2020 (11) TMI 300 - AT - Income Tax

Tribunal Affirms Disallowance of Bad Debt Deduction; Remands Deduction u/s 36(1)(viii) for Reassessment.

The Tribunal upheld the AO's decision to disallow the deduction under Section 36(1)(viia) of the Income Tax Act, 1961, due to the Assessee's failure to ... Deduction u/s.36(1)(viia) - assessee had not made any provision for bad and doubtful debts during the previous year as per the provisions contained in section 36(2)(v) and clarification in Explanation 2 to section 36(1)(vii) by the Finance Act, 2013, w.e.f 1.4.2013 - Assessee is a rural regional bank engaged in the business of banking - HELD THAT:- As decided in own case [2020 (1) TMI 995 - ITAT BANGALORE] AO was justified in disallowing the claim for deduction on account of provisions for bad and doubtful debts u/s.36(1)(viia) of the Act as admittedly the Assessee did not debit its profit and loss account any sum towards provision for bad and doubtful debts. We therefore restore the order of the AO and allow Gr.No.1 raised by the revenue. Disallowance of excess deduction claimed u/s. 36(1)(viii) - Quantum of deduction to be allowed u/s.36(1)(viii) - AO has calculated the eligible advances as per Annual Report - AO has adopted the figure of profit after tax and reduced Other Incomes while computing the deductions - CIT-A deleted addition - HELD THAT:- There is no dispute that the Assessee was an eligible entity and that to the extent of 20% of the profits derived from the eligible business, the Assessee was entitled to claim deduction u/s.36(1)(viii). A perusal of the CIT(A) order shows that the relief allowed by the CIT(A) to the assessee is based on the decision of Karnataka State Finance Corporation [1985 (10) TMI 5 - KARNATAKA HIGH COURT] - CIT(A) has not given a factual finding as to how the deduction claimed by the Assessee is in accordance with the statutory provisions - since no finding has been given by the CIT(A) as to the basis on which the relief was given by the CIT(A), we deem it fit and proper to set aside the order of the CIT(A) and remand to the AO for fresh consideration the question of proper deduction to be allowed u/s 36(1)((viii) - Appeal by the revenue is allowed for statistical purposes. Issues Involved:1. Deduction under Section 36(1)(viia) of the Income Tax Act, 1961.2. Deduction under Section 36(1)(viii) of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Deduction under Section 36(1)(viia) of the Income Tax Act, 1961:The primary issue raised by the Revenue was whether the assessee was entitled to claim a deduction of Rs. 381,26,66,985 under Section 36(1)(viia) of the Income Tax Act, 1961, without making a provision for bad and doubtful debts during the previous year. The Assessee, a rural regional bank, claimed this deduction during the assessment year 2014-15. The relevant provisions allow for two deductions: (i) 7.5% of the total income and (ii) 10% of the aggregate average advances made by the rural branches of the bank.The Assessing Officer (AO) disallowed the deduction on the grounds that the Assessee had not debited the claimed amount to the provision for bad and doubtful debts account, a requirement under Section 36(2)(v). This decision was based on the interpretation of the Supreme Court's ruling in Catholic Syrian Bank Ltd. Vs. CIT and the amendment to Section 36(1)(vii) Explanation-1 by the Finance Act, 2013.The Commissioner of Income-tax (Appeals) [CIT(A)], however, deleted the addition made by the AO, relying on the order of the predecessor CIT(A) for the assessment year 2013-14. The Tribunal, in the appeal for the assessment year 2013-14, had reversed the CIT(A)'s order, holding that the deduction under Section 36(1)(viia) cannot be allowed unless the provision is created by debiting the provision for bad and doubtful debts account.Following the Tribunal's earlier decision, it was held that the AO was justified in disallowing the claim for deduction since the Assessee did not debit its profit and loss account with any sum towards the provision for bad and doubtful debts. Consequently, the Tribunal restored the AO's order and allowed the Revenue's ground.2. Deduction under Section 36(1)(viii) of the Income Tax Act, 1961:The second issue pertained to the quantum of deduction allowable under Section 36(1)(viii). The AO had calculated the eligible deduction as Rs. 4,54,37,000, whereas the Assessee claimed Rs. 11,52,00,000. The dispute arose from the method of computation of the eligible deduction.The CIT(A) allowed the Assessee's claim, noting that the AO did not provide reasons for rejecting the Assessee's calculation, which was based on the Karnataka High Court's decision in Karnataka State Financial Corporation Vs. CIT. The CIT(A) observed that the AO's method was inconsistent with the statutory provisions and the precedent set by the jurisdictional High Court.However, the Tribunal found that the CIT(A) did not provide a factual basis for the relief granted. Therefore, the Tribunal set aside the CIT(A)'s order and remanded the matter to the AO for fresh consideration. The AO was directed to reassess the proper deduction to be allowed under Section 36(1)(viii), considering the Assessee's contentions and providing an opportunity for a hearing.Conclusion:The Tribunal upheld the AO's decision to disallow the deduction under Section 36(1)(viia) due to non-compliance with the provision requirements. For the deduction under Section 36(1)(viii), the matter was remanded to the AO for a fresh evaluation based on proper statutory interpretation and factual findings. The appeal by the Revenue was allowed for statistical purposes.