TaxTMI 
TaxTMI 
2015 (3) TMI 1360
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.... of deduction u/s 36(1)(viia) of the IT ACT, 1961 Amount in Rs. 1 Average rural advances A) 2895,05,96,571 2 Total income before deduction u/s 36(1) (viia) & chapter VI-A deduction B) 1790,54,30,542 3 10% of A) 289,50,59,657 4 7.5% of B) 134,29,07,91 5 Total 423,79,66,948 6 Provision for Bad debts made in the books 547,75,81,922 7 Claim for provision for bad debts restricted to eligibility 423,79,66,948 Since the total provision for bad debts made for assessee came to Rs. 547,75,81,922/-, the AO called for a break up. The break up furnished by the assessee read as under; Provision for bad and doubtful urban debts as per books Rs. 510,31,14,809/- Provision for bad and doubtful rural debts as per books Rs. 37,44,67,183/- Total Rs. 547,75,81.992 AO was of the opinion that against the claim of Rs. 423,79,66,948/- made by the assessee under section 36(1)(viia) the actual provision made for rural debts in the books was only Rs. 37,44,67....
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....ion sought to be given by the learned DR on Explanation2 to Section 36(1)(vii) was incorrect. According to him set off of bad debt could be done only against provisions and not vice-versa. 8. We have perused the orders and heard the rival contentions. There is no dispute that assessee had made total provision for bad debts of Rs. 547,75,81,922/- in its books of accounts. When assessee was required to given break-up of the above amount, it came out that the provisioning with respect to rural debts were only Rs. 37,44,67,183/-. However, as per the assessee it would be eligible for deduction u/s 36(1)(viia) for an amount of Rs. 423,79,66,948/- which was lower than the total provisioning entitling it to such a claim. We find that a similar issue had already came up before the Tribunal in the case of M/s ING Vysya Bank Ltd.(Supra). The argument made by the department and the assessee and also final decision given by the Tribunal in the above case are available at paras 21 to 41 of the said order which are reproduced here under; 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 learn....
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.... amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner; as deduction on account of Provision for Bad and Doubtful Debts whilecomputing its total income. 23. According to him after the aforesaid amendment, the requirement of the 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 no....
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.... relating to rural branches of scheduled commercial banks - Sec. 36(1 )(viia) 13.1 Under s. 36(1 )(viia) of the IT Act, a taxpayer carrying on business or profession is entitled to a deduction, in the computation of the taxable profits, of the amount of any debt which is established to have become bad during 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 provisionsmade by them for bad and doubtful debts relating to advancesmade 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 "r....
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....BDT Circular No. 346, dt. 30th June, 1982, the object of the amendment was to extend the benefit of the deduction to advances by rural branches of nonscheduled commercial banks as well. Stage-II Deduction enhanced - Amendment by the Finance Act, 1985 27. For the portion beginning with the 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 madebya 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 theaggregate average advances made by the rural branches ofsuch 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 wh....
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.... banks, whichever is higher, shall be allowed as a deduction in computing the taxable profits. 17.4 Sec. 36(1 )(vii) of the Act has also been amended to provide that in the case of a bank to which s. 36(1 )(viia) applies, the amount of bad and doubtful debts 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 DEDUCT....
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....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 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....
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....gn 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 presently available under cl. (viia) of sub-s. (1) of s. 36 of the IT Act has been split into two separate provisions. One of these limits the deduction to an amount not exceeding 2% of the aggregate average advances made ....
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....red 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.36(1)(viia) of the Act, the deduction allowed earlier was enhanced. The enhancement of the deduction was consequent to representation to the Government that the existing ceiling in this regard i.e. 10% of....
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....ssible 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. 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 said claim for deduction was allowed by the AO. The Assessee made a claim for deduction u/s.36(1)(viia)(a) of the Act of Rs. 23,80,55,247. This was rejected by the AO for the reason that ....
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.... 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;(i) 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. (ii) Clear legislative intent of the relevant provisions and unambiguous language of the circulars with reference to the amendments to s. 36 demonstrate that the deduction on account of pr....
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....an 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 provision accounts for each. 31. It was neither in dispute earlier, nor disputed before us, that the assessee bank is maintaining two separate accounts, one being a provision for bad and doubtful de....
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.... (c) Accounting Standard (AS) 29, issued in 2003, which concerns treatment of 'provisions, contingent liabilities andcontingent 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 benefit to the assessee, this would not by itself be a sufficient ground for accepting its interpretation. Furthermore, the provisions of a section have to be interpreted on their plain language and could not be interpreted on the basis of apprehension of the Department. This Court, in the case of Vijaya Bank vs. CIT &Anr. (2010) 231 CTR (SC) 209 : (2010) 37 DTR (SC) 401 : (2010) 5 SCC 416, held that under the accounting practice, the accou....
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....assessee in the light of the discussion of the Tribunal in the case of M/s ING Vysa Bank Ltd (Supra). Ground no.2 of the assessee is therefore allowed for statistical purposes. 10. Vide its ground no.3 assessee is aggrieved on a disallowance of Rs. 10,04,77,356/- made under section 14A of the Act. 11. Facts apropos that assessee had claimed exempt dividend income of Rs. 10,93,02,392.50. The above exempt income was arrived at after deducting Rs. 57,52,757.50 from the gross exempt income of Rs. 11,50,55,150/-. The deduction was towards cost of earning the exempt income. Through a revised return assessee changed the claim of expenditure to Rs. 52,88,281.90. AO required the assessee to explain why a disallowance under rule 8D of Income-tax Rules, 1961 should not be made. Reply of the assessee was that it as having total interest free funds at Rs. 21,208.59 Crores against which the value of investment that could give rise to tax free income was only Rs. 1444.02 Crores. As per the assessee in order to cover the over head expenditure it had itself made a disallowance of expenditure calculated at 5% of the tax free income. As per the assessee there was no question of any further disa....
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....ank Ltd. (supra). 13. With regard to disallowance under Rule 8D(2)(iii) of the Rules, it is seen that even in assessee's own case in the past, the disallowance of 5% of the exempt income was considered as appropriate disallowance u/s.14A of the Act. The Hon'ble ITAT in A. Ys. 2001-02 and 2003-04 has upheld such disallowance as reasonable. The Assessing Officer has however proceeded to apply the provisions of Rule 8D without having regard to the claim of the assessee that provisions of Rule 8D(2)(iii) of the Rules could not be applied. As laid down by the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd., (328 ITR 81), a claim made by the assessee with regard to disallowance u/s.14A of the Act had to be objectively examined by the Assessing Officer. It is not necessary for the Assessing Officer to resort to Rule 8D of the Rules when a reasonable and proper basis for disallowance u/s.14A of the Act exists. In the present case, such basis existed in the form of acceptance of the similar claim of the assessee in the past by the Tribunal. The Assessing Officer has not brought on record any facts to justify a higher disallowance than what....
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....him, assessee was eligible for Rs. 141.21 Crores, in the impugned assessment year itself. Reliance was placed on the decision of the Delhi Bench of the Tribunal in the case of M/s Power Finance Corpn.Ltd (PFCL) Vs JCIT(2008) 16 DTR 519. According to him, it was held by the Delhi Bench that reading of Section 36(1)(viii) did not put any time limit for creation of any special reserves so as to claim a deduction under that section. 18. Per contra, learned DR supported the orders of the authorities below. 19. We have perused the orders and heard the rival contentions. Section 36(1) (viii) is reproduced hereunder; "(viii) in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head 'Profits & gains of business or profession" (before making any deduction under its clause) carried to such reserve account" We find that Delhi Bench in the case of M/s PFCL (Supra) had considered the very same issue as to whether the special reserve was required to be created in the very same year of the claim of deduction of whether it could be created in a succee....
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....)(viii) does not indicate any time-limit for creation of special reserve for claiming deduction under s. 36(1)(viii) of the Act, hence, the contention of learned Departmental Representative for the Revenue that this provision does not permit the deduction in case the special reserve is created in subsequent year, has no force as it does not find support from the plain language of s. 36(1)(viii) of the Act. Perhaps, the words "......... (before making any deduction under this clause) carried to such reserve account" prompt such inference by the learned Departmental Representative for the Revenue but to our mind answer to such inference drawn by the learned Departmental Representative for the Revenue is that before making any deduction does not mean before making any claim but means at the time of considering such deduction claimed by the assessee. 21. Hon'ble jurisdictional High Court of Delhi while interpreting similar wordings in the context of s. 32A of the Act in the case of CIT vs. Orient Express Co. (P) Ltd. (supra) while dealing with creation of reserve required under s. 32A of the Act at p. 896 held that section prescribes no point of time by which the reserve shoul....
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....ves were created before finalization of the grant of deduction u/s 36(1)(viii) had not been verified by any of the authorities below. We therefore, set aside the orders of the authorities below and remand the issue to the file of the AO for fresh consideration in accordance with law. Ground no.4 of the assessee is allowed for statistical purposes. 20. In its last ground assessee assails the disallowance of Rs. 1,35,01,835/- u/s 40a(ia) of the Act which was confirmed by the CIT(A). 21. Facts apropos are that the assessee had claimed deduction of Rs. 273,76,25,645/- under the head "Other expenditure". From the breakup of this sum provided by the assessee, AO found that a payment of Rs. 1,35,01,835/- was made towards ATM user charges of other banks. As per the AO such payments which were made to National Financial Switch and Cash tree (NFS in short) consortium fell within the ambit of Section 194H of the Act. As per the AO assessee having not deducted tax at source on the amount paid to NFS Section 40a(ia) of the Act stood be attracted. A disallowance of Rs. 1,35,01,835/- was made. Assessee's appeal on this issue before the CIT(A) did not meet with any success. 22. Assailing ....
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....ayable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees. Explanation.--For the purposes of this section,-- (i) "commission or brokerage" includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities; (ii) the expression "professional services" means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA; (iii) the expression "securities" shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) ; (iv) where any income is credited to any account, whether called "Suspense account" or by any other name, in the boo....
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..... Commission, it was held, is a reward paid to an agent as well as to a salesman, executor, trustee, broker or bailee and is calculated as a percentage of the amount of the transaction or on the profit of the principal. It is a fee paid to an agent or an employee for generating a piece of business or performing a service. In such cases, normally, there exists a fiduciary duty, which has to be discharged by the person to whom commission is paid. The following excerpt from the decision of the Bombay High in Harihar Cotton Processing Factory versus CIT, (1960) 391 ITR 594 (Bom.) was referred to with approval:- "The expression "commission" has no technical meaning but both in legal and commercial acceptation of the term it has definite signification and is understood as an allowance for service or labour in discharging certain duties such as for instance of an agent, factor, broker or any other person who manages the affairs or undertakes to do some work or renders some service to another. Mostly it is a percentage on price or value of upon the amount of money involved in a transaction. It can be for a variety of services and is of the nature of recompense or reward for such s....
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....Act and the implication thereof and it was observed that the contract between a principal and an agent primarily is a contract of employment to bring about a legal relationship with a third party and the agent either actually or by law is held to be authorized or employed by the first i.e. the principal, whom he represents. Representative character and derivative authority are distinguishing features of an agent. It was accordingly held that provisions of Sections 194H of the Act were not attracted in the case of stamp vendors. 12. The expressions "commission" or "brokerage" are words of general and common parlance used both commercially and by the common man on the street. Clause (i) expressly seeks to define the expression "commission" or "brokerage" but states that it will include payments received or receivable, directly or indirectly by a person acting on behalf of another if they fall in the three categories. A definition may be exhaustive or restrictive of its common meaning or may be an extensive one. Indeed, there are decisions which observe that use of the word "includes" in the clause can show legislative intent to enlarge the meaning of the words or phrases occ....
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....sus Idea Cellular Limited, (2010) 325 ITR 148 (Delhi) wherein Explanation clause (i) to Section 194H of the Act had come up for consideration and on interpretation it was held that it would apply only if payment was received or receivable directly or indirectly by a person acting on behalf of another person for (i) services rendered (not being professional) and (ii) for any services in the course of buying or selling of goods or in relation to any transaction relating to an asset, valuable article or thing. The judgment records that the counsel for both the parties, i.e. the Revenue and the assessee, had agreed that the element of agency was to be established in all the aforesaid circumstances (see page 156 placitum 9 of the ITR citation). Thus, this contention if raised would not stand judicial scrutiny on the principles of consistency and certainty. Even otherwise, the view expounded and accepted is plausible, besides being reasonable. 15. Applying the above cited case law to the factual matrix of the present case, we feel that Section 194H of the Act would not be attracted. HDFC was not acting as an agent of the respondentassessee. Once the payment was made by HDFC, it ....
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....nal had held such claim to be allowable. As per the learned AR the CIT(A) had rightly followed the above decision and given relief to the assessee. 27. Per contra, learned AR fairly admitted that the issue at this point of time stood in favour of the assessee. 28. We have perused the orders and heard the contentions. In assessee's own case for the assessment year 2010-11 in ITA No.1310 & 1393(B)2012 dated 19-09-2014 it was held as under at paras-21 to 22 of its order; 21.We have considered the rival submissions. Similar issue as to whether depreciation on investments held under the category "Held to Maturity" can be allowed as deduction came up for consideration in the case of Syndicate Bank (supra) before the ITAT Bangalore Bench. The Tribunal on the issue held as follows: "58. We have heard the submissions of the ld. DR and the ld. counsel for the assessee. The ld. DR relied on the decision of the Hon'ble High Court of Karnataka in the case of CIT v. ING Vysya Bank Ltd. in ITA No.2886/2005 dated 06.06.2012. In the aforesaid decision, the Hon'ble High Court of Karnataka took a view that the guidelines issued by the RBI will not be relevant while computing i....
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....e real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case." The Bangalore Bench of ITAT in Corporation Bank (supra) has also followed the above decision of the Hon'ble Supreme Court as also the ITAT, Mumbai and ITAT, Chennai. Following the above decisions, we are deciding this issue in favour of the assessee. This ground of appeal by the Revenue is dismissed. 60. Apart from the above, the ld. counsel for the assessee also submitted that the decision rendered by the Hon'ble High Court of Karnataka in the case of ING Vysya Bank (supra) is per incuriam the decision of the Hon'ble Supreme Court in the case of UCO Bank v. CIT, 240 ITR 355 (SC). He brought to our notice that the Hon'ble Supreme Court approved the practice of nationalized bank governed by Banking Regulation Act, following mercantile system of accounting both for book keeping as well for income-tax purposes. The Hon'ble Apex Court upheld the method adopted by the banks valuing stock-in-trade (investments) at cost in balance sheet in accordance with the Banking Regulation Act and valuing the same....