TMI Blog2018 (9) TMI 1620X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has made the payments to the LIC towards group gratuity scheme directly in approved schemes. The assessee has also obtained the policy in favour of the bank. The assessee has no control over the funds contributed to LIC towards the gratuity. The assessee is receiving the gratuity payment directly from the LIC of India as per the scheme which is paid to the employee on happening of the event i. e. retirement or death or resignation. We hold that the assessee is entitled for the deduction for payment of gratuity to LIC and accordingly, we set aside the order of the lower authorities and allow the appeal of the assessee. Amortization loss on account of merger of Palakol Cooperative Urban Bank - Held that:- It is very clear that assessee company being an Indian company can only make a claim under section 35DD of the Act. The Income Tax Act, 1961 has defined what is an Indian company, as per section 2(26), Indian company means a company formed and registered under the companies Act 1956. In the present case, the assessee is not an Indian company and not registered under the Companies Act, 1956. It is only a Co-operative bank, therefore, assessee is not eligible to make claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 20/03/2017 for the Assessment Years 2012-13 2013 14. ITA No. 299/VIZ/2007 2. Ground Nos. 1 7 are general in nature, no adjudication is required, therefore, same are dismissed. 3. Ground No. 2 relating to addition of ₹ 26, 10, 443/- on account of interest on reverse fund. 4. Facts of this issue in brief are that during the course of assessment proceedings, the Assessing Officer has noted that the assessee had claimed ₹ 26, 10, 443/- in the profit loss account as interest on reserve fund under the category provisions and other expenditure . The Assessing Officer called upon the assessee to show-cause as to why the interest on reserve fund should not be treated as appropriation of profit and added to the total income. The assessee submitted before the Assessing Officer that the amount of ₹ 26, 10, 443/- was claimed as an expenditure at par with the interest payable to the deposit holders as it belong to the members of the society. The Assessing Officer did not accept the explanation of the assessee and made the addition of ₹ 26, 10, 443/- by making the following observations:- The submissions of the A. R of assessee have been c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Co-operative Act envisages real cost of funds to earn I arrive the real income. Hence the appellant appeal the Hon'ble Commissioner of Income tax (Appeals) to kindly delete the disallowance made by the respected Assessing Officer for ₹ 26, 10, 443/-. 6. The ld. CIT(A) after considering the explanation of the assessee observed that provision for interest has been made for the amount lying in the reserve fund. The said provision is notional and does not ascertain to be accrued liability. Mere provision made in the accounts would not be eligible for deduction. Accordingly, he found that Assessing Officer is justified in making the impugned disallowance and confirmed the order of the Assessing Officer. 7. On appeal before us, ld. counsel for the assessee has relied on the ground of appeal. 8. Ld. Departmental Representative supported the orders passed by the authorities below. 9. We have heard both the parties, perused the material available on record and the orders of the authorities below. 10. We find that the assessee has made a provision of ₹ 26, 10, 443/- in the profit loss account as interest on reserve fund . This provision is made by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal basis and it cannot be considered as an accrued liability. Mere provision made in the accounts would not be eligible for deduction. We find that ld. CIT(A) correctly confirmed the order of the Assessing Officer. Thus, this ground of appeal raised by the assessee is dismissed. 15. Ground No. 4 relates to claim towards staff gratuity. 16. In the assessment order, the Assessing Officer has observed that during the course of scrutiny proceedings, on verification, it is noticed that the assessee had claimed ₹ 4, 58, 983/- in the profit and loss account for the year ended 31/03/2012 as a staff gratuity. In this regard, it is requested the assessee to show-cause why the above amount should not be disallowed and added back to the total income as the gratuity fund has not yet been approved by the Commissioner of Income Tax. It was submitted before the Assessing Officer that the Board had obtained gratuity insurance policy during the year 2011-12 and in fact the amount was paid to LIC of India on behalf of the employees as per the agreement. In fact, the assessee has submitted an application to the Commissioner of Income Tax dated 08/11/2011 which is yet to be approved and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld as under:- 8. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee is a cooperative bank and created the group gratuity fund/trust of the District Co-operative Central Bank Employees but the same was not yet approved by the CIT. Pending receipt of approval, the assessee had made application to LIC of India under pension and group schemes, and taken policy under Master proposal for group for payment of gratuity on 1. 7. 2003, and is contributing the sums to the LIC of India towards the group gratuity on actuarial basis. The assessee has not made any provision and made the payment before filing the return of income. On happening the event, the assessee bank is receiving the gratuity payment from the LIC which is being paid to the employee concerned and no further deduction is being claimed by the assessee as expenditure. Thus no double deduction is claimed. The expenditure claimed by the assessee under group gratuity scheme to LIC of India was allowed in the earlier years prior to 2007-08. During the previous year relevant to the assessment year 2007-08, the A. O. disallowed the same sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come referred to in section 28 (v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust . We have also carefully gone through the provisions of sec. 37 of the Income-tax Act. Sec. 37 provides for deduction of expenditure not being in the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee, but laid out and expended wholly and exclusively for the purposes of the business or profession, while computing income chargeable to tax. The main contention of the Revenue is that under sec. 36(1)(v), the payment made by the assessee as employer could be allowed only in respect of approved gratuity fund. Since the Group Gratuity Scheme is not approved by the CIT, according to the Revenue, it cannot be allowed. However, the contention of the assessee is that in view of the judgment of the Madras High Court in the case of Premier Spinning Mills Ltd. (supra) and the judgment of the jurisdictional High Court in the case of Warner Hindustan Ltd. (supra), it has to be allowed. 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, in the case of the assessee, the assessee claimed deduction of the expenditure on account of actual expenses claimed under the head gratuity contribution. ITAT Ahmedabad Bench in the case of New Bharat Engineering Works (Jam) Ltd. (supra) held Disallowance under s. 40A(7) - Gratuity Actual payment of funds to LIC and not mere provision - Not hit by s. 40A(7) - CIT vs Gujarat Machine Tools (ITA 666/A hd/1985) followed . Hon'ble Punjab Haryana High Court in the case of CIT Vs Bitoni Lamps Ltd. 144 Taxman 33 held that Section 40A(7) of the Income-tax Act, 1961 - Business disallowance - Gratuity - Assessment year 1979-80 - Assessee-company claimed deduction under section 40A(7) (b) (i) on account of gratuity actually deposited in fund created by it - Whether such a claim could only have been disallowed if it had been proved that gratuity, in respect of which said payment had been made, had not become payable during previous year - Held, yes - Whether in absence of such a case made out by revenue, Tribunal was right in holding that grant of approval of gratuity fund was not relevant for purpose of instant case as said deduction was not being claimed on account of any pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the Assessing Officer that the cooperative bank is eligible for deduction under section 35DD, but it is to be worked out in accordance with the provisions of section 44DB. It was further submitted that the assessee has to be treated as a company for the purpose of section 35DD and the amounts allowable are, to be allowed to the assessee being a cooperative bank. Alternatively, it was argued that the assessee is eligible for claim under section 32 of the Act. It was further submitted that in the process of amalgamation, the assessee has acquired all the commercial rights and additional amount paid was towards acquisition of commercial right which represents licence. The Assessing Officer has considered the explanation given by the assessee and the same is not accepted on the following reasons:- All such claim of the assessee are considered and the facts submitted in the written submission have been considered. Income Tax Act has specific provisions embedded for computing deductions in the case of business reorganization of cooperative banks. Section 44DB deals with the details of such computation in case of deduction under section 32, section 35D, section 35DD or section 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osses or unabsorbed depreciation of Palakol Co-operative Urban Bank either in amortized form over a period of five years or otherwise. As the losses of both the acquired banks pertain to the period during which the total income of both the banks were exempt u/s 80P, hence in view of the provisions of section 14A, such claim of Amortized loss by the assessee bank needs to be disallowed. Accordingly the AO took the view that the claim of the assessee amounting to ₹ 57, 81, 211/- for the Asst. Yrs. 2012-13 2013-14 are not allowable as per the provisions of the Act and hence the impugned addition was made. 26. On appeal before the ld. CIT(A), it was submitted that the assessee acquired Palakol Cooperative Urban Bank on 20/01/2010 with RBI approval and as per proceedings of the Commissioner and Registrar of Cooperative Societies. It was further submitted that the accounts of the Palakol Cooperative Urban Bank finalized upto 20/01/2010 as audited by the Chartered Accountant; and that as on 20/01/2010, the liabilities were more than the assets for ₹ 2, 89, 00, 058/- and the same were reflected in the assets side of the balance sheet and submitted that an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such bank as if the business reorganization had not taken place. It is not disputed that Palakol Bank got merged with assessee-bank is done as per the approval of RBI and Registrar of Co-operative Societies. The assessee has not made any claim as per the provisions of Sec. 44DB and hence the claim of deduction u/s. 35DDis prima-facie inadmissible. Therefore, the allowance of brought forward losses/unabsorbed depreciation are to be dealt as per the specific provisions of I. T. Act and not by RBI guidelines. As per sub-section (7) of section 72AB, the accumulated losses would have been entitled to carry forward and set off under the provisions of section 72. Similar is the case with the unabsorbed depreciation. Therefore the main condition which needs to be fulfilled is that the said loss should have been allowable in the hands of Palakol Bank as per the provisions of the Act. The entitlement as to allowance of such loss in the hands of Palakol Bank or its eligibility otherwise to be carried forward under the provisions of section 72 was not proved. Therefore once this condition is not fulfilled the acquirer bank is not eligible to carry forward the said losses/ unabsorbed dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any amount towards goodwill in the depreciation schedule. The Hon'ble Supreme Court in the case of Smifs Securities Ltd has held that the amount paid in excess to the net asset acquired would constitute 'goodwill' and on which depreciation can be considered. The Hon'ble ITAT, Hyderabad in SKS Micro Finance Ltd has followed the above Supreme Court decision. Thus, the excess price paid over the value of net asset was held to be goodwill. However, in the assessee's case there was no consideration paid. Hence the loss amortized cannot be considered to constitute goodwill. In the circumstances, the claim of depreciation on the amortized loss is rejected as without basis. 28. So far as alternative ground is concerned, the ld. CIT(A) has considered the decision of coordinate bench of the Tribunal in the case of Visakhapatnam Cooperative Bank Ltd. in ITA Nos. 444, 445, 449 450/VIZ/2012 ITA No. 726/VIZ/2013 and ITA Nos. 2 38/VIZ/2014 dated 30/09/2016, the claim made by the assessee was rejected. The relevant portion of the order is extracted as under:- So far as alternative ground raised by the assessee is concerned, according to the Ld. Counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c) Areva T D India Ltd. Vs. CIT [(2012) 345 ITR 421 (Delhi HC) d) DCIT Vs. Cosmos Co-operative Bank Ltd. [(2014) 64 SOT 90 (Pune Trib. ) 33. We have heard both the sides, perused the material available on record and orders of the authorities below. 34. The assessee (acquirer) is a co-operative bank registered under the Co-operative Societies Act, 1964 and filed a return of income for the year under consideration, wherein it is claimed 1/5th of cost of acquisition of Palakol Co-operative Bank as an expenditure under section 35DD of the Act. The Assessing Officer after calling the explanation from the assessee, he has observed that as per the provisions of section 35DD, only assessee who is Indian company is eligible for deduction as the assessee is not an Indian company, claim of the assessee under section 35DD is denied. On appeal, ld. CIT(A) confirmed the order of the Assessing Officer. Before us, ld. counsel for the assessee has submitted that section 44DB refered section 35DD, therefore, claim of the assessee has to be considered under section 35DD of the Act. It is relevant to examine the provisions of section 35DD, which are extracted as under:- 35DD. (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee and the same is confirmed by the ld. CIT(A). 38. So far as another argument of the assessee is that liability undertaken by the assessee by paying over and above the asset value has to be considered as a payment for acquiring commercial rights. This aspect has been considered by the ld. CIT(A) and observed that assessee has not paid any consideration for acquisition of Palakol Co-operative Bank, only has taken accumulated losses. He further observed that the assessee has not shown any amounts towards goodwill in the depreciation schedule. The ld. CIT(A) by following the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. , [(348 ITR 32 (SC)] has considered and observed that the amount paid in excess to the net asset acquired would constitute 'goodwill' and on which depreciation can be considered. He also considere3d the decision of the ITAT, Hyderabad Bench in the case of SKS Micro Finance Ltd. , , in turn which is followed the above Supreme Court judgement and observed that excess price paid over and above the value of the net asset was held to be a goodwill. Similar issue has been considered by the coordinate bench of the Visa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny return of income. The assessee also not brought anything on record to show that the Bobbili bank has filed the return of income. Once the Bobbili bank which is merged with assessee s bank not filed any return of income, as per the provisions of section 72AB of the Act, the Bobbili bank is not eligible to carry forward any losses or unabsorbed depreciation. The same cannot be allowed in the hands of the assessee s case. The Ld. CIT(A) correctly by considering the provisions of the Act disallowed the claim made by the assessee. So far as RBI guidelines with regard to the amortization of losses is concerned, in view of the specific provision provided by section 72AB of the Act, in our opinion, RBI guidelines cannot prevail over the Income Tax Act. We further observed that business losses and unabsorbed depreciation of amalgamating co-operative bank i. e. Bobbili Co-operative bank can be set off against the income of successor co-operative bank i. e. amalgamated co-operative bank (assessee) if the amalgamation is within the meaning of section 72AB of the Act. In the present case, the amalgamating company i. e. Bobbili Co-operative bank not filed return of income as required u/s 72AB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. CIT(A) nor before us as an additional ground. Therefore, the same cannot be considered and is dismissed. ITA No. 300/VIZ/2017 43. Ground Nos. 1 5 are general in nature, no adjudication is required. 44. Ground No. 2 relates to payment towards staff gratuity, which is similar to the ground No. 4 in ITA No. 299/VIZ/2017 for the Assessment Year 2012-13. Keeping in view of our decision in ITA No. 299/VIZ/2017, this ground of appeal raised by the assessee is allowed. 45. Ground No. 3 relate to amortization loss on account of merger of Palakol Cooperative Urban Bank, which are similar to the ground Nos. 5 6 raised in ITA No. 299/VIZ/2017 for the Assessment Year 2012-13. Keeping in view of our decision in ITA No. 299/VIZ/2017, this ground of appeal raised by the assessee is dismissed. 46. Ground No. 4 raised by the assessee relates to deferred revenue expenditure or as depreciation. The assessee has not raised this ground neither before the ld. CIT(A) nor before us as an additional ground. Therefore, the same cannot be considered and is dismissed. ITA No. 326/VIZ/2017 47. Ground No. 1 12 are general in nature, no adjudication is required, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital 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 Benk for the A. Ys. 2007-08 to 2009-10, the AO is directed to delete the impugned additions of ₹ 61, 58, 437/- for the Asst. Yr. 2012-13 and ₹ 69, 95, 000/- for the Asst. Yr. 2013-14. 50. Being aggrieved, Revenue carried the matter in appeal before the Tribunal. 51. 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. 52. On the other hand, ld. Departmental Representative relied on the grounds of appeal raised. 53. The present issue involved in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. CIT(A). Thus, these grounds of appeal raised by the revenue are dismissed. 55. Ground Nos. 5 to 8 relating to addition in respect of interest paid to the members of the cooperative bank under section 40A(i)(a) of the Act. 56. In the assessment order, the Assessing Officer has noticed that the assessee paid interest of ₹ 10, 000/- and above to the various depositors, total amount of which computed, during the year was ₹ 4, 13, 56, 451/-. The assessee has not deducted TDS 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 194(3)(v) as it was clearly mentioned that the provisions of section 194(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 194(3)(i)(b) clearly mandates that the requirement to deduct TDS and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 38/VIZ/2014 for Assessment Year 2010-11 and requested to uphold the order of the ld. CIT(A). 60. On the other hand, ld. Departmental Representative relied on the ground of appeal. 61. We have heard both the parties, perused the material available on record and the orders of the authorities below. 62. 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 assessee s own case 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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. 5. 3 In view of the clarification given in the circular the view taken in the appellate order dtd. 22. 10. 2013 suffers from mistake and, as such a view was taken without consideration of the above referred CBDT circular clarifying the position of law, it would amount to mistake apparent from record and rectifiable u/s. 154 of the I. T. Act. Further, it is noted that the assessee had relied on the CBDT circular No. 9/2002 dtd. 11. 09. 2002 and the decision of Bombay High Court in the case of Jalgaon District Central Co-operative Bank, in its appeal for A. Y. 2007-08, which has been discussed and considered by the learned CIT(A) while deciding the assessee's appeal for A. Y. 2007-08. The relevant extract of the CIT(A) order has been referred and discussed in the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 existing at the time, but setting apart money which might became expenditure on the happ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld 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 directed to allow this claim delete the impugned addition made for A. Y. 2012-13 AY 2013-14. 67. On being aggrieved, Revenue is in appeal before the Tribunal. 68. Ld. Departmental Representative relied on the grounds of appeal. 69. Ld. counsel for the assessee has supported the order of the Assessing Officer. 70. We have heard both the parties, perused the material available on record and the orders of the authorities below. 71. In this case, the assessee has claimed an amount of ₹ 2, 68, 790/- as amortization of premium on Government Securities (HTM) in its profit loss account relates to Assessment Year 2012-13. 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 ₹ 2, 68, 790/- as it was a loss to the assessee bank and further assessee bank was required to offer as income wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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