2025 (8) TMI 1664 - AT - Income Tax

Assessee allowed full s.36(1)(viia) deduction of Rs.83,77,323 (Rs.40L provision, Rs.43.77L bad debts) as within statutory cap

Amreli Jilla Madhyasth Sahakari Bank Ltd. Versus Deputy Commissioner of Income-tax /ACIT, Circle-2 (1), Rajkot,

ITAT allowed the appeal of the assessee, holding that the total deduction claimed under s.36(1)(viia) of Rs.83,77,323 (comprising Rs.40,00,000 provision ... Provision of bad and doubtful debts u/s 36(1)(viia) - assessee is a Co-operative Bank, carrying on the business of banking and thus the provisions of section 80P(4) and 36(1)(vii) and 36(1)(viia) of the Act have their application HELD THAT:- We find total deduction u/s 36(1)(viia) of the Act, was claimed at Rs. 83,77,323/- and out of such total deduction, the provision was at to Rs. 40,00,000/- and bad debts was to the tune of Rs. 43,77,323/-. Therefore the maximum permissible deduction u/s 36(1)(viia) is @ 7.5% of total income or 10% of aggregate average advances, whichever is lower. Since the lower amount was to the tune of Rs. 83,77,323/-. The assessee for its convenience has made two parts of said total amount of Rs. 83,77,323/-, that is, two parts, viz. (i) provision for bad and doubtful debts of Rs. 40,00,000/- and (ii) bad debts of Rs. 43,77,323/-. Therefore, we find that the deduction claimed by the assessee, is in accordance with the provisions mentioned u/s 36(1)(viia) of the Act, hence no disallowance is attracted, therefore we delete the remaining addition sustained by the ld. CIT(A), and allow the appeal of the assessee on merit. ISSUES PRESENTED AND CONSIDERED 1. Whether the reassessment proceedings initiated under section 147 read with section 148 of the Income-tax Act were justified in re-opening assessment to add amounts allegedly escaping assessment. 2. Whether an addition of Rs. 43,98,000/- determined by reference to balance-sheet entries (purported reversal of excessive provision) was permissible when no corresponding deduction for that amount was claimed in the computation of total income. 3. Whether the claim of deduction of Rs. 83,77,323/- under section 36(1)(viia) (provision for bad and doubtful debts by a bank/co-operative bank) was allowable in full, having regard to the statutory limits and the manner of computation under the first and second limbs of section 36(1)(viia) and the related rule (Rule 6ABA) for rural advances. 4. Ancillary: Whether the assessing officer properly restricted the reassessment to verification of the quantum actually claimed in the return, or impermissibly travelled beyond that scope. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of reassessment under section 147/148 Legal framework: Section 147 permits reopening where income has escaped assessment; section 148 empowers issue of notice for reassessment. Reassessment scope must ordinarily be linked to the matters which escaped assessment and to issues actually raised by the reasons recorded. Precedent Treatment: The Court did not rely upon or cite any external precedent on the law relating to reopening; the question was rendered academic by the Tribunal's substantive disposal on merits. Interpretation and reasoning: The Tribunal observed that the assessing officer issued notice under section 148 upon finding perceived under-assessment arising from provision entries. However, because the Tribunal decided the substantive dispute in favour of the taxpayer (allowing the claimed deduction), the Tribunal did not adjudicate the legality of the reopening exercise and treated the question as infructuous. Ratio vs. Obiter: Obiter - the Tribunal expressly refrained from deciding the validity of reopening, stating the issue becomes academic upon allowing the appeal on merits. Conclusions: The Tribunal did not decide the validity of reassessment under section 147/148; that ground was left unadjudicated as academic in view of the substantive allowance of deduction. Issue 2: Legitimacy of adding Rs. 43,98,000/- where no corresponding claim of deduction was made Legal framework: Additions on account of reversal or disallowance of provisions must relate to deductions claimed by the assessee in computation of total income; taxing action cannot be predicated on amounts not claimed as deduction in the return. Precedent Treatment: No prior authorities were invoked; the Tribunal applied fundamental principles of assessment law and the mechanics of computation of total income. Interpretation and reasoning: The Tribunal found that the assessing officer's additional disallowance of Rs. 43,98,000/- was based on balance-sheet comparisons and a notional reversal, but the assessee had not claimed that specific amount as a deduction in its computation of total income (or in profit & loss account) under section 36(1)(viia) or section 36(1)(vii). The Tribunal accepted the Commissioner (Appeals)'s reasoning that disallowance can only operate against deductions actually claimed; travelling beyond the quantification claimed in the return to create a fresh disallowance lacked basis. Ratio vs. Obiter: Ratio - the Tribunal expressly held that where no corresponding claim of deduction is made in the computation of total income, an assessing officer cannot add that unclaimed sum as escaped income; the addition of Rs. 43,98,000/- was therefore unwarranted. Conclusions: The addition of Rs. 43,98,000/- was deleted as having no basis because no corresponding deduction had been claimed by the assessee; the assessing officer impermissibly travelled beyond the scope of the claimed deduction. Issue 3: Allowability of Rs. 83,77,323/- claimed under section 36(1)(viia) Legal framework: Section 36(1)(viia) permits deduction for provisions for bad and doubtful debts by banks subject to limits: generally the first limb (7.5% of profit before deductions under Chapter VI-A) and the second limb (not exceeding 10% of aggregate average advances of rural branches as computed under the Rules, including Rule 6ABA). The permissible deduction is the lower of the statutory limits and the actual provision created and debited to profit & loss account (subject to statutory formulae). Precedent Treatment: The Tribunal did not cite external case law; it examined the statutory scheme and the assessee's computation supplied in the record. Interpretation and reasoning: The Tribunal reviewed the computation in the assessee's return and noted that the total claimed deduction under section 36(1)(viia) was Rs. 83,77,323/-, comprised of two components: (i) provision for bad and doubtful debts of Rs. 40,00,000/- actually created and debited in the profit & loss account, and (ii) bad debts of Rs. 43,77,323/-. The Tribunal accepted that the assessee had computed the deduction in accordance with the statutory scheme (applying the first limb and second limb calculations). Although the Commissioner (Appeals) raised an issue about incorrect application of Rule 6ABA (using the entire aggregate average rural advances rather than incremental increase), that contention was rendered academic because the actual provision debited to books was only Rs. 40,00,000/-, which capped the allowable deduction. The Tribunal held that the assessee's split between provision and bad debts was consistent with the statutory provision and that the total claimed deduction did not exceed the permissible statutory limit as calculated by the assessee; accordingly, the remaining addition of Rs. 43,77,323/- (being part of the original disallowance after allowing Rs. 40,00,000) was deleted. Ratio vs. Obiter: Ratio - where the computation under section 36(1)(viia) conforms to the statutory scheme and the actual provision debited to the profit & loss account is within the statutory limits, the claimed deduction must be allowed; administrative or rule-application objections that do not affect the statutory ceiling or the actual provision in books cannot sustain disallowance. Conclusions: The Tribunal allowed the full claim of Rs. 83,77,323/- under section 36(1)(viia), holding that the deduction was computed in accordance with the statutory provision and that the actual provision debited (Rs. 40,00,000/-) and the manner of splitting the total claim justified deletion of the remaining addition sustained by the Commissioner (Appeals). The appeal was allowed on merit. Issue 4: Scope of reassessment verification versus impermissible traversal Legal framework: Reassessment or verification should be confined to matters relevant to the reasons for reopening and the claims made in the return; assessing officer cannot expand scope to create fresh additions unlinked to claimed items. Precedent Treatment: No external authority cited; Tribunal applied assessment principles. Interpretation and reasoning: The Tribunal found that the assessing officer had, at reopening, gone beyond scrutiny of the quantum actually claimed by the assessee and relied upon balance-sheet entries and comparative figures to create an additional disallowance. The Tribunal agreed with Commissioner (Appeals) that such expansion was unjustified where the reassessment ought to have been restricted to verifying the correctness of the deduction as claimed in the computation. Ratio vs. Obiter: Ratio - reassessment verification must be linked to the claim for deduction in the return; assessing officer cannot formulate additional disallowances unrelated to claimed amounts. Conclusions: The Tribunal sustained the principle that reassessment scope is limited to the verification of claimed deductions and deleted additions made by assessing officer that fell outside that scope.