Assistant Commissioner of Income-tax, V. The Nashik Merchants Co.op. Bank Ltd., Nashik

ITA 214/PUN/2014

• Counselvise Citation: 21424514 RSA 2014
• Duration Of Justice: 11 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-01-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 31-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B D SINGH
• Keywords: Earning of tax free income; Period of limitation; Proportionate interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 214/PN/2014 (ASSESSMENT YEAR : 2010-11) ACIT, CIRCLE-1, NASHIK .. APPELLANT VS. THE NASHIK MERCHANTS CO-OP BANK LTD., A-16, INDUSTRIAL ESTATE, BABUBHAI RATHI CHOWK, SATPUR, NASHIK-422007 .. RESPONDENT PAN NO.AAAAT3324K ASSESSEE BY : SHRI PRAMOD SHINGTE REVENUE BY : SHRI B.D. SINGH DATE OF HEARING : 13-01-2015 DATE OF PRONOUNCEMENT : 19-01-2015 ORDER PER R.K.PANDA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER DATED 19-11-2013 OF THE CIT(A)-I, NASHIK RELA TING TO ASSESSMENT YEAR 2010-11. 2. GROUNDS OF APPEAL NO.1 BY THE REVENUE READS AS U NDER : 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD.CIT(A)-I, NASHIK WAS JUSTIFIED IN DELETING THE ADDITION OF RS.38,69,208/- MADE ON ACCOUNT OF APPLICABILITY OF SE C.14A. 2.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE IS A CO- OPERATIVE BANK ENGAGED IN THE BUSINESS OF BANKING. IT FILED ITS RETURN OF INCOME ON 25-09-2010 DECLARING TOTAL INCO ME OF RS.23,65,82,560/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, 2 THE AO NOTED THAT THE ASSESSEE HAS INCURRED AN EXPE NDITURE OF RS.36.30 CRORES ON ACCOUNT OF INTEREST AS AGAINST R S.31.34 CRORES IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. HE FURT HER NOTED THAT THE ASSESSEE HAS NOT SHOWN TO HAVE INCURRED ANY EXP ENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. ON BEING QUESTIONED BY THE AO, IT W AS SUBMITTED THAT NO AMOUNT AS PER SECTION 14A R.W.RULE 8D WAS A TTRIBUTABLE TO SUCH EXPENDITURE INCURRED ON EARNING THE EXEMPT INC OME. IT WAS SUBMITTED THAT THE ASSESSEE HAS OWN ASSETS OF RS.99 5.75 CRORES AS ON 31-03-2010. HOWEVER, THE AO WAS NOT SATISFIED W ITH THE EXPLANATION GIVEN BY THE ASSESSEE. INVOKING THE PR OVISIONS OF SECTION 14A R.W. RULE 8D, THE AO DISALLOWED AN AMOU NT OF RS.38,69,208/-. 3. BEFORE THE CIT(A) IT WAS ARGUED THAT THE AO HAS WRONGLY PROCEEDED WITH THE NOTION THAT ALL THE FUNDS OF THE ASSESSEE BANK ARE INTEREST BEARING FUNDS WHEREAS THE FACT REMAINS THAT ONLY THE DEPOSITS AS BELONGING TO THE DEPOSITORS OF THE BANK ARE INTEREST BEARING FUNDS. IT WAS SUBMITTED THAT THE OWN FUNDS AND CAPITAL RESERVE ARE THE FUNDS OF THE BANK AND AS SUCH ARE I NTEREST FREE. THE ASSESSEE IS WITHIN ITS AUTHORITY TO INVEST SUCH FUN DS IN MUTUAL FUNDS FOR AUGMENTING THE RETURNS ON THE CAPITAL EMP LOYED BY THE BANK. IT WAS SUBMITTED THAT THE AO HAS WRONGLY CAL CULATED THE DISALLOWANCE U/S.14A R.W. RULE 8D. FURTHER, NOTHIN G HAS BEEN BROUGHT ON RECORD THAT ANY SPECIFIC EXPENDITURE HAS BEEN INCURRED TO EARN SUCH EXEMPT INCOME. RELYING ON VARIOUS DEC ISIONS IT WAS SUBMITTED THAT THE DISALLOWANCE MADE BY THE AO HAS TO BE DELETED. 3 4. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) DELETED THE ADDITION BY OBSERVING AS UNDE R : 4.7 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE RIVAL SUBMISSIONS. IT IS PERTINENT TO NOTE THAT THE A.O . HAS ERRED IN APPLYING THE OPENING AND CLOSING VALUES OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE (SUPRA) ON THE FIRST AND LAST DAY OF THE PRECEDING PREVIOUS YEAR, WHICH IS AGAINST THE METHOD PRESCRIBED U/S.!4A READ WITH RULE 8D. WHILE C ALCULATING THE DETAILS OF EXEMPT INCOME, THE FORMULA PROVIDED B Y SECTION 14A READ WITH RULE 8D IS AN ABSOLUTE FORMULA AND IT DOES N OT OFFER ANY LIBERTY TO THE A.O. TO MAKE ANY DEVIATION THERETO A ND TO DERIVE THE AMOUNT OF EXEMPT INCOME THEREFROM, HI THE APPELLANT 'S CASE 'B' WOULD BE NIL AS ACCORDING TO BALANCE SHEET THERE WAS NO. INVESTMENT ON THE FIRST DAY AND THE LAST DAY OF THE PR EVIOUS YEAR. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, I AM OF THE CONSIDERED OPINION THAT THE DISALLOWANCE OF INTEREST IS NOT JUSTIF IED. THIS GROUND OF APPEAL TAKEN BY THE ASSESSEE IS THEREFORE ALLO WED. 4.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REV ENUE IS IN APPEAL BEFORE US. 5. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES. IT IS AN ADMITTED FACT THAT THE AO IN THE I NSTANT CASE HAS DISALLOWED PROPORTIONATE INTEREST U/S.14A R.W. RULE 8D(II). FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE IN TH E PAPER BOOK, WE FIND THE OWN CAPITAL AND FREE RESERVES OF THE ASSES SEE BANK IS RS.208.28 CRORES WHICH IS MUCH MORE THAN THE AVERAG E INVESTMENT OF ABOUT RS.40 CRORES, THE INCOME OF WHICH IS EXEMP T FROM TAX. WE FURTHER FIND FROM PAGE 13 OF THE PAPER BOOK THAT THERE WAS NO OPENING OR CLOSING BALANCE OF INVESTMENTS IN MUTUAL FUNDS, THE DIVIDEND INCOME OF WHICH IS EXEMPT. THEREFORE, WE FIND MERIT IN THE OBSERVATION OF THE LD.CIT(A) THAT B IN RULE 8D (2)(II) WOULD BE NIL. FURTHER, SINCE THE OWN CAPITAL OF THE ASS ESSEE BANK AT RS.208.28 CRORES IS MUCH MORE THAN THE AVERAGE INVE STMENT OF RS.40 CRORES, THEREFORE, IN VIEW OF THE DECISION OF THE HONBLE 4 BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE U TILITIES AND POWER LTD., REPORTED IN 313 ITR 340, NO DISALLOWANC E OF INTEREST U/S.14A IS CALLED FOR. SINCE THE AO HAS NOT DISALL OWED ANY EXPENDITURE UNDER RULE 8D(2)(III) AND SINCE THERE W AS NO OPENING AND CLOSING INVESTMENT, THE INCOME OF WHICH IS EXEM PT AND FURTHER CONSIDERING THE FACT THAT THE OWN FUNDS OF THE ASSE SSEE BANK ARE MUCH MORE THAN THE AVERAGE VALUE OF INVESTMENTS, TH EREFORE, NO DISALLOWANCE UNDER RULE 8D IS CALLED FOR. IN THIS VIEW OF THE MATTER, WE DO NOT FIND ANY INFIRMITY IN THE ORDER O F THE CIT(A) DELETING THE DISALLOWANCE. ACCORDINGLY, THE SAME I S UPHELD. GROUND RAISED BY THE REVENUE IS ACCORDINGLY DISMISS ED. 6. GROUND OF APPEAL NO.2 BY THE REVENUE READS AS UN DER : 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD.CIT(A)-I, NASHIK WAS JUSTIFIED IN DELETING THE ADDITION OF RS.43,800/- MADE ON ACCOUNT OF DISALLOWANCE OF TRAINI NG EXPENSES, IN ABSENCE OF ANY CORROBORATIVE EVIDENCE. 6.1 FACTS OF THE CASE, IN BRIEF, ARE THAT DURING TH E COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTED THAT ASSESSEE B ANK HAS DEBITED RS.43,800/- TOWARDS EXPENSES ON THE TRAININ G OF STAFF AND DIRECTOR OF THE BANK. THE AO ALLEGED THAT THE ASSE SSEE WAS UNABLE TO JUSTIFY THAT SUCH EXPENSES IS FOR BANKING BUSINE SS PURPOSES. NO SCHEDULE FOR TRAINING, NOMINATIONS, BILLS, TICKETS WERE PRODUCED. THE DIRECTORS TRAINING TO DESTINATIONS ACCORDING T O THE AO WAS NOT SPECIFIED. IN VIEW OF THE ABOVE, THE AO DISALLOWED TRAINING EXPENSES CLAIMED AT RS.43,800/-. 7. BEFORE CIT(A) IT WAS SUBMITTED THAT IMPARTING TR AINING AND EDUCATION TO THE BOARD OF DIRECTORS OF THE BANK HAS BEEN MANDATED 5 BOTH BY THE RBI AND THE DEPARTMENT OF COOPERATION U NDER WHOSE INSTRUCTIONS AND CONTROL THE ENTIRE EXERCISE IS CAR RIED OUT. SUCH TRAINING IS UNDERTAKEN WITH A VIEW TO ENSURE THAT T HE BANK IS RENDERING BEST OF ITS SERVICES TO THE CLIENTS AND T HEY ARE MADE AWARE OF THE MOST RECENT DEVELOPMENTS IN THE FIELD OF BANKING BUSINESS. IT WAS FURTHER SUBMITTED THAT THESE ARE REGULAR AND ROUTINE EXPENSES AND HAS BEEN ALLOWED IN THE PAST A SSESSMENTS. 8. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) DELETED THE DISALLOWANCE BY OBSERVING AS UNDER : 5.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CAS E AND SUBMISSIONS. IT IS PERTINENT TO NOTE THAT THE A.O. HAS NO T BROUGHT ANYTHING ON RECORD TO SHOW THAT THE ASSESSEE HAS NOT ACT UALLY INCURRED ANY EXPENDITURE ON THIS ACCOUNT ON THE EXPE NDITURE INCURRED WERE NOT RELATED TO THE APPELLANT'S BUSINESS ACTIVITIES. MERE DISALLOWANCE OF THE EXPENDITURE ON THE FACT THA T THE UNDERLYING DOCUMENTS IN SUPPORT OF EXPENDITURE IS NOT MADE AVAILABLE DURING THE COURSE OF ASSESSMENT PROCEEDINGS IS N OT A SUFFICIENT CAUSE TO DO SO. FURTHER, CONSIDERING THE FAC T THAT THE EXPENDITURE INCURRED BY THE ASSESSEE UNDER THIS HEAD WAS PURELY INCIDENTAL ITS BUSINESS AND THE SAME HAS BEEN ALLOWED A ND ACCEPTED BY THE DEPARTMENT IN THE PRECEDING ASSESSMENTS OF THE ASSESSEE, I DO NOT FIND ANY REASON TO UPHOLD THE ADDITIO NS BY THE A.O. ON THIS COUNT AND HENCE THE ADDITION UNDER THIS HEAD IS DELETED AND THIS GROUND OF APPEAL TAKEN BY THE ASSESSE E IS ALLOWED. 8.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REV ENUE IS IN APPEAL BEFORE US. 9. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES. THE SUBMISSION OF THE ASSESSEE BEFORE THE L D.CIT(A) THAT SUCH TYPE OF EXPENSES WERE ALLOWED IN THE PAST AND NO DISALLOWANCE WAS MADE COULD NOT BE CONTROVERTED BY THE LD. DEPARTMENTAL REPRESENTATIVE. FURTHER, WE FIND MERI T IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT TRAINING 6 EXPENSES IS A ROUTINE EXPENSES INCURRED TO KEEP THE STAFF AND DIRECTORS OF THE BANK UPDATE ABOUT THE RECENT DEVEL OPMENTS AND TO ENSURE QUALITY SERVICE TO THE CUSTOMERS. FURTHER, THE EXPENDITURE INCURRED ON TRAINING EXPENSES IS VERY NOMINAL AS CO MPARED TO THE BUSINESS ACTIVITIES OF THE ASSESSEE. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE REASONING GIVEN BY THE LD.CIT(A), WE FIND NO INFIRMITY IN THE SAME. ACCORDINGLY, THE GROUND RAI SED BY THE REVENUE IS DISMISSED. 10. GROUND OF APPEAL NO.3 BY THE REVENUE READS AS U NDER : 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LD.CIT(A)-I, NASHIK WAS JUSTIFIED IN DELETING THE ADDITION OF RS.24,824/- MADE ON ACCOUNT OF CESSATION OF LIABILITY OF UNCLAIMED DEMAND DRAFTS. 10.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO N OTED THAT THE ASSESSEE COOPERATIVE BANK IS HAVING DEMAND DRAFTS P AYABLE FOR MORE THAN 3 YEARS AT RS.24,824/-. THEREFORE, HE WA S OF THE OPINION THAT THERE IS NO LIABILITY ON THE PART OF THE ASSES SEE TO PAY THESE OUTSTANDING AMOUNTS. ACCORDING TO HIM, THIS LIABIL ITY SHOULD BECOME INCOME OF THE ASSESSEE AND SHOULD HAVE BEEN OFFERED TO TAX. IN ABSENCE OF ANY SPECIFIC EXPLANATION GIVEN BY THE ASSESSEE, THE AO MADE ADDITION OF RS.24,824/-. 11. BEFORE CIT(A) IT WAS SUBMITTED THAT THE BUSINES S OF BANKING IS BASICALLY THE BUSINESS OF TRUST AND AS SUCH THE BANK (ASSESSEE) IS ALWAYS BOUND BY THE LEGAL OBLIGATION TO HONOR THE S AME SINCE THE UNDERLYING CONSIDERATION AND THE INCIDENTAL INCOME THERETO HAS ALREADY BEEN RECEIVED BY IT. HE HAS ALSO ARGUED THA T THE LIMITATION 7 PERIOD AS APPLIED BY THE AO IS APPLICABLE TO THE DE BT AND MORE SPECIFICALLY TO THE GENERAL BUSINESS AND NOT TO THE BUSINESS OF BANKING. THE BANK IS LEGALLY BOUND TO HONOUR THE SA ID STALE INSTRUMENTS AFTER COMPLYING WITH THE LEGAL FORMALIT IES AND AS SUCH OBLIGATIONS CANNOT BE REJECTED ON AN OUTRIGHT BASIS . 12. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE AND RELYING ON VARIOUS DECISIONS CITED BEFORE HIM THE L D.CIT(A) DELETED THE ADDITION MADE BY THE AO BY OBSERVING AS UNDER : 6.4 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE RIVAL SUBMISSIONS. I CONCUR WITH THE VIEWS OF THE ASSESSEE THAT THE PERIOD OF LIMITATION IS NOT APPLICABLE TO THE BUSINESS OF BANKING AND THAT IT WOULD NOT BE PRUDENT ON PART OF THE BAN K (ASSESSEE) THAT THE AMOUNTS PERTAINING TO ALL THE EARLIER PREVI OUS YEARS WOULD BE WRITTEN OFF IN THIS ASSESSMENT YEAR. FURTHER, THE DECISION RELIED UPON BY THE APPELLANT IS THAT OF THE JURISDICTIONAL HIGH COURT (SUPRA) WHICH IS RECENT AND VALID AS ON DA TE, I ALLOW THE APPELLANTS CLAIMS AND DELETE THE ADDITION OF RS.2 4,824/- MADE BY THE AO IN THIS REGARD. THE GROUND OF APPEAL TAKE N BY THE APPELLANT IS ALLOWED. 12.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE RE VENUE IS IN APPEAL BEFORE US. 13. AFTER HEARING BOTH THE SIDES, WE FIND NO INFIRM ITY IN THE ORDER OF THE CIT(A). ALTHOUGH THE DEMAND DRAFTS AR E OUTSTANDING FOR A PERIOD OF MORE THAN 3 YEARS AS NOTED BY THE A O, HOWEVER, THE FACT REMAINS THAT THE BANK CANNOT DENY ITS LIABILIT Y TO PAY AS AND WHEN THE CUSTOMER APPROACHES THE BANK SINCE THE PER IOD OF LIMITATION IS NOT APPLICABLE TO THE BUSINESS OF BAN KING. THEREFORE, THE OBSERVATION OF THE AO THAT THERE IS NO LIABILIT Y ON THE PART OF THE ASSESSEE BANK TO PAY THESE OUTSTANDING AMOUNTS IS MISPLACED. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE REASO NING GIVEN BY 8 THE LD.CIT(A) WE FIND NO INFIRMITY IN THE SAME. AC CORDINGLY, THE SAME IS UPHELD AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 14. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 19-01-2015. SD/- SD/- (SUSHMA CHOWLA) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBE R PUNE DATED: 19 TH JANUARY, 2015 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. THE CIT(A)-I, NASHIK 4. THE CIT-I, NASHIK 5. THE D.R, A PUNE BENCH 6. GUARD FILE BY ORDER // TRUE COPY // ASSISTANT REGISTRAR ITAT, PUNE BENCHES, PUNE