TaxTMI 
TaxTMI 
2019 (12) TMI 978
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....ts and circumstances of the case, the Ld. CIT(A) has erred in law and fact in deleting the addition of Rs. 3,70,00,000/- made by the Assessing Officer, ignoring the fact that the said amount has been shown as provision made for bad and doubtful debts, during the relevant previous year, over and above the prudential norms suggested by the RBI. 3. Whether in the facts and circumstances of the case, the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer be restored. 4. That the appellant craves leave to add, modify and or delete any ground(s) of appeal." 3. The assessee has claimed deduction u/s 36(1)(viia) of the Income Tax Act, 1961 of Rs. 16,06,72,355/-. The Assessing Officer disallowed this amount on the grounds that no provision made under the head "Provision for bad and doubtful debts for the year under consideration". It is held by the Assessing Officer that the net balance of other provisions have actually decreased in respect of last year balance and since it shows overall decrease in provisions, the same needs to be disallowed. 4. With regard to the disallowance the assessee submitted as under: 1. "The bank is governed....
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....visions of Income Tax Act. However, the banking industry has been given a specific deduction u/s 36(1) (viia) of the IT Act, 1961 in this regard and accordingly, the same has been claimed in column no. 30 of Schedule BP of ITR. Detailed submission for deduction u/s 36(1)(viia) has already been filed with you on 23.12.2014. 3. &5. As stated above that the bank made the total Provisions for bad and doubtful debts of Rs. 16,06,72,355/- during the year. Out of this, Rs. 1102.81 lakhs was reduced from the Advances and balance of Rs. 503.91 lakhs was shown in schedule 5 -other provisions in the Audited accounts as per Banking Regulation Act. In other words, the outstanding amount of advances as on 31.03.2012 shown in schedule 9 of Balance sheet is net of provision for bad and doubtful debts as on 31.03.2012 and remaining accumulated amount of provision for bad & doubtful debts as on 31.03.2012 has been shown in schedule 5 -other provisions. Besides the above, there can be reduction in the amount of accumulated provisions for bad & doubtful debts as compared to last year due to recovery in accounts, write off and up gradation of accounts etc. As such, the incremental provision fo....
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....refereed from schedule 17, spelt out the details of further provision made by the bank in addition to minimum provision required to be made in terms of RBI guidelines. It is to be noted that it is a settled position that RBI guidelines are irrelevant for the purpose of income tax computation under income tax. The bank has made the total provision of bad and doubtful debts of Rs. 16,06,72,355/- during the year which includes the provision of Rs. 3,70,00,000/- as given in the said note. Further, the provision for bad and doubtful debts has also been reduced by the amount of write off or rural advances by Rs. 210.36 lacs as this write off has been made out of the provision for bad and doubtful debts claimed earlier and accordingly, no separate claim of write off bad debts of Rs. 210.36 lacs has been made in the computation of income. In view of the above and considering the merit of the case and provision of the law, deduction claimed u/s 36(1)(viia) cannot be disallowed and the same has been correctly claimed by the bank. It is also relevant to state that this issue was also examined in detail during the course of assessment proceedings of earlier years and there has been no....
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....day of the month of the Assessment Year 2012-13, is aggregated separately. • The sum so arrived at in the case of each such branch is divided by the number of months, for which the outstanding advances have been taken into account. The aggregate of the sums so arrived at in respect of each of the rural branches is the aggregate average advances made by the rural branches of the bank which work out to Rs. 1116.57 crores and 10% of the same works out to Rs. 111.66 crores. 7.5% of taxable income before deduction u/s 36(1) (viia) comes to Rs. 3.10 crores. Since the provision for bad & doubtful debts is of Rs. 16.07 crores which is much less than the aforesaid aggregate amount of Rs. 114.76 crores (Rs. 111.66 crores + Rs. 3.10 crores), the bank has claimed the deduction under section 36(1 )(viia) of Rs. 16.07 crores. It is to be noted that Ld AO has duly accepted the calculation of 10% of aggregate average advances made by rural branches of Rs. 111.66 crores as well as 7.5 of total income of Rs. 3.10 aggregating to Rs. 114.76 crores which is the eligible amount for deduction u/s 36(1) (viia). As such only limited dispute has been raised by the LD ....
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....7.64 1102.81 Provision for bad & debts shown under of audited accounts 3451.91 210.36 3241.55 3745.47 503.91 Total 4933.02 316.64 6223.11 1606.72 However, the LD AO has totally overlooked the facts and figures available on record including the ledger account of Exp. Provision for NPA for the year ended on 31/03/2012 and Sundry Provision NPA (accumulated) as on 31/03/2012 filed with him and gone with his own calculations of simply doing the comparison of details filed with him of "other provisions" disclosed in Schedule-5 (Other liabilities & provisions) to audited accounts as on 31/03/2011 and 31/03/2012 in isolation which is totally incorrect as detailed above. Further, it has been one item of complete journey of accumulated account of provision for bad & Doubtful debts as on 31/03/2012 fi led with him vide its submission dated 11/02/2015 & shown above and other item vision for bad & doubtful debts netted with gross advances) of same submission (i.e. provision for bad & doubtful debts netted with gross advances) of same submission dated 11/02/2015 was totally ignored by him. Moreover, when the LD AO, in preferen....
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.... provision is not allowed at al l. For this, reason, the bank consistently follows the treatment of first adding the NPA Provisions in computation of Income then claiming the deduction u/s 36(1)(viia) after satisfying the conditions under section 36(1)(viia).This treatment has been consistently accepted by the income tax department in scrutiny assessment of earlier years as well. In the case of deduction u/s 36(1 )(viii), the question of first adding the amount in computation of income then claiming separately does not arise at all as for deduction u/s 36(1)(viii), the legislature talks about creation of reserve which is a below line item and is appropriation of prof its. Therefore, the same cannot be equated with deduction u/s 36(1)(viia) where provision has to be created which is a charge on prof its. In any case, it is a settled law that whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. Further, it is also a settled law th....
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....O,OOOI-also as the total provision of Rs. 16,06,72,355 (including the provision of Rs. 3,70,00,0001-) made by the bank and debited to its profit & loss account is much lower as compared to the total eligible amount of deduction u/s 36(1)(viia) of Rs. 114.76 crores as detailed above. To appreciate the provisions of section 36(1)(viia),one needs to look into the history of Sec.36(1 )(viia) as it exists in the present form. Stage-I: Sec. 36(1)(viia) was inserted by the Finance Act, 1979 w.e.f. 1st April,1980 and at the time of its insertion, this clause read as under: "(viia) in respect of any provision for bad and doubtful debts made by a scheduled bank in relation to the advances made by its rural branches, an amount not exceeding one and a half per cent of the aggregate average advances made by such branches, computed in the prescribed manner. Explanation: For the purposes of this clause,- ("rural branch" means a branch of a scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous ye....
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....of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or any other bank included in the Second Schedule to the Reserve Bank of India Act,1934. It may be mentioned that all co-operative banks have been excluded from the purview of this provision in view of the position that under s. 80P(2)(a)(i) of the IT Act, the profits and gains of a co-operative society engaged in the business of banking or providing credit facilities to its members are completely exempt from income-tax. It may be relevant to mention that the provisions of new cl. (viia) of s. 36(1) relating to the deduction on account of provisions for bad and doubtful debts is distinct and independent of the provisions of s. 36(1 )(vii) relating to allowance of the bad debts. In other words, the scheduled commercial banks would continue to get the full benefit of the write off of the irrecoverable debts under s. 36(1 )(vii) in addition to the benefit of deduction of the provision for bad and doubtful debts under s. 36(1)(viia). This provision will take effect from 1st April, 1980 and will accordingly apply in relation to the asst. yr. 1980-81 and subsequent years." By section ....
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....ebited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause." As explained in para 17 of the CBDT Circular No. 421, dt. 12th June, 1985, the benefit of deduction under this clause was enhanced having regard to the increasing social commitments of banks. "Deduction in respect of provisions made by banking companies for bad and doubtful debts Sec. 36(1 )(vii) of the IT Act provides for a deduction in the computation of taxable profits of the amount of any debt or part thereof which is established to have become a bad debt in the previous year. This allowance is subject to the fulfilment of the conditions specified in sub-so (2) of s. 36. Sec. 36(1 )(viia) of the IT Act provides for a deduction in respect of any provision for bad and doubtful debts made by a scheduled bank or a non-scheduled bank in relation to advances made by its rural branches, of any amount not exceeding 11/2 per cent of the aggregate average advances made by such branches. Having regard to the increasing social commitments of banks, s. 36(1)(viia) has been amended to provide that in res....
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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; Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, 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, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year. Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1^st day of April, 2005, the provisions of the first proviso shall have effect as if for the words "five per cent.", the words "ten per cent." had been substituted. Provided also that a scheduled bank or a non-scheduled bank referred to 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 ....
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....Act, 1955, a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959, a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934; iii) "public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); iv) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951) ; v) "State industrial investment corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956) engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of this subsection; vi) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural an....
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....oubtful debts." To complete the sequence of amendments, we may also make a reference to the Amendment to sec.36(1 )(viia) of the Act by the Finance Act, 2013. By the Finance Act, 2013, in section 36 of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2014, in clause (vii), the Explanation was numbered as Explanation 1 thereof and after Explanation1 as so numbered, the following Explanation was inserted, namely:- "Explanation 2.-For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;" It can be seen from the history of Sec.36(1 )(viia) of the Act that at stage-I the deduction was allowed in respect of any provision for bad and doubtful debts (PBOO) made by a scheduled bank in relation to the advances made by its rural branches. At this stage the PBOO had to be linked to the advances made by Bank's r....
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....duction upto 7.5% of their total income in respect of provision for bad and doubtful debts. The further deduction of 7.5% of total income was available to banks which did not have rural branches. Therefore after 1.4.1987, scheduled or non-scheduled banks having rural branches were allowed deduction., (a) upto 2% (now 10%) of the aggregate average advances made by such branches and (b) Schedule or non-scheduled banks whether it had rural branches or not a deduction upto 5% of their total income in respect of provision for bad and doubtful debts. Even under the new provisions creating a PBDD in the books of accounts is necessary. This limit of 5% was increased to 7.5% in 2002. Though under Stage-II and Stage-III of the provisions of Sec.36(1 )(viia) of the Act. PBOO has to be created by debiting the profit and loss account of the sum claimed as deduction. the condition that the provision should be in respect of rural advances is not necessary. At stage-II of the provisions of Sec. 36(1 )(viia) of the Act. this condition was done away with and it was only necessary to create PBOO in the books of accounts and debit to profit and loss account. The quantification of the....
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.... DCIT Vs. ING Vysa Bank Ltd. (2014) 62 SOT 26 (Bangalore) - (refer page 46-63 of PB) ii. Section 36(1)(viia) of the Income Tax Act, 1961 - Bad debts - In case of banks (Provision made for bad & doubtful debts) Assessment year 2009-10 - Assessee bank had claimed provision for non-performing assets' in accordance with s. 36(10(viia) - AO disallowed same on ground that assessee had not made any Provision for bad and doubtful debts and, thus, was not entitled to deduction u/s 36(1)(viia) - Whether although assessee had named provision as 'Provision for NPA' to keep it in line with RBI and BABARD Guidelines, but in pith and substance provision had been created for 'Bad & Doubtful Debts' and, therefore, assessee had claimed deduction in accordance with provisions of sec. 36(1)(viia) and was entitled to benefit of same - Held, yes [Para 6] [In favour of assessee] Tamilnadu State Apex Cooperative Bank Ltd. Vs. ACIT [2014] 62 SOT 113 (Chennai - Trib.) - (refer page 64-67 of PB) iii. Section 36(1)(viia) of the IT Act, 1961 - Bad debts [Cooperative bank] - AY 2008-09 - Whether, cooperative bank is a non-scheduled bank and, thus, entitled to claim benefit of provisions of sec....
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.... therefore, prayed that said provision to the extent of Rs. 14,72,79,355/- be allowed under section 37 if the same is not allowed under section 36(1) (viia) of IT Act, 1961." 7. Before us, during the arguments the Ld. CIT DR argued that the assessee's accounting system is not as per the guidelines given by the RBI. The Ld. DR argued relying on the judgment of Hon'ble P&H High Court in the case of State Bank of Patiala order dated 24th May, 2004, 272 ITR 54 that since the assessee has not made any provision further PBDD that disallowance made by the Assessing Officer needs to be upheld. It was argued that the Hon'ble Court has allowed PBDD u/s 36(1)(viia) only to the extent of the provisions made. It was reiterated that since no provision has been made that assessee, no deduction u/s 36(1)(viia) is allowable. The written submissions of the Ld. DR are as under: 1. The assessee has claimed deduction u/s 36(1)(viia) of the Income tax Act, 1961 amounting to Rs. 16,06,72,355/-. The addition of Rs. 11,02,79,355/- made by the AO due to disallowance of excess claim made by the assessee, in respect of provisions of bad and doubtful debts u/s 36(1)(viia) of the I T. Act, 1961. ....
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.... made Nil. provision for previous year against total monthly average advance of Rural Branches of the Bank for the Bad and doubtful debts over ana above the PBDD required to be made in accordance with the Prudential norms suggested by RBI. 6. Now during the year, the assessee has made this additional provision without any basis or requirement, same is liable to be disallowed. Even though, the proper opportunity was afforded to the assessee to justify the same but just for mere submission that RBI guidelines are irrelevant for the purpose of Income Tax computation under Income Tax is not sufficient. The assessee's contention cannot be accepted as the banks are regulated by the RBI and it has to comply with the directions and guidelines issued by the RBI. Therefore, assessee cannot modify the regulations at its own convenience to evade the tax on his own requirement. The PBDD during the relevant year are not allowed without any proper documentary evidence for its requirement. Therefore, the provision made by the assessee for Rs. 3,70,00,000/- was disallowed and the deduction claimed on this provision was also liable to be disallowed and, accordingly, deduction u/s 36(1....
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....etrospectively from; April 1, 1985. 4. Learned counsel pointed out that the previous year of the assessee had ended on/ December 31, 1984, and the assessee was required to get its accounts finalized and audited and audited within three months from the end of the accounting year to submit the same to the Reserve Bank of India. Accordingly, the balance-sheet of the assessed was finalised on February 14, 1985, in which provision had been made on the basis of the un-amended Section 36(l)(vria) of the Act. However, in view of the amendment of Section 36(l)(viia) of the Act with effect from April 1, 1985, it filed a revised return on April 24, 1986, enhancing the claim for deduction from Rs [ 1,19,36,000 to Rs. 1,94,21,000. Learned counsel explained that since the amendment in this section had been made after the finalisation of the balance-sheet for the assessment year 1985-86. the assessee could not have possibly made the higher provision in that balance-sheet and accordingly it made up the shortfall irj the provision in the balance-sheet of the subsequent assessment year. Thus} according to him, there was substantial compliance with the requirement of law and accordingly the ....
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....ation, i.e., 1985-86, by making supplementary entries and by revising its balance-sheet. The provision has been made in the books of account of the subsequent year. 9. We are, therefore, satisfied that, the Tribunal was right in holding that since the assessee had made a provision of Rs. 1,19,36,000 for bad and doubtful debts, its claim for deduction under Section 36(l)(viia) of the Act had to be restricted to that amount only. Since the language of the statute is clear and is not capable of any other interpretation, we are satisfied that no substantial question of law arises in this appeal for consideration by this court. 10. The appeal is, accordingly, dismissed. No costs." Thus, the Ld. DR relied on the above judgment and pleaded that the addition may please be confirmed. 8. Heard the arguments of both the parties and perused the material available on record. We find that the judgment dated 21st May, 2004 pertains to AY 1985-86. The board has issued directions verifying the benefit of deduction allowable to banks vide CBDT Circular 421 dt. 12.06.1985 which has been mentioned above. After considering the facts and the entire submissions of both the parties....
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....of such banks is such that the rural branches were practically treated as a distinct business, though ultimately these advances would form part of the books of accounts of the head office. An interpretation which serves the legislative object and intent is to be preferred rather than one which subverts the same. The deduction u/s 36(1)(vii) cannot be negated by reading into it the limitations of s. 36(1)(viia) as it would frustrate the object of granting such deductions. The Revenue's argument that this would lead to double deduction is not correct in view of the Proviso to s. 36(1)(vii) which provides that in respect of rural advances, 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 had already been allowed u/s 36(1) (viia) (Southern Technologies 320 ITR 577 (SC) & Vijaya Bank 323 ITR 166 (SC) referred) 10. In the instant case, we endorse the decision of Ld. CIT(A) which held that the assessee has admitted in its submissions as well as before AO regarding the entitlement of deduction u/s 36(1)(viia) of Rs. 114.76 crores. There is no dispute as to the correctness of the calc....
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.... Bank for the Bad and doubtful debts, over and above the provision for bad & doubt debts required to be made in accordance with the Prudential norms suggested by RBI. The bank has reduced Rs. 210.36 lacs (previous year Rs. 363.05 lacs) for write off of the rural advances not recoverable and are bad and doubtful debts from the provision made in earlier years and net provision for rural branches advances is Rs. 2844.03 lacs (Rs. 3054.39 lacs - Rs. 210.36 lags). included in other provisions in Schedule -5'. The ITAT Banglore in the case of DEPUTY COMMISSIONER OF INCOME TAX vs. ING VYSYA BANK LTD - (2014) 62 SOT 0026 (Banglore) and ITAT Chennai in the case of TAMILNADU STATE APEX COOPERATIVE BANK LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX - (2014) 62 SOT 0113 (Chennai) (URO) has held that 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. 13. In the present case, the assessee has admittedly made provision for nonperforming assets (NPA) in respect of its urban branches. The assessee has debited Rs. 2.52 Crores (approximately) (i.e., 7.5% of the gross total income) in P&L A/c creatin....