JILA SAHAKARI KENDRIYA BANK MARYADIT,RAIPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE- 3(1), RAIPUR

आदेश / O R D E R PER ARUN KHODPIA, ACCOUNTANT MEMBER:

This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-1, Jabalpur, dated 05.03.2018 and pertains to assessment year 2013-14.

ITA No.37/RPR/2018 :: 2 :: 2. Without prejudice to ground no. 1, Ld. C1T(A) erred in not allowing the relief of Rs.2,88,73,080/- on account of expenses incurred on computerization despite holding that appellant is entitled towards such deduction. 3. Ld. CIT(A) erred in confirming addition of Rs.27,94,800/- made by AO on account of disallowance of provision for contribution/subscription to District Union arbitrarily holding it to be provision for training fund without appreciating the facts of the case properly and judiciously. The addition of Rs.27,94,800/- made by AO and confirmed by CIT(A), is illegal, arbitrary and not justified. 4. Ld. CIT(A) erred in remanding the matter pertaining to allowance of depreciation of Rs.1,14,40,207/- to AO instead of deciding the issue, despite holding that appellant is eligible for allowance of correct depreciation as per rules. The action of Ld. CIT(A) remanding the matter to the AO is illegal, arbitrary and not justified. 5. Ld. CIT(A) erred in remanding the matter pertaining to double disallowance of Rs. 1,52,40,896/- on account of advance tax and TDS to AO, without adjudicating the same on merits. The action of Ld.CIT(A) remanding the matter to the AO is illegal, arbitrary and not justified. 6. Ld. CIT(A) erred in confirming the addition of Rs. 2,98,14,297/- holding it to be provision for reserve fund of interest from Apex Bank. The addition made by AO and confirmed by CIT(A) is illegal, arbitrary and not justified. 7. Ld. CIT(A) erred in confirming the addition of Rs. 2,84,55,7357- representing provision for reserve fund to the extent of 5%, out of total provision of 25% created for this purpose. The addition made by AO and confirmed by CIT(A) is illegal, arbitrary and not justified. 8. The appellant reserves the right to add, amend or alter any of the grounds of appeal. 3. The brief facts of the case are that the assessee is a co-operative bank has filed its return for the AY 2013-14 on 31.10.2013. Subsequently, the case was selected for scrutiny under CASS. Statutory notices were issued kin due course. In response, the Ld. Counsel of the assessee has attended proceedings and filed copy of return along with computation of income, audit report, Form 26AS, produced books of accounts, bills and vouchers, which were verified through test check basis. While verifying the P & L A/c of the assessee, the Ld.AO has observed that the assessee has debited an amount of Rs.40,74,46,277/- for various provisions/reserves. The assessee was asked to furnish details pertaining those

ITA No.37/RPR/2018 :: 3 :: provisions/reserves. After examination. it was observed by the Ld AO that an amount of Rs.1,23,61,720/- was already added back in the computation of income by the assessee. For remaining provisions/reserves, the assessee submitted that the provisions are created for business purposes of the assessee bank and represents its actual liabilities. Further, the impugned provisions also includes various statutory provisions created as per Income Tax Act, RBI & NABARD. The AO has not found substances in the submissions of the assessee and has made certain disallowances to the tune of Rs. 26,52,16,905/-. The Ld.AO also made another disallowance on account of certain expenditure debited under the head “other expenditure”, which includes payment of Rs.2,98,14,297/- on account of reserve fund of interest from Apex Bank, Rs.1,25,00,000/- on account of Advance Tax, Rs.1,26,000/- on account of Income Tax payment for 4th Floor and Rs.26,14,896/- on account of TDS deducted on FD totaling to Rs.4,50,55,193/-. Dissatisfying with such disallowances made by the Ld.AO, the assessee preferred an appeal before the Ld.CIT(A), wherein, the issues were discussed deliberated, and the appeal of the assessee was partly allowed. Even after the order of the Ld.CIT(A), the assessee was aggrieved with certain issues, for which, the assessee has carried the matter under this appeals before us for adjudication.

ITA No.37/RPR/2018 :: 4 :: 5. Ground Nos.1 & 2 regarding confirming the disallowance of Rs.2 Crs. made on account of computerization of branches of the assessee.

On this issue, the Ld.AR submitted that the operations of the assessee’s bank were manual which were on computerization and for this purpose, it is necessary to create reserve fund. Therefore, the funds were set apart for the purpose of business. The Ld.AR drew our attention to the order of the Ld.CIT(A) wherein, the Ld.CIT(A) has observed that the addition of Rs.2 Crs. made by the AO on account of contingent liability, do not constitute expenditure and cannot be subject matter of deduction even under the mercantile system of accounting. Therefore, the addition was confirmed. However, it was the observation of the Ld.CIT(A) that the assessee’s bank shall be entitled for deduction of expenditure on computerization out of reserves as and when it is incurred. The Ld.AR further argued that since the assessee’s bank has incurred expenditure of Rs.2,88,73,080/- on account of expenditure incurred on computerization during the relevant AY. Therefore, the entire amount of reserve created should have been allowed as an expenditure during the same year. While clarifying the issue further, it was explained by the Ld.AR that the entire amount incurred on computerization during the year was capitalized by the society and the same was not charged to P & L A/c. However, it was the request from the Ld.AR that since the Ld.CIT(A) has mentioned in his observation that the assessee is entitled for deduction of expenditure on

ITA No.37/RPR/2018 :: 5 :: computerization out of reserve as and when it is incurred, the expenditure to the extent of Rs.2,88,73,080/- incurred during the year should be allowed, without making any addition on this count.

5.1 The Ld.DR, on the other hand, submitted that since the expenditure incurred was capitalized by the assessee, nature of expenditure was supposed to be capital in nature only. On the contrary, since nothing was brought on record by the assessee that the expenditure is liable as revenue expenditure. It was the submission that the amount should not be allowed during this year. However, depreciation as allowable under the provisions of the Act, may be allowed to the assessee, for which, the assessee is entitled to.

5.2 We have heard the rival contentions, perused the materials available on record and have gone through the facts of the issue. Admittedly, the assessee has created reserve for computerization of its operations which were manual earlier and has undoubtedly incurred an expenditure of Rs.2,88,73,080/-. It is also the fact that such expenditure was capitalized by the assessee. Since the expenditure made pertaining to computerization was in nature of capital expenditure, the eligible depreciation is available u/s.32 of the Act, and the assessee is entitled to claim the same. The reserve created for incurring the expenditure in accordance with notifications issued under the Chhattisgarh Co-operative Societies Act, 1960, on account of computerization was in nature contingent liabilities which cannot be construed as actual expenditure and cannot be subject

ITA No.37/RPR/2018 :: 6 :: matter of deduction, even under the mercantile system of accounting. The observation of Ld.CIT(A) on this issue are worth agreed to. However, depreciation on expenditure actually incurred and capitalized will be allowed in accordance with the provisions of the Act. Therefore, we partly allow this ground of the assessee to reduce the addition made to the extent of eligible depreciation.

At the outset, the Ld.AR drew our attention to the observations of the Ld.CIT(A) on this issue, wherein, the Ld.CIT(A) has decided the issue against the assessee for the reasons that the provisions of training fund has been made in compliance of provisions of sec.43A(1A) of Chhattisgarh Co-operative Societies Act, 1960. The Sec.43A of Madhya Pradesh Co- operatives Act, deals with appropriation of profit concerned by the society, and therefore, the amount transferred to training fund is appropriation of profit. It was the observation that the amount transferred to training fund remains with the assessee. The Ld.CIT(A) further observed that it is not a case of the assessee that after such transfers, it loses control over the funds so transferred. The Ld.CIT(A) relied upon the judgment of ITAT Jabalpur Bench in the case of Krishi Upaj Mandi Samiti Seoni v ACIT, Chhindwara, in ITA No.95/Jab/2009 and has sustained the disallowance made by the AO. It was the submissions of the Ld.AR that the Ld.CIT(A) has erred in deciding

ITA No.37/RPR/2018 :: 7 :: the issue, for which, he drew our attention to Page No.16-19 of the Paper Book, showing us the contents of Madhya Pradesh / Chhattisgarh Co- operative Societies Act, 1960, wherein, u/s.43(2)(a) & (b) according to which, it was the compulsion on the society to transfer an amount not being less than 25% of such profits to the reserve funds, unless the society has been, by general or special order, partially or wholly exempted in this behalf by the Registrar, according to the provisions of sec.43(2)(b), the society is required to pay to the Madhya Pradesh Cooperative Union Ltd., and to such other institutions or unions as may be specified by the Registrar in this behalf, such contribution as may be prescribed, but cooperative credit structure shall not be required to pay any contribution. It was the submission of the Ld.AR that the society bank is covered under Chhattisgarh Co-operative Societies Act, 1960 as per notification No.2050- 9940-16, 05.04.1972. The Ld.AR further demonstrated that the sum of Rs.27,94,800/- set apart by the assessee were duly paid to the respective institutions on various dates. Therefore, it cannot be said that the assessee was having control over such funds. Such details were placed before at Page No.5 of the assessee’s Paper Book, which are extracted as under: Amount Amount Particulars (Rs. In lakhs) (Rs.) Agricultural loans disbursed during the year- - • Short Term Loans 55,602.89 • Medium Term Loans 204.66 • Long Term Loans 88.61 Total loans disbursed 55,896.16 - Contribution @ Rs.50 per lakh /part thereof - 27,94,800 Share of District Union (90% of total contribution) - 25,15,320 Share of state Union (10% of total contribution) - 2,79,480

ITA No.37/RPR/2018 :: 8 :: Details of payments of above contribution are as under: Payee Name PAN Address Amount Payment details Raipur Jila AACHR Sahakari 19,77,920 Cheque No. 0297 Bank -Self Sahakari 3800 B Sadan, Account No. Sangh Chaubey 2220006044700000 Date- Maryadit Colony, 16.09.2014 Mudralaya Raipur (District Union) -do- -do- -do- 5,37,400 Cheque No. 05527 Bank -Self Account No.2220006044700000 Date - 21.03.2016 C.G.Rajya AABAC 16, Park 2,79,480 Cheque No. 72145 Bank -Self Sahakari 0367 L Street 3, Account No. Sangh Chaubey 2220006044700000 Date - Maryadit Colony, 31.10.2013 (State Union) Raipur Total 27,94,800 6.1 The Ld.AR relied upon decision of ITAT Indore Bench, Indore, in the case of M/s.Indore Paraspar Shakari Bank v. Dy.CIT in ITA No.331/Ind/2010 for the AY 2007-08, dated 30.05.2011, wherein, the Tribunal has held as under:

“……….So far as the contribution by the respondent towards the payment of pension fund is concerned, it is submitted that the aforesaid liability is statutory in nature and the aforesaid payment towards the pension fund has been rightly allowed by the Income Tax Appellate Tribunal. So far as the interest accrued thereon is

ITA No.37/RPR/2018 :: 9 :: concerned, it is submitted by the learned counsel for the respondent that it was taxable and has rightly been held so by the Tribunal……..”. 6.3 The Ld.AR relied upon decision of ITAT Delhi Bench, New Delhi, in the case of ACIT v. Indian Farmer Fertilizers Coop. Ltd., in ITA Nos.3350/Del/2009 & 1194/Del/2011 for the AYs 2005-06 & 2006-07, dated 31.05.2011, wherein, the Tribunal has held as under:

ITA No.37/RPR/2018 :: 10 :: 6.4 In the backdrop of aforesaid submissions, the Ld.AR has submitted that the funds set apart assessee’s bank are eligible for deduction. Therefore, the same may be allowed.

6.5 The Ld.DR vehemently supporting the order of the revenue authorities and strongly recommended to sustain the addition.

6.6 We have heard both the parties, perused the materials available on record and the order of the ITAT and the decisions of the Hon’ble High Courts on this issue. On perusal of the facts an amount of Rs.27,94,800/- by the assessee’s bank as provision for contribution of subscription to District Union which were later in the due course were transferred to the respective authorities i.e. Raipur Jila Shakari Sangh Maryadit Mudralaya (District Union) and Chhattisgarh Rajya Sahakari Sangh Maryadit (Madhya Pradesh Union). Therefore, the understanding of the revenue authorities that the funds were in the control of the assessee cannot be accepted, on the contrary, the funds were set apart and kept for contributing according to the direction of the regulatory authorities. Therefore, the funds were not at all freely available in the hands of the assessee’s bank. Hence, respectfully following the ratio of decision by the Hon’ble Madhya Pradesh High Court in the case of CIT v. M/s.Krishi Upaj Mandi Samiti (supra), we do not find any hesitation to hold that the contributions made in accordance with the binding by-laws of Regulatory Cooperative Society Act, which is in the nature of statutory liabilities of the assessee and the funds kept aside were never available to be used at its disposal. In such circumstances, the

ITA No.37/RPR/2018 :: 11 :: findings of the Ld.CIT(A) cannot be subscribed to and therefore, we are of the considered view that such disallowance, which is not in accordance with the law, is liable to be vacated and we do so. In the result, Ground No.3 of the assessee’s appeal is allowed.

It was the submission of the Ld.AR that the AO has not dealt with this issue there was an inadvertent mistake by the assessee itself that the depreciation claimed in the return of Rs.1,55,45,705/- was incorrect whereas, the correct figure was Rs.2,69,85,912/- which resulted into a reduced claim of Rs.1,14,40,207/-. This issue was taken up before the Ld.CIT(A) who has directed the AO to verify the claim and allow the depreciation in accordance with rules and provisions of the Act. However, it was the grievance of the assessee that the effect is still not given by the AO. Therefore, the issue is again raised before the ITAT.

7.1 The Ld.DR submitted that since the matter is restored back to the file of the AO for verification and allowing the depreciation in accordance with law, there is no infirmity in the order of the Ld.CIT(A).

7.2 We have heard both the parties, perused the materials available on record. Admittedly, there was a mistake on the part of the assessee that the claim of the depreciation was made at a lower amount in the computation of income, which was noticed by the Ld.CIT(A) and has

ITA No.37/RPR/2018 :: 12 :: directed the AO to allow the same after due verifications applying the provisions of the Act. Assessee’s grievance is that till date, no effect was given by the AO even after the directions of the Ld.CIT(A). Therefore, the issue was raised before us. Since there was no infirmity pointed out in the order of the Ld.CIT(A), we do not find any divergent view on this issue. However, Ld CIT(A), who has co-terminus with that of the AO, should have allowed the relief after factual verifications, may be by way of a remand report from The Ld AO, we restore this issue and direct the Ld AO to follow the direction of Ld CIT(A), which we are also having concurrence with. In the result ground no 4 of the appeal of the assessee is partly allowed for statistical purposes.

The Ld.AR submitted that the assessee has made a payment of advance tax and TDS of Rs.1,52,40,896/-. This issue was raised before the Ld.CIT(A) that the assessee has suo moto added back the amount of Rs.1,53,96,634/- to the profit while computing total income for the AY 2013-14. However, the AO has added this amount again in the income of the assessee while framing the assessment order, therefore, the disallowance which the assessee has already suo moto made in the computation, was added double by the AO. The Ld. CIT(A) has appreciated this fact but instead of adjudicating the matter as directed, the AO to verify the claim and allow the appropriate relief. The assessee was aggrieved

ITA No.37/RPR/2018 :: 13 :: with such decision of the Ld.CIT(A). It was the contentions of the assessee that the Ld.CIT(A) should have verified the claim and allowed the relief instead of directing the AO to allow relief. Therefore, the order of the Ld.CIT(A) is not justified on this count.

8.1 The Ld.DR vehemently supported the order of the revenue authorities.

8.2 Having heard the rival parties on this issue on perusal of the material available on record, the Ld.AR of the assessee has shown us an amount of Rs.1,53,96,634/- added back to the profit of the assessee in the computation of total income at Page No.12 of the Paper Book. However, it is apparent from the order of the AO that addition of Rs.1,52,40,896/- (Rs.1,25,00,000/- (advanced tax) + Rs.1,26,000/- (Income Tax) + Rs.26,14,896/- (TDS)) was added back by the AO, also thereby making double disallowance. Since the matter was referred back to the AO by the Ld.CIT(A) for verification and allowing appropriate relief to the assessee, whereas the Ld.CIT(A) who has powers co-terminus with the AO, was supposed to adjudicate the issue by verifying the facts by himself or by seeking Remand Report from the AO on the issue. However, as it is apparent from the facts available for us at the addition was made on account of double disallowance. Therefore, the assessee is entitled for the relief. However, the figures and facts are subject to verification from the records by the AO. Therefore, we are directing the AO to allow the relief of amount double added to the profit of the assessee and was charged to tax

ITA No.37/RPR/2018 :: 14 :: accordingly. Under such circumstances, Ground No.5 of the assessee’s appeal is partly allowed for statistical purpose.

The Ld.AR of the assessee submitted that the reserve funds received on account of Apex Bank represents amount of interest from interest made out of reserve funds transferred to reserve funds of the assessee’s bank. The Ld.AR further submitted that as per sec.43(2) of Chhattisgarh Co- operative Societies Act, 1960, assessee is required to maintain reserve fund. As per sec.44(2) of Chhattisgarh Cooperative Societies Act, 1960, such reserve funds can be utiliesed/invested only in the manner as may be laid down by the Registrar of Societies. Assessee had invested such funds with Apex Bank according to conditions laid down on this behalf. Further, the interest paid by the Apex Bank on such deposits remains invested with the Apex Bank and is not actually received by the assessee. It was therefore submitted that such interest should be allowed as expenditure to the assessee.

9.1 The Ld. DR on the contrary submitted that sec.43A(1) reiterating the observation of the Ld.CIT(A) in Para (iii) in Page No.23 of the order of the Ld.CIT(A) that Sec.43A(1) of Madhya Pradesh Cooperative Societies deals with appropriation of profit of a co-operative society and such appropriations are not the charge over profit i.e. even after the

ITA No.37/RPR/2018 :: 15 :: appropriation made u/s.43A(1) with Chhattisgarh Co-operative Societies Act, 1960. With such observations, the Ld.CIT(A) has rightly confirmed the addition made by the AO by following the judgments of ITAT Jabalpur Bench in the case of Krishi Upaj Mandi Samiti Seoni v ACIT (supra).

9.2 We have heard both the parties, perused the materials available on record with regard to interest on the reserve funds by the assessee’s bank, the observation of the Hon’ble Madhya Pradesh High Court in the case of CIT v. M/s.Krishi Upaj Mandi Samiti (supra), wherein, it has been held that assessee’s interest incurred consists on such reserve fund, it was taxable and has rightly held by the Tribunal, in view of such findings of the Hon’ble Madhya Pradesh High Court. We are of inclined to accept that interest earned on such reserve funds are taxable in the hands of the assessee and therefore, there was no error in the order of the Ld.CIT(A) on this issue. Therefore, we sustained the addition. Ground No.6 of the assessee’s appeal stands dismissed.

The Ld.AR submitted that the assessee has claimed deduction of Rs.14,22,78,677/- on account of provision for reserve fund being 25% of the profit in accordance with sec.43(2)(a) of Chhattisgarh Co-operative Societies Act, 1960, which is a mandatory requirement to transfer profit to such statutory reserve funds. However, the AO has restricted the same

ITA No.37/RPR/2018 :: 16 :: applying the provisions of sec.36(1)(viii) allowing the assessee 20% of the said funds and disallowing 5% by making addition. This addition was sustained by Ld.CIT(A) with observation that these are appropriation of the profit and therefore, the same cannot be allowed as expenditure. The Ld.AR of the assessee placed reliance on the decision of the Hon’ble Madhya Pradesh High Court in the case of Keshkal Co-operative Marketing Society Ltd. v. CIT reported in [1987] 165 ITR 0437 (MP), wherein, it has been held as under:

The reserve fund created under s. 43(2) of the Societies Act is a 'statutory one' and is created at the instance of the Registrar and further after once created the reserve fund, the assessee does not have control over it, as under s. 44(2) of the Societies Act, the reserve fund of the Society shall be invested or utilized only in such a manner and on such terms and conditions as may be laid down by the Registrar in this behalf. Therefore, the creation of the reserve fund and the control the remain with the Registrar and in this respect the assessee, in any manner whatsoever, does the beneficiary of the said reserve fund. This position being the statutory position, is not disputed. The amount does not comprise income of the assessee because the same having been diverted under the provisions of s. 43(2) of the Societies Act and can only be invested or utilized in such manner and on such terms and conditions as may be laid down by the Registrar in this behalf as required under cl.(2) of s. 44 of the Societies Act. As such the said amount is not available for the use of the assessee Society, at its option.— Poona Electric Supply Co. Ltd. vs. CIT (1965) 57 ITR 521 (SC): TC 13R.287 and CIT v. Bombay State Road Transport Corporation (1977) 106 ITR 303 (Bom) : TC16R.183 applied; Vazir Sultan Tobacco Co. Ltd. vs. CIT (1981) 25 CTR (SC) 186 : (1981) 132 ITR 559 (SC) distinguished.

10.1 It was the submission of the Ld.AR that the creation of funds and control there of fully remains with the Registrar and the assessee does not remain beneficiary. It does not comprise income of the assessee, as it is diverted. The Ld.AR submitted that the addition made by the AO and confirmed by the Ld.CIT(A) is therefore illegal, arbitrary, and unjustified.

ITA No.37/RPR/2018 :: 17 ::

10.2 The Ld.CIT-DR on the contrary relied upon the order of the Ld.CIT(A) and has reiterated the observations of the Ld.CIT(A). This was only appropriation of profit of the Cooperative Society and such appropriations are not charge over the profit. Since, the assessee was having control over the funds so appropriated, therefore, the same cannot be allowed as an expenditure for the relevant year under consideration. It was, therefore, the prayer that the decision of the Ld.CIT(A) is worth accepting and deserves to be confirmed.

10.3 We have heard both the parties, perused the materials available on record. Admittedly, the funds transferred to statutory reserves in accordance with the provisions of Chhattisgarh Co-operative Societies Act, 1960, i.e. Regulatory Body for the assessee’s bank, which is mandatory for the assessee and after creation of such funds, the control thereof is fully transferred in the hands of Registrar and the assessee does not remain the beneficiary of the same. Respectfully following the judgement of the Hon’ble Madhya Pradesh High Court in the case of Krishi Upaj Mandi Samiti Seoni v ACIT (supra), we are of the considered opinion that reserve funds so created for which amount is transferred under the statutory obligation over which the assessee loses control, diverted overriding title is eligible for deduction and therefore, the same does not form part of the assessee

ITA No.37/RPR/2018 :: 18 :: income, accordingly, we set aside the order of the Ld.CIT(A) and vacate the addition made by the AO on this count. In the result, Ground No.7 of the assessee’s appeal is allowed in terms of our observation hereinabove.

Order pronounced on the 10th day of August 2023, in Raipur. Sd/- Sd/- (रवीश सूद) (अरुण खोडपिया) (ARUN KHODPIA) (RAVISH SOOD) लेखा सदस्य/ACCOUNTANT MEMBER न्यायिक सदस्य/JUDICIAL MEMBER रायपुरयपुर/Raipur, दिनांकंक/Dated: 10th August, 2023. TLN, Sr.PS (on Tour) आदेश की प्रतिलिपि अग्रेषित त/Copy to: 1. अपीलार्थीर्थी / The Appellant 2. प्रत्यर्थी / The Respondent 3. आयकर आयुक्त (अपील) / The CIT(A)-1, Raipur (C.G) 4. The Pr.CIT-1, Raipur (C.G) 5. विभागीय प्रतिनिधि, आयकर अपीलीय अधिकरण करण, रायपुरयपुर बेंच, रायपुरयपुर / The DR, ITAT, Raipur Bench, Raipur. 6. गार्ड फाईलईल/Guard File आदेशानुसार र / By Order

वरिष्ठष्ठ निजी सचिव व / Sr. Private Secretary आयकर अपीलीय अधिकरणकरण, रायपुरयपुर / ITAT, Raipur