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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SHRI GEORGE GEORGE K.
Per Chandra Poojari, Accountant Member
This appeal by the assessee is directed against the order dated 20.6.2018 of the CIT(Appeals)-7, Bengaluru for the assessment year 2015-16.
The first ground is with regard to granting of deduction u/s. 80P(4) of the Income-tax Act, 1961 [the Act]. At the time of hearing, this ground was not pressed and accordingly the same is dismissed.
The second ground is regarding disallowance of contribution to Education Fund of Rs.7,04,080. The facts of the issue are that the assessee made contribution of an amount of Rs.7,04,080 towards co- operative education fund and the same was claimed as deduction u/s. 37 of the Act. According to the AO, contribution to education fund is nothing but appropriation of profits and appropriating that amount out of profits cannot be allowed as deduction u/s. 37.
Now the contention of the ld. AR is that co-operative education fund is required to be paid mandatorily by all co-operative societies and this issue was considered by the Tribunal in the case of Karnataka State Co- operative Apex Bank Ltd. v. DCIT in . Contrary to this, the ld. DR relied on the orders of the lower authorities that it is appropriation of profits and deduction cannot be allowed.
We have heard both the parties and perused the material on record. Similar issue was considered by the Hon’ble High Court of Karnataka in the case of CIT v. Pandavapura Sahakara Sakkare Karkhane Ltd., 174 ITR 175 (Karn) wherein it was held as under:-
“The scheme of the Societies Act is as follows: Every co- operative society (other than a co-operative society whose net profit does not exceed Rs. 500) which declares payment of a dividend to its members on the paid-up share capital at a rate of 2% or more shall contribute towards the Co-operative Education Fund at such rates not exceeding 1½% of the net profits. Rule 20 of the rules provides that the payment has to be ascertained by reference to the rate of dividend. An analysis of section 57 of the Societies Act and rule 20 of the Societies Rules will disclose that the condition for payment is that if the profits of a society exceed Rs. 500, and a declaration of payment of dividend to the members on paid-up share capital at the rate of 2% is made, then the society is under an obligation to contribute towards the Co- operative Education Fund at a rate not exceeding 1½% of the net profits. The rate of contribution depends upon the rate of dividend. The language of section 57(4)(a) of the Societies Act makes it clear that though the contribution is to be made with reference to the profits, it is not out of profits, and the rate is with reference to the rate of dividend. What is provided in the section is an obligation to contribute to the Cooperative Education Fund under certain contingencies and is a statutory liability which is an overriding charge on the income or profits of the society. In somewhat similar circumstances, in Poona Electric Supply Co. Ltd. v. CIT[1965] 57 ITR 521, the Supreme Court has held that the assessee is a commercial undertaking carrying on the business of supply of electricity in accordance with the provisions of the Electricity (Supply) Act. Certain amounts were credited by it to "the consumers' benefit reserve account" which was part of the excess amount paid to it and reserved to be returned to the consumers. The Supreme Court held that such amounts do not form part of the real profits of the assessee because such amounts which were paid to the company even at source were impressed with the character or obligation that the same shall be paid or contributed to the said account. In the present case also, the contribution towards the Co-operative Education Fund is not paid out of profits, but the rate alone is fixed with reference to profits and this obligation was impressed with the character of an overriding charge on the total amount received by it which were ultimately to be computed as profits. Therefore, when the assessee makes a payment which is computed with reference to profits, the payment represents a diversion of profits at source, though computed later. When the Act by section 4 charges all income of a person to income-tax, it is what reaches the person as income, which is brought to tax. Here, by charging the whole resources of the society with a specific payment to the Co- operative Education Fund, it has, to that extent, diverted its income from it and has directed it to the fund; to that extent, what the society receives for the payment to the fund is not its income. It is not a case of application by the assessee of part of its income in a particular way, it is rather an allocation of its receipts before it becomes income in its hands. In this context a reference to two cases reported in CIT v. South Arcot District Co-operative Supply and Marketing Society Ltd.[1981] 127 ITR 467 (Mad) and Keshkal Co-operative Marketing Society Ltd. v. CIT[1987] 165 ITR 437 (MP) is necessary. In the former case, the Madras High Court took the view that the statutory contribution of a portion of its profit to the education fund does not amount to diversion by overriding title and is only an application of income not deductible from total income, whereas, in the latter case, the Madhya Pradesh High Court took the view that the reserve fund created under statutory regulation at the instance of the Registrar of Co-operative Societies is an amount transferred to the reserve fund and diverted at source by overriding liability and the amount transferred to the reserve fund is liable for deduction. The Madras High Court took the view, on the language of section 62 of the Madras Co-operative Societies Act, 1961, which provided that the net profit of the co-operative society shall be appropriated towards contribution to the education fund, while the Karnataka Act does not contain any such provision. It does not say that the appropriation should be out of the profits, but creates a liability to pay with reference to, or in relation to, profits. Therefore, there is a charge even at the source on receipt to the co-operative societies. Hence, the decision of the Madras High Court is distinguishable. The Madhya Pradesh High Court has held that the payment to the reserve fund was only an obligation created under the statute and the society was under an obligation to invest or utilise the same at the instance of the Registrar of Co-operative Societies. Applying the ratio of the Madhya Pradesh High Court decision and the decisions referred to earlier of the Supreme Court, we hold that the payment or contribution by the co- operative society in the present case is a diversion of profits at source on account of overriding charge created under the Act which is a statutory obligation on the society. Hence, such payment is liable for deduction. Therefore, we answer the question referred to us in the affirmative and against the Department.”
Being so, this issue is covered by the judgment of the Hon’ble High Court of Karnataka cited supra and respectfully following the same, we allow this ground taken by the assessee.
The next ground is with respect to disallowance of Rs.6,59,000 towards payment of scholarship to children of members. The assessee made payment of Rs.6,59,000 towards scholarship to children of members and towards death relief of members. The same was claimed as deduction u/s. 37 while computing income of the assessee. However, the AO disallowed it on the reason that it is appropriation of profit. The CIT(Appeals) confirmed the order of the AO. Against this, the assessee is in appeal before us.
We have heard both the parties and perused the material on record on the issue. The amount spent on scholarship to children of members and members death relief fund was incurred by the assessee for promoting goodwill amongst the members and to lure them to continue their support to the assessee society. If this has been given to its members, it could not be said that the assessee was not someone as a prudent businessman. This gesture was continued by the society to attract members confidence and loyalty towards the assessee society in the prevailing competition in the business so that the members place their deposits with the assessee bank and also continue to borrow funds from the assessee bank which will result in improving the business of the assessee thereby the profits also. We also notice that the amount spent by the assessee towards scholarship and contribution members death relief is very nominal, which will surely improve the goodwill of the assessee bank amongst the members and it cannot be said that it is not necessary for the purpose of business of the assessee. In such circumstances, this expenditure has to be allowed u/s. 37 of the Act. More so, similar issue was considered by the Ahmedabad Bench of the Tribunal in the case of The Kalupur Commercial Co-op Bank Ltd. v. ACIT, 46 CCH 658 (Ahd. Trib.) and the claim of the assessee was allowed. Accordingly, we allow this ground of the assessee.
The ld. DR, however, referred to the decision of this Bench in the case of ACIT v. Tumkur Veerashaiva Co-Operative Bank Ltd. in dated 16.10.2015 wherein it was held as follows:-
“9. We have heard the Ld. DR, perused the material available on record and gone through the orders of the authorities below. Admittedly, the assessee claimed this expenditure out of the funds earmarked from the profits appropriated. It is an admitted fact that this amount is not claimed by debiting to its income and expenditure statement. The assessee claimed this deduction by making adjustment to its net profit in the statement of total income to arrive at income from business. The AO was of the view that this amount represents the appropriation of profits and spent from the earmarked funds therefore, should not be allowed as deduction from the business income. The assessee contention is that this amount was incurred exclusively for the purpose of business therefore, should be allowed as deduction while computing the business profits. We have gone through the assessment order, facts of the case, grounds of appeal before the CIT(A) and the order of the CIT(A). The assessee right from the beginning contended that this amounts represents the amount spent out of the earmarked funds and for the benefit of the members. But, the findings of fact by the CIT(A) states that these amounts are contributed for the welfare of the employees therefore, deleted the additions made by the Assessing Officer. No doubt, if assessee incurred these amounts towards welfare of the employees, it should be allowed as business expenditure incurred exclusively for the business, because it definitely enhance the productivity of the employees and has a direct nexus between earning of income. Similarly, if these amounts are incurred out of the earmarked funds for the welfare of the members then, the same should be deducted from the respective fund account and cannot be allowed as deduction from the business profits, because these expenditure are in the nature of personal expenditures of members of the society. Though, the assessee claims that this is exclusively incurred for the business, but the amounts incurred for the welfare of the members but not to the staff of the society.
10. In the instant case, from the facts it is clearly shows that the amount spent out of members benevolent fund and members death relief fund are spent for the welfare of the members. It is also clear from the facts that these funds are created out of appropriation of profits. The Karnataka Co-Operative Society Act, 1959 mandates the Societies to appropriate certain percentage of its profit before declaration of dividends to its members but, the said two funds are not covered under the said act. Therefore, it is amply clear that the said funds are created to achieve the objects of the society through the bylaws for the welfare of the members out of the profits of the society. The Society is having liberty to create any funds for the welfare of its members within the frame work of by-laws but, the Income-tax Act does not provide for any deduction towards these expenditures under specific provisions. Further, it cannot be claimed under general category by virtue of section 37, because it is not incurred exclusively for the purpose of business and also there is an element of personal in nature, because the benefit was given to members being owners of the society. It is also admitted fact that these deductions are claimed in the statement of total income without routed through profit and loss statement of the assessee. If this amounts are incurred wholly and exclusively for the business purpose, it could have been claimed in the profit and loss account by debiting to the concerned expenditure account. Therefore, we are of the opinion that, the amount spent by the assessee for the welfare of its members out of the earmarked funds cannot be deductible as expenditure wholly and exclusively incurred for the purpose of business. From the findings of the facts, the CIT(A) did not appreciated the facts correctly while deleting the impugned additions. There is difference of findings of facts in the orders of the CIT(A). The assessee contends that the amounts spent out of members benevolent fund and members death relief fund but, the CIT(A) states that the amount contributed to these funds are for the welfare of the employees. Thus, there is clear difference between findings of facts by both the authorities, which needs to be relooked by the CIT(A). Therefore, we remit the issue back to the file of the CIT(A) in the light of the discussion above and direct the CIT(A) to consider the issue after affording an opportunity of hearing to the parties.”
10. The Tribunal in the above decision has only remitted the issue to the CIT(Appeals) for reconsideration, hence there is no ratio decendi. Being so, the decision of the Ahmedabad Bench of the Tribunal is followed in upholding the claim of the assessee.
In the result, the appeal by the assessee is allowed.
Pronounced in the open court on this 22nd day of November, 2021.