M/S KANYAKAPARAMESHWARI CO-OPERATIVE BANK LIMITED ,MYSORE vs. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-1(1), MYSORE

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER

ITA No.1481/Bang/2018 Assessment Year : 2012-13 M/s. Kanyakaparameshwari Vs. The Assistant Commissioner of Co-operative Bank Limited, Income-Tax, K. R. Circle, Circle – 1[1], Mysuru – 570 001. Mysuru. PAN : AACAS 1220 M APPELLANT RESPONDENT

Assessee by : Shri. V. Srinivasan, Advocate Revenue by : Shri. R. N. Siddappajji, Addl. CIT

Date of hearing : 19.07.2019 Date of Pronouncement : 28.08.2019

O R D E R Per Jason P. Boaz, A.M. This appeal by the assessee is directed against the order of CIT(A), Mysuru, dated 28.02.2018, for Assessment Year 2012-13.

2.1 The assessee, a Co-operative Society, carrying on the business of banking, filed its return of income for Assessment Year 2012-13 on 27.09.2012 declaring income of Rs.2,00,48,830/-. The case was taken up for scrutiny and the assessment was concluded under section 143(3) of the Income Tax Act, 1961

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(in short ‘the Act’) vide order dated 25.03.2015, wherein the assessee’s income was determined at Rs.3,44,33,194/- in view of the following additions / disallowances:-

(i) Disallowance under section 40(a)(ia) - Rs.1,59,59,667/

(ii) Disallowance of interest accrued on standard assets - Rs. 19,10,753/-

(iii) Interest received in earlier year excluded

2.2 Aggrieved by the order of assessment dated 25.03.2015 for Assessment Year 2012-13, the assessee filed an appeal before the CIT(A), Mysuru raising various grounds / additional grounds. The CIT(A) dismissed the assessee’s appeal vide order dated 28.02.2018.

3.1 The assessee, being aggrieved by the order of the CIT(A), Mysuru, dated 28.02.2018 for Assessment Year 2012-13, has preferred this appeal wherein it has raised the following grounds:-

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3.2 The assessee has also raised the following additional grounds:-

3.3 In the course of appellate proceedings, the learned AR for the assessee filed paper book (pages 1 to 69) containing various documents and copies of some judicial pronouncements. The learned DR for Revenue has also put forth submissions / cited a judicial pronouncement. The rival contentions / submissions put forth have been duly considered.

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5.1 In the course of hearings, the learned AR of the assessee submitted that ground Nos.3, 3.1 and 3.2 (supra) and Additional Ground Nos.1 to 3 (supra) are not being pressed by the assessee. In these circumstances, ground Nos. 3, 3.1 and 3.2 and Additional Ground Nos.1 to 3 are rendered infructuous and are accordingly dismissed as not pressed.

6.1 In this ground (supra), the assessee denies itself liable to be charged interest u/s 234B and 234C of the Act. The charging of interest is consequential and mandatory and the AO has no discretion in the matter. This proposition has been upheld by the Hon’ble Apex Court in the case of Anjum H. Ghaswala (252 ITR 1) (SC) and we, therefore, uphold the action of the AO in charging the assessee the aforesaid interest u/s 234B and 234C of the Act. The AO is, however, directed to re-compute the interest chargeable u/s 234B and 234C of the Act, if any, while giving effect of this order.

7.1 In support of the grounds raised (supra), the learned AR of the assessee submitted that the disallowance under section 40(a)(ia) of the Act made by the Assessing Officer (AO) was erroneous because of the specific exemption available to the assessee, a Co-operative Society, under section 194A(V) of the Act and as such the assessee was not required to deduct tax at source. It was also submitted that the Amendment to the said section was w.e.f. 01.06.2015 and

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since it is prospective in nature was not applicable to the Assessment Year 2012- 13; which is the year under consideration for the present appeal. In this regard, the learned AR relied on the following judicial pronouncements of the Hon’ble Karnataka High Court; which he contended covered the issue squarely in favour of the assessee:-

(1) Jamkhandi Urban Co-operative Bank Vs. ACIT in ITA No.100004/2015 dated 16.12.2015;

(2) Shri Siddeshwar Co-operative Bank Ltd., (2016) 71 taxmann.com 126 (Karnataka).

7.2 Per contra, the learned DR for Revenue placed strong reliance on the orders of the authorities below; submitting that the CIT(A) had rejected the assessee’s claim on the ground that the assessee had not been able to adduce factual evidence to prove its claim. The learned DR submits that in view of the above, the assessee’s ground on this issue be dismissed.

7.3 In rejoinder, the learned AR submitted that the case of the AO was not that the assessee had not furnished the requisite evidence to support its claim. The AO’s case was that the provisions of section 194A(3)(v) of the Act were not applicable to the assessee; and that the AO arrived at the disallowance only on the basis of the submissions and details furnished by the assessee. According to the learned AR, the conclusion of both the AO and the CIT(A) was erroneous and the issue being squarely covered by the decisions of the Hon’ble jurisdictional High Court (supra), the disallowance under section 40(a)(ia) of the Act needs to be deleted.

7.4.1 We have considered the rival submissions and perused the material on record; including the judicial pronouncements cited. From a perusal of the

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record, it emerges that in the course of assessment proceedings, the AO required the assessee to explain the reasons for non-deduction of tax at source under section 194A of the Act in respect of interest paid by it to its Members on Fixed Deposits maintained by the Members. The assessee submitted that in terms of section 194A(3)(v) of the Act, applicable to Co-operative Societies, it is not required to deduct TDS on interest paid or credited by it to its Members. In support of this proposition, the assessee placed reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. The Rajajinagar Co- operative Bank (ITA No.86 of 2006). The AO, however, did not agree with the assessee’s contentions; holding that the provisions of section 194A(3)(i)(b) of the Act are applicable to the assessee as it is a ‘Co-operative Bank’ and not a ‘Co-operative Society’ to which the provisions of section 195A(3)(v) of the Act are applicable. According to the AO, section 194A(3)(i)(b) of the Act is a specific provision applicable to Co-operative Societies engaged in the business of banking and therefore it overrides the general provision of section 194(3)(V) of the Act applicable to Co-operative Societies. The AO also sought to distinguish the decision of the Hon’ble Karnataka High Court in the case of The Rajajinagar Co-operative Bank (supra) on the ground that the Hon’ble High Court has not taken cognizance of section 194A(3)(i)(b) of the Act and that the observation of the Hon’ble Court was not a ratio, as it was rendered while passing a decision in the context of penalty under section 271(1)(c) of the Act. The CIT(A) upheld the disallowance made by the AO under section 40(a)(ia) of the Act by observing that no factual documentary evidence was adduced by the assessee to support the claim that interest payments of Rs.1,59,59,667/- made by the assessee to its members on Fixed Deposits maintained with it was exempt from deduction of TDS thereon under section 195A(3)(V) of the Act.

7.4.2 In our considered view, an appraisal of the record shows that the contentions of the CIT(A), that no evidence was produced by the assessee to

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buttress its claim that it was exempt from making TDS on payments / credits of interest to its Members on their Fixed Deposits maintained by it in view of the provisions of section 195A(3)(V) of the Act; is factually incorrect. We observe that at para 2.18 of the impugned order of assessment, the AO has specifically mentioned that the assessee was asked to quantify the interest paid over Rs.10,000/- under various categories of deposits over and above Rs.10,000/- and the assessee has furnished the same. In fact, it appears that it is from the very details furnished by the assessee that the AO has quantified the interest on time deposits as Rs.1,59,59,667/- and held the same liable for TDS. Therefore, the finding rendered by the CIT(A) is factually incorrect.

7.4.3 As regards the applicability of the provisions of section 195A(3)(i(b) of the Act; this issue has been decided by the Hon’ble Karnataka High Court in its judgment in the case of CIT Vs. Jamkhandi Urban Co-operative Bank in ITA No.1004 of 2015, wherein it held that the Amendment made to section 194(3)(V) of the Act, that the exemption is not applicable to payment of interest on term deposits to Members only w.e.f. 01.06.2015. In the aforesaid case of the Hon’ble Karnataka High Court (supra), the following was the substantial question of law before it:

“1 Whether the Tribunal is right in concluding that the provisions of section 194A(3)(V) of the Income Tax Act, 1961 applies to all Co-operative Societies including Co-operative Society engaged in the business of banking?” The relevant portion of the judgment where the aforesaid substantial question of law was answered at Para 4 of the Hon’ble High Court’s order is extracted hereunder:-

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7.4.4 Respectfully following the decisions of the Hon’ble Karnataka High Court in the case of CIT Vs. The Jamkhandi Urban Co-operative Bank (supra) and the case of Shri Siddeshwara Co-operative Bank Ltd., (2016) 71 taxmann.com 126 (Karnataka); wherein also the Hon’ble Court had held that the Amendment to section 194A(3)(V) operates prospectively w.e.f. 01.06.2015; we hold that the assessee, being a Co-operative Bank, is not required to deduct tax at source from the payment of interest on terms deposits to its Members in the year under consideration i.e., Assessment Year 2012-13. We consequently delete the disallowance under section 40(a)(ia) of the Act made by the AO and accordingly allow the ground No.2 and 2.1 raised by the assessee. We hold and direct accordingly.

8.1 Before us, the learned AR fairly conceded that the issue raised in these grounds are covered against the assessee by the decision of the Hon’ble Apex Court in the case of Vellore Electric Corporation Ltd., Vs. CIT (1997) 222 ITR 557 (SC). In this regard, the learned AR drew the attention of the following observations of the Hon’ble Apex Court at paras 9 and 10 thereof which are extracted hereunder:

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8.2 Respectfully following the decision of the Hon’ble Apex Court in the case of Vellore Electric Corporation Ltd., in (1997) 222 ITR 557 (SC), we hold that the assessee is not entitled to claim deduction in respect of transfer to reserve fund. Consequently, ground No.4 and 4.1 of assessee’s appeal is dismissed.

9.1 The learned AR of the assessee was heard in support of the grounds raised on this issue (supra). In this regard, the learned AR submitted that in the course of assessment proceedings, the assessee had made a plea for deduction of an amount of Rs.1,24,330/-; being the amount transferred to the Co-operative Education Fund from out of the profits of the assessee or in the alternate, allow the same as a deduction under section 37 of the Act. On appeal, the CIT(A) in the impugned order has also dismissed the assessee’s claim; raised before him in ground Nos.18 and 19; on the ground that the assessee was unable to establish that the same was incurred wholly and exclusively for the assessee’s business. In this regard, the learned AR submitted that the issue was covered in favour of the assessee by the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Pandarpura Sahakara Sakkare Kharkhane Ltd., (1998) 174 ITR 475 (KAR).

9.2 Per contra, the learned DR for Revenue supported the orders of the authorities below on this issue and placed reliance on the decision of the Co- ordinate Bench of this Tribunal in the case of Tumkur DCC Bank Ltd., in ITA No.1532 and 1533/Bang/2016 dated 31.01.2019.

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9.3.1 We have considered the rival contentions and perused the material on record; including the judicial pronouncements cited. We have carefully perused the decisions cited by both parties (supra). The issue before the Hon’ble Karnataka High Court was directly on the point of whether the contribution to Co-operative Education Fund by a society governed by the Karnataka Societies Registration Act, was allowable. The issue before the Hon’ble Apex Court in the case of Vellore Electric Corporation Ltd., (supra) was on the issue of allowability of amounts transferred to contingency reserve, development reserve and tariff and dividend control reserve out of profits of an electric supply corporation under section 37(1) of the Act. The Apex Court came to the conclusion that the amounts appropriated to these reserves were available in the hands of the Electricity Corporation in one or other form and therefore, an appropriation of amounts towards these reserves ought not to be allowed as a deduction under section 37(1) of the Act.

9.3.2 In the case of Pandavpura Sahakara Sakkare Kharkane Ltd., (supra), the Hon’ble High Court of Karnataka, while deciding on the allowability of contributions to the Co-operative Education Fund considered them to be akin to consumer rebate reserve and following the parity of the decision of the Hon’ble Apex Court in the case of Poona Electric Supply Company ltd., Vs. CIT (1965) 57 ITR 521 (SC), upheld its allowability. We find that the ratio of the decision of the Hon’ble Apex Court in the case of Poona Electric Supply Company Lt., (supra) was upheld by the Hon’ble Apex Court in the case of Vellore Electric Corporation Ltd., (1997) (222 ITR 557) (SC); relied on by the Co-ordinate Bench in the case of Tumkur DCC Bank Ltd., (supra).

9.3.3 In the case of Pandavpura Sahakara Sakkare Kharkane Ltd., (supra), the question before the Hon’ble Court was:-

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“Whether on facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs.9,431/- paid by the assessee to the Co-operative Education Fund was allowable as a deduction in computing the assessable income?”

In this regard, the Hon’ble Karnataka High Court went on to hold as under:-

9.3.4 In the above decision of the Hon’ble Karnataka High Court in the case of Pandavapura Sahakara Sakkare Kharkane Ltd., (supra), while deciding on the allowability of contributions to the Co-operative Education Fund, the Hon’ble Court considered them akin to consumer rebate reserve and, following

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the decision of the Hon’ble Apex Court in the case of Poona Electric Supply Company Ltd., (supra), upheld its allowability. The ratio of the decision in the case of Poona Electricity Supply Company Ltd., (supra) was upheld by the Hon’ble Apex Court in the case of Vellore Electric Corporation Ltd., (supra), relied on by the Co-ordinate Bench of this Tribunal. We are, therefore, of the view that the decision of the Hon’ble Karnataka High Court in the case of Pandavapura Sahakara Sakkare Karkhane Ltd., (supra) would continue to hold the ground and is to be followed and respectfully following the same, allow the grounds 5 and 5.1 raised by the assessee.

Pronounced in the open court on 28th August, 2019.

Sd/- Sd/- (N. V. VASUDEVAN) (JASON P. BOAZ) VICE PRESIDENT Accountant Member Bangalore. Dated: 28th August, 2019. /NS/* Copy to:

Assistant Registrar, ITAT, Bangalore.