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2017 (11) TMI 1746 - AT - Income TaxCooperative bank is eligible for deduction u/s 36(1)(viia) - Held that - The assessee has debited the same amount to the account of the customers. It is normal practice of the Banks to debit the expenses relating to the customer to their account so as to enable the bank to collect the entire outstanding along with the expenses incurred in the process of recovery of loans. Therefore we agree with the assessee s argument that if the expenditure is debited to the P&L account bank would incur a loss therefore the assessee has rightly debited the expenses to the customer s account. Hence the same should be included in the outstanding balance of the debts and while creating the provision the debt should be included by the expenses incurred by the bank. The Cooperative bank is eligible for deduction u/s 36(1)(viia) of the APCS Act @ 7.5% of the profits and 10% of its rural advances. The deduction claimed by the assessee as a provision for doubtful debts or NPA is within the limit provided by the Income Tax Act u/s 36(1)(viia) inclusive of the expenses. Therefore the above sums are allowable u/s 36(1)(viia) of the Act accordingly we uphold the order of the CIT(A) and dismiss the appeal of the revenue on this ground. Allowability of reserve created for sundry debtors Government - Held that - A.R argument that on receipt of the subsidy the same was offered to the income in subsequent year is not tenable because the income of each assessment year has to be assessed independently and the assessee cannot postpone the income to the next assessment year. The assessee is a Cooperative Bank following the mercantile system of accounting. The subsidy released to PACS was not a loan it was the assistance of funds in lieu of expected subsidy. Therefore the order of the CIT(A) on this issue cannot be sustained hence set aside and the order of the A.O. is restored and the addition is upheld. The appeal of the revenue on this issue is allowed. DCCB s share of 35% of waiver of penal interest and interest on overdue deposits - Held that - In this case during the appeal hearing the Ld. A.R. did not furnish the details with regard to what was the exact nature of overdue interest created for reserve. As per the RBI guidelines the assessee need not recognize the interest on bad and doubtful debts. Such interest neither credited to the profit & loss account nor offered as income. The assessee requires to record such accrued interest in a Memorandum of account in their books. It is not known whether the interest related to the overdue interest is on NPA advances or not. In case the interest is related to the non performing assets (NPA) as claimed by the assessee the same required to be allowed as a deduction since the same cannot be recognised as income and the treatment given by the assessee in the profit & loss account appears to be correct. Since the issue involve verification with regard to the true and correct nature of the overdue interest both the parties have agreed to remit the matter back to the file of the A.O. to verify the true and correct nature of interest whether it is relating to bad and doubtful debts or NPA or on performing assets. Therefore we direct the A.O. to verify the true nature of the overdue interest and decide the issue afresh on merits. This ground of appeal of the revenue is allowed for statistical purposes. Provision for NPA - deduction is allowable u/s 36(1)(viia) - Held that - As perused the materials available on record and gone through the orders of the authorities below. The assessee is entitled for deduction u/s 36(1)(viia) of the Act to the extent of 7 % of total income and 10% of rural advances as NPA. The assessee has categorized the interest of Rs. 2, 84, 11, 535/- as NPA provision. The assessee argued that it is an interest part of the advances which was categorized as NPA. The ld.AO did not dispute the fact that the sum represented the interest on advance which was categorized as NPA. The AO did not bring any evidence to show that the same was not NPA and not covered by the prudential norms of RBI. D.R did not controvert that the provision for Bad and doubtful inclusive of NPA provision crossed the limit provided in section 36(1)(viia). Since the deduction claimed by the assessee is within the limit of section 36(1)(viia) the same is allowable as per the provisions of section 36(1)(viia)no infirmity in the order of the CIT(A) and the same is upheld. 3% interest on agricultural stabilization fund - Held that - A.O. disallowed the above expenditure under the impression that the said amount was not an expenditure but it was related to the investments. However during the appeal hearing before the CIT(A) and before us the assessee argued that the item represents the interest paid by the bank to the depositors. Since the amount is interest paid on the deposits of the co-operative societies relating to fund called agricultural credit stabilization fund the same is a business expenditure and the CIT(A) has allowed the same correctly. There is no dispute with regard to the genuineness of the expenditure and we agree with the Ld. CIT (A) that it was not an appropriation of the profits and it was the interest paid on the deposits of PACS. The appeal of the revenue on this ground is dismissed. Reserve for Co-operative Educational fund - Held that - As gone through the orders of the authorities below. As per section 45(1) of A.P. Co-operative Societies Act 1964 the society was subject to such limits as may be prescribed credit of 1% of gross profit or gross income in a year as the case may be to the Co-operative Educational fund. As per the A.P. C-operative Societies Act it is mandatory to the bank to create educational fund and Hon ble M.P. High Court in the case of Keshkal Co-operative Marketing Society 1986 (4) TMI 13 - MADHYA PRADESH HIGH held that the payment to the reserve fund was an obligation created under the statute. In the instant case the assessee had created the educational fund as mandated by the co-operative credit society. The assessee submitted that the payment was made to A.P. State Cooperative union to give training to their staff but not the contribution to the Union. Therefore as rightly held by the CIT(A) the payment or contribution to co-operative educational fund is diversion of profits at source by over riding title under the Act. Hence we do not find any reason to interfere with the order of the Ld. CIT(A) and the same is upheld.
Issues Involved:
1. Statutory Reserve under Section 46(e) of the APCS Act. 2. Reserve for Bad and Doubtful Debts. 3. Reserve for Sundry Debtors. 4. Reserve for Interest Subsidy Receivable from Government. 5. DCCB’s Share of Waiver of Penal Interest and Interest on Overdue Deposits (IOD). 6. Overdue Interest. 7. Provision for Non-Performing Assets (NPA). 8. Interest on Agricultural Stabilization Fund. 9. Reserve for Co-operative Educational Fund. Issue-wise Detailed Analysis: 1. Statutory Reserve under Section 46(e) of the APCS Act: The assessee created reserves for the assessment years 2007-08, 2008-09, and 2010-11 and claimed deductions under Section 36(1)(viia) of the Income Tax Act. The A.O. disallowed the deduction, arguing that Section 46(e) of the APCS Act, which mandated the reserve, was omitted w.e.f. 25.4.2001. The CIT(A) allowed the appeal, but the Tribunal held that Section 46 deals with the investment of funds and does not mandate diversion of income. The Tribunal concluded that the reserve is not allowable as a deduction. 2. Reserve for Bad and Doubtful Debts: For the A.Y. 2007-08, the assessee claimed a deduction for reserves created for sundry debtors. The A.O. disallowed the deduction, but the CIT(A) allowed it, stating it was in compliance with RBI norms and should be allowed as a business expenditure. The Tribunal upheld the CIT(A)'s decision, recognizing the reserve as a legitimate business expense under Section 36(1)(viia) of the Income Tax Act. 3. Reserve for Sundry Debtors: The A.O. disallowed the reserve for sundry debtors, arguing it should be treated as an expenditure. The CIT(A) allowed the deduction, stating it was a legitimate business expense. The Tribunal upheld the CIT(A)'s decision, agreeing that the reserve should be included in the outstanding balance of debts and allowed as a deduction under Section 36(1)(viia). 4. Reserve for Interest Subsidy Receivable from Government: The A.O. disallowed the reserve created for interest subsidy receivable from the Government, arguing it cannot be treated as a doubtful debt. The CIT(A) allowed the appeal, but the Tribunal reversed the CIT(A)'s decision, stating that the subsidy is receivable from the Government and cannot be treated as a bad debt unless repudiated by the Government. 5. DCCB’s Share of Waiver of Penal Interest and IOD: The A.O. disallowed the waiver of penal interest and IOD, but the CIT(A) allowed it, stating it was a business expenditure incurred in the ordinary course of business. The Tribunal upheld the CIT(A)'s decision, recognizing the waiver as a legitimate business expense and allowable under Section 37(1) of the Income Tax Act. 6. Overdue Interest: The A.O. disallowed the overdue interest, arguing it should not be recognized as income. The CIT(A) allowed the appeal, but the Tribunal remitted the matter back to the A.O. for verification of the true nature of the overdue interest, whether it relates to bad and doubtful debts or performing assets. 7. Provision for NPA: The A.O. disallowed the provision for NPA, but the CIT(A) allowed it, stating it was within the limits of Section 36(1)(viia) of the Income Tax Act. The Tribunal upheld the CIT(A)'s decision, recognizing the provision as allowable under the Income Tax Act. 8. Interest on Agricultural Stabilization Fund: The A.O. disallowed the interest on the agricultural stabilization fund, but the CIT(A) allowed it, stating it was a business expenditure. The Tribunal upheld the CIT(A)'s decision, recognizing the interest as a legitimate business expense. 9. Reserve for Co-operative Educational Fund: The A.O. disallowed the reserve for the co-operative educational fund, but the CIT(A) allowed it, stating it was a statutory obligation. The Tribunal upheld the CIT(A)'s decision, recognizing the reserve as a diversion of profits by overriding title under the APCS Act. Conclusion: The Tribunal partly allowed the appeals filed by the revenue for statistical purposes and upheld the CIT(A)'s decisions on several issues, recognizing the reserves and provisions as legitimate business expenses and allowable deductions under the Income Tax Act. The cross objections filed by the assessee were also partly allowed for statistical purposes.
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