TaxTMI 
TaxTMI 
2018 (5) TMI 511
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.... sum of Rs. 2,65,10,567/- under the head 'provision for bad and doubtful debts' which includes provisions provided against standard assets amounting to Rs. 47,93,922/-. The Assessing Officer (AO) called for explanation of the assessee as to why the provision for standard assets should not be disallowed and added back to income. The authorized representative submitted explanation stating that as per section 36(1)(viia) of I.T.Act, the assessee is eligible for deduction in respect of provision for bad and doubtful assets made in the books of account, an amount not exceeding 7.5% of the total income computed before any deduction under Chapter VIA of Income Tax Act or an amount of 10% of aggregate advances made by the rural branch or such bank computed in the prescribed manner. The assessee argued before the AO that the provision for standard assets also represents the provision for bad and doubtful debts and only the nomenclature is different. The entire provisions made in respect of provision for bad and doubtful debts u/s 36(1)(viia) is within the limit prescribed under I.T.Act, hence requested the AO to allow the same as deduction. Not being convinced with the explanation of the as....
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....ddition made by the AO and allowed the appeal of the assessee. 4. Aggrieved by the order of the Ld.CIT(A), the revenue is in appeal before this Tribunal. During the appeal hearing, the Ld.DR argued that the provision for standard assets does not cover u/s 36(1)(viia) as the same is contingent in nature. Though Reserve Bank of India (RBI) provided for standard assets in prudential norms, the same is to be considered as a precautionary measure to deal with a situation, where banks are not to suffer shock of sudden risks that could happen in future. The provision for standard assets is not against any debts which have become doubtful and are always considered in the sense that bank has no doubt of recovery. When the bank itself has treated the such assets as good and recoverable any provision made on such assets cannot be considered as a provision for bad and doubtful debts and hence not allowable as deduction u/s 36(1)(viia) on the standard assets, thus argued that the AO has rightly made the disallowance which required to be upheld. 5. On the other hand, Ld.AR submitted that the assessee is a bank engaged in the finance of rural advances as well as urban banking. The assessee ....
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....ff as irrecoverable in the accounts of the assessee for the previous year]: [Provided that in the case of [an assessee] to which clause (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:] [Provided further that where the amount of such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under sub-section (2) of section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purposes of this clause.] [Explanation 1].-For the purposes of this clause, any bad debt or part thereof written off as irrecove....
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....ebt. The bad debt which is written off and claimed as deduction required to be offered to income when it is recovered. Similarly the provision made for bad and doubtful debt recovered subsequently required to be offered to income as and when it is recovered. Therefore the deduction of Provision for Bad and doubtful debts should be provided for on identification of each debt as per the conduct of the business but not lump sum deduction as argued by the assessee. For identification of Non performing assets, Bad and doubtful debts the bank has to identify each debt as per the norms prescribed by the Reserve Bank of India and classify the same as Bad and doubtful Debts. As per the Master circular of Prudential Norms NPAs and Bad and doubtful debts are classified as under: "Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, RBI/2014-15/74, DBOD.No.BP.BC.9/21.04.048/2014-15, July 1, 2014 2.1 Non performing Assets 2.1.1 An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank. 2.1.2 A non performing asset (NPA) is a loan or an advance wh....
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....as below. Banks should make general provision for standard assets at the following rates for the funded outstanding ii) Theprovisions on standard assets should not be reckoned for arriving at net NPAs. (ii) The provisions on standard assets should not be reckoned for arriving at net NPAs. (iii) The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others' in Schedule 5 of the balance sheet. 5.3 Doubtful assets i. 100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis. ii. In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful:" From the above norms of RBI it is clarified that the Non performing assets and the Doubtful debts constitute the debt in cases of non recoveries of principal and ....
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....s advances to be shown separately as contingent provision against standard assets. In the Income tax, the provisions are not allowable deduction and only the expenditure actually incurred or ascertained as per the system of accounting is the allowable expenditure except the provision for Bad and doubtful debts discussed above. The above classification of the provision clearly shows that it was purely general and contingent in nature. There is no indication of non-recoverability of the debt. Therefore the provision for standard assets cannot be equated with the Provision for bad and doubtful debt and the assessee' s argument that only the nomenclature is different is unacceptable. The provision is required only to meet the unexpected eventuality in the interest of the banking, but it is neither an allowable expenditure nor an ascertained liability. The Ld.CIT(A) relied on the decision of DCIT Vs. The Gurdaspur Central Co-op Circle, Pathankot Bank Ltd. in ITA No.99/ASR/2011 dated 07.05.2012 and in the cited case the coordinate bench of ITAT set aside the issue and remitted the matter back to the file of the AO, hence the case law relied up on the Ld.CIT(A) does not help the assessee.....
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....lso has to be considered for applying the condition set out under Section 36(1)(viia) is not in accordance with law." Coordinate Bench of ITAT, Hyderabad 'A' also expressed the similar view in the case of M/s. Andhra Pradesh Grameena Vikas Bank, Warangal Vs. ACIT, Warangal, ITA Nos. 502/H/11- Asst. year 2007- 08/967/Hyd/11- A.Year 2007-08 And ITA No. 1387/Hyd/11- A.Year.2008- 09. In instant case the ITAT held as under: "Again, according to RBI, a sub-standard asset is one which has remained NPA for a period of at least 18 months. In such cases, the current net worth of the borrower or the current market value of the security is not enough to ensure recovery of the dues in full. Doubtful asset is one which has remained NPA for a period of exceeding 18 months. It has all weaknesses inherent in assets that were classified as sub- standard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable. A loss asset is one where loss has been identified which has not been written off fully. Such an asset is considered as uncollectible and of such little value that its continuance as a bankable asset is not warrant....
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....smissed. ITA No.327/Viz/2016 9. Ground No.1 and 4 are general in nature which does not require specific adjudication. 10. Ground No.2 is related to the provision made against the standard assets u/s 36(1)(viia) under the head 'provision for bad and doubtful debts'. The assessee made the provision for bad and doubtful debts in aggregate of Rs. 6,12,89,928/- which includes provision made against standard assets amounting to Rs. 69,37,085/-. This issue was discussed in the earlier order in appeal No.326/Viz/2016 for the assessment year 2010- 11 and confirmed the addition made by the AO allowed the appeal of the revenue. Accordingly we hold the issue in favour of revenue and against the assessee. Revenue's appeal on this ground is allowed. 11. The next issue is writing back of excess provision of bad and doubtful debts against non- rural advances. The AO during the assessment proceedings disallowed a sum of Rs. 9,57,70,177/- relating to the writing back of the excess provision. During the assessment proceedings, the AO asked the assessee to furnish the provisions created and allowed in respect of rural advances and non-rural advances u/s 36(1)(viia) in the light of Hon'ble ....
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....perused the material placed on record. The assessing officer allowed the provision made on Rural advances excluding the provision for standard assets. The AO restricted the net provision for Bad and Doubtful debts to the extent of provision made on rural advances. The AO is of the view that the assessee is entitled for deduction u/s 36(1)(viia) only on rural advances and worked out the excess claim under provision for bad and doubtful debts to the extent of Rs. 9,57,70,177/- relating to the assessment year 2007-08 to 2011-12 and the same was added back to the total income. The assessee's case is that the assessee is entitled for provision for bad and doubtful debts not only on Rural debts but also on non-rural advances. He argued that the deduction claimed is within the limit of section 36(a)(viia) and the same is allowable as deduction. The Coordinate Bench of ITAT Bangalore in the case of DCIT, Circle-11(4) Vs.ING Vysya Bank Limited (supra) held that what is to be seen by the AO is whether the provision for bad and doubtful debts is created, whether it is in respect of rural or non-rural advances by debiting profit and loss account and to the extent provision for doubtful debts s....
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....o in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government: Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession". Explanation : For the purposes of this sub-clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005. (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 a....
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....uction under clause (viii) of this sub-section; (vi) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P.' 32. The object of the substitution, as explained in para 5 of the CBDT Circular No. 464, dt. 18th July, 1986, was to give 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 G....
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....ad and doubtful debts made by a scheduled bank in relation to the advances made by its rural branches. At this stage the PBDD had to be linked to the advances made by Bank's rural branches. At stage-II of Sec.36(1)(viia), the deduction while computing the taxable profits was allowed of an amount not exceeding ten per cent of the total income (computed before making any deduction under the proposed new provision) or two 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 ....
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....create PBDD in the books of accounts and debit to profit and loss account. The quantification of the maximum deduction permissible u/s.36(1)(viia) of the Act had to be done. Firstly it has to be ascertained as to what is 10% of the aggregate average advances made by rural branches, if the Bank has rural branches, otherwise that part of the deduction u/s.36(1)(viia) of the Act will not be available to the bank. The second part of the deduction u/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 non-rural) 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." 14. In the instant case there is no dispute with regard to ....