2025 (5) TMI 1791 - AT - Income Tax

Change of Status of the appellant from Co-operative Society to Banking Company - applicability of section 115-O - HELD THAT - As decided in own case 2015 (4) TMI 1161 - ITAT KOLKATA as held that the there is no basis for the Assessing Officer to change status of the assessee from a co-operative society to a company. As on the face of the assessment order the status of the appellant was mentioned as cooperative bank under the Income Tax Act 1961 and there is no status as cooperative bank but the status is of Cooperative Society and the status of the assessee was clearly mentioned as Cooperative Society in the Income Tax Computation Form and the tax was computed at the rate of tax applicable to a Cooperative Society. So even the Ld. AO had accepted the status of the appellant as a Cooperative Society and therefore the provisions of section 115-O of the Act are not applicable. Since the issue is decided in favour of the assessee by the order of the Coordinate Benches of the Tribunal in AYs 2007-08 2009-10 and 2010-11 therefore following the order of the coordinate benches the change of status of the assessee from cooperative Society to cooperative bank is held to be not justified. Dividend distribution tax u/s 115-O of the Act and interest u/s 115P of the Act is applicable only to a domestic company and since the assessee is not a domestic company therefore there was no liability for levying of any dividend distribution tax u/s 115-O of the Act and consequential interest u/s 115P of the Act. Thus Ground No. 3 is also allowed in favour of the assessee more so when the same has been allowed in favour of the assessee by the coordinate bench of the Tribunal A.Y. 2010-11. Disallowance u/s 40(a)(ia) - non-submission of bills/vouchers ledger copy proof of filing of e-TDS returns/statement etc. - HELD THAT - As submitted that the assessee has sufficient evidence to justify that either the tax was not deductible or wherever required it was duly deposited in time. The assessee requested that the matter may be remitted to the Ld. AO to verify. In view of the written submission filed the order of the Ld. CIT(A) in respect of confirmation of all these disallowances is their way set aside and the issue is remitted to the AO who shall verify the evidences filed by the assessee that either TDS was not deductible or wherever deductible the same has been paid to the credit of the Central Government and thereafter wherever required the disallowances should be made u/s 40(a)(ia). These grounds of appeal are therefore allowed for statistical purposes. Non-deduction of employees contribution to Provident Fund as income u/s 2(24)(x) r.w.s. 36(1)(va) - CIT(A) has upheld the ground of appeal adduced by the appellant in relation to section 36(1)(va) of the Act as the appellant was engaged in the business of banking and was treated as a non-schedule bank - HELD THAT - Since the concerned authority of Employees Provident Fund had extended the due date and allowed a grace period of 5 days which was available up to December 2015 therefore on this issue also the order of the Ld. CIT(A) is hereby set aside and the matter is remitted back to the Ld. AO to verify the amount paid within the grace period and delete the same and the rest of the addition made shall be upheld. In view of the decision of Checkmate Services (P) Ltd. 2022 (10) TMI 617 - SUPREME COURT (LB) the rest of the amount shall remain confirmed. Hence this ground of appeal is partly allowed. Allowable business expenditure - disallowance of Donation and Subscription as the expenses - whether were in the nature of advertisement in souvenirs sponsorships etc. all of which were incidental to and for the purpose of business? - HELD THAT - CIT(A) did not uphold this ground of appeal as the assessee had not furnished any proof or evidence of the same being for the purpose of the business. Before us as well though a written submission has been filed in this regard but no evidence has been filed in support of the claim that the expenditure made was for the purpose of business. Moreover the assessee did not press this ground of appeal in the course of the hearing before us. Hence the addition made by the Ld. AO is hereby confirmed. Addition for provision for income tax being a duplicate addition - HELD THAT - Since this issue has not been adjudicated upon by the Ld. CIT(A) therefore the Ld. AO is directed to verify whether the assessee had itself made the disallowance for computing the income and if it is so then the duplicate addition should be deleted. Hence this ground of appeal is allowed for statistical purposes since provision made for income tax was already disallowed by the assessee as it is not an allowable expenditure. Disallowance of provision on standard assets - HELD THAT - Bench was of the view that the CIT(A) has not adjudicated this issue and therefore the same maybe remitted to the Ld. AO to verify and delete the addition if the provisions on standard assets is eligible for deduction u/s 36(1)(viia) of the Act as per the RBI guidelines and the provisions of the Act and the judicial pronouncements relied upon as the assessee is to be treated as a non-scheduled bank though its status is of a cooperative society. Hence this Ground No. 11 of the appeal is allowed for statistical purposes. Addition being 15% of Vehicles Hire Charges Petrol Mobile Expenses and Entertainment on estimated basis for non-business purposes - HELD THAT - The claim of expenditure u/s 37(1) of the Act needs to be supported by primary documents which are the bills and vouchers and since the assessee could not produce the same before the Ld. AO therefore the same was partly disallowed. However we find that the disallowance of expenditure is excessive and the same is reduced to 10% from 15% made by the Ld. AO with consequential relief to the assessee. Hence ground of the appeal is partly allowed. Donation and subscription - HELD THAT - As stated that the assessee had already added back the amount of Rs. 88, 680/- in the computation of total income of Rs. 9, 66, 04, 937/- and the said addition of Rs. 90680/- is a duplicate one and is required to be deleted as the balance amount of Rs. 2, 000/- was allowable u/s 37. The order of the Ld. CIT(A) in this regard has not adjudicated this issue therefore this issue is remitted back to the AO to verify the computation of income made by the assessee and if the assessee has itself made the disallowance delete the addition as double addition cannot be made for the same. As regards the balance sum of Rs. 2, 000/- the assessee has not established how the same was allowable u/s 37 of the Act hence the addition to this extent is confirmed and Ground is allowed for statistical purposes.

Summary

The core legal issues considered by the Tribunal across the appeals for assessment years 2014-15, 2015-16, and 2017-18 primarily revolve around the following questions:

1. Whether the status of the assessee should be treated as a "Co-operative Society" or as a "Banking Company" or "Domestic Company" for the purposes of the Income Tax Act, 1961, and the consequent applicability of dividend distribution tax under section 115-O and interest under section 115-P.

2. Whether the disallowances made by the Assessing Officer under section 40(a)(ia) of the Income Tax Act, 1961 for various expenses on account of non-deduction or non-submission of proof of tax deducted at source (TDS) are justified.

3. Whether the additions made on account of provisions for income tax and provisions on standard assets are justified or constitute double additions.

4. Whether the disallowance of employees' contribution to Provident Fund as income under section 2(24)(x) read with section 36(1)(va) is justified, considering the grace period allowed for deposit under the Provident Fund Act.

5. Whether the disallowance of donation and subscription expenses is justified, particularly when such expenses are claimed to be incidental and for the purpose of business.

6. Whether the additions made on estimated basis for vehicle hiring charges, entertainment, petrol, and mobile expenses are justified in the absence of supporting vouchers.

Issue 1: Status of the Assessee and Applicability of Dividend Distribution Tax

The relevant legal framework involves the classification of the assessee under the Income Tax Act, 1961, and the applicability of dividend distribution tax under section 115-O and interest under section 115-P, which are leviable only on domestic companies. Additionally, the Banking Regulation Act, 1949, and the Companies Act, 1956/2013, are relevant for determining the status of the assessee.

The Assessing Officer (AO) treated the assessee as a "Banking Company" (non-scheduled bank) for income tax purposes, applying provisions of the Income Tax Act applicable to banking companies, including levy of dividend distribution tax under section 115-O and interest under section 115-P. This was despite the assessee filing returns as a "Co-operative Society" and previous orders of the Tribunal and the Hon'ble Jurisdictional High Court holding the status as a cooperative society.

The Tribunal noted that the issue had been conclusively decided in the assessee's favor in earlier years (AYs 2007-08, 2009-10, and 2010-11) by coordinate benches of the Tribunal and confirmed by the High Court, where it was held that the AO's change of status from cooperative society to company was without basis and not permissible unless supported by cogent reasons. The Department had not challenged these findings before the High Court, and thus the issue attained finality.

The Tribunal held that the status of the assessee must be treated as a cooperative society and not a banking company or domestic company. Consequently, the levy of dividend distribution tax under section 115-O and interest under section 115-P was not justified. The Tribunal observed, "The change of status of the assessee from cooperative Society to cooperative bank is held to be not justified."

Therefore, Grounds relating to the change of status and levy of dividend distribution tax were allowed in favor of the assessee.

Issue 2: Disallowances under Section 40(a)(ia) for Non-Deduction of TDS

Section 40(a)(ia) of the Income Tax Act disallows expenses where tax is deductible at source but not deducted or paid to the government. The AO disallowed various expenses including law charges, audit fees, vehicle hiring charges, agents' commission, security expenses, and advertisement expenses on the ground of non-deduction or non-submission of proof of TDS.

The CIT(A) upheld these disallowances relying on the Supreme Court decision in Shree Choudhary Transport Co. vs Income Tax Officer, which clarified the applicability of TDS provisions.

The assessee contended that tax was deducted and deposited wherever applicable and that the disallowance was made without considering the tax audit report and other evidence filed. The assessee explained that due to demonetization and workload, documents could not be submitted timely but had since filed TDS returns and submitted ledger extracts and statements from the TRACES portal.

The Tribunal found that the CIT(A) had not adequately considered the evidence submitted by the assessee to prove compliance with TDS provisions. The Tribunal observed that the AO's disallowance was based on suspicion and surmise without rejecting the books of account or tax audit reports.

Accordingly, the Tribunal set aside the CIT(A) order confirming disallowances and remitted the matter to the AO for verification of the evidence regarding TDS deduction and deposit. The AO was directed to allow expenses where TDS was deducted and deposited or where TDS was not applicable, and disallow only where non-compliance was established.

This approach was applied mutatis mutandis to all the relevant assessment years.

Issue 3: Additions for Provision for Income Tax and Provision on Standard Assets

The AO made additions for provisions for income tax and provision on standard assets, treating them as disallowable expenses or duplicate additions.

The Tribunal noted that provision for income tax is not an allowable expense and the assessee had already excluded the provision in its computation of income, thereby making the AO's addition a duplicate. The CIT(A) had not adjudicated this ground, so the Tribunal remitted the issue to the AO for verification and deletion of duplicate additions.

Regarding provision on standard assets, the assessee claimed deduction under section 36(1)(viia) of the Act, submitting compliance with Reserve Bank of India (RBI) prudential norms on income recognition, asset classification, and provisioning. The Tribunal found that the CIT(A) had not adjudicated this issue and remitted it to the AO to verify eligibility under section 36(1)(viia) and relevant RBI guidelines. The assessee was to be treated as a non-scheduled bank for this purpose.

Issue 4: Disallowance of Employees' Contribution to Provident Fund

The AO disallowed employees' contribution to Provident Fund as income under section 2(24)(x) read with section 36(1)(va) for non-deposit within the due date. The assessee contended that the delay was within the grace period of five days allowed under the Provident Fund Act and supported this with circulars and judicial precedents including Hunsur Plywood Works Ltd. vs Deputy Commissioner of Income-Tax.

The CIT(A) upheld the disallowance without proper adjudication. The Tribunal, however, accepted the assessee's submission that the grace period was applicable up to December 2015 and amounts deposited within this period should be allowed as deduction. The Tribunal remitted the matter to the AO to verify challans and allow deduction for amounts deposited within the grace period, confirming disallowance only for amounts deposited beyond the grace period.

Issue 5: Disallowance of Donation and Subscription Expenses

The AO disallowed donation and subscription expenses on the ground that they were not allowable as business expenses under the Act. The assessee claimed these expenses were for advertisement, sponsorships, and business promotion, thus allowable under section 37.

The CIT(A) rejected the claim due to lack of evidence. The Tribunal noted that the assessee did not press this ground during hearing and failed to produce supporting evidence. Accordingly, the Tribunal confirmed the disallowance.

Issue 6: Additions on Estimated Basis for Vehicle Hiring, Entertainment, Petrol, and Mobile Expenses

The AO disallowed 15% of the total expenses on vehicle hiring, entertainment, petrol, and mobile expenses on an estimated basis due to absence of supporting vouchers, suspecting possible excessive claims.

The CIT(A) confirmed the addition without adjudicating the grounds of appeal. The Tribunal found that the AO's addition was arbitrary and not supported by material evidence. However, since the assessee could not produce the primary documents, the Tribunal reduced the disallowance from 15% to 10%, granting consequential relief to the assessee.

Other Issues

Grounds relating to denial of opportunity to produce documents, duplicate additions on account of donation and subscription, and provision for income tax were also considered. The Tribunal allowed these grounds for statistical purposes and remitted them to the AO for verification and appropriate action.

Significant Holdings:

"The change of status of the assessee from cooperative Society to cooperative bank is held to be not justified."

"The levy of dividend distribution tax under section 115-O and interest under section 115-P is not applicable to the assessee as it is not a domestic company."

"Disallowance under section 40(a)(ia) cannot be confirmed without verifying that tax was not deducted or deposited; mere non-submission of documents without rejection of books of account or tax audit reports is insufficient."

"Provision for income tax is not an allowable expenditure and if already excluded in computation, duplicate addition is not justified."

"Amounts deposited within the grace period allowed under the Provident Fund Act should be allowed as deduction under section 36(1)(va)."

"Disallowance of expenses on estimated basis without material evidence is arbitrary; however, absence of primary documents justifies partial disallowance."

In conclusion, the Tribunal partly allowed the appeals for all assessment years primarily by restoring the status of the assessee as a cooperative society, disallowing levy of dividend distribution tax, remitting issues of disallowance under section 40(a)(ia) for verification of TDS compliance, and directing verification of provisions and duplicate additions. Disallowances unsupported by evidence were either reduced or confirmed based on the facts and submissions. The appeals were disposed of with directions for further verification and compliance by the Assessing Officer.