TaxTMI 
TaxTMI 
2021 (1) TMI 956
X X X X Extracts X X X X
X X X X Extracts X X X X
....Subsequent to finalization of assessment under section 143(3) of the I.T.Act (in short 'the Act') on 9.12.2016, the ld Pr. Commissioner of Income tax, Cuttack (PCIT) sought to subject the assessment revision. In the impugned revisionary order, ld PCIT states that on verification of profit and loss account for the year ending 31st March, 2014, it is found that the assessee had debited Rs. 17,03,22,962/- towards " loss of OTS A/c". Further, On verification of balance sheet for the previous year, it is found that the assessee had credit balance of Rs. 38,43,38,064/- as on 31.3.2013 as well as on 31.3.2014 in its "provision for bad & doubtful debts' account. From the above facts, ld PCIT observed that the claim of assessee bank towards "loss on OTS" or "claim of deduction of bad debt" neither exceeded the credit balance in the "provision for bad & doubtful account nor the said amount was debited to the provision for bad & doubtful debt account. Hence, the claim of the assessee was required to be disallowed and added back to the total income of the assessee in the light of provisions of section 36(1)(vii) and its first proviso together with its Explanation-2 read with sections 36(1)(via....
X X X X Extracts X X X X
X X X X Extracts X X X X
....OTS". The above explanation of the assessee was not found acceptable to ld PCIT. He thus set aside the assessment order with a direction to the AO to modify his assessment order dated 9.12.2016 by making disallowance of Rs. 17,03,22,962/- claimed under the head "loss on OTS" in the light of provisions of section 36(1)(vii), its first proviso and its Explanation -2 read with section 36(1)(via) and 36(2) of the Act and keeping in view the ratio of the decision of Catholic Syrian Bank Ltd vs CIT (2012) 343 ITR 270 (SC). 4. Hence, the assessee is in appeal before the Tribunal. 5. Ld A.R. of the assessee submitted that the Assessing Officer show caused the assessee by way of note sheet dated 16.11.2016 on six points asking the assessee to furnish the details under section 142(1) of the Act including allowability of claim of loss on One time settlement (OTS), which was replied by the assessee vide written submission dated 24.11.2016, wherein, it was explained that the assessee has claimed loss on OTS as the assessee is a co-operating bank and the principal business to take deposit and lending i.e. extending loans. Ld A.R further submitted that as per direction of Reserve Bank of In....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....R. submitted that in the earlier years also, when the interest was charged, same was accounted as income by passing following entry: Interest receivable A/c. ..... Dr To interest a/c. And when the main branch write off some amount, then the entry is passed as follows: Loss on OTS ........ Dr To interest receivable A/c." Therefore, the loss on OTS is nothing but the bad debt & written off during the year and claimed as deduction u/s.36(1)(vii). 8. Ld A.R. further submitted that when the assessee is crediting interest receivable to the profit and loss account and the interest amount is not being received by the assessee, as the debt become bad and amount of interest was waived off during OTS then the claim of loss on OTS is nothing but reversal of interest credited by the assessee on the same loan account during earlier period. Therefore, the claim of the assessee is very much available u/s.36(1)(vii) of the Act. Ld A.R. strenuously contended that Ld PCIT has not appreciated and considered the claim of the assessee in right perspective by considering the relevant facts and circumstances on the issue but the only point that the balance she....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essee bank as on 31.3.2013 and 31.3.2014 revealed that the assessee has made provisions for bad and doubtful debts account. He further submitted that the claim of the assessee bank towards loss on OTS neither exceeded the credit balance in the "provision for bad and doubtful debts account" nor the said amount was debited to the "provisions for bad and doubtful debts account", hence the claim was required to be disallowed and added back to the total income of the assessee in the light of provisions of section 36(1)(vii) and its first proviso together with its Explanation-2 read with sections 36(1)(via) and 36(2) of the Income tax Act. 10. Ld CIT DR further submitted that this is a case of inadequate and insufficient enquiry as the AO simply show caused the assessee on six points including the issue of loss on OTS and simply taken on record the reply of the assessee without any deliberation or adjudication in the assessment order. Therefore, Ld PCIT was right in holding the assessment order as erroneous and prejudicial to the interest of the revenue. Ld CIT DR placed reliance on various decisions including the decision of Hon'ble Supreme Court in the case of Malbar Industrial Co. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nue. 12. On careful consideration of the rival submissions, we note that the Ld PCIT in paras 12 to 17 after considering the factual matrix of the case held as under: "12. Thus, we are left with only one issue i.e. the issue of claim of "loss on OTS" amounting to Rs. 17,03,22,962/-, which the assessee had claimed as a "bad debt" and the AO had implicitly allowed it u/s 36(1)(vii) of the Act, based on the written submissions filed by the assessee on 24.11.2016 and 07.12.2016 during assessment proceedings. Now let me refer to the contents of these two written submissions. 13. In its written submission filed before the AO on 07.11.2016, the assessee had made the following submission on the issue of "loss on OTS" : "7. Loss on OTS: . We have claimed Rs. 17.03.22.962/- as loss on OTS. This is a Co-Operative Bank; The principal business is deposit & lending. As per the direction of the RBI, the bank has taken up a One Time Settlement Scheme (OTS) for recovery of BAD Loans, which are not recoverable for couple of years & the bank has shown the same as Non Performing Assets(NPA). Therefore against the said loan the bank was able to recover some money & the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by the same amount in the very next year. Thus, in reality there was no loss. These additional facts relating to its claim of "Loss on GTS" had not been submitted before the AO during the assessment proceedings, but have been submitted only during the present revisionary proceedings. In any case, facts remains that the AO had not made efforts to collect full facts during assessment proceedings. In other words, the AO had failed to examine the issue from all angles. 16. In the present proceedings, it has been submitted on behalf of the assessee that since the claim was allowed by the AO based on written submissions made before him on the issue, it has to be presumed that the AO had applied his mind to the issue in hand and had therefore allowed the claim being satisfied with its correctness as per law. But in para no 15, I have brought out the factual background leading to this claim of "Loss on OTS". The full facts had not been placed before the AO by the assessee. The AO also did not make any effort to get to the bottom of this claim, which was expected of him, before he allowed such a huge claim of loss of Rs. 17.03 Crores. This failure to conduct complete inqu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nation -2 to Section 36(1)(vii) which was introduced w.e.f. 01.04.2014 by Finance Act, 2013. He also failed to take into consideration the CBDT's Circular No.3/2014 dated 24-1-2014 containing the "Explanatory Notes to the Provisions of Finance Act, 2013". The failure of the AO to consider the first proviso to s.36(1)(vii) and provisions of Section 36 (D(viia) and the newly inserted Explanation -2 to Section 36(1 )(vii), has made his order erroneous and prejudicial to the interest of Revenue. Now, I proceed to explain the issue in detail. 19. According to section 36(1)(vii), if the bad debt or and part thereof is written off as irrecoverable in the accounts of the assessee, the same is allowable as a deduction, subject to the provisions of S.36(2) of the Act. However, the first proviso to s.36(1)(vii) imposes one more restriction in the case of "banks" to whom provisions of S.36(1)(viia) applies. For better appreciation, Section 36(1)(vii) and its first proviso are reproduced hereunder: Other deduction Section 36(1): The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that in the case of [an assessee] to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause:] Explanation 1.-For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee; Explanation 2-For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii)of this subsection 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; (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 outside India or a non-scheduled bank or a co-operative bank other tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essee bank was having Rs. 15,01,29,990/- towards "provision for bad and doubtful debts" under section 36(1)(viia). It claimed an amount of Rs. 12,65,95,770 as deduction on account of "bad debts". The Assessing Officer held that, since the bad debts did not exceed the credit balance in the provision for bad and doubtful debts account and also, the requirements of clause (v) of sub-section (2) of section 36 were not satisfied, the assessee's claim for deduction of bad debts written off from the account books was to be disallowed. However, before the Supreme Court, it was pleaded that while provision of Rs. 15,01,29,990 for bad and doubtful debts under section 36(1)(viia), related to "rural debts", the bad debts claimed at Rs. 12,65,95,770, pertain to 'urban branches' only. The Supreme Court, adjudicating the claim of the assessee, held that while "bad debts" referred to in section 36(1 )(vii) refers to both "rural debts" and "urban debts", "provision for bad and doubtful debts" referred to in section 36(1)(viia) refers to only "rural debts". Thereafter, it went on to hold that under the proviso to Section 36(1)(vii) read with Section 36(2) and 36 (1)(viia), while "rural d....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... part of section 36(1)(vii), while the proviso will operate in cases under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written-off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to section 36(1)(vii) will relate to cases covered under section 36(1)(viia) and has to be read with section 36(2)(v) of the Act. Thus, the proviso would not permit the benefit of double deduction, operating with reference to rural loans while, under section 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year....." (Emphasis mine) 26. In para 45 of the same judgement, Justice S.H. Kapadia, in his concurring judgement, has also clarified the scope and ambit of Section 36(1)(vii), its proviso, Section 36(2)(v) and Section 36(1)(viia), in the following words. ".....No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....me Court, is taken care of by the proviso to clause (vii), which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). 29. In the present assessee's case, the "bad debts" of Rs. 17,03,22,962/- which have been written off during the year, were in the nature of "rural debts" as it had been extended to weavers in rural areas. Admittedly, in this case, the assessee had a credit balance of Rs. 38,43,38,064/- in its "provision for bad and doubtful account" and therefore "bad debts" of Rs. 17,03,22,962/-, pertained to "rural debts" could not have been allowed by the AO either under the provisions of law or even according to the ratio of the decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. v CIT(2012) 343 ITR 270(SC). Hence the assessment order passed in this case has to be held erroneous and prejudicial to the interest of revenue within the meaning of section 263 of the I.T. Act. 30. Moreover, we have to keep another issue in mind. Since the above decision of the Supreme Court in the case of Catholic Syrian B....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rein. The limit specified under section 36(1)(viia)(a) of the Income-tax Act restricts the claim of deduction for provision for bad and doubtful debts for certain banks (not incorporated outside India) and certain cooperative banks to 7.5 percent of gross total income (before deduction under this clause) of such banks and 10 percent of the aggregate average advance made by the rural branches of such banks. This limit is 5 percent of gross total income (before deduction under this clause) under sections 36(1)(viia)(b) and 36(1)(viia)(c) for a bank incorporated outside India and certain financial institutions. 11.2 Provisions of clause (vii) of sub-section (1) of section 36 of the Income-tax Act provides for deduction for bad debt actually written off as irrecoverable in the books of account of the assessee. The proviso to this clause provides that for an assessee, to which section 36(1) (viia) of the Income-tax Act applies, deduction under said clause (vii) shall be limited to the amount by which the bad debt written off exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1) (viia) of the said Act. 11.3 The provision....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f sub-section (1) of section 36 has been inserted stating that for the purposes of the proviso to clause (vii) of sub-section(l) of section 36 and clause (v) of sub-section (2) of section 36, only one account as referred to therein is made in respect of provision for bad and doubtful debts under clause (viia) of sub-section (1) of section 36 and such account relates to all types of advances, including advances made by rural branches. Therefore, for an assessee to which clause (viia) of sub-section (1) of section 36 applies, the amount of deduction in respect of the bad debts actually written off under clause (vii) of subsection (1) of section 36 shall be limited to the amount by which such bad debts exceeds the credit balance in the provision for bad and doubtful debts account made under clause (viia) of sub-section (1) of section 36 without any distinction between rural advances and other advances. 11.8 Applicability: - This amendment takes effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years. (Emphasis mine) 33. A combined reading of the newly inserted Explanation-2 and Paragraph 11 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of bad debts actually written off u/s.36(1)(vii) shall be limited to the amount by which such bad debts exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia) of the Act. 15. The provisions of section 36(1)(vii) of the Act provides that in case of the banks, who are eligible deduction u/s.36(1)(viia), deduction on account of bad debts relating to rural advance/loans shall be first set off against credit balance in the provision for bad and doubtful debts account and deduction will be allowed to the extent of debts relating to rural debts which exceeds credit balance available in the said provision created under section 36(1)(vii) of the Act. The facts and circumstances of the present case are that the assessee had a credit balance of Rs. 38,43,38,064/- in its balance sheet as on 31.3.2014 as "provision for bad and doubtful account". Thus, as per proviso to section 36(1)(vii) of the Act, the amount of loss on TOS, which was in the nature of rural debts of Rs. 17,03,22,962/-, which was extended as benefit to the weaver in the rural areas, which should have been first set off against credit balance of Rs. 38,43,38,064/- avail....