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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’
PER G MANJUNATHA, ACCOUNTANT MEMBER :
This appeal filed by the Revenue is directed against the order of Commissioner of Income –tax (Appeals)-II, Bangalore dated 1/6/2014 for the assessment year 2010-11.
Initially, the case is posted for hearing on 19/3/2015 and none appeared for the assessee. The case is again posted for hearing on 7/7/2015 with a direction to issue notice through DR however, no response from the assessee. Finally, the case is posted for hearing on 8/10/2015 but, none appeared for the assessee. Therefore, we proceed to dispose off the appeal on merits after hearing the Departmental representative.
The brief facts of the case, are that the assessee is Co-operative Bank which is engaged in the business of banking, filed its return of income for the A.Y. 2010-11 declaring total income of Rs. 2,88,16,767/-. The case was selected for scrutiny assessment by issuing statutory notice u/s 143(2) along with notice u/s 142(1) calling for details. The Assessing Officer completed the assessment u/s 143(3) and determined the total income of Rs. 3,30,70,554/- after making additions being disallowances of amount spent out of members benevolent fund amounting to Rs. 12,60,537/- and members death relief fund amounting to Rs. 4,60,000/-. Besides, the AO, disallowed the amortisation of premium paid on Govt. securities of Rs. 9,93,550/-.
The Revenue has raised three grounds. From these grounds, it has agitated two issues, viz. (i) Whether the CIT(A) is right in deleting the additions of Rs. 12,60, 537/- and Rs. 460,000/- respectively, being amount spent out of members benevolent fund and members death relief fund. (ii) addition of Rs.9,93,550/- being amortisation of premium paid on Govt. Securities.
Let us first take up issue relating to disallowance of amounts spent on member benevolent fund and member’s death relief fund.
During the course of assessment proceedings, the AO noticed that the assessee claimed deduction in the statement of total income towards amount spent on members benevolent fund amounting to Rs. 12,60,537/- and members death relief fund amounting to Rs. 4,60,000/-. The AO questioned the deductibility of above said expenditures and sought explanations from the assessee. In response to the show cause notice, the assessee contended that the payments out of member benevolent funds and members death relief fund are incurred for business purpose and hence deductible under section 37 of the Income tax Act. The Assessing Officer however, did not satisfied with the explanations disallowed the amount paid out of members benevolent fund amounting to Rs. 12,60,537/- & members death relief fund amounting to Rs. 4,60,000/- by stating that, these amounts represents the appropriation of profit which cannot be allowed as deduction while computing the taxable income.
Aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals)-II, Bangalore. Before CIT(A), the assessee contended that the assessee being a co-operative society, created various funds out of its profits and these amounts are paid out of these funds for the welfare of the members. The assessee further, contended that ultimately these amounts are expenditure spent out of coffers of the assessee Society for the benefit of members, therefore, incurred wholly and exclusively for the business purpose. It was further argued that the assessee is following cash system of accounting for these expenditures and claimed as and when incurred therefore, allowable under section 37 of the income –tax Act. The CIT(A), after considering the submissions, delete the impugned additions. While doing so, the CIT(A), held that, the contributions of member’s benevolent fund and death relief funds are clearly intended for the welfare of the employee’s and the fund is used to provide assistance to its members therefore, allowable deduction u/s 37 of the Income –tax Act, 1961.
The learned Departmental representative submitted that, the CIT(A) erred in facts to state that these are the amounts contributed for the welfare of the employees, in fact from the facts it was emerged that the deduction claimed by the assessee was towards amount spent out of members benevolent fund and members death relief funds. He further submitted that these expenditure are in the nature of personal expenditure intended for the benefit of the members of the Society cannot be allowed as business expenditure deductible u/s 37 of the Act.
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
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 by- laws 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.
Now coming to the next issue, i.e. addition of Rs.9,93,550/- being disallowance of amortisation of premium paid on Govt.
Securities.
The brief facts of the issue are that, during the assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of Rs. 9,93,550/- under the head amortisation of premium paid on Govt. securities. In response to a specific query, it was submitted that as per the laws applicable to Co-Op banks, it needs to invest certain portion of its funds in SLR securities. To comply with the statutory requirements, it has purchased Govt. securities from open market by paying premium on face value of the securities which was amortised over the period of security as per the Circular issued by RBI vide circular No. CO.BSD.1.PCB.44/12.02.2005 and this is as per the prescribed method of accounting suggested by the ICAI as well as CBDT Circular No. 17/2008 dated 26-08-2008. However, the AO did not convinced with the explanation, disallowed the amortisation of premium paid on Govt. securities amounting to Rs. 9,93,550/- and completed the assessment u/s 143(3). While doing so, the AO was of the opinion that, the securities classified as ‘Held to maturity’ are long term investments cannot be treated as Stock in trade of the assessee like ‘Held for trading’ or ‘Available for sale’ therefore, any premium paid on purchase of these securities should be capitalised as part of cost of acquisition and cannot be treated as revenue expenditure. In support of his contention, he relied upon the Judgments of Hon’ble Supreme Court in the case of Vijaya bank vs CIT, 187 ITR 541 (SC) and Hon’ble Madras High Court decision in the case of T.N. Power Finance and Infrastructure Development Corporation Ltd vs JCIT (2006) 280 ITR 491 (Mad).
Aggrieved by the assessment order, the assessee preferred an appeal before CIT(A). The Ld. CIT(A) after considering the submissions of the assessee and also relied upon the Co-ordinate bench decision in ITA.No. 1122/B/2010 of Sir.M.Visweswaraya Co- op Bank Ltd., Vs. JCIT, held that the assessee is eligible for deduction for amortisation of premium paid on Govt. securities.
The Departmental representative strongly supported the orders of the Assessing Officer and urged to set aside the order of the CIT(A) and restore the Assessment order.
We have heard the Ld. DR, perused the material available on record and considered the case laws relied upon by the parties. A. similar issue came for consideration before this Tribunal. The Co- ordinate bench of this Tribunal decided the issue in favour of the assessee in the case of Sir.M. Visweswaraya Co-op Bank Ltd., Vs. JCIT, in ITA No. 1122/B/2010. In the said case, the Tribunal has allowed the claim of the assessee by observing as under:
“08. We have carefully considered the rival submissions and perused the relevant facts and materials on record. We have also considered the findings of the various benches of the Tribunal, as under :
(i) Catholic Syrian Bank Ltd v. ACIT – (2010) 38 SOT 553 (Coch): An identical issue to that of the subject matter under consideration had arisen before the Cochin Bench. After analyzing the issue in depth, the bench has observed that with regard to amortization of premium on purchase of Government securities, it was clarified that this was made as per the prudential norms of the RBI. Following the Tribunal decision in the assessee's own case and considering that the assessee bank is following consistent and regular method of accounting system, there is no justification in interfering with the order of the Commissioner of Income-tax (Appeals) on this issue of amortization of premium on government securities. United Commercial Bank v. CIT (1999) 156 CTR (SC) 380 ; (1999) 240 ITR 355 (SC) and South Indian Bank Ltd., (ITA No.126/Coch/2004, dated.___ Sept, 2005 Followed”.
(ii) The Khanapur Co-op Bank Ltd v. ITO – ITANo.141/PNJ/2011, dated.8.9.2011 :
The Hon'ble Bench of Panaji Tribunal had recorded its findings that "6. Likewise, the premium amortized atRs.1,78,098/- is claimed to be in respect of securities held under the category 'held to maturity'. The Assessing Officer has taken them as long term investments. In other words, he has accepted the assessee's claim that the securities are 'held to maturity'. That being so and having regard to the CBDT Instruction No.17 of 2008 dated.26.11.2008 as reproduced herein above, the premium paid on such government securities is required to be amortized over the period remaining to maturity ………."
(iii) In the case of Corporation Bank v. ACIT, M'lore inITA.112/Bang/2008(Bang), for the assessment year 2004-05,the earlier bench had also held a similar view.
In the light of the above discussion and the case laws discussed supra, taking into account the totality of the facts and materials, we are of the considered view that the assessee is entitled to claim this deduction and hence we allow the grounds of the assessee relating to this issue.”
15. Therefore, respectfully following the co-ordinate bench of this tribunal in cited supra, we are of the opinion that the assessee is eligible for deduction towards amortisation of premium paid on Govt. securities. Hence, we upheld the CIT(A) order and dismiss the ground raised by the Revenue.
In the result, the Revenue appeal is partly allowed for statistical purpose.
Order pronounced in the open court on 16th Oct, 2015.