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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
Per Shri Balakrishnan S, Accountant Member This appeal is filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-1 [for short, “CIT(A)”],
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. Visakhapatnam in ITA No.10359/2016-17/CIT(A)-1/VSP/2019-20 dated 23/01/2020 for the A.Y. 2014-15. Cross objections are filed by the assessee in support of the order of the Ld.CIT(A).
Ground Nos. 1, 11 & 13 are general in nature which does not require any, therefore the same are dismissed.
Ground Nos. 2 to 4 relate to interest on share capital paid to the members of the bank. During the course of assessment proceedings, the Assessing Officer has noted that assessee had debited an amount of Rs.94,00,000/- for Assessment Year 2014-15 towards interest on share capital. The Assessing Officer called upon the assessee to show-cause as to why the said interest amount should not be treated as an appropriation of profit and added to the total income. In response, assessee submitted before the Assessing Officer that the assessee bank collects deposits from deposit holders, who are admitted as members and the deposits were given to the members as a loan under the A.P. Mutually Aided Cooperative Societies Act 1995, supports payment of interest on share capital as per section 16(1) of the Act. The Assessing Officer after considering the explanation of the assessee took a view that the interest on share capital to the members, amounts to appropriation of profits and such interest is paid out of surplus of profits and cannot be charged on income and hence,
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. cannot be allowed as a deduction and claim made by the assessee is disallowed. 4. On appeal before the ld. CIT(A) it was submitted that similar issue was decided by the Hon'ble ITAT in the case of Visakhapatnam Cooperative Urban Bank Ltd. in ITA No.19/VIZ/2011 for the Assessment Year 2007-08, dated 29/08/2011 and the Assessing Officer is not justified in making the addition. The ld.CIT(A) has considered the explanation given by the assessee and by following the order of the ITAT Visakhapatnam Bench in the case of Visakhapatnam Cooperative Urban Bank Ltd. (supra) came to a conclusion that interest on share capital paid to the members is an allowable deduction and directed the Assessing Officer to delete the impugned addition. The relevant portion of the order of the CIT(A) is extracted as under:-
“4.4 I have considered the submissions made. The issue to be resolved is whether interest on share capital would amount to appropriation of profit and not charge on income. I find that the Hon'ble ITAT, Visakhapatnam has examined this issue in detail in the case of Visakhapatnam Co-operative Bank for the Asst. Yr. 2007-08 in ITA No.19/Vizag/2011 dated 29.8.2011 and come to the ion that interest on share capital paid to members is an allowable on. The issue as to whether interest on share capital would amount to nation of profit arose again in the said case before the Hon'ble ITAT, 3patnam for Asst. Yrs. 2008-09, 2009- 10 & 2010-11 in ITA No.444, 445,449 & 450/Vizag/2012 & ITA No.726/Vizag/2013 & ITA No.2&38/Vizag/2014 and the bench followed the co-ordinate bench decision for the Asst. Yr. 2007-08. Respectfully following the decision of Hon'ble ITAT in the case of Visakhapatnam Co-operative Bank for the A.Ys. 2007-08 to 4
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. 2009-10, the AO is directed to delete the impugned additions of Rs.61,58,437/- for the Asst. Yr. 2012-13 and Rs.69,95,000/- for the Asst. Yr. 2013-14.
Being aggrieved, Revenue carried the matter in appeal before the Tribunal. 6. When this appeal is taken up for hearing, ld. counsel for the assessee has submitted that the issue involved in this appeal is covered by the decision of the coordinate bench of the Tribunal in the case of Visakhapatnam Cooperative Urban Bank Ltd. vs. Addl. CIT in ITA No. 449/VIZ/2012 for Assessment Year 2008-09 and requested that same may be followed. 7. On the other hand, ld. Departmental Representative relied on the grounds of appeal raised. 8. The present issue involved in this appeal is whether interest paid on share capital is allowable deduction or not. According to the assessee, it is allowable and as per Assessing Officer the interest on share capital to the members, amounts to appropriation of profits and such interest is paid out of surplus of profits and cannot be charged on income and hence cannot be allowed. The ld. CIT(A) has considered the order of the ITAT, Visakhapatnam in the case of Visakhapatnam Cooperative Urban Bank Ltd. for the Assessment Year 2007-08 in ITA No. 19/VIZ/2011 dated 29/08/2011 and came to a conclusion that interest on share capital paid to 5
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. the members is an allowable deduction. The very same issue has been considered by the ITAT, Visakhapatnam Bench in ITA No.449/VIZ/2012 (supra) by following the case of Visakhapatnam Co-operative Bank for the Assessment Year 2007-08 which upheld the view taken by the ld.CIT(A). For the sake of convenience, the relevant portion of the order is extracted below:- “22. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. In this case, the assessee has debited an amount of Rs.1,57,53,620/- towards interest on share capital. It was submitted that as per the section 16 of the A.P. Mutually Aided Cooperative Societies Act, 1995, it is an allowable expenditure. The A.O. has not accepted the explanation of the assessee and he has observed that the assessee has to allocate the interest on share capital only upon determination of the surplus arising from the business i.e. net profit. This is nothing but appropriation of profits but not an expenditure incurred for carrying on the business. The Ld. CIT(A) by following the decision of the coordinate bench of the Tribunal in assessee’s own case for the assessment year 2007-08 in ITA No.5/Vizag/2011 & 19/Vizag/2011 for A.Y. 2007-08 vide order dated 29.8.2011 has directed the A.O. to delete the addition made by him. It is submitted across the bar that the very same issue in the assessee’s own case is pending before the Hon’ble High Court. In view of the above, by following the coordinate bench of the Tribunal, in view of the doctrine of precedent, we dismiss this ground of appeal raised by the Department.” 9. Respectfully following the decision of the coordinate bench of the Tribunal, we find no infirmity in the order passed by the ld.CIT(A). Thus, these grounds of appeal raised by the revenue are dismissed.
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. 10. Ground Nos. 5 to 8 are related to addition in respect of disallowance of interest paid to the members of the cooperative bank under section 40(a)(ia) of the Act. 11. In the assessment order, the Assessing Officer has noticed that the assessee paid interest of Rs. 10,000/- and above to the various depositors, total amount of which computed, during the year was Rs.12,25,69,245/-. The assessee has not deducted tax at source as per section 194A of the Act on such interest payments. The Assessing Officer called upon the assessee to explain as to why the provisions of section 40(a)(ia) be not made applicable to the above interest payments. In response, the assessee has submitted that no deduction of TDS on interest accrued or paid to the members of the co-operative society on the deposits was required as per section 194A(3)(v) as it was clearly mentioned that the provisions of section 194A(1) shall not apply to such income credited or paid by a cooperative society. The Assessing Officer has considered the explanation of the assessee and observed that a plain reading of section 194A(3)(i)(b) clearly mandates that the requirement to deduct TDS and therefore the claim of the assessee is covered by exemption under section 194A(3)(v) was rejected and accordingly addition was made. 12. On appeal, ld. CIT(A) has considered the order of the Tribunal in the case of Visakhapatnam Cooperative Bank for the Assessment Year 2007-08
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. in ITA Nos. 5 & 19/VIZ/2011 dated 29/08/2011 and also CBDT Circular No. 9/282 dated 11/09/2002 and directed the Assessing Officer to delete the disallowance. The relevant portion of the order is extracted as under:- “5.6 I have considered the submissions made in this regard. The issue to be resolved is whether the interest paid to members exceeding Rs.10,000/- by the assessee, a co-operative bank would not attract liability to TDS in view of the exemption available in Sec.194A(3)(v) of the I.T.Act. The Hon'ble ITAT, Visakhapatnam, in the case of The Visakhapatnam Cooperative Bank Ltd. for the Asst. Yr. 2007-08 in ITA Nos. 5 & 19/Vizag/2011, dated 29.8.2011, held that the exemption u/s.194A(3)(v) would be available to the assessee and accordingly deleted the disallowance made u/s.40(a)(ia). The same issue again arose in the case of The Visakhapatnam Co-operative Bank Ltd., and was resolved in favour of the bank holding that the assessee would be entitled to exemption from TDS as per Sec.194A(3)(v) of the Act for A.Ys. 2008-09, 2009-10 & 2010-11 by the Hon'ble ITAT vide its order in ITA Nos. 444&445, 449, 450/Vizag/2012 & ITA No.726/2013 & ITA Nos. 2 & 38/Vizag/2014 dated 30.9.2016. In the light of the decision of the Ld.CIT(Appeals) in the assessee's case for A.Y. 2008-09, the clarification given by CBDT vide Circular No.9/2002 dated 11.9.2002 and the decisions rendered by the Hon'ble ITAT in the case of Visakhapatnam Cooperative Bank for A.Ys. 2007-08 to 2010-11 (in ITA Nos.5&9/Vizag/2011 dated 29.8.2011; ITA Nos. 444 & 445, 449, 450/ Vizag/2012 & ITA No.726/2013 & ITA Nos. 2 & 38/Vizag/2014 dated 30.9.2016), it is held that impugned disallowance is not justified and the AO is directed to delete the disallowance for A.Ys. 2012-13.” 13. On being aggrieved, the Revenue is in appeal before the Tribunal. 14. At the outset, ld. counsel for the assessee has submitted that the issue involved in this appeal is squarely covered by the decision of the coordinate bench of the Tribunal in the case of Visakhapatnam Cooperative Bank in ITA No. 38/VIZ/2014 for Assessment Year 2010-11 and requested to uphold the order of the ld. CIT(A). 15. On the other hand, ld. Departmental Representative relied on the grounds of appeal.
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. 16. We have heard both the parties, perused the material available on record and the orders of the authorities below. 17. The issue under consideration is squarely covered by the decision of ITAT, Visakhapatnam in ITA No.38/VIZ/2014 (supra) wherein the Tribunal has considered the Assessment Year 2007-08 in the case of Visakhapatnam Cooperative Bank and upheld the order of the ld. CIT(A). The relevant portion of the order is extracted as under:- “43. In so far as another appeal filed by the revenue for the same assessment year i.e. 2010-11 vide ITA No.38/Vizag/2014 is concerned, the facts are in brief that the assessee has paid interest to various depositors and no TDS was deducted. The A.O. of the opinion that assessee being a cooperative society engaged in the banking business is under obligation to deduct the TDS on interest payment exceeding ` 10,000/- in view of the specific provision u/s 194A(3)(i)(b) of the Act and the assessee has failed to deduct TDS. Therefore, the A.O. has disallowed the claim of the assessee. The Ld. CIT(A) initially confirmed the order of the A.O. Subsequently, the assessee has filed a rectification u/s 154 of the Act dated 14.12.2013 and submitted that the very same issue has been considered by the CIT(A) as well as ITAT for earlier years and decided in favour of the assessee. The Ld. CIT(A) has considered the submissions of the assessee and directed the A.O. to delete the addition by observing as under: 5.2 I have considered the submissions. The issue considered in the above appellate order was whether the assessee, a cooperative bank is required to effect TDS on payment of interest made to its members, when the amounts exceed Rs.10,000/-. A view was taken that in the above order dtd.22.10.2013 that if the interest amount exceeds Rs.10,000/- then the appellant is required to deduct TDS even if the payment was made to the members. Such a view was taken with reference to provision contained in section 194A(3)(i)(b) and it was held that section 194A(3)(i)(b) would prevail over section 194A(3)(v) of the Act. Such a view was taken without considering the clarification given in the CBDT circular No.9 of 2002 dtd.11.09.2002. The relevant clarification in the circular reads as under: Under section 194A of the Income-tax Act, 1961, tax is deductible at source from any payment of income by way of interest other than income by way of interest on securities. Clause(v) of sub-section (3) of section 194A exempts such income credited or paid by a cooperative
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. society to a member thereof from the requirement of TDS. On the other hand, clause (viia) of sub-section(3) of section 194A exempts from the requirement of TDS such income credited or paid in respect of deposits (other than time-deposits made on or after 1st July, 1995) with a cooperative society engaged in carrying on the business of banking. Representations have been received in the Board seeking clarification as to whether a member of a cooperative bank may receive without TDS interest on time deposit made with the cooperative bank on or after 1st July, 1995. The Board has considered the matter and it is clarified that a member of a cooperative bank shall receive interest on both time deposits and deposits other than time deposits with such cooperative bank without TDS under section 194A by virtue of the exemption granted vide clause (v) of sub-section (3) of the said section. The provisions of clause (vila) of the said sub-section are applicable only in case of a non-member depositor of the cooperative bank, who shall receive interest only on deposits other than time deposits made on or after 1st July, 1995 without TDs under section 194A. (emphasis underlined) Thus the circular clarifies that provisions of section 194A(3)(v) would prevail. 44. The Ld. CIT(A) by following his own decision for the assessment year 2007- 08 and also order of the Tribunal for the very same year in the rectification order he has deleted the addition made by the A.O. We find no reason to interfere with the order passed by the Ld. CIT(A). This appeal raised by the revenue is dismissed.” 18. Respectfully following the decision of the coordinate bench of the Tribunal in the above referred to case, we find no infirmity in the order of the ld. CIT(A). Thus, these grounds of appeal raised by the Revenue are dismissed.
Ground Nos.9 to 11 relate to amortization of premium on Government Securities i.e. HTM.
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. 20. The assessee has claimed an amount of Rs.2,43,742/- as ‘amortization of premium on Government Securities (HTM)’ in its profit & loss account relating to Assessment Year 2014-15. The Assessing Officer asked the assessee to explain the basis of which claim is made. It was submitted before the Assessing Officer that the premium paid was claimed as expenditure on the basis of amortization of Rs.2,43,742/- as it was a loss to the assessee bank and further the assessee bank was required to offer as income whenever the securities were sold for more than purchase price paid; that the amortization of expenditure is not a contingent liability since it was already incurred and the excess premium paid over fair value of the securities were amortized over a period of time of unexpired period of securities and that the question of contingency does not arise at all. The Assessing Officer has not accepted the explanation of the assessee for the reason that the actual expenditure was not incurred by the assessee and only a provision i.e., a contingent liability was made which may become payable at a future date. Contingent liabilities do not constitute expenditure and cannot be the subject matter of deduction even under the mercantile system of accounting. The assessee claims that the premium amount was actually incurred. However, upon perusal of the assessee’s reply, it becomes clear that it is only contingent in nature. The expenditure which is deductible for income tax purpose is towards a liability actually
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. existing at the time, but setting apart money which might became expenditure on the happening of an event is not an expenditure. For determining whether there is an expenditure, it is necessary to see whether there is an existing liability to pay irretrievably. The expenditure may be allowed in the year in which it is actually accrued or incurred by the assessee. Such provisions are not allowable to section 36 or 37 of the Act, hence, the same is disallowed and added to the total income of the assessee. 21. On appeal, ld. CIT(A) by following the CBDT Instruction No. 17/2008, dated 26/11/2008 directed the Assessing Officer to delete the addition. For the sake of convenience, the relevant portion of the order is extracted as under:- “4.3.2. I have considered the facts of the case, explanation of appellant and the decision of Assessing Officer. The Assessing Officer is of the opinion that the expenditure is contingent in nature. Hence not allowable as per Act. There is no dispute of the fact that the appellant had invested in Govt. securities as per the guidelines of RBI. The Govt. securities are to be purchased at premium i.e. more than the face value of securities. It is not in dispute that the premium paid is Rs. 18,02,037/-. The premium is paid in anticipation of further increase of value of share/ security. It is also not in dispute that the entire premium was debited in the books on the date of purchase of securities. The appellant had amortized the expenditure for A.Y. 2015-15 at Rs. 2,43,742/- and claimed deduction. During the appellant proceedings, the ld.AR of the appellant had brought to my notice that the issue was decided by my predecessor in favour of the appellant while deciding the issue for the A.Y. 2012-13 and 2013-14. 6.3 In view of the CBDT Instruction in respect of the investments classified under HTM category, the premium should be amortized over the period remaining to maturity. From the details filed it is seen that the securities were held under HTM category, and the premium paid over the cost of acquisition ave been amortized over the period of maturity and claimed as allowance. I find that the assessee's claim is in accordance with the above referred CBDT Instruction. Therefore, the AO is 12
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. directed to allow this claim & delete the impugned addition made for A.Y. 2012-13 & AY 2013-14. Following the rule of consistency, the grounds raised by the appellant is allowed and the Assessing Officer is directed to delete the addition.”
On being aggrieved, Revenue is in appeal before the Tribunal. 23. Ld. Departmental Representative relied on the grounds of appeal. 24. Ld. counsel for the assessee has supported the order of the Assessing Officer. 25. We have heard both the parties, perused the material available on record and the orders of the authorities below.
In this case, the assessee has claimed an amount of Rs.2,43,742/- as amortization of premium on Government Securities (HTM) in its profit & loss account relates to Assessment Year 2014-15. When the Assessing Officer asked the assessee to explain in detail, it is submitted that the premium paid was claimed as an expenditure on basis of amortization for Rs.2,43,742/- as it was a loss to the assessee bank and further assessee bank was required to offer as income whenever securities were sold for more than the purchase price paid and the amortization of expenditure is not a contingent liability since it was already incurred and the excess premium paid over fair value of the securities were amortized over a period of time of unexpired period of securities and the same has to be allowed. However, the Assessing Officer is of the view that it is only a
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. contingent liability, which may become payable at a future date, hence, disallowed the same. On appeal, ld. CIT(A) by following the CBDT Instruction (supra) has observed that in view of the CBDT instruction in respect of investments classified under HMT category, the premium should be amortized over the period of remaining to maturity. From the details filed, it is seen that the securities were held under HTM category and the premium paid over the cost of acquisition have been amortized over a period of maturity and claimed as allowance. He found that assessee’s claim is in accordance with the CBDT Instruction and directed the Assessing Officer to allow this claim and delete the addition. The ld. Departmental Representative has not pointed out any error in the order passed by the ld. CIT(A), which is neither contrary to any provision of law nor CBDT Circular. We have also considered CBDT circular and find that ld. CIT(A) by following the Circular No. 17/2008, dated 26/11/2008 directed the Assessing Officer to delete the addition. We find no infirmity in the order of the ld.CIT(A). Thus, these grounds of appeal raised by the Revenue are dismissed. 27. Ground No.12 is related to disallowance of premium paid to LIC of India amounting to Rs.5,75,212/- towards gratuity liability of employees. The Ld.AR relied on the decision of ITAT, Visakhapatnam in the case of The District Co-operative Central Bank in I.T.A. Nos.49 & 50/Viz/2012. The
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. Ld.AR also submitted that the application for approval of gratuity fund was made by the assessee to CIT on 08.11.2011, which is yet to be approved by CIT.
Per contra the ld.DR argued that since the fund is not approved, no deduction is allowable for the payments made to LIC of India. The ld.DR also relied on Shree Sajjan Mills Ltd. vs. Commissioner of Income-tax 156 ITR 585 (SC)/[1985].
We have heard both the parties, perused the material available on record and the orders of the authorities below. We are of the considered view that the facts are not similar / identical in the case Shree Sajjan Mills Ltd. vs. Commissioner of Income-tax 156 ITR 585 (SC)/[1985], relied by the Revenue. Admitted facts are that the payments towards liability amounting to Rs 5,75,212 was directly made to LIC of India as a premium based on actuarial valuation, where the policy governing the fund is unapproved by CIT as on the date of contribution by way of premium. The Ld.CIT(A) also in Para 4.4.2 agreed to the fact that the application for approval of gratuity fund was made by the assessee to CIT on 08.11.2011, which is yet to be approved by CIT. The Ld.CIT(A) relying on the decision of Hon’ble ITAT, Hyderabad in the case of Capital IQ Information Systems (India) P Ltd [ITA No 84/HYD/2013] allowed the claim of the assessee.
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. The relevant part of the order of the Tribunal is extracted in Page No 16 of the Ld.CIT(A) order. Respectfully following the decision of Co-ordinate Bench of ITAT, we concur with in the directions of the Ld.CIT(A) and consequently this ground raised by the Revenue is dismissed.
Cross objections filed by the assessee are in support of the orders of the CIT(A). As there is no grievance against the orders of the CIT(A), the same are dismissed as infructuous.
In the result, appeal filed by the Revenue and the cross objections filed by the assessee are dismissed.
Order Pronounced in open Court on 16th March, 2022.
Sd/- Sd/- (दुव्वूरु आर.एल रेड्डी) (एस बालाकृष्णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) न्याधयकसदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER Dated :16.03.2022 L.Rama, SPS
ITA No. 68/Viz/2021 and C.O.No.59/Viz/2021, A.Y.2014-15 M/s. Kanakamahalakshmi Co-operative Bank Ltd. आदेश की प्रतितिति अग्रेतिि/Copy of the order forwarded to:- 1. रधजस्व/The Revenue – ACIT, Circle-1(1), Visakhapatnam 2. ननधधाऩरती/ The Assessee– M/s. The Kanakamahalakshmi Co- operative Bank Ltd., D.No.49-34-22, Main Road, Akkayyapalem, Visakhapatnam. 3. The Principal Commissioner of Income Tax-1, Visakhapatnam 4. आयकर आयुक्त (अपील)/ The Commissioner of Income Tax (Appeals)-1, Visakhapatnam 5. नवभधगीय प्रनतनननध, आयकर अपीलीय अनधकरण, नवशधखधपटणम/ DR,ITAT, Visakhapatnam 6.गधर्ा फ़धईल / Guard file आदेशधनुसधर / BY ORDER
Sr. Private Secretary ITAT, Visakhapatnam