THE NAWANSHAHAR CENTRAL CO- OPERATIVE BANK LIMITED,NAWANSHAHAR vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-2, JALANDHAR

Date of Hearing 09.11.2022 Date of Pronouncement 15.11.2022 ORDER Per:Anikesh Banerjee, JM:

The instant appeal of the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals)-1, Jalandhar, [in brevity the ld. CIT(A)] bearing appeal no.CIT (A)-1/Jal/10273/18-19, date of order 30.03.2019, the order passed u/s 250 (6)of the Income Tax Act 1961, [in brevity the Act] for A.Y. 2016- 17. The impugned order was emanated from the order of the ld. Asstt.

Commissioner of Income Tax, Circle-2, Jalandhar, (in brevity the AO), order passed u/s 143(3)/147 of the Act date of order 27.12.2018. The assessee took the following grounds which are reproduced as under:

“1. That the Ld. Commissioner of Income Tax (Appeals)-l, Jal, erred in law and facts of the case in confirming the disallowance of interest of Rs.l,14,01,454/- on Agricultural Credit Stabilization Fund. 2. That the impugned order under appeal is arbitrary and contrary to law & facts of the case, hence deserves to be cancelled. 3. That the appellant craves leave to add/alter or forgo any of the grounds of appeal before or at the time of hearing of appeal.”

2. Brief fact of the case is that during assessment proceeding the assessee disallowed the interest paid against“Agricultural Credit Stabilization Fund”(in brevity ‘ACSF’) amount of Rs. 1,14,01,454/- which was debited by the assessee in P & L A/c. The assessee is a Co-operative Bank governed by the Banking Regulation Act, 1949 and as per section 56 of the said Banking Regulation Act, 1949. The assessee is to follow guidelines issued from time to time by Reserve Bank of India. The assessee was charged 3% on deposit of State Government with bank and bank paid simple interest @ 3%. The said amount was debited in the P & L A/c. On the other hand the said fund was exploited and earned the interest @7.5% to 8%. Both the interests are debited and credited in the P & L A/c. The grievance of the ld. AO was that the said payment of interest was related to contingent fund, ACSF and not chargeable to profit of the assessee. The said amount was disallowed and added back with the total income of the assessee.

Aggrieved assessee filed an appeal before the ld. CIT(A). The ld. CIT(A) had upheld the order of the ld. AO.

He argued that the said fund, ACSF received from the Government Authority and maintained in saving bank and interest was paid 3%. So, this is a normal nature of banking business in one hand bank is paying interest and other hand bank is earning the interest by exploiting this fund.

“5.2 I have carefully considered the facts of the case and submissions of the appellant. As per letter dated 04.05.1965 issued by The Registrar Cooperative societies Punjab all the central Cooperative banks were directed to create Agricultural Credit (Stabilization) fund maintained at Central bank level. As per para 3 of the said letter the fund would be created as follows:-

(i) ’ By annual appropriation of 15 % of the net profits.

(ii) Transfer of the entire amount of dividend payable on the shareholdings of the Govt, in the central Co- operative banks over and above 3 %.

(iii) Credit of interest at 3 % per annum of the balance to the credit of the fund as at the beginning of the year.

Thus as per the directions of the Registrar the assessee is required to Credit interest @ 3 % per annum on the balance to the credit of the fund at beginning of the year. The Cooperative bank is not required to make any payment of interest on the basis of the fund to the Govt. In accordance with the direction of the Registrar, an amount @ 3 % of the outstanding fund is further appropriated towards the fund which is not a charge on the Profits of the assessee. Therefore, claim of deduction of interest on account of credit of 3 % of the balance in the Agriculture Credit Stabilization Fund is not a charge on the profits of the assessee. Therefore, the disallowance made by the assessing officer is upheld. This ground of appeal is dismissed.”

6. We heard the rival submissions and relied on the documents available on the record. The moot point of the addition was that the interest payment related ACSF which was debited by the assessee treating is as a simple interest paying to the party and chargeable to P & L A/c. But revenue has observed that this interest is not an interest but it’s accumulation of fund which is not a chargeable interest u/s 37 of the Act. Considering the Register Co-operative Society, Punjab in para 3 the direction was made for maintenance of the funds in the Banking Act. The ld. CIT(A) already discussed the issue, vide paragraph 5 of the order.

6.1. The ACSF fund is a contingent fund and the reason created to use the fund for a wide range of possibilities, including, meeting future plan payment, unexploited fund, emergency, central banks and Government set aside for future use from just in case, in banking, the terms referred to money i.e. set aside for a Financial Sale Institutions Debit Operation or for meeting emergency liquidity problem, i.e. no primary and secondary reasons respectfully.

6.2. During hearing, the ld. Counsel draws our attention in Circular No. 68/DOS, 10/2018 dated 12.05. 08 issued from CGM, NABARD, (copy is enclosed) in APB: “It is humbly submitted here that the Ld. A.O. has misdirected himself in treating the said deposit of the State Government as corpus of the assessee bank. As per circular No 68/D o S 10/2008 dated 12 May 2008, issued from CGM NABARD, [Copy on record], It is very much clear that the Balance in the said Agri. Credit Stabilization Fund is not at all a corpus of the Bank, as the same is not a part of "capital Fund" and nor a part of "Lendable Resources".

At page 2 of the said letter, in clause I (v) under the head "Lendable Resource" (LR) shall be computed as the sum of share capital, reserves including provisions and excluding the balance under Agricultural Credit Stabilization Fund (ACSF). deposits.........................and advances.

Thus as per the said letter, It is clear that the said fund is not a reserve of the assessee bank, nor the same is a provision, but is simply a deposit of the state government with the Bank, and the Bank pays simple interest on this deposit to the tune of 3% only, such as on saving bank accounts, which also gets added to the funds of the government. As such the action of the Worthy CIT(A) Jal-1, in confirming the action of Id. ACIT in disallowing the interest paid by the assessee/appellant is against law & facts of the case.”

6.3 As per counsel the plan in the said ACSF is not at all corpus of the bank as the same is not part of the capital fund and not a part of “Lendable Resource”. For calculation of “Lendable Resource”, the agricultural ‘ACSF’ was excluded.

6.4. Wethoughtfulobservethe details& we find that the objects of the fund as stated in the Scheme are as under: — The object of constitution of Agricultural Credit Stabilization Fund at the Apex and District Central Cooperative Banks' levels is to facilitate the conversion of short terms loans for agricultural purposes into medium terms loans and to provide conversion facilities to the instalments of medium term loans for agricultural purposes in circumstances in which total or partial failure of crops resulting from natural calamity renders the repayment of such short term loans or instalments of medium term loans impossible without dislocation of the credit structure and without hardship to individual agriculturalists. The principles and procedures set out below shall govern the establishment and utilization of the stabilization fund at various levels."

6.5. The resources for the establishment of the fund clearly indicate that the fund was created out of appropriation of profits of the appellant bank and therefore, even the credit of interest @ 3% on the balance at the beginning of the year is also an appropriation of profit to meet the exigencies as mentioned in the aims and objects of the fund and the interest cannot be a charge to the profit & loss account. The claim of the appellant that the fund was utilized for its business purposes and therefore the interest is business expenditure cannot be accepted. It is only an appropriation of profit towards a specific purpose and the same does not constitute business expenditure of the appellant. The same is the position with the interest on Corpus fund, which is meant for weaker sections of the society and it is only an appropriation of the profit and cannot be a charge to the income & expenditure account. Accordingly, the additions made by the Assessing Officer on this ground do not call for any interference and the ground raised by the appellant in this regard stands rejected.”

6.6 Accordingly, the interest is not an expenses chargeable u/s 37 of the Act. We find no infirmity in the order of the ld. CIT(A). Accordingly, the appeal of the assessee is dismissed.

Order pronounced in the open court on 15.11.2022