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2014 (9) TMI 44
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.... sum of Rs. 52,39,411 on account of provision for frauds. The assessee submitted that in the regular operations of the bank, irregularities and embezzlements occur. Such losses have a direct and proximate connection to the carrying on of the business and therefore claim of the assessee for deduction on account of anticipated liability towards irregularities and embezzlement is business expenditure. The assessee further pointed out that the bank has a vigilance department. Wherever a fraud or embezzlement occurs, the vigilance department submits a report and also suggests recovery action to the audit committee. The assessee also pointed out that such cases of fraud are reported to RBI as per the RBI directions. The assessee also submitted that the provisions were made only after netting of the recoveries, if any, made by the bank. The assessee also pointed out that FIRs were filed in respect of such frauds. The assessee thus submitted that the liability in question has crystallized during the previous year relevant to A.Y. 2003-04. 4. It may be relevant to point out that this amount was allowed as a deduction in the original assessment completed by the AO u/s. 143(3) in March, 20....
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....ed that the fact that FIRs were lodged, cannot mean crystallization of liability has not occurred. Since the loss relates to the previous year, the same has to be allowed as deduction for the relevant assessment year. 9. The CIT(Appeals) accepted the claim of the assessee. He was of the view that the actual amount involved in the fraud as made out by the vigilance report of the vigilance cell should be accepted as crystallized liability of the assessee. The claim of the assessee was accordingly directed by the CIT(A) to be accepted. 10. Aggrieved by the order of the CIT(A), the revenue has raised ground No.2 before the Tribunal. 11. We have heard the submissions of the ld. DR, who relied upon the order of the Assessing Officer. The ld. counsel for the assessee reiterated the submissions as were made before the CIT(A). 12. We have considered the rival submissions. There is no dispute that the loss that occurred on account of irregularities and embezzlement is a loss incidental to the business and has to be allowed as deduction. The only dispute is with regard to the whether the loss claimed by the assessee can be said to have crystallized during the previous year. In thi....
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....t of the aggregate average advances made by the rural branches of a bank computed in the prescribed manner, will be allowed as a deduction. Rule 6ABA of the Income Tax Rules, 1962 (the Rules) lays down the manner of computation of Aggregate Average Advances for the purpose of clause (a) (viia) of Sec.36(1). The above sum of Rs. 23,80,55,247 is 10% of the aggregate average advances made by the rural branches calculated in accordance with the provisions of rule 6ABA of the Rules. 15. Apart from the above, the Assessee had also created a PBDD in respect of non-rural advances of Rs. 88,20,47,000. The Assessee wrote off a sum of Rs. 88,26,10,825 as bad debts on account of non-rural advances and claimed the same as deduction u/s.36(1)(vii) of the Act. 16. The PBDD in respect of rural and non rural advances of Rs. 88,30,47,000 (Rs.88,20,47,000 for non rural advances and Rs. 10,00,000 for rural advances) which was debited in the profit and loss account was added to the profit as per profit and loss account in the computation of total income and the deduction on account of PBDD u/s.36(1)(viia) of Rs. 23,80,55,247 was claimed by the Assessee and deduction of Rs. 88,26,10,265 on account....
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....ral advances and bad debts for non-rural advances. For the above reasons, the A.O was directed to recompute the deduction u/s 36(1)(viia) of the Act in accordance with the decision of the Apex Court cited above. 19. Aggrieved by the order of the CIT(A), the revenue has raised ground No. 3 to 5 in its grounds of appeal. "3. The learned CIT(A) in allowing relief of Rs. 23,70,55,274/- without appreciating that deduction u/s 36(1)(viia) cannot exceed provision of bad and doubtful debts made in respect of the advances made by the rural branches of the bank and the ld. CIT(A) failed to appreciate that such provisions was only of Rs. 10,00,000/- during the year. 4. The ld.CIT(A) allowed relief without appreciating the law which lays down that deduction u/s 36(1)(viia) is in respect of provision for bad and doubtful debts made by the bank in its books account and that the deduction can not any situation be more than the provision made and the amount of deduction is also subject to the two ceilings laid down in terms of section 36(1)(viia) of the Act. 5. The ld.CIT(A) has erred in allowing the deduction claimed u/s 36(1)(viia) of the Act re....
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....ng the deduction claimed u/s 36(l)(viia) of the Act relying on the decision of Hon'ble Supreme Court in the case of M/s Catholic Syrian Bank without appreciating that the facts of the present case are different than the facts in the case before the Hon'ble Supreme Court. 5. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed in so far as it relates to the above mentioned issue and that of the Assessing Officer restored. 6. The appellant craves leaves to add, to alter, to amend or to delete any of the grounds that may be urged at the time of hearing of the appeal." 21. We have heard the submissions of the learned counsel for the Assessee and the learned DR. The learned DR relied on the order of the AO. The learned counsel for the Assessee submitted that originally when Sec.36(1)(viia) of the Act was introduced, the requirement of PBDD having to be in relation to advances made by its rural branch was a condition for allowing deduction on account of PBDD. After amendment of Sec.36(1)(viia) by the IT (Amendment) Act, 1985, the requirement that the PBDD should be in rel....
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....he Provision having to be made in respect of advances by rural branches has been dispensed with. As long as the bank makes any provision for bad and doubtful debts, it is eligible to claim deduction u/s.36(1)(viia) as per the calculation provided therein. It was submitted that in AY 03-04, the Assessee made PBDD to the extent of Rs. 88,30,47,000 in its books of accounts. Out of which Rs. 10,00,000 was PBDD in respect of rural advances and Rs. 88,20,47,000 was PBDD in respect of non-rural advances. It was eligible to claim deduction of Rs. 25,15,44,262 as per the calculation made u/s.36(1)(viia) of the Act. Since the provision made in the books of PBDD for non-rural and rural advances was much more than the deduction claimed u/s.36(1)(viia)(a) of the Act, the deduction claimed has to be allowed. Similarly for AY 04-05, the Assessee made PBDD in respect of non-rural advances of Rs. 51,72,00,000 and in respect of rural advances Rs. 10,00,000. The entire provision of Rs. 51,82,00,000 debited to the profit and loss account was added to the profit as per profit and loss account in the computation of total income. Bad debt written off in respect of non-rural branches was Rs. 88,26,10,825 ....
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....ing the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debts is not allowed as a deduction in the computation of the taxable profits. 13.2 In order to promote rural banking and assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act has inserted a new cl. (viia) in sub-s. (1) of s. 36 of the IT Act to provide for a deduction, the computation of the taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debts relating to advances made by the rural branches. The deduction will be limited to 1-1/2 per cent of the aggregate average advances made by the rural branches computed in the manner to be prescribed by rules in the IT Rules, 1962. For this purpose, a "rural branch" means a branch of a scheduled bank situated in a place with a population not exceeding 10,000 according to the last preceding census of which the relevant figures have been published before the first day of the previous year. The expression "scheduled bank" has the same meaning as in the Expl....
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....e words "in respect of any provision" and ending with the words "in the prescribed manner", the following was substituted w.e.f. 1st April, 1985 : "in respect of any provision for bad and doubtful debts made by a scheduled bank [not being a bank approved by the Central Government for the purposes of cl. (viiia) or a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank, an amount not exceeding ten per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) or an amount not exceeding two per cent of the aggregate average advances made by the rural branches of such banks, computed in the prescribed manner, whichever is higher." 28. Proviso to Sec.36(1)(vii) of the Act, was introduced by the Finance Act, 1985 and it reads thus: "Provided that in the case of an assessee to which cl. (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause." 29. Simultaneously, Sec.36(2)(v) was....
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....ts shall be debited to the provision for bad and doubtful debts account and that the deduction admissible under s. 36(1)(vii) shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account. 17.5 Sec. 36(2) has been amended by insertion of a new cl. (v) to provide that where a debt or a part of a debt considered bad or doubtful relates to advances made by a bank to which s. 36(1)(viia) applies, no such deduction shall be allowed unless the bank has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debt account made under cl. (viia) of s. 36(1)." Stage-III: 31. The IT (Amendment) Act, 1986 substituted the present cl. (viia) for the one as substituted by the Finance Act, 1985. These provisions came into effect from 1.4.1987. SECTION 36 - OTHER DEDUCTIONS The section reads as under : Other deductions.- (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 -  ....
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....nbsp; (b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A); Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, of an amount not exceeding ten per cent. of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year. (c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed befor....
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....the separate deduction, viz., one in respect of rural advances and the other for provision for bad and doubtful debts in general and also to extend the benefit of deduction to all banks including foreign banks. "Modification in respect of deduction on provision for bad and doubtful debts made by the banks. 5.1 Under the existing provisions of cl. (viia) of sub-s. (1) of s. 36 of the IT Act inserted by the Finance Act, 1979, provisions for bad and doubtful debts made by a scheduled or a non-scheduled Indian bank is allowed as deduction within prescribed limits. The limit prescribed is 10% of the total income or 2% of the aggregate average advances made by the rural branches of such banks, whichever is higher. It had been represented to the Government that the foreign banks were not entitled to any deduction under this provision and to that extent they were being discriminated against. Further, it was felt that the existing ceiling in this regard i.e. 10% of the total income or 2% of the aggregate average advances made by the rural branches of Indian banks, whichever is higher, should be modified. Accordingly, by the Amending Act, the deduction present....
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....per cent of the aggregate average advances made by rural branches of such banks, whichever is higher. At this stage also the PBDD had to be created and debited to the profit and loss account but it was not required to be done in relation to advances made by Bank's rural branches and can be in relation to any debt. PBDD need not be in relation to rural advances but can be in relation to any advances both rural and non-rural advances. The two percent AAA made by rural branches of such banks had to be computed and the PBDD made in books has to be in relation to rural advances. The other eligible sum which can be considered for deduction u/s.36(1)(viia) of the Act viz., ten per cent of the total income (computed before making any deduction under the proposed new provision) does not require computation in relation to rural advances. Nevertheless the debit of PBDD to Profit and Loss account is necessary of the higher of the two sums to claim deduction u/s.36(1)(viia) of the Act. If the concerned bank does not have rural branches then they could not claim the deduction. Therefore the deduction was confined only to banks that had rural branches. 35. At Stage-III of the provisions of Sec....
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..../s.36(1)(viia) has to be ascertained viz., 7.5% seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A). The above are the permissible upper limits of deductions u/s.36(1)(viia) of the Act. The actual provision made in the books by the Assessee on account of PBDD (irrespective of whether it is rural or nonrural) has to be seen. To the extent PBDD is so created, then subject to the permissible upper limits referred to above, the deduction has to be allowed to the Assessee. The question of bifurcating the PBDD as one relating to rural advances and other advances (Non-rural advances) does not arise for consideration. 38. In the present case as far AY 03-04 is concerned, the Assessee debited in the Profit and Loss A/C. on account of PBDD in respect of rural and non- rural advances of Rs. 88,30,47,000 (Rs.88,20,47,000 for non-rural advances and Rs. 10,00,000 for rural advances). A sum of Rs. 4,36,165 was actually written off out of the PBDD of rural advances. The Assessee wrote off a sum of Rs. 88,26,10,825 as bad debts on account of non-rural advances and claimed the same as deduction u/s.36(1)(vii) of the Act. The sa....
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....ul Debts Account u/s.36(1)(viia)(a) of the Act, which was in excess of the claim of the assessee for deduction on account of bad debts. The AO after making reference to proviso to Sec.36(1)(vii) of the Act and also Sec.36(2)(v) of the Act was of the view that the Assessee could not be allowed the deduction claimed because (i) the amount claimed as deduction on account of bad debts was not the excess available in the credit of the Provision for Bad and Doubtful Debts Account created u/s.36(1)(viia)(a) of the Act and; (ii) that u/s.36(2)(v) of the Act the amount of bad debts written off should first be debited in the Provision for Bad and Doubtful Debts Account created u/s.36(1)(viia)(a) of the Act. The stand of the Assessee was that since the claim of deduction of Bad debts made by the Assessee was u/s.36(1)(vii) of the Act and pertained to bad debts of non-rural advances, the credit balance in the PBDD account should not be looked into at all. The Hon'ble Supreme Court held: (i) The provisions of Section 36(1)(vii) and 36(1)(viia) are separate items of deduction. These are independent provisions and, therefore, cannot be intermingled or read into each other. &nbs....
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....ne account and whenever claim for deduction is made u/s.36(1)(vii) the same should be debited to the PBDD account. Further the law laid down by the Hon'ble Supreme Court in the case of Catholic Syrian Bank (supra) has to be understood in the context of its assumption that Banks would maintain separate PBDD A/C. in respect of rural branches and non-rural branches and therefore it is possible to discern PBDD as one in respect of rural branches and non-rural branches and therefore there is no basis for the assumption that Bank's would get double benefit of deduction by way of Provision for Bad and Doubtful Debts and also by way of Bad Debts written off. The following observations of the Hon'ble Supreme Court in the case of Catholic Syrian Bank (supra) would be relevant in this regard. "30. The scope of the proviso to cl. (vii) of s. 36(1) has to be ascertained from a cumulative reading of the provisions of cls. (vii), (viia) of s. 36(1) and cl. (v) of s. 36(2) and only shows that a double benefit in respect of the same debt is not given to a scheduled bank. A scheduled bank may have both urban and rural branches. It may give advances from both branches with separate pr....
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.... bank to ensure that the accounts represent the correct statement of affairs of the bank. (b) Maintaining the common account may result in overstating the profits or the profits will shoot up which would result in accruing of liabilities not due. (c) Accounting Standard (AS) 29, issued in 2003, which concerns treatment of 'provisions, contingent liabilities and contingent assets'. Under the head 'Use of Provisions', cls. 53 and 54 state as under : "53. A provision should be used only for expenditures for which the provision was originally recognised. 54. Only expenditures that relate to the original provision are adjusted against it. Adjusting expenditures against a provision that was originally recognised for another purpose would conceal the impact of two different events." 35. The above clauses justify maintenance of distinct and different accounts. 36. Merely because the Department has some apprehension of the possibility of double bene....