Case Law Details
Nashik Road Deolali Vyapari Sahakari Bank Ltd. Vs ACIT (ITAT Pune)
The assessee earned exempt income of Rs.13,71,442/- from investments in mutual funds. According to AO, the assessee has incurred interest expenditure and claimed no expenditure attributable to exempt income. The AO proceeded to compute the disallowance under Rule 8D(2) and accordingly made disallowance to an extent of Rs.20,15,540/- particularly under Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Rules.
The CIT(A) restricted the disallowance to the extent of exempt income.
The contention of ld. AR is that the assessee has reserve exceeding the investment and drew our attention to the Balance sheet at Page No. 6 of the paper book. On perusal of Balance sheet prepare as on 31-03-2011 we note that the assessee has capital funds i.e. share capital, reserve fund, and building fund to an extent of Rs.18,74,97,548/- and the investments made in mutual funds to an extent of Rs.9,00,00,000/- which is evident from the asset side in the Balance sheet.
There is no dispute by the ld. DR in this regard. The Hon‟ble Supreme Court in the case of South Indian Bank Ltd. in Civil Appeal No. 9606 of 2011 vide its order dated 09-09-2021 held that when the funds available to the assessee both interest free and interest bearing loans, there shall be a presumption that the investments made would be out of the interest free funds available with the assessee, provided the interest free funds were sufficient to meet the investments which means that when the interest free funds are available to the assessee which were sufficient to meet its investments should be presumed that investments were made out of such interest free funds.
In the present case as discussed above, the assessee made investments to an extent of Rs.9,00,00,000/- and its capital funds of Rs.18,74,97,548/- which is evident that the interest free funds are more than the investments made. Therefore, in our opinion, it should be presumed that the investments were made from interest free funds i.e. capital funds held by the assessee. Thus, the interest expenditure as computed by the AO under Rule 8D(2)(ii) to an extent of Rs.17,90,540/- is not permissible. Thereupon, the only disallowance remains for our consideration is the disallowance made under Rule 8D(2)(iii) to an extent of Rs.2,25,000/-, in our opinion, is justified. Accordingly, we confirm the addition to that effect made under Rule 8D(2)(iii) of Rules and the order of CIT(A) is set aside.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal by the assessee against the order dated 28-12-2015 passed by the Commissioner of Income Tax (Appeals)-1, Nashik [„CIT(A)‟] for assessment year 2011-12.
2. Brief facts relating to the case are that the assessee is a Cooperative society duly registered under the Maharashtra State Co-operative Society Act and is carrying Banking Business. The assessee declared total income of Rs.5,21,24,751/- and on scrutiny the AO determined the same at Rs.6,29,07,859/- inter alia making addition on account of section 14A r.w. Rule 8D, cessation of liability u/s. 41(1) of the Act and excess deduction u/s. 36(i)(viia) of the Act vide its order dated 18-03-2014. The CIT(A) has given partial relief with regard to the additions made by the AO and amongst which aggrieved, the assessee is before us.
3. We note that the ground Nos. 1 and 4 are interlinked, we proceed to hear both the grounds together for the sake of convenience.
4. Heard both the parties and perused the material available on record. During the course of assessment proceedings, the AO found that the assessee has increased reserves and surplus by transferring some funds in the Balance sheet. According to him, it is a cessation of liability. The assessee was asked to furnish the details on account of Gratuity of Rs.4,66,533/-, Entrance fee for Rs.71,915/- and Emergency fund of Rs.30,27,789/-, amongst which these three items, the CIT(A) has given relief in respect of Entrance fee for Rs.71,915/-. Out of two above, the Emergency fund of Rs.30,27,789/- which consists of Rs.15,00,000/- in respect of amount transferred from taxable profit to reserve fund and an amount of Rs.15,27,789/- in respect of the demand drafts which remained unpaid for more than three years.
5. In respect of Rs.15,00,000/- the ld. AR submitted that the AO did not clearly make out a case in assessment order and the CIT(A) held that the assessee has not furnished cogent evidence to show that the amount was not transferred from appropriation account nor explained how the appropriation account has been created. The contention of ld. AR is that since it was not properly adjudicated by both the authorities below an opportunity may be given to the assessee to support the claim by producing relevant evidences and drew our attention to Page No. 58 of the paper book. On perusal of the same, we note that the Board of Directors resolved to transfer an amount of Rs.15,00,000/- to emergency fund and there is no dispute of such amount was not debited to profit and loss account. The fact remains undisputed that the said amount is out of taxable profit. Further, the appropriation account is at Page No. 56 of the paper book which clearly shows that the said amount passed through appropriation account and to emergency fund on 27-08-2010. The contention of CIT(A) is that the assessee has not furnished any evidence to show that the amount was not transferred from appropriation account nor explained whether the appropriation account is created. The evidence regarding the appropriation account at Page No. 56 and the Resolution of Board of Directors at Page No. 58 of the paper book were not before the AO and CIT(A). Therefore, we find force in the arguments of the ld. AR and in view of the same, we deem it proper to remand the matter to the file of AO for its fresh verification. The assessee is liberty to file all evidences, if any, in support of its claim. The AO shall afford reasonable opportunity of hearing to the assessee and pass order, in accordance with law.
6. Regarding an amount of Rs.15,27,789/- in respect of demand drafts not paid more than three years, the contention of ld. AR is that the amounts in pending pay orders and demand draft amounts of various branches issued upto 31-03-2005 are transferred to emergency fund. The AO held that it is a liability, if the liability is not paid even after 3 years it has to be considered as income of the assessee. As it appears from the record there is no material or evidence or even explanation were not adduced before the CIT(A). The ld. AR submits that since there is no clear cut finding from the AO and the CIT(A), it may also be remanded to the file of AO for its fresh verification and subject to verification the AO may be directed to pass order. We note that from the record that pay orders and demand drafts were not claimed by the parties within relevant time as explained by the AO and in our opinion, it becomes the income of the assessee. There is no evidence to show that the amounts were paid or adjusted by the assessee which clearly shows the assessee recognized the said amounts as income of the assessee. Therefore, since, the said amount of Rs.15,27,789/- has been accepted by the assessee as income in its accounts again remanding the issue to the AO does not arise at all. We find no infirmity in the order of CIT(A). Accordingly, it is justified.
7. Regarding cessation of liability on account of Gratuity of Rs. 4,66,533/- the ld. AR submitted that the said fund does not cease to exist but it is payable out of this funds. On perusal of the impugned order passed by the CIT(A) we notice that there was no documentary evidence in support of claim of assessee to controvert the findings of AO. The ld. AR requested to remand this matter to the file of AO for its fresh adjudication.The ld. DR did not report any objection for remanding this issue to the file of AO. Accordingly, we direct the AO to examine the issue in detail and the assessee is liberty to file evidences, if any in support of its claim. Thus, ground Nos. 1 and 4 raised by the assessee are allowed for statistical purpose.
8. Ground No. 2 raised by the assessee challenging the action of CIT(A) in restricting the addition made on account of section 14A r.w. Rule 8D of the Rules in the facts and circumstances of the case.
9. Heard both the parties and perused the material available on record. The assessee earned exempt income of Rs.13,71,442/- from investments in mutual funds. According to AO, the assessee has incurred interest expenditure and claimed no expenditure attributable to exempt income. The AO proceeded to compute the disallowance under Rule 8D(2) and accordingly made disallowance to an extent of Rs.20,15,540/- particularly under Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Rules. The CIT(A) restricted the disallowance to the extent of exempt income. The contention of ld. AR is that the assessee has reserve exceeding the investment and drew our attention to the Balance sheet at Page No. 6 of the paper book. On perusal of Balance sheet prepare as on 31-03-2011 we note that the assessee has capital funds i.e. share capital, reserve fund, and building fund to an extent of Rs.18,74,97,548/- and the investments made in mutual funds to an extent of Rs.9,00,00,000/- which is evident from the asset side in the Balance sheet. There is no dispute by the ld. DR in this regard. The Hon‟ble Supreme Court in the case of South Indian Bank Ltd. in Civil Appeal No. 9606 of 2011 vide its order dated 09-09-2021 held that when the funds available to the assessee both interest free and interest bearing loans, there shall be a presumption that the investments made would be out of the interest free funds available with the assessee, provided the interest free funds were sufficient to meet the investments which means that when the interest free funds are available to the assessee which were sufficient to meet its investments should be presumed that investments were made out of such interest free funds. In the present case as discussed above, the assessee made investments to an extent of Rs.9,00,00,000/- and its capital funds of Rs.18,74,97,548/- which is evident that the interest free funds are more than the investments made. Therefore, in our opinion, it should be presumed that the investments were made from interest free funds i.e. capital funds held by the assessee. Thus, the interest expenditure as computed by the AO under Rule 8D(2)(ii) to an extent of Rs.17,90,540/- is not permissible. Thereupon, the only disallowance remains for our consideration is the disallowance made under Rule 8D(2)(iii) to an extent of Rs.2,25,000/-, in our opinion, is justified. Accordingly, we confirm the addition to that effect made under Rule 8D(2)(iii) of Rules and the order of CIT(A) is set aside. Thus, ground No. 2 raised by the assessee is partly allowed.
10. Ground No. 3 raised by the assessee challenging the action of CIT(A) in confirming the order of AO on account of section 36(1)(viia) of the Act.
11. Heard both the parties and perused the material available on record. Both the authorities below i.e. the AO and CIT(A) held when there was no provision made for bad and doubtful debts in the account of assessee the claim made therein is not allowable. We note that the assessee claimed deduction of Rs.42,26,331/- on account of 7.5% of total income before allowing any deduction u/s. 36(i)(viia) of the Act. It was stated the provision against for standard assets of Rs.10 lakhs were made and there is no dispute by the AO in this regard as it was observed by the AO in his order that the assessee has made total provisions for standard assets in profit and loss account. The CIT(A) in its order, the provision of standard asset cannot be construed against any debt which become doubtful. The contention of ld. AR is that the similar issue is came up before this Tribunal in assessee‟s own case and the Tribunal considered the submissions of assessee and allowed deduction to the extent provision made under standard assets and drew our attention at Page No. 75 of the paper book. On perusal of the same at Para No. 5, the Co-ordinate Bench of this Tribunal held even though provision under standard assets made and no separate deduction was claimed, the assessee is entitled to claim deduction u/s. 36(1)(viia) of the Act in respect of different nomenclature was given to the provision made for standard assets. We are of the opinion, there is no dispute with regard to provision made under standard assets, to claim a deduction u/s. 36(1)(viia) of the Act requires creation of provision as a mandatory pre-condition for claiming deduction under statute. Therefore, when the assessee has not claimed separate deduction on standard assets, in our opinion, the assessee is entitled to claim deduction u/s. 36(1)(viia) of the Act to the extent as the provision made under standard assets. Thus, the AO is directed to give deduction to the extent of Rs.10 lakhs as against the deduction claimed Rs.42,26,631/-. Thus, ground No. 3 raised by the assessee is allowed for statistical purpose.
12. The ld. AR submits that the assessee has no interest to prosecute ground No. 5. Accordingly, the same is dismissed as not pressed.
13. In the result, the appeal of assessee is partly allowed for statistical purpose.
Order pronounced in the open court on 16th September, 2021.
