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1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 5TH DAY OF JULY 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR.JUSTICE HEMANT CHANDANGOUDAR I.T.A. NO.516 OF 2016 BETWEEN: 1. PR. COMMISSIONER OF
INCOME TAX-5
BMTC COMPLEX
KORMANGALA, BANGALORE. 2. THE DEPUTY
COMMISSIONER OF INCOME TAX
CIRCLE 3(1), BENGALURU.
... APPELLANTS (BY SRI. JEEVAN J., NEERALGI AND SRI. E.I. SANMATHI, ADV.) AND: M/S. THE KARNATAKA STATE CO-OPERATIVE APEX BANK LTD., 'UTHUNGA', NO.1 PMK ROAD CHAMARAJPET BANGALORE -560 018
... RESPONDENT (BY SRI.M. LAVA, ADVOCATE FOR RESPONDENT)
2 THIS I.T.A. IS FILED UNDER SECTION 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 29.02.2016 PASSED IN ITA NO.1372/BANG/2014, FOR THE ASSESSMENT YEAR 2007-2008, PRAYING TO:
I. DECIDE THE FOREGOING QUESTION OF LAW AND/ OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT. II. TO SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN
ITA NO.1372/BANG/2014-03 DATED 29.02.2016 AND CONFIRM THE ORDER PASSED BY THE ITAC, 'C' BENCH, BENGALURU. THIS I.T.A. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT
This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act' for short) has been filed by the revenue against the order dated 29.02.2016 passed by the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal' for short). The subject matter of the appeal pertains to Assessment Year 2007-08. The appeal was admitted by a Bench of this Court on the following substantial question of law: " Whether, on the facts and in circumstances of the case, the Tribunal is right in law in directing the assessing authority to allow the amount expended on the funds of Rs.10,86,43,785/- as deduction while computing
3 income of the assessee co-operative bank even when said expenditure do not come under section 37(1) of the I.A. Act and that the purported expenditure is only application of income and that there is no diversion of income by overriding title"?
Facts leading to filing of this appeal briefly stated are that the assessee is a Co-operative Society registered under the provisions of the Karnataka Co-operative Society Act, 1959 and the Banking Regulation Act, 1939. The assessee is engaged in the business of banking. The assessee filed return of income for the Assessment Year 2007-08 on 31.10.2007 and declared the income of Rs.40,77,27,150/-. The return of income was processed under Section 43(1) of the Act. There was a scrutiny assessment against the original return of income. The proceeding under Section 147 of the Act were initiated and necessary notice was issued to the assessee. The assessee filed return of income in response to the notice under Section 148 of the Act and declared the income of Rs.36,19,77,100/-. The Assessing Officer, by an order dated 30.03.2013, assessed the total
4 income of the assessee at Rs.51,71,70,670/- and held that the following funds are not allowable as deduction: a) Common Good Fund Rs. 25,00,000/- b) Special Assistance Fund Rs.5,00,00,000/- c) Payment to PACS/DCCB Fund Rs.5,27,50,000/- d) Rural Farmers Socio Economic Development Fund Rs. 33,93,782/-
The assessee thereupon filed an appeal. The Commissioner of Income Tax (Appeals), by an order dated 31.07.2014, partly allowed the appeal. The revenue did not file any appeal against which relief was granted by the Commissioner of Income Tax (Appeals). The assessee thereupon filed an appeal before the Tribunal. The Tribunal, by an order dated 29.02.2016, has partly allowed the appeal and has granted relief to the assessee in respect of payment of TACS / DCCB fund. In the aforesaid factual background, this appeal has been filed.
Learned counsel for the revenue submitted that appropriation made from the net profits by the assessee cannot be allowed as expenditure under Section 37 of the
5 Act and purported expenditure is only application of income and there is no diversion of income by overriding title. It ought to have been appreciated by the tribunal that though the payments made by the assessee may be authorized under the bye-laws, some of the payments made were a statutory liability and therefore, cannot be allowed as expenditure. Learned counsel for the revenue has also referred to Section 57 of the Karnataka Co-operative Societies Act, 1959 (hereinafter referred to as 'the Act' for short), which provides for the method of disposal of net profits. In support of aforesaid submissions, reliance has been placed on decisions in 'ASSOCIATED POWER CO. LTD. VS. COMMISSIONER OF INCOME-TAX', (1996) 84 TAXMAN 355 (SC), 'COMMISSIONER OF INCOME-TAX VS. JODHPUR CO-OPERATIVE MARKETING SOCIETY', (2004) 140 TAXMAN 541 (RAJASTHAN), 'C.E.S.C. LTD. VS. DEPUTY COMMISSIONERO F INCOME-TAX', (2004) 27- ITR 383 (CAL.).
On the other hand, learned Senior counsel for the assessee submitted that contributions made by the assessee
6 towards various funds in accordance with the bye-laws of the assessee which is a co-operative bank cannot be held as distribution of profits as appropriation of net profit can only be done in an Annual General Meeting of the co-operative society as required under Section 27 of the Act. It is also submitted that expenditure was incurred exclusively for the business purpose of business of the assessee and same is in accordance with the bye-laws of the assessee. It is also urged that similar issue pertaining to Assessment Year 2009- 10 has been decided in favour of the assessee by a division bench of this court in the case of assessee itself viz., KARNATAKA STATE CO-OPERATIVE APEX BANK LTD. VS. DCIT in I.T.A.No.275/2015 dated 01.03.2021 in respect of Primary Agricultural Cooperative Societies (PAC) and District Central Co-operative Bank (DCCB) fund and therefore, the issue is covered in favour of the assessee. In support of aforesaid submissions, reliance has been placed on decisions in 'KARNTAKA STATE CO-OPERATIVE APEX BANK LTD. VS. DCIT IN ITA NO.275 OF 2015 DATED 01.03.2021 (KAR.), 'MYSORE KIRLOSKAR LTD. VS. CIT', (1987) 166 ITR 836 (KARNATAKA), 'SASSOON J.
7 DAVID AND CO.P. LTD. VS. CIT', (1979) 118 ITR 261, 'CIT VS. KIRLOSKAR OIL ENGINES LTD.', (1986) 157 ITR 762 (BOM.)
We have considered the submissions made by learned counsel for the parties and have perused the record. The solitary issue, which arises for consideration in this appeal is whether contribution of Rs.10,86,43,782/-made to the funds is eligible as expenditure under Section 37(1) of the Act. From perusal of para 4.6 of the order passed by the Commissioner of Income Tax (Appeals), it is evident that all the claims have been rejected taking into account the fact that they are similar in nature and on same reasoning. For the facility of reference para 4.6 of the order passed by Commissioner of Income Tax (Appeals) is reproduced below, which reads as under: The three claims for the appellant mentioned above are similar in nature. For the same reasons mutatis mutandis given in my appellate order (supra) for the Assessment Year 2008-09, I uphold the disallowances of the three amounts mentioned above aggregating Rs.10,61,43,782/-.
8 7. The tribunal while dealing with the claims of the assessee for allowance as an expenditure under Section 37 of the Act, has held that the funds contributed by the assessee neither remains with the Apex co-operative bank nor comes back to the assessee bank in any other form. The amounts have been spent only out of the statutory obligation. It has further been held that Section 37(1) of the Act makes an exception in case of capital expenditure or personal expenditure of the assessee or expenditure of the nature described in other Sections of Chapter IV of the Act. The case of the revenue is not that the contribution made by the assessee to the fund is capital expenditure or is in the nature of personal expenses or expenditure described in any other Sections of Chapter IV of the Act. It has further been held that assessee has incurred the expenditure for the purposes of business and therefore, the same is an admissible expenditure under Section 37 of the Act. This court in KARNATAKA STATE CO-OPERATIVE APEX BANK LTD. case of assessee in respect of Assessment Year 2009-10 has allowed the payments made to Primary Agricultural
9 Cooperative Societies and District Central Co-operative Banks as an admissible expenditure under Section 37 of the Act. The other amounts are expended for the purposes of business of the assessee and therefore, the same are allowable expenditure under Section 37 of the Act. The decisions relied upon by learned counsel for the respondent pertain to cases of reserve fund, which are not applicable to the fact situation of the case. For the aforementioned reasons, the substantial question of law framed in the appeal is answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE RV/SS