2026 (2) TMI 569 - AT - Income Tax

Miscellaneous branch expenses and bank NPA provisions - expenses not disallowed by presumption; provisions recognised as deductible.

Authorities disallowed a 10% deduction from composite petty branch expenses for lack of documentary proof; the tribunal found no plausible basis for ... Disallowing expenses at the rate of 10% of total amount debited under miscellaneous expenses - AO observed from the Profit and Loss account that the assessee has debited under the head miscellaneous expenses under the head other expenses schedule 19 -assessee submitted before the AO that these are the composite expenses of 7 branches of the bank to meet the day-to-day expenses CIT (A) confirmed the disallowance by observing that since, the assessee has failed to establish the genuineness of the expenses before the AO and before the appellate authority and there was also no explanation apart from furnishing the debit vouchers self-generated for meeting the day-to-day expenses of the bank - HELD THAT:- We find that the authorities below have disallowed the expenses on the ground that these are the petty expenses incurred by the branches to meet the day-to-day expenses for which there were no proper evidences. Therefore, the genuineness of which could not be established. In our opinion, the authorities below have failed to give any plausible and reasonable findings as to how these were non-genuine. In our opinion, the disallowance of expenses merely on presumption and surmises at the rate of 10% of the said expenses incurred is incorrect and cannot be sustained. Disallowance cannot be made on estimation and presumption basis as has been held in the case of CIT vs. Daulat Ram Rawatmull [1972 (9) TMI 9 - SUPREME COURT] and Omar Salay Mohamed Sait [1959 (3) TMI 2 - SUPREME COURT]. Consequently, we set aside the order of ld. CIT (A) and direct the ld. AO to delete the addition. Disallowance of provisions made against the non-performing assets under the head other expenditure schedule-19 of the Profit and Loss account - as argued same are allowable under Provisions of Section 36(1)(viia) and was created in accordance with the RBI and NABARD guidelines - HELD THAT:- Both the deductions 36(1)(vii) AND 36(1)(viia) are independent of each other. We note that Section 36(1)(vii) of the Act deals with the writing off bad debts whereas the section 36(1)(viia) deals with creation of provisions for bad and doubtful debts based upon the non-performing assets of the bank, which is in accordance with the guidelines issued by the Reserve Bank of India and NABARD. Therefore, considering these provisions of these sections, we are of the view that the assessee is entitled to deduction u/s 36(1)(viia) of the Act. The case of the assessee is squarely covered by the decision of Catholic Syrian Bank Ltd. [2012 (2) TMI 262 - SUPREME COURT]. We note that the decision relied by the ld. AO in case of Southern Technologies Ltd.[2010 (1) TMI 5 - SUPREME COURT] is not applicable to the assessee as the decision was rendered in the context of Section 36(1)(vii) of the Act, where the assessee is a co-operative bank and therefore, the Section 36(1)(viia) is appliable for rural branches. We also note that the issue has been decided in case of Tamilnadu State Apex Coop Bank Ltd [2014 (1) TMI 1737 - ITAT CHENNAI] wherein it has been held that the assessee is entitled to deduction claim in respect of provision for bad and doubtful debts. Decided in favour of assessee. Issues: (i) Whether the adhoc 10% disallowance of miscellaneous/petty branch expenses debited under 'miscellaneous expenses' can be sustained where expenses are supported by internal vouchers and not specifically found non-genuine; (ii) Whether provisions for non-performing assets (NPA) created by the co-operative bank in accordance with RBI/NABARD guidelines are allowable deduction under Section 36(1)(viia) of the Income-tax Act, 1961.Issue (i): Whether the adhoc disallowance of 10% of miscellaneous expenses is sustainable.Analysis: The authorities below disallowed 10% of miscellaneous branch expenses on the basis that records comprised internally generated petty vouchers and the genuineness of expenses could not be established. The Tribunal found no specific findings demonstrating non-genuineness and held that disallowance was made by presumption and estimation without plausible basis. The Tribunal referred to authorities prohibiting disallowance purely on conjecture.Conclusion: The disallowance is not sustainable and is set aside; decision is in favour of the assessee.Issue (ii): Whether the provisions for NPA created by the co-operative bank are deductible under Section 36(1)(viia) of the Income-tax Act, 1961.Analysis: Section 36(1)(viia) separately permits deduction in respect of provisions for bad and doubtful debts created inter alia by co-operative banks subject to specified limits, distinct from Section 36(1)(vii) which deals with write-offs. The assessee followed RBI/NABARD norms and supporting records were placed on record. The Tribunal held that the provision falls within the statutory scheme permitting deduction and that decisions cited by revenue on Section 36(1)(vii) are not apposite to provisioning under Section 36(1)(viia).Conclusion: The provisions for NPA are allowable under Section 36(1)(viia); decision is in favour of the assessee.Final Conclusion: The appeals are allowed and the additions/disallowances challenged in the appeals are deleted, resulting in a favourable outcome for the assessee across the assessed years.Ratio Decidendi: Ad hoc disallowance based on estimation or presumption is impermissible; provisions for bad and doubtful debts created by a co-operative bank in accordance with RBI/NABARD norms are deductible under Section 36(1)(viia) of the Income-tax Act, 1961.