2020 (8) TMI 195 - AT - Income Tax

Tribunal Overturns CIT (A) Order on Principal NPA Disallowance, Directs Re-examination

The tribunal set aside the order of the ld. CIT (A) regarding the disallowance of Principal NPA, determining that the assessee was not eligible for the ... Deduction for provision for bad and doubtful debts under section 36(1)(viia) - Exclusion of a primary cooperative agricultural and rural development bank from the cooperative bank category in clause (viia) - Allowability of written off time barred interest under section 36(1)(vii) and potential overlap with section 36(1)(viia) - Verification of actual write off in books and applicability of section 36(2)Deduction for provision for bad and doubtful debts under section 36(1)(viia) - Exclusion of a primary cooperative agricultural and rural development bank from the cooperative bank category in clause (viia) - Whether the assessee, being a primary cooperative agricultural and rural development bank, is entitled to deduction under section 36(1)(viia) in respect of provision for NPA principal. - HELD THAT: - The Tribunal found that clause (viia) grants deduction to scheduled banks, non scheduled banks and cooperative banks, but expressly excludes a primary agricultural credit society and a primary cooperative agricultural and rural development bank from the cooperative bank category. The assessee did not dispute that it is a primary cooperative agricultural and rural development bank and therefore falls within the statutory exception. The appellate authority's conclusion that the assessee was covered by clause (viia) was held to be based on a misunderstanding of the statutory text. Accordingly the CIT(A)'s contrary finding was set aside. [Paras 5]Assessee, being a primary cooperative agricultural and rural development bank, is not entitled to deduction under section 36(1)(viia); the CIT(A)'s opposite finding is set aside.Allowability of written off time barred interest under section 36(1)(vii) and potential overlap with section 36(1)(viia) - Verification of actual write off in books and applicability of section 36(2) - Whether the amount claimed as time barred interest was actually written off in the books and hence allowable, and whether the AO should verify overlap between deductions under sections 36(1)(vii) and 36(1)(viia). - HELD THAT: - The Tribunal observed that the CIT(A) deleted the addition on the basis that the assessee had treated the time barred interest as written off, but the supporting details were not part of the audited books and were not certified by the auditors. It was unclear from the materials whether the entire amount formed part of the interest income in the profit and loss account or met the conditions of section 36(2). The Tribunal noted the settled principle that deduction under section 36(1)(vii) for debts written off is allowable only to the extent such bad debt exceeds the credit balance of provisions under clause (viia), and that overlap must be guarded against. In the interests of justice the Tribunal remanded the issue to the assessing officer to re examine and verify whether the amount was actually written off and to apply the law accordingly, affording the assessee opportunity of hearing. [Paras 7]Issue remanded to the assessing officer for fresh examination and verification of whether the time barred interest was actually written off in the books and for applying sections 36(1)(vii)/36(1)(viia)/36(2) as appropriate.Final Conclusion: The appeal is partly allowed: the CIT(A)'s allowance under section 36(1)(viia) is set aside insofar as the assessee is a primary cooperative agricultural and rural development bank and thus excluded from clause (viia); the question of allowability of time barred interest is remanded to the assessing officer for verification and fresh adjudication. Issues:1. Disallowance of Principal NPA2. Disallowance of Time Barred Interest RESIssue 1: Disallowance of Principal NPA:The appeal concerns the disallowance of Principal NPA by the Assessing Officer (AO) for the assessment year 2010-11. The AO contended that the assessee, a Cooperative Land Development Bank, did not fall under section 36(1)(viia) of the IT Act and thus made an addition of Rs. 3,91,38,329. On appeal, the ld. CIT (A) deleted the addition, stating that the assessee was covered under section 36(1)(viia) for the provision made in respect of NPA. The dispute centered on whether the assessee, being a primary Cooperative Agricultural and Rural Development Bank, was eligible for the deduction under section 36(1)(viia). The tribunal found that the assessee fell under the exception provided in clause (viia) of section 36(1) and was not entitled to the deduction. The order of the LD. CIT (A) was set aside on this issue.Issue 2: Disallowance of Time Barred Interest RES:The AO disallowed the Time Barred Interest RES, contending it was a provision and not allowable since the assessee was not covered under section 36(1)(viia). The ld. CIT (A) deleted the addition, believing the amount was written off based on the P & L account details. However, the tribunal noted that the details provided were not part of the audited books of account and lacked clarity on whether the amount was part of the Interest income. Considering the possibility of overlapping deductions under sections 36(1)(vii) and 36(1)(viia), the tribunal set aside the issue for the AO to re-examine if the amount was actually written off. The decision aimed to ensure compliance with the provisions of section 36(2) of the Act and provide the assessee with a fair hearing opportunity.In conclusion, the tribunal partially allowed the appeal for statistical purposes, addressing the issues of disallowance of Principal NPA and Time Barred Interest RES comprehensively, ensuring a fair assessment based on the provisions of the IT Act.