Case Law Details
Advocate Akhilesh Kumar Sah
Kanaka Mahalakshmi Cooperative Bank case: Provision made on notional basis and not on account of accrued liability not eligible for deduction.
Recently, in the Kanaka Mahalakshmi Cooperative Bank Ltd. vs. ACIT & vice-versa [ITA Nos. 299 & 300/VIZ/2017 and ITA Nos. 326 & 327/VIZ/2017, (A.Y.: 2012-13 & 2013-14), decided on 5.9.2018], there were cross appeals by the assessee and the Revenue for the AYs 2012-13 & 2013 & 14. In ITA No. 299/VIZ/2007, one of the ground related to the addition of Rs. 26,10,443/- on account of interest on reverse fund.
Facts to this issue in brief were that during the course of assessment proceedings, the Assessing Officer(AO) had noted that the assessee had claimed Rs. 26,10,443/- in the profit & loss account as interest on reserve fund under the category ‘provisions and other expenditure’. The AO 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 AO that the amount of Rs. 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 AO did not accept the explanation of the assessee and made the addition of Rs. 26,10,443/- by making the following observations:-
“The submissions of the A.R of assessee have been considered but the same are not acceptable. In this regard, it is submitted that Interest on Reserve Fund is clubbed under the head ‘Provisions and Other Expenditure’ and hence, the Interest on Reserve Fund is treated as appropriation of profit. As already stated above, for examining whether an expense claimed is allowable or not, we have to examine its nature and whether the expenditure has already been incurred or it is only notional. Interest on reserve fund is not paid on a day to day basis. In fact, no payment has been made on account of this interest. Moreover, this expenditure has not even accrued. It is only in the nature of a provision. The income tax act is very clear on this aspect. Any expenditure which is incurred or accrued can only be debited to the Profit and Loss Account. Provisions are not allowable as expenses. They only amount to appropriation of profit and reducing the income offered for taxation. When the actual expenses are incurred, the same can very well be claimed in the corresponding return of income for that year. However, in the present year it is not allowed. Accordingly, the same is added to he total income of the assessee.”
Against above, the assessee carried the matter in appeal before the CIT(A) and submitted as under:-
“The appellant is a Mutual Aided Cooperative Society formed with members to support each other by depositing their surplus in bank and availing the said amount as loan by the needy members. The Bank has been registered under AP State Mutual Cooperative Society Act, Wherein, the Preamble of the Act narrates that the certain amount of interest is to be charged to ascertain the real net surplus in the operations of the bank. The Reserve Fund which was kept aside for future contingencies of the Appellant and same was used by the bank. The amount belonging to the members of the bank which is at par with the share capital. In the case of Cooperative Societies I Banks, the surplus I deficit would belong to them. If bank consider the reserve fund at par with the deposit, it would have to pay interest on such amount Hence the interest claimed on reserve funds is an expenditure to the Institution which should be allowed at par with interest on share capital and same would be transferred to Reserve Fund Account and no tax is leviable on the basis of mutuality and belong to all members. Since the 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 Rs. 26,10,443/-.”
The CIT(A) after considering the explanation of the assessee observed that provision for interest had been made for the amount lying in the reserve fund. The said provision was notional and did not ascertain to be accrued liability. Mere provision made in the accounts would not be eligible for deduction. Accordingly, he found that AO was justified in making the captioned disallowance and confirmed the order of the AO.
On appeal before ITAT, Visakhapatnam, counsel for the assessee relied on the ground of appeal while Departmental Representative supported the orders passed by the lower authorities.
The learned members of the ITAT heard both the parties and perused the material available on record and the orders of the authorities below and found that the assessee had made a provision of Rs. 26,10,443/- in the profit & loss account as ‘interest on reserve fund’. This provision was made by the assessee on notional basis and not accrued liability, therefore, AO had made addition on this count and the CIT(A) confirmed the same on the ground that it was a provision on notional basis and did not ascertain to be accrued liability. The learned Members of the ITAT held that there was no infirmity in the order passed by the CIT(A).
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