M/S KARNATAKA STATE CO-OPERATIVE APEX BANK LTD vs. DEPUTY COMMISSIONER OF INCOME TAX

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 1ST DAY OF MARCH 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE ASHOK S. KINAGI I.T.A. NO.275 OF 2015 BETWEEN: M/S. KARNATAKA STATE CO-OPERATIVE APEX BANK LTD., REP. BY ITS SECRETARY SRI C.N. DEVARAJ 'UTHUNGA', NO.1, PAMPA MAHAKAVI ROAD CHAMARAJAPET, BANGALORE-560018. ... APPELLANT (BY SRI. A. SHANKAR, SR. COUNSEL FOR SRI. M. LAVA, ADV.,) AND: DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 3(1), UNITY BUILDINGS ANNEXE 4TH FLOOR, MISSION ROAD BANGALORE-560027. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.,) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 20.02.2015 PASSED IN ITA NO.891/BANG/2013 FOR THE ASSESSMENT YEAR 2009-10, PRAYING TO: (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AS STATED ABOVE AND ANSWER THE SAME IN FAVOUR OF THE APPELLANT.

2 (ii) ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO THE EXTENT AGINST THE APPELLANT IN THE ORDER PASSED BY THE INCOME TAX APPELLANT TRIBUNAL BANGALORE 'A' BENCH IN ITA NO.891/BANG/2013 RELATING TO ASSESSMENT YEAR 2009- 10 VIDE ITS ORDER DATED 20.02.2015. 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 preferred by the assessee. The subject matter of the appeal pertains to the Assessment year 2009-10. The appeal was admitted by a bench of this Court vide order dated 30.10.2015 on the following substantial question of law: "Whether the Tribunal is justified in law in holding that the monetary incentive in a total sum of Rs.4,45,00,000/- provided to various District Central Co-operative Banks (DCCB's) and Primary Agricultural Co-operative Societies (PACS) is not expenditure laid out wholly and exclusively for the purpose of business contrary to material on record and passed a perverse

3 order on the facts and circumstances of the case?". 2. Facts leading to filing of this appeal briefly stated are that the assessee is a Co-operative Apex Bank registered under the provisions of Karnataka Co- operative Societies Act, 1959 (hereinafter referred to as 'the Act' for short). A licence to carry on the business of banking has been issued by the Reserve Bank of India to the assessee under the provisions of Banking Regulation Act, 1949. The assessee filed the return of income for Assessment Year 2009-10 on 29.09.2009 and declared a total income of Rs.33,83,04,,750/-. The assessee subsequently filed a revised return and declared a revised income of Rs.33,61,92,270/- on 31.03.2010. The return was processed under Section 143(1) of the Act and was selected for scrutiny. The Assessing Officer by an order dated 31.12.2011 under Section 143(3) of the Act made several additions amounting to Rs.16,12,53,463/- and assessed income was determined

4 at Rs.49,74,45,733/-. The additions included a sum of Rs.4,45,00,000/- being expenditure in the nature of monetary incentives to various District Central Co- Operative Banks and Primary Agricultural Co-operative Societies. 3. The assessee thereafter filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 27.03.2013 granted the relief with regard to disallowance of Rs.4,45,00,000/- and partly allowed the appeal. Being aggrieved, the revenue filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal by an order dated 20.02.2015 reversed the order of the Commissioner of Income Tax (Appeals) and disallowed the sum of Rs.4,45,00,000/- being incentive paid to various District Central Co-Operative Banks and Primary Agricultural Co-operative Societies. In the aforesaid factual background, the assessee has filed this appeal.

5 4. Learned Senior counsel for the assessee submitted that the incentive payments are not in the nature of appropriation of net profits as held by the Assessing Officer and confirmed by the tribunal. It is further submitted that in a Co-Operative Society, net profits can be appropriated in an Annual General Meeting of the Co-Operative Society as per Section 27 of the Act. It is further submitted that the payment of incentives to District Central Co-Operative Banks and Primary Agricultural Co-operative Societies was duly authorized by Board of Directors in its meeting held on 19.03.2009. It is also submitted that the payment cannot be held as appropriation of net profit as the same could not have been done by the Board Of Directors in their meeting. It is contended that he expenditure is towards development of co-operative sector apart from just providing services to the co-operative sector. It is also submitted that expenditure was incurred only exclusively for the purpose of business of the assessee.

6 5. It is also pointed out that the tribunal itself has held that incentive could have been given to the District Central Cooperative Banks and Primary Agricultural Cooperative Societies in the form of higher rate of interest, the same constitutes an expenditure. However, the expenditure has been disallowed on the ground that it has been made in the manner which is acceptable to the revenue and it is not for the revenue to decide how incentives have to be paid to the member banks. It is also contended that the revenue cannot sit in the arm chair of the businessmen and decide that particular payment has to be paid in a particular manner, failing which it does not par take the character of an expenditure as per provisions of the Act. Reliance has also been placed on Circular No.117 dated 22.08.1973 issued by Central Board of Direct Taxes (CBDT). In support of aforesaid submissions, reliance has been placed on decisions in 'MEHSANA DISTRICT CO-OPERATIVE MILK PRODUCERS UNION LTD. VS.

7 CIT', (1993) 203 ITR 601 (GUJARAT), 'KRISHNA SAHAKARI SAKHAR KARKHAN LTD. VS. CIT', (1998) 229 ITR 577 (BOMBAY), 'MYSORE KIRLOSKAR LTD. VS. CIT[', (1987) 166 ITR 836 (KARNATAKA), 'T.T.D. CO-OPERTIVE STORES LTD, (1998) 232 ITR 109 (AP), 'CIT VS. PANDAVAPURA SHAKARA SAKKARE KARKHANE LTD', (1988) 14 ITR 457 (KARNATAKA), 'SASSOON J. DAVID AND CO.P.LTD VS. CIT', (1979) 118 ITR 261, 'CIT VS. INFOSYS TECHNOLOGIES LTD', (2012) 349 ITR 582, 'KARJAN CO-OPERATIVE COTTON SALES GINNING ANDPRESSING SOCIETY VS. CIT (1993) 199 ITR 17 (GUJARAT), 'CIT VS MALAYALAM PLANTATIONS LTD.,', (1964) 53 ITR 40 (SC), 'CIT VS. DELHI SAFE DEPOSIT CO. LTD', (1982) 133 ITR 756 (SC), 'S.A.BUILDERS VS. CIT (A)', (2007) 288 ITR 1 (SC) and KANHAIYALAL DUDHERIA VS. JCIT', (2020) 113 TAXMANN.COM 217 (KAR.).

8 6. On the other hand, learned counsel for the revenue while inviting the attention of this court to Section 37 of the Act submitted that the burden was on the assessee to prove the fact that the expenses were incurred for the purposes of business. However, the assessee has failed to discharge the burden. It is further submitted that the expenses were incurred by the assessee even before payment of tax, therefore, the expenses were personnel in nature. It is further submitted that the order passed by the tribunal is just and proper, which does not call for any interference by this court in exercise of powers under Section 260A of the Act. 7. We have considered the submissions made by learned counsel for the parties and have perused the record. The issue which arises for consideration in this appeal is whether the monetary incentive for a total sum of Rs.4,45,00,000/- provided to District Central Co- Operative Banks and Primary Agricultural Co-operative

9 Societies is an expenditure laid out wholly and exclusively for the purpose of business and is an admissible expenditure under Section 37 of the Act. The Supreme Court in SASSOON J. DAVID AND CO.P.LTD has held that the expression 'wholly and exclusively' used in Section 10(2)(xv) of the Income Tax Act, 1922 does not mean necessarily and it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business and assessee can claim deduction even though there was no compelling necessity to incur such expenditure. In MALAYALAM PLANTATIONS LTD. Supra, the Supreme Court has held that the expression for the purpose of business used in Section 37(1) of the Act is wider in scope than the expression for the purposes of earning profits and it may improve measures for preservation of the business and for protection of its assets and property from expropriation. In DELHI SAFE DEPOSIT CO. LTD supra the Supreme Court has held that income tax authorities

10 must put themselves in the shoes of the income tax authority and see how the prudent business man would act and should not look at the matter from their own perspective. 8. In the instant case, the assessee had claimed deduction of the aforesaid amount which was paid by way of incentives to member banks on the ground that the aforesaid expenditure resulted in earning higher income for the assessee and therefore, the expenditure was allowable as deduction. The Assessing Officer has held that from the details furnished by the assessee, it is evident that the assessee has made payment of the aforesaid amounts out of its net profit i.e., after meeting all its expenses including income tax and since, this payment was found to have been made from general revenue, the claim of assessee for deduction has been denied. However, the tribunal has held that incentives are simplicitor and aid to the members which amount to appropriation of the profit and mere debiting in the

11 profit and loss account would not be sufficient to allow an expenditure to assessee. It has further been held that the expenditure must be laid out wholly and exclusively for the purpose of business, which the assessee has failed to establish. Therefore, the order of the Assessing Officer has been upheld. 9. It is noteworthy that the aforesaid amount was debited to the profit and loss account. The Assessing Officer has not questioned the genuineness or reasonableness of the expenditure. The relevant extract of Circular issued by Central Board of Direct Taxes dated 22.08.1973 reads as under: Incentive /rebate granted / allowed to members of co-operative society should be allowed as a deduction in computing the business income of the society. 10. The Assessing Officer on the basis of the aforesaid circular has already allowed the incentive paid to member bank by the assessee for the Assessment

12 Year 2008-09 as revenue expenditure. The Commissioner of Income Tax (Appeals) has also while placing reliance on the circular issued by the Central Board of Direct Taxes (CBDT) has held that the Assessing Officer has misunderstood the term 'net profit' used in Act, which differs from the expression 'net profit' as used in the context of provisions of Income Tax Act, 1961. It has further been held that the aforesaid circular allows payment which are made in the nature of incentives and since, the payment in question has been made by the assessee to its member banks as incentives, the aforesaid amount is allowable as expenditure. The assessee has incurred the expenditure during the course of the business which was duly approved by the board of the assessee in its meeting. The tribunal in para 8 of its order has held that if the assessee could provide higher rate of interest to a particular District Central Co-Operative Banks or Primary Agricultural Co-operative Societies on making a deposit

13 beyond a threshold limit, it was a permissible course of action. Thus, the revenue is not opposed to the action of the assessee giving incentives to the member banks but is only opposed to the manner in which the incentive has been paid. It is not for the revenue to decide how the incentive has to be paid by the assessee to its member banks and the revenue cannot sit in an armchair of the businessman and to decide as to the manner in which payment has to be made. In view of preceding analysis, the substantial question of law framed by a bench of this court is answered in favour of the assessee and against the revenue. In the result, the impugned order dated 28.02.2015 insofar as it contains the finding against the assessee relating to Assessment Year 2009-10 is hereby quashed.

14 Accordingly, the appeal is allowed. Sd/- JUDGE Sd/- JUDGE ss