Case Law Details
Brief of the Case
ITAT Bangalore held in the case of ACIT vs. M/s Tumkur Veerashiva Co-operative Bank Ltd. that from the facts, it is clearly shows that the amount spent out of members benevolent fund and members death relief fund are spent for the welfare of the members. It is also clear from the facts that these funds are created out of appropriation of profits. The Karnataka Co-Operative Society Act, 1959 mandates the Societies to appropriate certain percentage of its profit before declaration of dividends to its members but, the said two funds are not covered under the said act. Therefore, it is amply clear that the said funds are created to achieve the objects of the society through the bylaws for the welfare of the members out of the profits of the society. The Society is having liberty to create any funds for the welfare of its members within the frame work of by-laws but, the Income-tax Act does not provide for any deduction towards these expenditures under specific provisions. Further, it cannot be claimed under general category by virtue of section 37, because it is not incurred exclusively for the purpose of business and also there is an element of personal in nature, because the benefit was given to members being owners of the society. Therefore, the amount spent by the assessee for the welfare of its members out of the earmarked funds cannot be deductible as expenditure wholly and exclusively incurred for the purpose of business.
Facts of the Case
The assessee is Co-operative Bank which is engaged in the business of banking, filed its return of income for the A.Y. 2010-11 declaring total income of Rs. 2,88,16,767/-. The case was selected for scrutiny assessment by issuing statutory notice u/s 143(2) along with notice u/s 142(1) calling for details. The Assessing Officer completed the assessment u/s 143(3) and determined the total income of Rs. 3,30,70,554/- after making additions being disallowances of amount spent out of members benevolent fund amounting to Rs. 12,60,537/- and members death relief fund amounting to Rs. 4,60,000/-. Besides, the AO, disallowed the amortisation of premium paid on Govt. securities of Rs. 9,93,550/-.
Contention of the Revenue
The ld counsel of the revenue submitted that the CIT (A) erred in facts to state that these are the amounts contributed for the welfare of the employees, in fact from the facts it was emerged that the deduction claimed by the assessee was towards amount spent out of members benevolent fund and members death relief funds. He further submitted that these expenditure are in the nature of personal expenditure intended for the benefit of the members of the Society cannot be allowed as business expenditure deductible u/s 37.
Held by CIT (A)
CIT (A) deleted the addition and allowed the appeal of the assessee. It was held that the contributions of member’s benevolent fund and death relief funds are clearly intended for the welfare of the employee’s and the fund is used to provide assistance to its members therefore, allowable deduction u/s 37.
Held by ITAT
ITAT held that the assessee right from the beginning contended that this amounts represents the amount spent out of the earmarked funds and for the benefit of the members. But, the findings of fact by the CIT (A) states that these amounts are contributed for the welfare of the employees therefore, deleted the additions made by the Assessing Officer. No doubt, if assessee incurred these amounts towards welfare of the employees, it should be allowed as business expenditure incurred exclusively for the business, because it definitely enhance the productivity of the employees and has a direct nexus between earning of income. Similarly, if these amounts are incurred out of the earmarked funds for the welfare of the members then, the same should be deducted from the respective fund account and cannot be allowed as deduction from the business profits, because these expenditure are in the nature of personal expenditures of members of the society. Though, the assessee claims that this is exclusively incurred for the business, but the amounts incurred for the welfare of the members but not to the staff of the society.
In the instant case, from the facts it is clearly shows that the amount spent out of members benevolent fund and members death relief fund are spent for the welfare of the members. It is also clear from the facts that these funds are created out of appropriation of profits. The Karnataka Co-Operative Society Act, 1959 mandates the Societies to appropriate certain percentage of its profit before declaration of dividends to its members but, the said two funds are not covered under the said act. Therefore, it is amply clear that the said funds are created to achieve the objects of the society through the bylaws for the welfare of the members out of the profits of the society. The Society is having liberty to create any funds for the welfare of its members within the frame work of by-laws but, the Income-tax Act does not provide for any deduction towards these expenditures under specific provisions. Further, it cannot be claimed under general category by virtue of section 37, because it is not incurred exclusively for the purpose of business and also there is an element of personal in nature, because the benefit was given to members being owners of the society. It is also admitted fact that these deductions are claimed in the statement of total income without routed through profit and loss statement of the assessee.
Therefore, we are of the opinion that, the amount spent by the assessee for the welfare of its members out of the earmarked funds cannot be deductible as expenditure wholly and exclusively incurred for the purpose of business. From the findings of the facts, the CIT (A) did not appreciate the facts correctly while deleting the impugned additions. There is difference of findings of facts in the orders of the CIT (A). The assessee contends that the amounts spent out of member’s benevolent fund and member’s death relief fund but, the CIT (A) states that the amount contributed to these funds are for the welfare of the employees. Thus, there is clear difference between findings of facts by both the authorities, which needs to be relooked by the CIT (A). Therefore, we remit the issue back to the file of the CIT (A) in the light of the discussion above and direct the CIT (A) to consider the issue after affording an opportunity of hearing to the parties.
Accordingly appeal disposed of.
