2025 (1) TMI 1470 - AT - Income Tax

Bank's bad debt reserve claim rejected but fixed deposit write-off allowed as business loss under section 36(1)(viia)

ITAT Surat dismissed appellant's claim for deduction under section 36(1)(viia) for bad and doubtful debt reserve, distinguishing between 'reserve' and ... Disallowance being provisions for bad and doubtful reserve - whether appellant was entitled to the relief u/s 36(1)(viia)? - HED THAT:- As in case of Bharuch Dist. Central Co-op. Bank Ltd. [2013 (8) TMI 405 - ITAT AHMEDABAD] as held that amount credited by bank to reserve for bad and doubtful debts towards standard assets is not deductible u/s 36(1)(viia), as it is not akin to provision for bad and doubtful debts. The terms “reserve” and “proviso” are not one and same. Provision for bad and doubtful debts is a liability whereas reserve is assessee’s own fund. Hence, both cannot be equated and assessee is not entitled for any deduction in absence of any provision for bad and doubtful debts. The facts of present case are similar to the above decision. It is clear from the details given by the appellant during the proceedings before ITAT that the appellant has not created any provisions for bad and doubtful debts. The reserve account cannot be considered as provision for the purpose of allowing deduction u/s 36(1)(viia) of the Act. The decisions relied upon by Ld. AR are not applicable because facts in those decisions are different. The issue in these cases pertained to “Provision for bad and doubtful debts” and not “reserve”. Therefore, claim of deduction u/s 36(1)(viia) of the Act is not allowable. Therefore, the decision of the CIT(A) is confirmed, and the ground of the assessee is dismissed. Write up u/s 36(1)(vi) of investment in Madhavpura Mercantile Co-Op. Bank (MMCB) - appellant has also taken alternate ground that the same is allowable even without provisions of section 36(1)(vii)/36(1)(viia) - whether investment of FDs written off by a Co-operative Bank is capital or revenue in nature? - HELD THAT:- It is seen that as per section 6 of the Banking Regulation Act, 1949 which deals with the form and business in which the banking companies may engage, dealing in funds is a part of banking business. Apart from accepting deposits and lending money, investing in deposits is also a part of banking business. Accepting deposits and giving of loans and advances, making investments, deposits etc. form part of core activity of banking business. Thus, the deposits placed with MMCB was wholly in the course of and for the purpose of business. Therefore, the deposits held by the assessee-bank cannot be treated as capital asset and they formed part of stock-in-trade. This is also fortified by the fact that the interests earned on such deposits are offered to tax and have been taxed by the Department as business income. Whether write off the said deposit is a loss arising in the course of carrying on banking business? - Once it is held that holding of deposits forms part of banking business, write off such loss will be a loss arising in the course of carrying on banking business. From the facts of record, it is seen that the same MMCB incurred huge losses and the RBI cancelled its license to carry on banking business. The RBI also directed the banks which had deposits with MMCB to write off those losses. Accordingly, we are of the view that loss incurred by the appellant is a business loss incurred during the course of carrying on its banking business. Whether loss can be claimed without debiting the P&L account? - On the issue of violation of RBI norms, it is for RBI to take appropriate action against the bank, if at all there was any violation in 2011-12. It is further seen that in the subsequent period, the appellant had recovered part of the deposit amount which was also offered to tax. This also strengthens the claim of the appellant as a business loss was incurred in the course of carrying on of banking business. In his brief summary, the Ld. AR submitted that assessee has offered subsequent recovery from MMCB as income and the assessee may recover further amount in future. The assessee has also conceded deduction of Rs. 35,00,000/- out of Rs. 7.81 crore, which pertained to AY.2013-14. Claim of the appellant that write off of FDs with MMCB as a business loss is partly allowed and AO is directed to delete addition. Accordingly, the ground of appeal is partly allowed. ISSUES PRESENTED and CONSIDEREDThe judgment addresses several key legal issues: Whether the disallowance of Rs. 35,00,000 claimed as a provision for bad and doubtful debts under section 36(1)(viia) of the Income-tax Act for AY 2013-14 was justified. Whether the write-off of Rs. 7,81,70,034 as a bad debt related to investments in Madhavpura Mercantile Co-operative Bank for AY 2014-15 is allowable under section 36(1)(vii) or section 37 of the Income-tax Act. Whether the accounting treatment and the claim for deductions made by the assessee constituted double deduction or were otherwise flawed.ISSUE-WISE DETAILED ANALYSIS1. Disallowance of Provision for Bad and Doubtful Debts (AY 2013-14): Relevant Legal Framework and Precedents: The legal framework involves section 36(1)(vii) and section 36(1)(viia) of the Income-tax Act. The Supreme Court's decision in Catholic Syrian Bank Ltd. vs. CIT clarified that deductions under these sections are distinct and independent. Court's Interpretation and Reasoning: The Tribunal noted that the assessee claimed a deduction under section 36(1)(viia) without having rural branches, which is a prerequisite for such a claim. The Tribunal emphasized that reserves cannot substitute for provisions. Key Evidence and Findings: The Tribunal found that the assessee added Rs. 35,00,000 to reserves rather than making a provision for bad debts, which is necessary for claiming the deduction. Application of Law to Facts: The Tribunal concluded that since no provision for bad debts was made, the deduction under section 36(1)(viia) was not allowable. Treatment of Competing Arguments: The Tribunal dismissed the assessee's reliance on previous cases, as they pertained to provisions, not reserves. Conclusions: The Tribunal upheld the disallowance of Rs. 35,00,000, confirming the CIT(A)'s decision.2. Write-off of Investment in MMCB (AY 2014-15): Relevant Legal Framework and Precedents: The legal framework involves sections 36(1)(vii) and 37 of the Income-tax Act. The Tribunal referenced the Supreme Court's decision in Kedarnath Jute Co. Ltd. regarding the treatment of deductions. Court's Interpretation and Reasoning: The Tribunal assessed whether the FDs with MMCB were capital assets or part of the banking business's stock-in-trade. It determined that the FDs were part of the banking business, thus a business loss. Key Evidence and Findings: The Tribunal noted that the RBI's cancellation of MMCB's license necessitated the write-off, and the FDs were treated as business assets, not capital investments. Application of Law to Facts: The Tribunal found that the loss was incurred in the course of banking business and was allowable under section 37. Treatment of Competing Arguments: The Tribunal rejected the CIT-DR's argument that the loss was capital in nature and emphasized the business nature of the FDs. Conclusions: The Tribunal partially allowed the claim, directing deletion of Rs. 7,46,70,034 from the addition, treating it as a business loss.SIGNIFICANT HOLDINGS Core Principles Established: The Tribunal reinforced the principle that reserves cannot substitute for provisions when claiming deductions under section 36(1)(viia). It also clarified that losses from business activities, even if involving investments, may be deductible under section 37. Final Determinations on Each Issue: The Tribunal dismissed the appeal for AY 2013-14 regarding the provision for bad debts. For AY 2014-15, the Tribunal partially allowed the appeal, recognizing the write-off as a business loss.