2013 (11) TMI 1696 - AT - Income Tax

Tribunal allows Co-operative Bank provisions for assets, emphasizing RBI guidelines

M/s Nagaur Urban Co-operative Versus Asstt. Commissioner of Income Tax, Bank Limited, Circle – Nagaur. C/o. Shri U.C. Jain, Advocate, “Shatrunjay”,

The Tribunal ruled in favor of the Co-operative Bank, allowing provisions for standard assets, NPA, impaired assets, and investment depreciation reserve. ... Eligibility for deduction u/s.36(1)(viia) to Co-operative bank - Provision for ‘Reserve for NPA' used according to the RBI directions - 'Provision for loss on investment' an allowable deduction - HELD THAT:- the provision for NPA is not equal to provision for bad and doubtful debts. The provision for bad and doubtful debts means the debt is either become bad or its recovery is doubtful, whereas, Classification of NPA as per RBI guidelines means that recovery of principle and interest could not be made in the particular period from the party and that does not mean as per the accounting standard issued by the ICAI, it became either bad or recovery is doubtful. Thus, not eligible for deduction since the above provisions are not in accordance with Sec.36(1)(viia) The terminology ‘Reserve for NPA’ has been used by the assessee in accordance with the RBI directions. As is evident from the assessment order, the assessee has indeed created ‘Reserve for NPA’. For claiming benefit under the provisions of Section 36(1)(viia)(a) the conditions to be satisfied is: that provision for bad and doubtful debts should have been made by the bank eligible to claim such deduction. Co-operative Banks do not strictly follow the provisions of Banking Regulation Act for the purpose of maintaining their Books of Accounts. Therefore, creation of provisions for bad and doubtful debts may be under different nomenclature. This will not disentitle the assessee for claiming deduction under the provisions of Section 36(1)(viia(a). The purpose for creation of reserve for NPA is same i.e., creating provision towards bad and doubtful debts. The decision in the case of CIT vs. Bank of Baroda, 262 ITR 334 (Bombay) [2003 (3) TMI 80 - BOMBAY HIGH COURT]. Therefore, the claim of ₹ 19,57,916/- becomes allowable. We order to allow the same. In the result, the appeal of the assessee bank is allowed. Issues:1. Disallowance of provisions for standard assets, NPA, impaired assets, and investment depreciation reserve.2. Eligibility of Co-operative Bank for deduction under section 36(1)(viia) of the Income Tax Act, 1961.3. Interpretation of provisions for bad and doubtful debts.4. Allowability of provision for investment depreciation reserve.Analysis:Issue 1: Disallowance of provisionsThe Assessing Officer (AO) disallowed provisions made by the Co-operative Bank for standard assets, NPA, impaired assets, and investment depreciation reserve. The bank justified these expenses as per RBI guidelines and Banking Regulation Act, but the AO was not convinced. The first appeal also ruled against the bank, leading to the current appeal.Issue 2: Eligibility for deduction under section 36(1)(viia)The Co-operative Bank claimed deduction under section 36(1)(viia) of the Income Tax Act, 1961. The AO disallowed the deductions citing discrepancies in the provisions made by the bank. The bank argued that the provisions were in line with RBI guidelines and should be allowed as deductions.Issue 3: Interpretation of provisions for bad and doubtful debtsThe dispute centered on whether the provisions made by the bank, particularly for NPA, met the criteria of 'provision for bad and doubtful debts' as required for deduction under section 36(1)(viia). The CIT(A) held that the provisions for NPA did not qualify as provisions for bad and doubtful debts as per the Act. The bank contended that the provisions were essentially for bad and doubtful debts, albeit under a different nomenclature.Issue 4: Allowability of provision for investment depreciation reserveThe AO disallowed the provision for investment depreciation reserve made by the bank, arguing that it was a provision and not an actual expenditure. However, the bank maintained that the provision was in line with accounting standards and RBI guidelines. The Tribunal, following precedent, allowed this provision as an allowable expenditure, emphasizing that valuation losses should be recognized as expenses.In conclusion, the Tribunal ruled in favor of the Co-operative Bank, allowing the provisions for standard assets, NPA, impaired assets, and investment depreciation reserve. The decision highlighted the importance of adherence to RBI guidelines and accounting standards in determining the eligibility of deductions under the Income Tax Act.