2014 (10) TMI 292 - AT - Income Tax

Tribunal allows appeal on bad debts, remands gratuity fund issues, dismisses S.154 appeal.

The Tribunal allowed the appeal, deleting the disallowance on bad debts written off, citing Supreme Court rulings that post-1.4.1989, it is not necessary ... Bad debts written off disallowed – Amount covered by State Government Guarantee – Held that:- The claim of the assessee for deduction on account of bad debts written off was disallowed by the AO mainly on the ground that the relevant debts written off by the assessee had not actually become bad during the year – relying upon TRF Limited V/s. CIT [2010 (2) TMI 211 - SUPREME COURT] - every assessee, prior to 1.4.1989 had to establish that the debt advanced by him, had in fact become irrecoverable in order to claim deduction u/s 36(1)(vii) - this position has got altered by the amendment made in S.36(1)(vii) of the Act with effect from 1.4.1989 and it is not necessary for the assessee after 1.4.1989 to establish that the debt in fact has become irrecoverable - if the bad debt is written off as irrecoverable in the accounts of the assessee, it is enough for the assessee to claim deduction on account of bad debts u/s 36(1(vii) - the relevant debts were written off by the assessee in the books of account and since the same represented the money lent in the ordinary course of business of banking carried on by the assessee, the assessee is entitled to claim deduction on account of bad debts written off u/s 36(1)(vii) r.w. section 36(2) – the order of the CIT(A) is set aside – Decided in favour of assessee. Amount paid to LIC towards Employees Gratuity Fund disallowed – Held that:- The amount paid by the assessee to LIC towards Employees Gratuity Fund was disallowed by the AP on the ground that the Fund was not approved by the prescribed authority under the Income tax Act, although application seeking such approval was filed by the assessee – assessee contended that the Employees Group Gratuity Fund has since been approved by the Commissioner of Income-tax II, Hyderabad with effect from 1.3.2009 vide letter dated 1.3.2013 - both the sides have agreed that the matter should be sent back to the AO – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of assessee. Bad debts written off under the Agricultural Debt Waiver and Debt Relief Scheme, 2008 – Held that:- As per clause (v) of sub-section (2) of S.36, no deduction for a bad debt or part thereof can be allowed, where such debt or part thereof relates to advances made by an assessee to which clause (viia) of sub-section (1) applies, unless the assessee has debited such debt or part of the debt in that previous year to the provision for bad and doubtful debts account made under that clause – assessee contended that the provisions of S.36(1)(viia) introduced in the statute book with effect from 1.4.1979 are made applicable to cooperative banks only from 1.4.2007, and therefore, the CIT(A) ought to have directed the AO to satisfy himself about the fulfilment of the conditions stipulated in S.36(2)(v) by the assessee keeping in view that S.36(1)(viia) was applicable in the case of the assessee only with effect from 1.4.2007 - this contention raised by the assessee is duly supported by the Board Circular No.258/1979 dated 14.6.1979 and No.3 of 2008 dated 12.3.2008, clarifying that the provisions of S.36(1)(viia) introduced from 1979 would not be applicable to cooperative banks from 1.4.1979, but only from 1.4.2007 – thus, the direction given by the CIT(A) is modified to the extent that the AO shall satisfy himself about the fulfillment of the condition stipulated in S.36(2)(v) by the assessee, keeping in view that S.36(1)(viia) is applicable in the case of the assessee only with effect from 1.4.2007 while considering the claim of the assessee for deduction on account of bad debts under the Agricultural Debt Waiver and Debt Relief Scheme, 2008 – Decided partly in favour of assessee. Computation of business income – Investment depreciation and profit on sale of investments to be included or not – Held that:- CIT(A) has directed the AO to consider the claim of the assessee for relief on the issues after verifying the same from the relevant records – as decided in assessee’s own case for the similar issue was restored by the Tribunal also to the file of the Assessing Officer in assessee’s own case The Andhra Pradesh State Co-operative Bank Ltd. Versus The Asst. CIT, Circle-2(3), Hyderabad [2014 (1) TMI 295 - ITAT HYDERABAD] the matter is to be remitted back to the AO for fresh adjudication – Decided in favour of assessee. Issues Involved:1. Disallowance of Rs. 70,96,83,398 on account of bad debts written off covered by State Government Guarantee.2. Disallowance of Rs. 21,55,72,052 on account of amount paid to LIC towards Employees Gratuity Fund.3. Disallowance of Rs. 173,15,46,253 on account of bad debts written off under the Agricultural Debt Waiver and Debt Relief Scheme, 2008 (ADWDRS).4. Inclusion of investment depreciation and profit on sale of investments in taxable income.5. Rectification application under S.154.Issue-wise Detailed Analysis:1. Disallowance of Rs. 70,96,83,398 on Account of Bad Debts Written Off:The assessee, a state-level Apex Cooperative Credit institution, claimed a deduction for bad debts written off. The Assessing Officer disallowed Rs. 70,96,83,398, reasoning that the debts were covered by State Government guarantees and had not actually become bad. The CIT(A) partly sustained this disallowance, stating that the decision to write off some debts was not bona fide as the debts were recoverable. The Tribunal, however, referred to the Supreme Court rulings in Vijaya Bank V/s. CIT and TRF Limited V/s. CIT, which clarified that post-1.4.1989, it is not necessary to establish that debts have become irrecoverable; writing off in the books is sufficient. The Tribunal concluded that the assessee is entitled to the deduction and deleted the addition made by the Assessing Officer and sustained by the CIT(A).2. Disallowance of Rs. 21,55,72,052 on Account of Amount Paid to LIC towards Employees Gratuity Fund:The Assessing Officer disallowed the amount paid to LIC towards Employees Gratuity Fund as the fund was not approved by the prescribed authority. The CIT(A) confirmed this disallowance. However, the Tribunal noted that the fund was approved with effect from 1.3.2009. Both parties agreed to remand the matter to the Assessing Officer for fresh consideration in light of the approval. The Tribunal set aside the CIT(A)'s order and restored the issue to the Assessing Officer.3. Disallowance of Rs. 173,15,46,253 on Account of Bad Debts Written Off under ADWDRS:The assessee claimed a deduction for its share in the waiver of interest and other charges under ADWDRS. The Assessing Officer disallowed this, arguing that the relief was to be reimbursed by the Central Government, making the claim premature. The CIT(A) agreed that the amount represented debts written off but held that the deduction was subject to S.36(2)(v). The Tribunal modified the CIT(A)'s direction, instructing the Assessing Officer to verify the fulfillment of conditions under S.36(2)(v), considering that S.36(1)(viia) applies to cooperative banks only from 1.4.2007.4. Inclusion of Investment Depreciation and Profit on Sale of Investments in Taxable Income:The assessee contended that investment depreciation and profit on sale of investments should not be included in taxable income. The CIT(A) directed the Assessing Officer to verify the claim. The Tribunal restored the issue to the Assessing Officer for fresh consideration, following the same directions as in the assessee's case for the assessment year 2008-09.5. Rectification Application under S.154:The assessee's appeal against the CIT(A)'s order under S.154 was based on the same issues as grounds Nos. 5 to 7 of ITA No.1481/Hyd/2013. Since these issues were already addressed by the Tribunal, the appeal under S.154 was deemed infructuous and dismissed.Conclusion:The Tribunal partly allowed the appeal in ITA No.1481/Hyd/2013, deleting the disallowance on bad debts written off and remanding the issues of gratuity fund and ADWDRS bad debts to the Assessing Officer. The appeal in ITA No.88/Hyd/2014 was dismissed as infructuous. The order was pronounced on 9th October, 2014.