or paid by a cooperative society. The Assessing Officer has considered the explanation of the assessee and observed that a plain reading of section 194(3)(i)(b) clearly mandates that the requirement to deduct TDS and therefore the claim of the assessee is covered by exemption

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under section 194A(3)(v) was rejected and accordingly addition was made. 57. On appeal, ld. CIT(A) has considered the order of the Tribunal in the case of Visakhapatnam Cooperative Bank for the Assessment Year 2007-08 in ITA No. 5 & 19/VIZ/2011 dated 29/08/2011 and also CBDT Circular No. 9/282 dated 11/09/2002 and directed the Assessing Officer to delete the disallowance. The relevant portion of the order is extracted as under:- “5.6 I have considered the submissions made in this regard. The issue to be resolved is whether the interest paid to members exceeding Rs.10,000/- by the assessee, a co-operative bank would not attract liability to TDS in view of the exemption available in Sec.194A(3)(v) of the I.T.Act. The Hon'ble ITAT, Visakhapatnam, in the case of The Visakhapatnam Cooperative Bank Ltd. for the Asst. Yr. 2007-08 in ITA Nos. 5 & 19/Vizag/2011, dated 29.8.2011, held that the exemption u/s.194A(3)(v) would be available to the assessee and accordingly deleted the disallowance made u/s.40(a)(ia). The same issue again arose in the case of The Visakhapatnam Co- operative Bank Ltd., and was resolved in favour of the bank holding that the assessee would be entitled to exemption from TDS as per Sec.194A(3)(v) of the Act for A.Ys. 2008-09, 2009-10 & 2010-11 by the Hon'ble ITAT vide its order in ITA Nos. 444&445, 449, 450/Vizag/2012 & ITA No.726/2013 & ITA Nos. 2 & 38/Vizag/2014 dated 30.9.2016. In the light of the decision of the Ld.CIT(Appeals) in the assessee's case for A.Y. 2008-09, the clarification given by CBDT vide Circular No.9/2002 dated 11.9.2002 and the decisions rendered by the Hon'ble ITAT in the case of Visakhapatnam Cooperative Bank for A.Ys. 2007-08 to 2010-11 (in ITA Nos.5&9/Vizag/2011 dated 29.8.2011; ITA Nos. 444 & 445, 449, 450/ Vizag/2012 & ITA No.726/2013 & ITA Nos. 2 & 38/Vizag/2014 dated 30.9.2016), it is held that impugned disallowance is not justified and the AO is directed to delete the disallowance for A.Ys. 2012-13.”

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35 ITA No.299, 300 & 326/NAG/2017 (The Kanaka Mahalakshmi Co-op Bank Ltd.)

claim of the assessee. The Ld. CIT(A) initially confirmed the order of the A.O. Subsequently, the assessee has filed a rectification u/s 154 of the Act dated 14.12.2013 and submitted that the very same issue has been considered by the CIT(A) as well as ITAT for earlier years and decided in favour of the assessee. The Ld. CIT(A) has considered the submissions of the assessee and directed the A.O. to delete the addition by observing as under: 5.2 I have considered the submissions. The issue considered in the above appellate order was whether the assessee, a cooperative bank is required to effect TDS on payment of interest made to its members, when the amounts exceed Rs.10,000/-. A view was taken that in the above order dtd.22.10.2013 that if the interest amount exceeds Rs.10,000/- then the appellant is required to deduct TDS even if the payment was made to the members. Such a view was taken with reference to provision contained in section 194A(3)(i)(b) and it was held that section 194A(3)(i)(b) would prevail over section 194A(3)(v) of the Act. Such a view was taken without considering the clarification given in the CBDT circular No.9 of 2002 dtd.11.09.2002. The relevant clarification in the circular reads as under: Under section 194A of the Income-tax Act, 1961, tax is deductible at source from any payment of income by way of interest other than income by way of interest on securities. Clause(v) of sub-section (3) of section 194A exempts such income credited or paid by a cooperative society to a member thereof from the requirement of TDS. On the other hand, clause (viia) of sub-section(3) of section 194A exempts from the requirement of TDS such income credited or paid in respect of deposits (other than time-deposits made on or after 1st July, 1995) with a cooperative society engaged in carrying on the business of banking. Representations have been received in the Board seeking clarification as to whether a member of a cooperative bank may receive without TDS interest on time deposit made with the cooperative bank on or after 1st July, 1995. The Board has considered the matter and it is clarified that a member of a cooperative bank shall receive interest on both time deposits and deposits other than time deposits with such cooperative bank without TDS under section 194A by virtue of the exemption granted vide clause (v) of sub-section (3)

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of the said section. The provisions of clause (vila) of the said sub-section are applicable only in case of a non-member depositor of the cooperative bank, who shall receive interest only on deposits other than time deposits made on or after 1st July, 1995 without TDs under section 194A. (emphasis underlined) Thus the circular clarifies that provisions of section 194A(3)(v) would prevail. 5.3 In view of the clarification given in the circular the view taken in the appellate order dtd.22.10.2013 suffers from mistake and, as such a view was taken without consideration of the above referred CBDT circular clarifying the position of law, it would amount to mistake apparent from record and rectifiable u/s.154 of the I.T. Act. Further, it is noted that the assessee had relied on the CBDT circular No.9/2002 dtd.11.09.2002 and the decision of Bombay High Court in the case of Jalgaon District Central Co-operative Bank, in its appeal for A.Y.2007-08, which has been discussed and considered by the learned CIT(A) while deciding the assessee's appeal for A.Y.2007-08. The relevant extract of the CIT(A) order has been referred and discussed in the Hon'ble ITAT's order for A.Y.2007-08, (copy of which submitted as part of paper-book in the original appeal). Therefore, it cannot be said that this aspect was not considered by the Hon'ble ITAT while passing order in the assessee's appeal for A.Y.2007-08. 5.4 In view of the above discussion, I am convinced that the appellate order dtd.22.10.2013 suffers from mistake apparent from record and the mistake is rectified by substituting the following operative para in the place of the para 6.3, 6.4 & 6.5 of the appellate order dtd.22.10.2013. 6.3 I have considered the submissions made. In view of the clarification given in the CBDT circular No.9/2002, it is held that the assessee is not required to effect TDS on the interest payment made to its members even if it exceeds Rs.10,000/-. The impugned disallowance made in the assessment is not in accordance with the clarification given in the CBDT Circular No.9/2002 and accordingly the AO is directed to delete the impugned

37 ITA No.299, 300 & 326/NAG/2017 (The Kanaka Mahalakshmi Co-op Bank Ltd.)

disallowance made of Rs.5,64,79,087/-. This ground of appeal is allowed in favour of the appellant. 5.5 The appellate order dtd.22.10.2013 in ITA No.0297/12-13 be considered to be modified and rectified accordingly with reference to ground No.3 of the appeal. 44. The Ld. CIT(A) by following his own decision for the assessment year 2007-08 and also order of the Tribunal for the very same year in the rectification order he has deleted the addition made by the A.O. We find no reason to interfere with the order passed by the Ld. CIT(A). This appeal raised by the revenue is dismissed. 63. Respectfully following the decision of the coordinate bench of the Tribunal in the above referred to case, we find no infirmity in the order of the ld. CIT(A). Thus, these grounds of appeal raised by the Revenue are dismissed. 64. Ground Nos. 9 to 11 relate to amortization of premium on Government Securities i.e. HTM. 65. The assessee has claimed an amount of Rs. 2,68,790/- as ‘amortization of premium on Government Securities (HTM)’ in its profit & loss account relating to Assessment Year 2012-13. The Assessing Officer asked the assessee to explain the basis of which claim is made. It was submitted before the Assessing Officer that the premium paid was claimed as expenditure on the basis of amortization of Rs. 2,68,790/- as it was a loss to the assessee bank and further the assessee bank was required to offer as income whenever the securities were sold for more than purchase

38 ITA No.299, 300 & 326/NAG/2017 (The Kanaka Mahalakshmi Co-op Bank Ltd.)

price paid; that the amortization of expenditure is not a contingent liability since it was already incurred and the excess premium paid over fair value of the securities were amortized over a period of time of unexpired period of securities and that the question of contingency does not arise at all. The Assessing Officer has not accepted the explanation of the assessee for the reason that the actual expenditure was not incurred by the assessee and only a provision i.e., a contingent liability was made which may become payable at a future date. Contingent liabilities do not constitute expenditure and cannot be the subject matter of deduction even under the mercantile system of accounting. The assessee claims that the premium amount was actually incurred. However, upon perusal of the assessee’s reply, it becomes clear that it is only contingent in nature. The expenditure which is deductible for income tax purpose is towards a liability actually existing at the time, but setting apart money which might became expenditure on the happening of an event is not an expenditure. For determining whether there is an expenditure, it is necessary to see whether there is an existing liability to pay irretrievably. The expenditure may be allowed in the year in which it is actually accrued or incurred by the assessee. Such provisions are not

39 ITA No.299, 300 & 326/NAG/2017 (The Kanaka Mahalakshmi Co-op Bank Ltd.)

allowable to section 36 or 37 of the Act, hence, the same is disallowed and added to the total income of the assessee. 66. On appeal, ld. CIT(A) by following the CBDT Instruction No. 17/2008, dated 26/11/2008 directed the Assessing Officer to delete the addition. For the sake of convenience, the relevant portion of the order is extracted as under:- “During the appeal hearing, the AR submitted that the assessee is required to invest the government securities, and in pursuance of the same, the assessee had acquired government securities for which it had paid price more than the face value; the excess price paid over the face value was amortized over the maturity period of asset. It was also clarified that these securities were held to maturity and the details relating to securities acquired under HTM along with acquisition and amortization particulars were filed as part paper book. I have perused the details filed and considered the contentions this regard, it is relevant to refer to the CBDT Instruction No. 17/2008, dated 26.11.2008, wherein at para (vii), it is stated: (vii) As per RBI guidelines dated 16th October 2000, the investment portfolio of the banks is required to be classified under three categories viz. Held to Maturity (HTM), Held for Trading (HFT) and Available for Sale (AFS). Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortised over the period remaining to maturity. In the case of HFT and AFS securities forming stock in trade of the bank, the depreciation / appreciation is to be aggregated scrip wise and only net depreciation, if any, is required to be provided for in the accounts. The latest guidelines of the RBI may be referred to for allowing any such claims. 6.3 In view of the CBDT Instruction in respect of the investments classified under HTM category, the premium should be amortized over the period remaining to maturity. From the details filed it is seen that the securities were held under HTM category, and the premium paid over the cost of acquisition ave been amortized over the period of maturity

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and claimed as allowance. I find that the assessee's claim is in accordance with the above referred CBDT Instruction. Therefore, the AO is directed to allow this claim & delete the impugned addition made for A.Y. 2012-13 & AY 2013-14.”

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was already incurred and the excess premium paid over fair value of the securities were amortized over a period of time of unexpired period of securities and the same has to be allowed. However, the Assessing Officer is of the view that it is only a contingent liability, which may become payable at a future date, hence, disallowed the same. On appeal, ld. CIT(A) by following the CBDT Instruction (supra) has observed that in view of the CBDT instruction in respect of investments classified under HMT category, the premium should be amortized over the period of remaining to maturity. From the details filed, it is seen that the securities were held under HTM category and the premium paid over the cost of acquisition have been amortized over a period of maturity and claimed as allowance. He found that assessee’s claim is in accordance with the CBDT Instruction and directed the Assessing Officer to allow this claim and delete the addition. The ld. Departmental Representative has not pointed out any error in the order passed by the ld. CIT(A), which is neither contrary to any provision of law nor CBDT Circular. We have also considered CBDT circular and find that ld. CIT(A) by following the Circular No. 17/2008, dated 26/11/2008 directed the Assessing Officer to delete the addition. We find no infirmity in the order of the

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ld.CIT(A). Thus, this ground of appeal raised by the Revenue is dismissed.

ITA No. 327/VIZ/2017

43 ITA No.299, 300 & 326/NAG/2017 (The Kanaka Mahalakshmi Co-op Bank Ltd.)

Sd/- sd/- (D.S. SUNDER SINGH) (V. DURGA RAO) Accountant Member Judicial Member Dated : 05th September, 2018. vr/- Copy to: 1. The Assessee. 2. The Revenue. 3. The CIT 4. The CIT(A) 5. The D.R. 6. Guard file. By order

(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Visakhapatnam.