TDS deductible on interest payment by Co-Op bank to Minors & Unregistered Firms

Sadhana Sahakari Bank Ltd. Vs ACIT (ITAT Pune)

During the assessment proceedings, the AO observed that assessee has not deducted TDS on interest income earned by minor and partnership firm. The AO observed that minor and partnership firm are not members of the assessee. Therefore, the AO held that as per section 194A of the Act, TDS was mandatory, hence, AO disallowed an amount of Rs.7,92,500/- which was interest paid to minor and Rs.2,60,181/- which was interest paid to unregistered firm. Before the ld.CIT(A), assessee had submitted that TDS was not deducted in the case of minors, because minors income is clubbed with their parents and parents are members, therefore, assessee was under bonafide belief that TDS deduction is not required in the case of minors. No specific submission has been made vis-à-vis interest paid to unregistered firm. As per the bylaws of the assessee, unregistered firm and minor are not eligible to be members. As per proviso to section 194A exemption is granted only to the members in case of co-operative societies. In the case of the assessee, it is an admitted fact that minors and unregistered firms cannot become members of the society. Thus, assessee had paid interest to minor and unregistered firms who were not members of the assessee. This is violation of section 194A of the Act. In the facts and circumstances, we are of the opinion that the AO has rightly invoked provisions of section 40(a)(ia) of the Act and disallowed interest paid to minor and unregistered firm hence, the said addition is confirmed. A

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal filed by the Assessee is directed against the order of ld.Commissioner of Income Tax(Appeals)-7, Pune dated 15.12.2017 emanating from assessment order dated 19.12.2016 under section 143(3) of the I.T.Act, 1961 for the A.Y.2014-15. The Assessee has raised the following grounds of appeal:

“1. The learned CIT(A)-7, Pune and learned AO erred in law and on facts in making disallowance of Rs.91,200/- u/s 37(1) of the ITA, 1961 on account of advertisement expenses.

2. The learned AO erred in law and on facts in making adisallowanceand further learned CIT(A)-7 , erred in Confirming AO’s action for disallowing Rs. 41,78,942/- u/s 36(l)(viia) of the ITA, 1961 in respect of provision for bad and doubtful debts.

3. The learned CIT(A)-7 and learned AO erred in law and on facts in not appreciating that while calculating allowance u/s 36(l)(viia) i.e. 7.5% of total income, there is no requisite to have rural advances with the appellant bank.

4. The learned CIT(A)-7 and learned AO erred in law and on facts in making disallowance of Rs.10,59,681/- on account of interest on deposits paid to “minors” and “unregistered firms” u/s 40(a)(ia) holding that these category of account holders are not members of the bank and TDS u/s 194A ought to have been deducted by the appellant bank.

5. The learned ClT(A)-7 and the learned AO erred in law and on facts in not appreciating that both “minors (guardians of members who are major)” and “unregistered firms” are nominal members of the bank and as such are “members” as mentioned in section 194A and therefore there was no need to deduct tax on interest paid to these members.”

Brief Facts :

2. The assessee is a Co-operative Bank. The assessee filed return of income for A.Y. 2014-15 on 30.09.2014 declaring total income of Rs.5,04,27,080/-. The case was selected for scrutiny. After hearing, the ld.AR of the assessee, the AO passed assessment order under section 143(3) of the Act. The AO has made following additions:

i) Disallowance of Advertisement Expenditure being non-business expenditure of Rs.91,200/-; ii) Disallowance of claim under section 36(1)(viia), disallowance on account of non-deduction of TDS; iii) Amortization of Premium paid and iv) 40(a)(ia) disallowance.

3. Aggrieved by the same, the assessee filed appeal before this Tribunal.

4. We have heard both the parties and perused the records. Our discussion ground wise is as under:

Ground No.1, Disallowance of Advertisement Expenses of Rs.91,200/- :

5. The AO has mentioned as under :

“4. Disallowance of advertisement expenditure being for non- business purpose: Rs. 91.200/-

4.1 P & L a/c of the assessee, was debited on a/c of expenditure under the head Advertisement expenses” at Rs.91,200/-. On verification of such expenses and “advertisement given in the print media vis-a-vis business exigencies of such advertisement expenses, it is seen that the same is not for the purpose of business and thus, are not deductible u/s 37(1) of the Act. The details are given as under:

4.2 On discussion with the AR of the assessee, he agreed that the business expediency of such expenditure to the above extent cannot be substantiated and as such, an amount of Rs 91,200/- is being disallowed u/s 37(1) of the and added to the total income.”

6. The ld.CIT(A) has held as under :

“6.4 Ostensibly, the appellant has made expenditure of Rs.91,200/- towards payment to daily newspaper for death news of Mr.Kalyanrao Gujar and Mr. Rambhau Tupe/Shreerang Kadam. The appellant has not demonstrated that how this advertisement on print media is for attracting more customers specially when these persons are not related to the banks. Further, during the assessment proceedings the appellant could not prove business expediency of such expenditure. The contention of the appellant that expenditure is very nominal does not lead to conclusion that expenditure is allowable. Moreover, the appellant has admitted during the assessment proceedings that business expediency of the such expenditure cannot be substantiated. In other words, the appellant has agreed for additions of Rs. 91,200/-. Now at the appellate proceedings the appellant is contending the addition though agreed during the assessment proceedings.

6.5 The AR of the appellant has agreed to the addition which makes the appeal unsustainable. Reliance is placed on the decision of the Bombay High Court in case of the Rameshchandra & Co. v. Commissioner of Income-tax reported in 168 ITR 375 wherein it has been held that:

“Where an assessee has made a statement of facts, he can have no grievance if the taxing authority taxes him in accordance with that statement. If he can have no grievance, he can file no appeal. Therefore, it is imperative, if the assessee’s case is that his statement has been wrongly recorded or that he made it under a mistaken belief of fact or law, that he should make an application for rectification to the authority who passed the order based upon the statement. Until rectification is made, an appeal is not competent.”

7. It is observed that identical issue came up for hearing before the ITAT in ITA No.1204 to 1206/PUN/2017 for A.Y. 2011-12 to 2013-14 vide order dated 16.03.2020 held as under :

“12. On hearing both the sides on this issue, we find that the order of CIT(A) is fair and reasonable. For the sake of completeness, para 6.4 of the order of CIT(A) is extracted as under:-

“6.4 Ostensibly, the appellant has made expenditure of Rs.1,27,500/- towards payment to daily newspaper for death news of G.P Pardhan, birth day greetings of Mr. Ajit Pawar and Mr. Sharad Pawar and congratulating Mr. Ajit Pawar. The appellant has not demonstrated that how this advertisement on print media is for attracting more customers specially when these persons are not related to the banks. Further, during the assessment proceedings the appellant could not prove business expediency of such expenditure. The contention of the appellant that expenditure is every nominal does not lead to conclusion that expenditure is allowable. Moreover, the appellant has admitted during the assessment proceedings that business expediency of such expenditure cannot be substantiated. In other words, the appellant has agreed for additions of Rs.1,27,500/-. Now at the appellate proceedings the appellant is contending the addition though agreed during the assessment proceedings.”

13. Thus, the expenditure incurred on the birthday / victory day celebration qua the erection of Flexies of the politicians, is not an allowable expenditure u/s 37 of the Act. In our considered opinion, the orders of the Assessing Officer / CIT(A) are fair and reasonable. They do not call for any interference. Accordingly, ground 3 of the assessee is dismissed.”

8. During the hearing before us, the ld.AR could not prove how the said advertisement expenditure is wholly and exclusively for the purpose of the business. The ld.AR also could not rebut the fact that during the assessment proceedings, it was accepted by the ld.AR of the assessee that he is unable to substantiate and therefore agreed for the addition. In these facts and circumstances of the case, we are of the opinion that the expenditure of Rs.91,200/- incurred on advertisement was not wholly and exclusively for the purpose of the business of the assessee. Therefore, the AO has rightly disallowed the said expenditure, accordingly, ground no.1 of the assessee is dismissed.

Ground No.2 & 3 Disallowance under section 36(1)(viia) :-

9. During the assessment proceedings, the ld.AO observed that assessee was not having any Rural Advances, therefore, the AO held that assessee was not eligible for deduction under section 36(1)(viia) of the Act. The AO relied on the order of the Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd. vs. CIT. Accordingly, the AO disallowed the assessee’s claim of deduction under section 36(1)(viia) of R.s41,78,942/-.

10. It is observed that identical issue came up for hearing in the case of assessee for A.Y. 2011-12, 2012-13 and 2013-14. The ITAT in ITA No.1204 to 1206/PUN/2017 vide order dated 16.03.2020 held as under :

“8. We have heard both the parties. We find that Pune Bench of Tribunal in the case of Bhagni Nivedita Sahakari Bank Ltd. Vs. DCIT (supra) dated 30.11.2018 has decided the issue in favour of assessee. We find it relevant to extract the same as under:

“27. Then, analyzing the two decisions of Hon’ble Bombay High Court, it was held that where two interpretations are possible; one in favour of assessee must be adopted, in turn, relying on the decision of the Hon’ble Supreme Court in CIT Vs. Vegetable Products Ltd. (supra). It was also noted that there were various other High Courts which were not in favour of view taken in CIT Vs. Smt. Godavaridevi Saraf (supra). The Tribunal decided the issue in turn, relying on the ratio laid down by the Hon’ble High Court of Gauhati in Smt. Bandana Gogoi Vs. CIT & Anr. (2007) 289 ITR 28 (Gau) in the absence of any other decision of any High Court in other State. In view of the above said position of law, we are departing from the view taken by Pune Bench of Tribunal in assessee’s own case relating to assessment year 2010-11, wherein the order is dated 29.05.2015 but decision of the Hon’ble High Court of Kerala on the issue is dated 03.04.2014 was neither relied upon nor brought to the knowledge of Tribunal and the issue was decided against assessee. The issue raised in the present appeal stands fully covered by the decision of the Hon’ble High Court of Kerala (supra) though not the jurisdictional High Court, but the only decision available on the said issue squarely binds the Tribunal and hence, applying the said ratio, we hold that the assessee is entitled to the claim of deduction under section 36(1)(viia) of the Act to the extent of 7.5% of total income. The assessee co-operative bank do not have any rural branches, hence is not entitled to the second part claim of 10% of advances made by rural branches. The deduction is allowable with a rider to satisfy the provisions of said section i.e. making a provision to that extent in the books of account. The first issue which is raised in the case of different co­operative banks stands decided in favour of assessee.”

9. From the above it is clear that the assessee without rural branches / advances, is entitled to deduction u/s 36(1)(viia) of the Act. Accordingly, we are of the opinion, that the grounds 1 and 2 raised by the assessee are allowable.”

11. Respectfully following the earlier years decision in assessee’s own case, it is held that assessee is eligible for deduction under section 36(1)(viia) of the Act. Accordingly, ground no.2 & 3 of the assessee are allowed.

Ground No.4 & 5, Disallowance under section 40(a)(ia) r.w.s 194A :

12. During the assessment proceedings, the AO observed that assessee has not deducted TDS on interest income earned by minor and partnership firm. The AO observed that minor and partnership firm are not members of the assessee. Therefore, the AO held that as per section 194A of the Act, TDS was mandatory, hence, AO disallowed an amount of Rs.7,92,500/- which was interest paid to minor and Rs.2,60,181/- which was interest paid to unregistered firm. Before the ld.CIT(A), assessee had submitted that TDS was not deducted in the case of minors, because minors income is clubbed with their parents and parents are members, therefore, assessee was under bonafide belief that TDS deduction is not required in the case of minors. No specific submission has been made vis-à-vis interest paid to unregistered firm. As per the bylaws of the assessee, unregistered firm and minor are not eligible to be members. As per proviso to section 194A exemption is granted only to the members in case of co-operative societies. In the case of the assessee, it is an admitted fact that minors and unregistered firms cannot become members of the society. Thus, assessee had paid interest to minor and unregistered firms who were not members of the assessee. This is violation of section 194A of the Act. In the facts and circumstances, we are of the opinion that the AO has rightly invoked provisions of section 40(a)(ia) of the Act and disallowed interest paid to minor and unregistered firm hence, the said addition is confirmed. Accordingly, ground no.4 and 5 are dismissed.

13. The Ground No.6 is general in nature, needs no adjudication, therefore, the same is dismissed as not pressed.

14. In the result, appeal of the assessee is partly allowed.

Order pronounced in the open Court on 17^th March, 2023.