AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (3) TMI 1360
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....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. 37,44,67,183/-. Thereafter, relying on the decision of the Hon'ble Apex Court in the case of Catholic Syrian Bank Vs CIT 343 ITR 27....
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....ebt 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 learned counsel for the Assessee submitted that originally when Sec.36(1)(viia) of the Act was introduced, the requirement of PBDD having t....
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.... 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 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 ....
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....ts, 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 "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 expre....
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....n 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 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 introduced....
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....er 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 - viia) in respect of any provision for bad and doubtful debts made by - (a) a scheduled bank not being a bank incorporated by or under the laws of a country....
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....ub-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 before making any deduction under this clause and Chapter VI-A). Explanation : For the purposes of this clause- (i) "non-scheduled bank" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) which is not a scheduled bank;] (ia) "rural branch" means a branch of a scheduled bank or a nonscheduled bank situated in a place which has a population of not more than ten tho....
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....t 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 by rural branches of the banks concerned. It may be clarified that foreign banks do not have rural branches and hence this amendment will not be relevant in the case of the foreign banks. The other provision secures that a further deduction shall be allowed in respect of the provision for bad and doubtful debts made by all banks not just the banks incorporated in India, limited to 5% of the total income (computed before making any deduction under this clause and Chapter VI-A). This will imply that all scheduled or non-scheduled ba....
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....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 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% (as it existed originally, now it is 10%) of the aggregate average advances made by rural branches of the banks concerned. This will imply that all scheduled or non-scheduled banks havin....
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....d 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 the deduction u/s.36(1)(viia) of the Act is allowed only to the extent PBDD in respect of rural advances is created in the books of accounts. As we have already explained above, this is not a relevant consideration. What has to be seen by the AO is as to whether PBDD is created (irrespective of whether it is in respect of rural or non-rural advances) by debiting the Profit & Loss A/C. To the extent PBDD is so created, the Assessee is entitled to deduction subject to the upper limit of deduction laid down in Sec.36(1)(viia) of the Act. To avoid possible claim for double de....
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....ction 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 provisions for bad and doubtful debts under s. 36(1)(viia) is distinct and independent of the provisions of s. 36(1)(vii) relating to allowance of the bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. (iii) The language of s. 36(1)(vii) is unambiguous and does not admit of two interpretations. It applies to all banks, commercial or rural, scheduled or unscheduled. It gives a benefit to the assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the....
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....f 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 debts other than provisions for bad debts in rural branches and another provision account for bad debtsin rural branches for which separate accounts are maintained. This fact is evinced by the entries in the P&L a/c, balance sheet and break up details. We need not deliberate this aspect with reference to records at any greater length as this is not a matter in issue before us. It was contended on behalf of the Revenue that the Revenue is only concerned with the assessee as a single unit and not with how many separate accounts are being maintained by the assessee and under what items. The Department, therefore, would asse....
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....use 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 accounts of the rural branches have to tally with the accounts of the head office. If the repaid amount in subsequent years is not credited to the P&L a/c of the head office, which is what ultimately matters, then there would be a mismatch between the rural branch accounts and the head office accounts. Therefore, in order to prevent such mismatch and to be in conformity with the accounting practice, the banks should maintain separate accounts. Of course, all accounts would ultimately get merged into the account of the head office, which will ultimately reflect one account (balance sheet), though containing different items. 37. Another example that would support this view is that,....
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....y 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 disallowance u/s 14A, in addition to what was suomoto done by it. However, the AO took section 14A a presumptive in nature and made a workout of the disallowance at Rs. 10,57,65,638/-applying Rule 8D. After deducting the suomotu disallowance of Rs. 52,88,282/- made by the assessee the addition came to Rs. 10,04,77,356/-. Assessee's appeal before the CIT(A) did not meet with any success. 12. Now before us, learned AR relying on a copy of the decision in ITA No.1310 & 1393(B)/2012 dated 19-09-2014, in assessee's own case for assessment year 2010-11, placed at paper book pages 18 -40 submitted that a similar disallowance stood deleted in assessment year 2010-11. According to him, the fact situation rema....
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....sallowance 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 is claimed by the assessee. The Bangalore Bench of the ITAT in the case of Bharatiya Reserve Bank Note Mudran Private Ltd (supra) has taken the view that resort to Rule 8D(2) cannot be had as a matter of course and it is only when no reasonable and proper parameter for making disallowance u/s.14A of the Act exists, resort to Rule 8D(2) can be had by the Assessing Officer. We are of the view that in the present case, the Assessing Officer has completely ignored the submissions made by the assessee in this regard and has blindly applied Rule 8D(2)(iii) of the rules and made disallowance u/s.14A of the Act. In our view, such an action cannot be sustained. We are also of the view that the basis of disallowance made ....
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....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 succeeding year. In its order dated 31-07-2008 it was held as under at paras 18 to 24. 18. We have considered the rival contentions of both the parties, perused the records and carefully gone through the orders of the tax authorities below. 19. We would first like to reproduce the relevant section referred to by both the parties in their arguments : Sec. 36(1) Other deductions 36. (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 s. 28. Sec. 36(1)(viii) in respect of any special reserve created (and maintained) by a financial corporation which is engaged in providing long-term finance for industrial or agri....
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....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 should be created and in this regard accepted that a reserve created after the closure of the accounts of the year qualifies by observing as under : "The second question which is raised only in ITC Nos. 44 and 45 of 1986 is whether the assessee is disentitled to the investment allowance scheme because no requisite reserve has been created by the assessee company before the close of books of the relevant previous year. On this, the finding is that the requisite 'reserve' has been created by holding a second annual general meeting of the members of the company and that the accounts had been duly amended so as to provide for the reserve before the assessment was completed. In view of the fact that the section prescribes no point of time by which the reserve should be created and in view of the various decisions also referred to by the Tribunal, we ....
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....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 the orders of the authorities below learned AR submitted that the issue stood squarely covered by the judgment of Hon'ble Deli High Court in the case of CIT Vs JDS Apparels Pvt.Ltd. 370 ITR 454. 23. Per contra, learned DR supported the orders of the authorities below. 24. We have perused the orders and heard the rival contentions. Section 194H of the Act deals with commission and brokerage. AO has not specified in its order as to under what head he classified the payments made by the assessee to M/s NFS. He simply stated that the payments were in respect of service used by the account holders of the bank and therefore, Section 194H of the Act stood attracted. Whether Section 194H of the Act was attracted on banking services provided by bank to its clients was an issue had came up before the Hon'le Delhi High Court in the case of JDS Apparels Pvt.Ltd (Supra) Their Lordship'....
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....ave 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 books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly." 7. Section 194H of the Act applies to income by way of commission or brokerage excluding insurance commission referred to in Section 194D of the Act. Tax at source is to be deducted at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by way of cheque/draft or any other mode. The explanation clause (i) states that for the purpose of this section, commission or brokerage includes any payment received or receivable directly or indirectly by a person acting on behalf of another person, (i) for services rendered, not being in the nature of professional services; (ii) any service rendered in the course of buying or selling of goods; and, (iii) in relation to any transaction relati....
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....me 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 services. "Rebate", on the other hand, is a remission or a payment back and of the nature of a deduction from the gross amount. It is sometimes spoken of as a discount or a draw-back. The dictionary meaning of the term includes a refund to the purchaser of a thing or commodity of a portion of the price paid by him. It is not confined to a transaction of sale and includes any deduction or discount from a stipulated payment, charge or rate. It need not necessarily be taken out in advance of payment but may be handed back to the payer after he has paid the stipulated sum. The repayment need not be immediate. It can be made later and in case of persons who have continuous dealings with one another it is nothing unusual to do so." Importantly, the Gujarat High Court held that there should be an element of agency in all the three situations as envisaged in clause (i) of the Explanation to Section 194H of the Act. 9. On appeal before the Supreme Court, the decision was uphel....
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....nsive 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 occurring so as to not only mean and comprehend such things as they signify according to their nature and import, but also things which the interpretation clause declares that they shall include. (see CIT versus Taj Mahal Hotel, (1971) 3 SCC 550). But, this may not always be the case and in certain cases, the expression "includes" has been construed as "equivalent to" and, therefore, given a narrower meaning (see South Gujarat Roofing Tiles Manufacturers Association versus State of Gujarat and Others AIR 1977 SC 90). Thus, the word "includes" can be used in the sense of the word "means". The definition clause in such cases is treated as an exhaustive one (see Reserve Bank of India versus Peerless General Finance and Investment Company Ltd. (1987) 1 SCC 424). Thus, in a particular context the word "includes" when used, may only mean "comprise of" or "consist of". 13. It is apparent from the decision of the Supreme Court in the case of Ahmedabad Stamp Vendors Association (supra) that clause (i) of the Explanat....
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.... 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 was received and credited to the account of the respondent-assessee. In the process, a small fee was deducted by the acquiring bank, i.e. the bank whose swiping machine was used. On swiping the credit card on the swiping machine, the customer whose credit card was used, got access to the internet gateway of the acquiring bank resulting in the realisation of payment. Subsequently, the acquiring bank realised and recovered the payment from the bank which had issued the credit card. HDFC had not undertaken any act on "behalf" of the respondent-assessee. The relationship between HDFC and the respondent-assessee was not of an agency but that of two independent parties on principal to principal basis. HDFC was also acting and equally protecting the interest of the customer whose credit card was used in the swiping machines. It is noticeable that the bank in question or their employees were not present at the spot and were not associated with buying or selling of goods as such. Upon swiping the card, the bank made payment of the bil....
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....oresaid decision, the Hon'ble High Court of Karnataka took a view that the guidelines issued by the RBI will not be relevant while computing income under the Income-tax Act. The Hon'ble Court further took the view that every investment held by a bank cannot be considered as stock-in-trade. The Hon'ble High Court finally concluded that 30% of the investments can be clothed to the character of stock-intrade and that the remaining amounts will be investments and therefore diminution in their value cannot be allowed as a deduction. 59. The ld. counsel for the assessee, however, submitted that in the assessee's own case for the A.Y. 2005-06, this Tribunal has confirmed the order of the CIT(A), deleting identical addition made by the AO. Our attention was also drawn to the order of the Tribunal in assessee's own case in ITA No.492/Bang/2009 for the A.Y. 2005-06, order dated 13.01.2012, wherein the Tribunal had to deal with identical issue as to whether the CIT(A) was correct in deleting the addition made by the AO on account of profit on sale of investments of Rs. 200,77,13,662/- and deleting the action of the AO in disallowing loss claimed on treating investments as stock-in-trade by....