Appeal success for gratuity provision, but setback for bad debts deduction under section 36(1)(viia)

The appeal for the A.Y. 2007-08 regarding the disallowance of deduction claimed towards provision for gratuity was allowed. The Tribunal permitted the deduction as the payment was made directly to SBI Life Insurance before the due date of filing the return. However, for the A.Y. 2008-09, the appeal regarding the disallowance of deduction claimed under section 36(1)(viia) for bad and doubtful debts was dismissed. The Tribunal upheld the disallowance subject to verification by the A.O. to confirm if the provision for bad and doubtful debts was created in the account books.

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Issues Involved:
1. Disallowance of deduction claimed towards provision for gratuity.
2. Disallowance of deduction claimed under section 36(1)(viia) for bad and doubtful debts.

Issue 1: Disallowance of Deduction Claimed Towards Provision for Gratuity

The assessee, a Regional Rural Bank, was aggrieved by the CIT(A)'s order confirming the disallowance of Rs. 2,74,49,761 towards provision for gratuity. The primary contention was that the payment was not made through an approved gratuity fund but directly to SBI Life Insurance before the due date of filing the return.

The Tribunal reviewed the facts and noted that the payment to SBI Life Insurance was made before the due date of filing the return. The Tribunal referenced its previous decision in the assessee's own case for A.Y. 2010-2011, where it allowed the deduction after considering relevant judgments, including the Calcutta High Court's decision in Sree Kamakhya Tea Co. P. Ltd. and the jurisdictional High Court's decision in Hitech (India) P. Ltd. vs. Union of India.

The Tribunal concluded that the payment made directly to SBI Life Insurance, which is registered with IRDA, should be allowed as a deduction. It cited the Supreme Court's decision in CIT vs. M/s. Textool Co. Ltd., which supported the view that payments made directly to an insurer for the benefit of employees could be allowed as deductions.

Issue 2: Disallowance of Deduction Claimed Under Section 36(1)(viia) for Bad and Doubtful Debts

For the A.Y. 2008-09, the assessee claimed a deduction of Rs. 10,46,19,487 under section 36(1)(viia). The A.O. disallowed this claim, stating that the assessee had not filed a revised computation within the stipulated time and had not made a provision for the 7.5% of the total income in its books of account.

The Tribunal reviewed the facts and noted that the law did not require a provision for the 7.5% of the total income to be made in the books for the A.Y. 2008-09. The Tribunal referenced its decision in the case of Deccan Grameena Bank for A.Y. 2010-2011, where it held that the 7.5% deduction of the total income could be claimed independently of any provisions made for bad and doubtful debts.

However, the Tribunal also considered the decision of the Punjab & Haryana High Court in the case of State Bank of Patiala, which required that a provision for bad and doubtful debts be made in the account books in the same previous year in which such provision is claimed as a deduction under section 36(1)(viia). The Tribunal, therefore, remitted the matter back to the A.O. to verify whether the assessee had created any provision for bad and doubtful debts in its books of account.

Conclusion:

- ITA.No.713/Hyd/2015 (A.Y. 2007-08): The appeal was allowed, and the deduction for the provision for gratuity was permitted.
- ITA.No.714/Hyd/2015 (A.Y. 2008-09): The appeal was dismissed, and the disallowance of the deduction under section 36(1)(viia) was upheld, subject to verification by the A.O.

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