M/S Karnataka Vikas Grameena Bank, vs Assessee

Karnataka Vikas Grameena Bank, Head Office, CTS No.52/B1/A1/D.H.No.133A, H.O.Building, Belgaum Road, D.N.Koppa Dharwad-580 008. ... Appellant

Vs.

Commissioner of Income-tax, Hubli. ... Respondent

Appellant by: Shri Narendra Sharma, Advocate and Srihari Kutsa Respondent by: Shri Farhat Hussain Qureshi, CIT(DR)

Date of hearing : 03/02/2015 Date of pronouncement: 13/02/2015

Per Smt.P.MADHAVI DEVI, JM:

This is an appeal filed by the assessee against the order of

the CIT, Hubli, dated 14/03/2013 for the assessment year 2008-

09.

2. Brief facts of the case are that the assessee is a co-

operative society doing banking business. It filed its return of

income for the assessment year 2008-09 on 30/09/2008

declaring an income of Rs.93,22,72,000/-. The same was

processed u/s 143(1) on 17/12/2009 and refund of

Rs.11,86,450/- was adjusted against the arrears for the ITA No.662/Bang/2013 Karnataka Vikas Grameena Bank Page 2 of 7 assessment year 2007-08. Thereafter, the assessee filed revised

return on 28/03/2009 declaring an income of Rs.93,25,06,010/-.

The assessee also made an application u/s 154 to grant extra

refund on account of revised return. Thereafter the Assessing

Officer (AO) proceeded to complete the assessment u/s 143(3)

after verification of the books of account produced by the

assessee. The AO considered the allowability of deduction u/s

36(1)(viia) and 36(1)(vii) of the Act and also 36(1)(viii) of the

Act and disallowance u/s 14A etc., and computed the tax

accordingly. Thereafter, the CIT perused the assessment

records and observed that the assessee-bank had debited an

amount of Rs.1,43,23,61,632/- to its profits and loss account

under the head 'interest on deposits' as expenditure and on

verification of interest paid account on such deposits, it is seen

that the assessee has paid/credited interest to its

customers/depositors without making TDS on the interest

amount exceeding Rs.10,000/- which is in violation of the

provisions of sec.194A of the Act. He, therefore, observed that

the assessment order is both erroneous as well as prejudicial to

the interest of revenue. He, accordingly, issued a notice u/s 263

of the Act on 26/11/2012. The assessee was also asked to

furnish branch-wise details of depositors and deposit amount,

interest accrued/paid, Form No.15G/H, if any obtained and

submitted to the department and the details of TDS made in

respect of interest payment exceeding Rs.10,000/-. The ITA No.662/Bang/2013 Karnataka Vikas Grameena Bank Page 3 of 7 assessee filed the requisite details vide its submission dated

12/3/2013. It was submitted that no TDS was required to be

made for interest paid up to Rs.10,000/- on term deposits and

as regards the interest in excess of Rs.10,000/-, it was informed

that interest was not deducted after obtaining declaration in

form No.15G/H from depositors as well as the Government and

Quasi-Government bodies. It was admitted that total sum of

Rs.6,61,48,819/- was paid as interest without TDS even though

each of the payments exceeded Rs.10,000/-. The CIT, after

considering the assessee's submissions held that the assessee

has not produced Forms 15G/H in the office of the CIT, Hubli, by

the prescribed date which is mandatory to avail the facility of not

making TDS on interest payment. He, therefore, held that the

interest payment of Rs.4,84,13,546/- debited to profit and loss

account is liable to be disallowed u/s 40(a)(ia) of the Act for this

reason. Similarly, with regard to interest paid in excess of

Rs.10,000/- without making any TDS, he held that the same is

also liable to be disallowed u/s 40(a)(ia). He accordingly set

aside the assessment order. Aggrieved by the order of the CIT,

the assessee is in appeal before us.

3. The learned counsel for the assessee, while supporting

the orders of the AO submitted that the assessee had filed all the

details including books of account before the AO and as observed

by the AO, they were test checked before accepting the same.

He has drawn our particular attention to the profit and loss ITA No.662/Bang/2013 Karnataka Vikas Grameena Bank Page 4 of 7 account which included both interest earned as well as interest

expended and submitted that when the AO has considered

interest income earned by the assessee, he would have

considered the interest expenditure also. He submitted that the

issue of disallowability u/s 40(a)(ia) of interest paid or payable

was a subject of debate during the relevant assessment year and

the AO, having accepted one of the possible views, the

assessment order cannot be said to be erroneous or prejudicial

to the interest of the revenue. For this proposition, he placed

reliance upon the judgment of the Hon'ble Supreme Court in the

case of Malabar Industrial Co. vs. CIT (243 ITR 83)(SC). As

regards merits of the disallowance u/s 40(a)(ia) is concerned,

the learned counsel for the assessee submitted that the

disallowance u/s 40(a)(ia) can be made only if the interest is

payable by the end of the relevant financial year and not of the

amount already paid. He submitted that in the case before us,

interest has been paid before the end of the relevant financial

year and therefore, as held by the Special Bench of the Tribunal

in the case of Merilyn Shipping reported in (2012) 136 ITD 23

(Vishakapatnam)(SB), this amount cannot be disallowed u/s

40(a)(ia). He also placed reliance upon the judgment of the

Hon'ble Allahabad High Court in the case of CIT vs. Vector

Shipping Services (P) Ltd., reported in (2013) 357 ITR 642(All.)

which has referred to the decision of the Special Bench of the

Tribunal for coming to the above conclusion and also drawn our ITA No.662/Bang/2013 Karnataka Vikas Grameena Bank Page 5 of 7 attention to the fact that the Hon'ble Supreme Court has

dismissed the SLP filed by the Revenue against the judgment of

the Hon'ble Allahabad High Court. Thus, according to him, the

decision of the Hon'ble Allahabad High Court has been upheld by

the Hon'ble Supreme Court. Therefore, according to him, the

assessment order is neither erroneous nor prejudicial to the

interest of revenue and the order of the CIT u/s 263 is not

sustainable.

The learned Departmental Representative, on the other

hand, supported the order of the CIT and supported the order of

the CIT and submitted that as is clear from the assessment

order, the AO has not considered the allowability or otherwise of

the interest expenditure without TDS u/s 40(a)(ia) of the Act.

Therefore, according to him, the order of the CIT u/s 263 is to

be upheld.

4. Having regard to the rival contentions and the material

on record, we find that during the assessment proceedings u/s

143(3), the AO has not verified the issue as to whether the

assessee has complied with the provisions of 194A and has

deducted the tax at source on the interest paid to its customers

or depositors even where the interest exceeded Rs.10,000/-.

There is nothing on record to demonstrate that the assessee has

filed these details before the AO or that the AO has called for

and verified these facts. The Hon'ble Delhi High Court in the

case of Gee Vee Enterprises, reported in (1975) 99 ITR ITA No.662/Bang/2013 Karnataka Vikas Grameena Bank Page 6 of 7

375)(Del.) has held that the ITO being an adjudicator as well as

investigator, cannot remain passive in the face of a return which

is apparently in order but calls for further enquiries in the facts

and circumstances of the case and the word 'erroneous' in

sec.263 includes the failure to make such enquiry. Therefore, in

the case before us, since the AO failed to make any enquiries on

the issue, the assessment order is clearly erroneous. However,

for an order to be revisable u/s 263 of the Act, it has to be both

erroneous as well as prejudicial to the interest of the revenue.

We find that the issue of disallowance u/s 40(a)(ia) was a highly

debatable one leading to the reference of the said issue to the

Special Bench in the case of Merilyn Shipping (cited supra) and

the Special Bench had held that the said provision is applicable

only to the amounts payable as on the last date of the financial

year and not to the amounts already paid. This decision has

been confirmed by the Hon'ble Allahabad High Court in the case

of Vector Shipping Services (supra) and aggrieved by the same,

the Revenue had filed an SLP before the Hon'ble Supreme Court

which was dismissed in limine. Therefore, though the Hon'ble

Supreme Court has not laid down any ratio decidendi, since it

has not entertained any appeal against the order of the Hon'ble

High Court, the decision of the Hon'ble High Court is final. Thus,

on merits, this issue is covered in favour of the assessee by the

decision of the Hon'ble Allahabad High Court which is followed by

this Tribunal in a number of cases to which both of us i.e. the ITA No.662/Bang/2013 Karnataka Vikas Grameena Bank Page 7 of 7 Judicial Member and the Accountant Member are signatories.

Therefore, respectfully following the decision of the Hon'ble

Allahabad High Court, we hold that the issue is covered in favour

of the assessee on merits. Therefore, it is clear that there is no

prejudice caused to the revenue by the assessment order. Thus

the order u/s 263 is not sustainable. The order u/s 263 is thus

set aside and the assessment order is upheld.

6. In the result, the assessee's appeal is allowed.

Pronounced in the open court on 13th February, 2015.

sd/- sd/- (Jason P Boaz) (Smt. P.Madhavi Devi) ACCOUNTANT MEMBER JUDICIAL MEMBER eksrinivasulu

Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order

Assistant Registrar Income-tax Appellate Tribunal Bangalore