TaxTMI 
TaxTMI 
2014 (10) TMI 993
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....ue reads as follows:- "2.1 The learned CIT(A) failed to appreciate the fact that the distinction made by the assessee in respect of urban bad debts deductible u/s 36(1)(vii) and for rural debts u/s 36(1)(viia) is not tenable as there are no such distinctions as per the said sections. 2.2 The Ld. CIT(A) has not taken into cognizance the fact that the deductions u/s 36(1)(vii) are subject to the provisions of sec 36(2)(v) which is overriding in nature. 2.3 The Learned CIT (A) erred in not considering the accounting principle that bad debts actually written off u/s 36(1)(vii) has to be first adjusted against the provision for bad and doubtful debts created u/s 36(1)(viia) and the balance of unabsorbed bad debts only can be written off." 4. The assessee is a nationalized bank. In the course of assessment proceedings, the Assessing Officer noticed that the Assessee had claimed deduction Rs. 131,78,25,000/- u/s. 36(1)(vii) of the Income Tax Act, 1961 (Act) as an allowable deduction regarding the bad debts written off. Additionally, the Assessee had also claimed deduction u/s. 36(1)(viia)(a) of the Act amounting to Rs. 128,40,29,809/- on account of provision ....
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....at Section 36(1)(vii) of the Act provides deductions in respect of bad debts written off as irrecoverable in the accounts of the assessee, while Section 36(1)(viia)(a) provides the deduction merely for making provision for bad and doubtful debts up to the prescribed limit in respect of aggregate average advances made by the rural branches (AAAR) of such bank. 8. In the light of the above provisions of law applicable to banks which claim deduction u/s.36(1)(viia)(a) of the Act, the examined the aforesaid claim made by the Assessee. The AO found that as per actual provision made as per the books of accounts towards bad & doubtful debts was Rs. 187,00,00,000/-. The AO was of the view that since the Assessee had already claimed Rs. 128,40,29,809/- u/s. 36(1)(viia)(a) of the Act towards provision for bad and doubtful debts, the claim for deduction on account of Bad debts written off u/s.36(1)(vii) of the Act of a sum of Rs. 168.97 Crores could not be allowed. The AO held that as laid down in the proviso to Sec.36(1)(vii) bad debts written off should first be adjusted towards provision created u/s.36(1)(viia) of the Act and only if the bad debts written off is more than the credit bal....
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....f written off under section 36(1)(vii), would not be allowed to the extent of the provision made for such debt. The proviso does not apply to debts that are independent of the provisions under section 36(1)(viia), viz., urban debts. The restriction laid down by the proviso is to prevent double claims for deduction under both sections 36(1)(vii) and 36(1)(viia) in respect of rural debts. It was also brought to the notice of the CIT(A) that the Hon'ble High Court of Karnataka has held in DCIT (Asst.) Special Range, Bangalore, Vs. The Karnataka Bank Ltd. [2008 175 Taxman 325, that deduction under section 36(1)(vii) is allowable independently and irrespective of the provision for bad and doubtful debts created by the assessee in relation to the advances of the rural branches, subject to the limitation that an amount should not be deducted twice under section 36(1) (vii) and 36(1) (via) simultaneously. The facts in that case were that the appellant bank had, in the return for assessment year 1993-94 filed on 30- 12-1993, claimed a sum of Rs. 38,28,836 as bad debts actually written off. It had also claimed provision for bad and doubtful debts under section 36(1)(via) in a sum of Rs. 1,10....
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....iia), such debts would fall squarely under the main part of clause (vii) which was entitled to deduction, and in respect of that part of the debt with reference to which a provision was made under clause (viia), the proviso would operate to limit the deduction to the extent of the difference between that part of debt written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under clause (viia). If the bad debt written off related to debts other than those for which provision was made under section 36(1)(viia), such debts would fall squarely under the main part of subsection (vii) and would be entitled to the deduction. In respect of that part of debt with reference to which a provision was made under clause (viia), the Proviso would operate to limit the deduction to the extent of the difference between that part of the debt written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under clause (viia). 10. The ld. CIT(Appeals) agreed with the contentions put forth by the Assessee and he held as follows:- "7. I have carefully considered the rival contentions. In the lat....
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....n was made under clause (viia), such debts would fall squarely under the main part of clause (vii) which was entitled to deduction, and in respect of that part of the debt with reference to which a provision was made under clause (viia), the proviso would operate to limit the deduction to the extent of the difference between that part of debt written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under clause (viia)." The Addition made by the AO was deleted by the CIT(A) on the above reasoning. 11. Aggrieved by the order of the CIT(Appeals), the revenue has raised grounds No. 2.1 to 2.3 before the Tribunal. The ld. DR relied on the order of the AO. The ld. counsel for the assessee relied on the decision of Hon'ble Supreme Court in the case of Catholic Syrian Bank v. CIT, 343 ITR 270 (SC), wherein the Hon'ble Supreme Court has clearly held that deduction u/s. 36(1)(vii) of the Act is an independent deduction and the provision for doubtful debts made u/s. 36(1)(viia) of the Act has nothing to do with the claim for deduction u/s. 36(1)(vii) of the Act. 12. We have considered the rival submissions. Identical issue raise....
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....claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. This benefit is subject only to s. 36(2). It is obligatory upon the assessee to prove to the AO that the case satisfies the ingredients of s. 36(1)(vii) on the one hand and that it satisfies the requirements stated in s. 36(2) on the other. The proviso to s. 36(1)(vii) does not, in absolute terms, control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely under s. 36(1)(viia). The Explanation to s. 36(1)(vii) specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of 'any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee'. Thus, the concept of making a provision for bad and doubtful debts will fall outside the scope of s. 36(1)(vii) simpliciter. (iv) As per the proviso to cl. (vii) of s. 36(1), the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which ha....
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.... (viia). Thus, the proviso to cl. (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of cl. (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which cl. (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to cl. (vii)." 13. The ratio laid down by the Hon'ble Supreme Court can be summed up as follows:- (1) Deduction under Section 36(1)(vii) of the Act is available for deduction on account of Bad debts written off pertaining to non-rural debts. This deduction is allowed only when the amount of bad debt is actuall....
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....e purpose of books but has treated the entire investments as stock-in-trade and valued the same as per least of cost or market value, values for income tax purpose only thereby making a claim for a notional loss. 3.3 The CBDT Circular No.665 directs the Assessing Officers to approach the issue of valuation of investment portfolio held by the banks in line with the RBI Guidelines issued from time-totime. The Ld. CIT(A) has not considered this Circular properly." 16. The assessee claimed deduction of a sum of Rs. 66,24,90,750 and Rs. 148,58,25,576 in respect of Dimunition in the value of Investments held by the Assessee in the "Available for Sale" (AFS) and "Held to Maturity" (HTM) category of Investments respectively. According to the Assessing Officer, as per the RBI's Master Circular - Prudential norms for classification, valuation and operation of Investment Portfolio by banks - vide No.DBOD BP BC.21/21.04.141/2003-04 dtd. 02.09.2003 and Circular of the CBDT, investment portfolio of banks cannot be treated as stock in trade where the investments are held on the basis of "Held to Maturity" category or "Available for Sale" category. The Assessing Officer was also of....
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.... Rs. 148,58,25,576 Rs. 214,83,16,326 Less: Depreciation disallowed by Assessee Bank in the I.T.Memo under AFS Rs.49,38,98,040 Amortization under HTM category Rs.97,89,95,197 Rs.147,28,93,237 Rs.67,54,23,089 Add: Appreciation under HFT category Rs.55,78,535 Disallowance Rs.68,10,01,624 Disallowance under the head Depreciation on Investment Portfolio is Rs. 68,10,01,624/-." 17. On appeal by the assessee; the CIT (A), following the decision of the Hon'ble Supreme Court in the case of UCO Bank 240 ITR 355(SC) and decision of ITAT in Assessee's own case in AY 04-05 in ITA No.112/Bang/08 dated 3/12/2008, deleted the disallowance made by the Assessing Officer. Aggrieved by the order of the CIT (A), Revenue has preferred the present appeal before the Tribunal. 18. The learned DR relied on the order of the Assessing Officer. 19. The learned counsel for the assessee brought to our notice the decision of the Hon'ble ITAT, Bangalore Bench on similar issue in the case of Syndicate Bank v. DCIT (2013) 38 taxmann.com 25 (B....
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.... "16. We have heard both sides and find that the Supreme Court in the case of UCO Bank in 240 ITR 355 has held as under : "In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutory balance-sheet, and for the income-tax return, valuation was at cost or market value, whichever was lower. That practice was accepted by the Department and there was no justifiable reason for not accepting the same. Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the Income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balancesheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-intrade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. For the purpose o....
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....e. The later decision of the Hon'ble High Court of Karnataka is also in favour of the assessee. In such circumstances, we are of the view that the issue raised by the revenue in its appeal is without merit. Consequently, the same is dismissed." 22. The above decision squarely covers the issue in favour of the Assessee. Respectfully following the same, we uphold the order of the CIT(A) and dismiss the relevant grounds of appeal of the Revenue." 21. The above decision squarely covers the issue in favour of the Assessee. Respectfully following the same, we uphold the order of the CIT(A) and dismiss the relevant grounds of appeal of the Revenue. 22. The revenue has filed an application seeking to raise the following additional grounds:- "1. Ld. CIT(A) has erred in holding that Rs. 128.40 crores is the amount of provision in respect of rural bad and doubtful debts, made during the year, whereas the assessee has made provision for rural bad and doubtful debts amounting to Rs. 18.03 crores only (out of total provision of Rs. 187 crores), which could be allowed under clause (viia) of S.36(1), as held by the Hon'ble Supreme Court in 343 ITR 270. No provision which is....
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....00,000/- as reflected in the books of accounts. The re-computation of eligible deduction u/s.36(1)(viia) was done by the AO as below : A. Total income before deduction u/s.36(1)(viia) and Chapter VI-A deductions Rs.1669,40,72,790/- B. Add : Deduction made for provision for bad debts Rs. 336,96,38,872/- C. Add : Deduction u/s. Chapter VIA Rs. 33,23,334/- D. Total Rs.2006,70,34,996/- E. 10% of Average rural advance of Rs. 2513,19,12,300/- Rs.251,31,91,230/- F. 7.5% of D above Rs.150,50,27,625/- Total of E & F Rs. 401,82,18,855/- Since provision for bad debts made in books was Rs. 345,25,00,000/- the claim for provision for Bad Debts was restricted to Rs. 345,25,00,000/- by the AO as per the assessee's eligibility. The total assessed income as per order u/s.143(3) included Provision for Bad Debts amounting to Rs. 336,96,38,872/-. The difference amount of Rs. 8,28,61,128/- had to be reduced from the total income and was done accordingly by the AO. The assessee accepted the above computation of deduction u/s.36(1)(viia) of the Act and d....
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....l Appeal No. 1143/2011 and others), reported in 2012-TIOL-16-SC-lT-LB." 26. The Tribunal dealt with the admissibility of the aforesaid grounds of appeal and refused to admit the same for adjudication observing as follows: "42. Now with regard to additional ground No.(i) sought to be raised by the Revenue, there is no dispute by the AO in the order of assessment that the provision of Rs. 503.49 crores is not in accordance with Rule 6ABA of the rules. The case of the AO was that (i) deduction u/s.36(1)(viia)(a) will be allowed only to the extent provision is created in the books; (ii) Even when such provision is created in the books, if there is opening balance in the PBDD A/C. that has to be taken into account and it is only where the provision made is in excess of the opening balance of provision available in PBDD a/c., subject to the limits prescribed in Sec.36(1)(viia)(a) of the Act that will be allowed as deduction. Therefore the additional gr.No.(i) sought to be raised by the Revenue does not arise out of the order of the AO or the CIT(A) and the same cannot be therefore admitted for adjudication. Even assuming there was an error on the part of the AO in this ....
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.... misappreciation of facts. Suffice it to say that the additional ground No.2 sought to be raised by the revenue is frivolous. Additional ground No.3 is again frivolous as the AO in the order giving effect to the order of the CIT(A) has factually found that the bad debts claimed as deduction u/s.36(1)(vii) of the Act has actually been written off in the books of accounts of the Assessee. There is, therefore, no basis for the revenue to raise the aforesaid additional grounds before the Tribunal. The additional ground sought to be raised is therefore not admitted for adjudication. In this regard, we are also of the view that decision rendered by the Tribunal in assessee's own case for the A.Y. 2010-11 in ITA No.1393/Bang/2012 on an identical additional ground, will also be applicable in the present case. The additional ground sought to be raised are therefore dismissed as not admitted for adjudication. 25. In the result, ITA No.496/B/2010 is dismissed. ITA NO.815/BANG/2012 (A.Y. 2008-09) 26. Ground No.1 is general in nature and calls for no specific adjudication. 27. Ground Nos. 2 to 4 raised by the assessee reads as follows:- "2. Learned Commissioner of Income-ta....
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....ard to other expenses in respect of which Rule 8D(2)(iii) of the Rules will apply, it was his submission that similar issue was considered in assessee's own case and 5% of tax free income was considered to be a just and proper disallowance u/s. 14A of the act. In this regard, our attention was drawn to order of the Tribunal in ITA No.1310/Bang/2012 for the A.Y. 2010-11 dated 19.9.2014, wherein similar issue was considered by the Tribunal. 33. The ld. DR relied on the order of the revenue authorities. 34. We have considered the rival submissions. Perusal of the financial statements of the Assessee for the relevant financial year shows that Investments of the assessee in tax free securities as on 31.3.2007 was Rs. 592.48 Crores and the same as on 31.3.2008 was Rs. 850.23 crores. Own interest free funds available with the Assessee 31.3.2007 was Rs. 10,542.77 Crores and the same as on 31.3.2008 was Rs. 14,734.64 Crores. Therefore, available of interest free funds for making the investments which yielded tax free income cannot be disputed by the revenue. It is clear from the statement of available own funds and balance sheet that the assessee had enough funds out of which investme....
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.... to be accepted. For the reasons given above, we delete the disallowance made by the Assessing Officer u/s.14A of the Act." 36. The above observations of the Tribunal in Assessee's own case in AY 2010-11 would be equally applicable to the present assessment year also, as the facts and circumstances are identical. In the present assessment year, assessee has not made any disallowance on his own u/s. 14A of the Act. Under the circumstances, it would be just and proper to sustain disallowance of 5% of the tax free income. We hold and direct accordingly. 37. Ground No.5 raised by the revenue reads as follows:- "5. The learned AO be directed to allow the deduction of Rs. 36,54,07,903/- u/s 36(1)(vii) of the Act, being the debts written off by the non-rural branches of the appellant bank." 38. The non-rural branches of the Assessee had written off debts to the tune of Rs. 36,54,07,903 as bad debts. The Assessee was entitled to claim the said sum as deduction u/s.36(1)(vii) of the Act. It appears that the Assessee did not claim on an erroneous advise that the bad debts written off should be adjusted against provision for bad and doubtful debts created u/s.36(1)(viia)(a) ....
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....crores respectively. The availability of interest free funds for making investments in tax free securities cannot be disputed. Therefore disallowance u/s.14A of the Act read with Rule 8D(2)(i) & (ii) of the Rules cannot therefore be made. The disallowance u/s.14A of the Act read with Rule 8D(2)(iii) of the Rules alone has to be made and the same is directed to be determined at 5% of the tax free income earned by the Assessee for the reasons stated while deciding identical grounds in A.Y. 2008-09. We hold that disallowance u/s. 14A of the Act be restricted to 5% of the exempted income and direct the AO delete the remaining sum. 44. Ground Nos.5 & 6 raised by the assessee is as follows:- "5. The lower authorities erred in not giving credit of Rs. 84,97,160/- being additional income tax paid u/s 115(O) of the Act on the dividend received from a 100% subsidiary of the appellant. 6. The lower authorities erred in not giving credit of Rs. 1,20,08,840/- being the refund arising u/s 115WE(3) of the Act being the excess payment of fringe benefit tax." 45. As far as ground No.5 is concerned, same was raised before the CIT(Appeals) by the assessee, but the same was wit....