TaxTMI 
TaxTMI 
2014 (12) TMI 562
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....serve already created. The reserve for bad debts is already more than the claim and the CIT(A) ought to have sustained the addition. 3. The CIT(A) erred in deleting the addition of Rs. 3,88,25,672 made towards bad debts. As per Rule 6ABA, the aggregate average of advances should be computed from the amounts of advances made by each rural branch as outstanding at the end of the last of each month. The CIT(A) erred in misinterpreting the Rule 6ABA taking into consideration the entire amount of loans advanced, whereas only the loans advanced during the year have to be taken into account. 4. The CIT(A) erred in deleting the addition of Rs. 50,43,457 made towards provision for audit fee. The CIT(A) omitted to note that the assessee is following mercantile method of account, wherein no provisions towards expenditure are shown." 3. The first issue is relating to addition of Rs. 18,79,704 made by AO and deleted by ld. CIT(A). 4. Briefly the facts are assessee is a cooperative bank in the district of Nizamabad. Assessee is mainly engaged in providing agricultural finance to the farmers in the district. For the AY under dispute, assessee filed its return of income on 28/10/07 dec....
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....as completed by determining the total income at Rs. 7,12,71,655. Being aggrieved of the assessment order so passed assessee preferred appeal before ld. CIT(A). 5. In course of hearing of appeal before ld. CIT(A), assessee contended that the interest waived of Rs. 18,79,704 has to be allowed as deduction as Govt. of AP has directed to waive interest on the advances made by assessee to primary agricultural cooperative societies (PACS). Accordingly, assessee waived such interest and debited to the P&L A/c. Alternatively, it was submitted by assessee that when the interest amount is to be debited to the reserve account such reserve gets reduced by similar amount and the amount will become allowable u/s 36(1)(viia). Ld. CIT(A) after considering the submissions of assessee in the context of facts and materials on record deleted the addition by holding as under: "3......................I considered the submissions made by the appellant and the observations made by AO. According to the details submitted by the appellant, the appellant waived interest already accrued. The interest accrued is credited to the interest account and as per the directions of the Government of AP, such inter....
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....nt to be included is the total of the advances outstanding and not the amount of advances given during the month. I find that the AO worked out the deduction by taking into consideration the advances made during the month. This is not correct and is not in accordance with the Rule 6ABA. I find that the working made by the appellant is in accordance with the said rule as the appellant considered the entire outstanding advances as at the end of each month contained in the previous year. Therefore, I hold that the appellant is eligible for deduction of Rs. 5,16,46,977. I accordingly direct the AO to allow the amount of Rs. 5,16,46,977 u/s 36(1)(viia) as against the amount allowed of Rs. 1,28,21,305. This ground of appeal is allowed." 6. Ld. DR reiterating the view expressed by AO submitted that as far as the waiver of interest of Rs. 18,79,704 is concerned, the same cannot be allowed as deduction u/s 36(1)(vii) as the amount does not exceed the provision created u/s 36(1)(viia). As far as the issue relating to deduction claimed u/s 36(1)(viia) is concerned, ld. DR submitted that the 10% deduction has to be worked out on the aggregate average of outstanding advances made during the ....
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..... Section 36(1)(vii) provides for deduction on account of bad debts actually written off in the books of account. However, proviso to 36(1)(vii) makes an exception by providing that in case of an assessee to which clause (viia) applies the claim of bad debt shall be limited to the amount by which such debt exceeds the credit balance in the provision for bad and doubtful debts made under clause (viia). Clause (viia) permits a cooperative bank to claim deduction of provision made for bad and doubtful debts as per the prescribed conditions. As has been correctly observed by ld. CIT(A), the only dispute between assessee and department is in respect of working out 10% of aggregate average rural advances. While assessee has made such working by considering the entire outstanding advances at the end of each month, AO has worked out by considering the aggregate average rural advances of each month and not on the entire outstanding advances. However, a perusal of the provision contained u/s 36(1)(viia) and rule 6ABA, would make it clear that the 10% of aggregate average advances has to be worked out on the entire outstanding advances and not the advances of that month alone. That being the ....
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....ystem and as audit fee has already been incurred towards services rendered and the amount is provided in the books of account after ascertaining the expenditure, the same has to be allowed. She further observed that AO did not bring on record the fact that provision made by assessee is either excessive or not correct. 13. The ld. DR submitted before us, as the provision created by assessee is not an ascertained liability, ld. CIT(A) was not justified in allowing the claim. He submitted that only after completion of audit, the fee charged by the auditor accrues. However, when the audit has not been made, assessee could not have made the provision for audit fee as liability has not accrued. 14. The ld. AR on the other hand submitted before us that already the amount has accrued to assessee towards audit fee, hence, it cannot be said that the liability has not ascertained. In this context, ld. AR referred to the letter dated 25/09/07 of the Govt. of AP cooperation Department wherein the assessee bank was intimated about the payment of audit fee of Rs. 53,78,637. Thus, ld. AR submitted that as the liability has already accrued the deduction claimed by assessee is allowed. 15. ....
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....with the contention of assessee. He was of the view that deduction u/s 36(1)(viii) has to be computed on the advances made during the year only. Accordingly, AO worked out the deduction u/s 36(1)(viii) to Rs. 88,107. Being aggrieved of disallowance of deduction claimed, assessee preferred appeal before ld. CIT(A). 19. In course of hearing of appeal before ld. CIT(A), it was submitted by assessee that deduction has to be worked out on the total outstanding advances and cannot be restricted to the advances for the year alone. Ld. CIT(A) after considering the submissions of assessee in the light of the statutory provision, held that the deduction has to be worked out on the basis of total outstanding advances and not the outstanding advances of the year alone. Accordingly, he deleted the addition made by AO. 20. We have considered the submissions of the parties and perused the materials on record as well as orders of revenue authorities. Having examined the issue in the context of statutory provision as contained u/s 36(1)(viii) we do not find any infirmity in the order of ld. CIT(A). In our view, the provisions of section 36(1)(viii) cannot be interpreted in a manner to suggest....
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....ng before us, ld. AR brought it to our notice that in the consequential order passed by AO in pursuance to the first appellate authority's order, the gross total income has been revised to Rs. 9,47,39,180. Ld. AR, therefore, submitted before us that AO may be directed to compute the deduction u/s 36(1)(viia) on the gross total income as may be determined in pursuance to the order passed by the Tribunal. Considering the submissions of the parties and keeping in view the relevant statutory provision, we direct AO to compute deduction u/s 36(1)(viia) on the total income as may be determined in pursuance to the direction of the Tribunal (before allowing any deduction u/s 36(1)(viia) and under Chapter - VIA). 25. The next issue as raised in ground no. 2 is in respect of allowance of assessee's claim of deduction u/s 36(1)(viia). 26. While completing the assessment, AO computed deduction u/s 36(1)(viia) by considering 10% of the average aggregate rural advances during the month which remained outstanding on the last day of the month. However, ld. CIT(A) accepted assessee's claim that as per section 36(1)(viia) read with rule 6ABA, deduction has to be worked out on the entire outsta....
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....ver of interest claimed by assessee as bad debts written u/s 36(1)(vii) is only allowable to the extent of the amount by which it exceeds the reserve already created. As the amount claimed towards waiver of interest did not exceed the reserve created for bad debts, AO was of the view that the same is not allowable u/s 36(1)(vii). Accordingly, he issued a show cause notice proposing to disallow the deduction claimed of Rs. 5,84,360. In response to the show cause notice, assessee submitted that the waiver of interest is on account of interest waived on settlement with borrowers/debtors, hence, the same should be allowed. AO, however, did not find merit in the submissions of assessee as he was of the view that the amount of Rs. 5,84,360 claimed as bad debts did not exceed the reserve created for bad debts as on 01/04/07, hence, the deduction claimed by the assessee is not allowable, hence, the disallowed the same. Aggrieved by the order of AO, assessee preferred appeal before CIT(A). CIT(A) also confirmed the addition made by accepting the reasoning of the AO. 34. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materi....
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....tion of the total income. However, the A.O has worked out such amount at Rs. 90,65,767/- indicating it to be 10% of the outstanding amounts of Aggregate Average Advances (AAA) by rural branches as on 31.03.2008, which was quantified a~ Rs. 9,06,57,670/-; out of the total advances of loans by the bank .that has been put at Rs. 140,70,13,034/-. In this regard, it is pertinent to say that it is wrong on the part of the appellant to assume that the A.O has calculated the eligible 20% of the profits on AAA at Rs. 90,65,767/-, since the A.O was only indicating the calculation on the basis of the amounts as available on record, as per the statutory provisions in the' assessment order. It is also relevant to indicate that the amounts of Rs. 9,06,57,670 was shown as the total of the out standings of AAA, which was not acceptable to the Assessing Officer, for calculating the eligible profit for the purpose of calculating the provisions for bad and doubtful debts. As per the A.O, such amounts should be calculated only on the advances made' during the year under reference. On these lines, the disallowances were restricted in the earlier year to the extent of the amounts claimed by the ....
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....bts as on 01/04/2008 is Rs. 5,23,60,261. Therefore, AO was of the view that as the reserve created for bad debts is more than the claim of bad debts, assessee's claim of deduction cannot be allowed. Though, assessee objecting to the proposed disallowance, stated that the expenditure claimed is not in the nature of bad debut but it is a business expenditure, but, AO rejecting the submissions of assessee, disallowed the amount of Rs. 3,12,31,869. Assessee challenged the disallowance before ld. CIT(A). 43. Ld. CIT(A), though, in principle, agreed to the view expressed by AO that assessee is eligible to claim deduction u/s 36(1)(vii) of an amount which exceeds the provision for bad debts created u/s 36(1)(viia). However, he observed that the amount of Rs. 5,23,60, 261 considered by AO to be the reserve created while determining the eligibility of deduction u/s 36(1)(vii) did not seem to have any proper basis. Ld. CIT(A), therefore, considering the fact that provision for bad and doubtful debts has been quantified at Rs. 86,15,514 u/s 36(1)(viia) directed the AO to allow the claim of waiver of interest to the extent of Rs. 2,26,16,355. 44. The ld. AR submitted before us that the a....
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....ated. 48. Briefly the facts relating to the aforesaid issue are, in course of assessment proceeding, AO noticed that assessee has debited an amount of Rs. 2,27,82,782 towards miscellaneous reserve. On a query made by AO, it was submitted by assessee that the reserve represents crystallized liability. AO, however, on examining the details submitted by assessee, found that the agreements, supply orders/purchase orders pertained to FY 2009-10. He, therefore, was of the opinion that as the liability does not pertain to the year under consideration, assessee's claim cannot be allowed. Accordingly, he added the amount of Rs. 2,27,82,782. Assessee challenged the addition in the appeal preferred before ld. CIT(A). 49. Ld. CIT(A) also sustained the addition by holding as under: "9.3 Perused the submissions of the appellant, with reference to the observations made by the AO, in the assessment order. The claims of the said reserves was disallowed on the basis that the liability was not crystallized during the year as per the AO and it is a fact too. Further, the claim of the assessee under 36(1)(viii) to the extent of Rs. 14,21,432 was restricted by the assessee itself holding that t....