TaxTMI 
TaxTMI 
2024 (9) TMI 1443
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.... 2. The Ld. Commissioner of Income-Tax (Appeals), Income Tax Department NFAC, Delhi erred in holding that deduction u/s.36(1)(viia) was applicable to rural advances only, and that since the appellant had not rural branches, said deduction was not available to the Appellant. 3. The appellant craves leave to add, amend, alter and withdraw any ground of appeal anytime up to the hearing of this appeal." 3. The facts necessary for disposal of the appeal, are stated in brief. The assessee before us, is a Co-operative bank and engaged in the business of banking. The assessee-bank claimed deduction, under section 36(1)(viia) of the Act, in respect of provision for bad and doubtful debts. During the assessment proceedings, the assessing officer asked the assessee, to explain, why deduction u/s 36(1)(viia) of the Act, should not be disallowed, as there are no rural branches and no rural advances. 4. During the assessment proceedings, the assessee submitted, its detailed reply, before the assessing officer, which is reproduced below: "Assessee has claimed deduction of Rs.20,38,284 in respect of provision for bad and doubtful debt u/s 36(1)(viia) on the ground that the ....
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.... The clear legislative intent of s. 36(1)(vii) & 36(1)(viia) together with the circulars issued by the CBDT demonstrate that the deduction on account of provision for bad and doubtful debts u/s 36(1)(viia) is distinct and independent of s. 36(1)(vii) relating to allowance of bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. The functioning 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 wri....
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....e we would like to give the details of the history of the section 36(1)(viia) a) For the first time in 1979 the finance ministry introduced the new clause 36(1)(viia) to promote rural advances by benefiting the banks to make provisions on their average rural advances. The relevant para of the speech of Shri Charan Singh deputy Prime Minister and Minister of Finance introducing the budget for the year 1979-80 is as follows "in recent years, commercial banks, public sector banks, have been asked to reach out into the rural areas and to expand rural credit in order to promote rural banking and to assist the scheduled commercial banks in making adequate provisions from their current income to provide for risks in rural advances, I propose to amend the Income-tax Act to grant a deduction in respect of provisions made for bad and doubtful debts by scheduled commercial banks relating to advances made by their rural branches Such a deduction will however be limited to 1.5 per cent of the aggregate average advances made by the rural branches. This measure will result in a revenue loss of Rs. 12 crores during 1979-80 but it will be in a good cause." b) CBDT CIRCULA....
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....nks entitled to any deduction under this provision and to that extent, they were being discriminated against. Further, it was felt that the existing celling in this regard,i.e. 10% of the total income of 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 clause (viia) of subsection (1) of section 36 of the Income-tax Act has been split into two separate provisions. One of these limits the deduction to an amount not exceeding 2% of the aggregate average advance made by the rural branches of the banks concerned 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 provisions secures that a further deduction shall be allowed in respect of the provision for bad and doubtful debts made by all banks, not the banks incorporated in India, limited to 5% of the total income computed before making any deduction under this clause and Chapter VIA. This will imply that scheduled or non-scheduled banks having rural branches would be allowed the deduction up....
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.... double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause(vii). This situation 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)...... .....The proviso limits its application to the case of a bank to which clause(viia) applies, clause (viia) applies only to rural advances. This has been explained by the Circulars saved by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank, it follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected controlled or limited in any way by the proviso to clause (vii). j) From the above discussion it is clear that the provisions of sections 36(1)(vi) and 36(1)(via) of the Act are distinct and independent items of deducti....
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....limbs of this provisions, that is - (a) 7.5% of the total income before making any deduction under this section and chapter VIA and; b) 10% of the average aggregate rural advances the appellant is eligible for deduction under the first limb. It has also been submitted that similar deduction was allowed in earlier years. However, ld CIT(A) rejected the plea of the assessee and observed that appellant has not made any submission with respect to the applicability of the decision of Hon'ble Apex Court in case of Catholic Syrian Bank Ltd. (supra). Further, in income tax proceedings allowing any expense in earlier years cannot be a criterion for allowing that expense in the next year, as rest- judicata is not strictly applicable in income tax proceedings. Further, it has not been submitted by the appellant whether the previous decisions on this issue were arrived after due inquiry. In view of these facts ld CIT(A) confirmed the addition made by the assessing officer. 7. Aggrieved by the order of the Ld. CIT(A), the assessee is in further appeal before us. 8. We have heard the rival contentions, perused the material on record and duly considered facts of the....
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.... therefore this deduction is available to the assessee, under consideration. Therefore, the ld Counsel stated that if the bank does not have rural advances or rural branches then the assessee-bank shall not claim the deduction of 10%, however deduction at the rate of "eight and half percent" or "seven and half percent", whichever is applicable, as the case may be, to the assessee under consideration, can be claimed by the assessee, and accordingly, the assessee has claimed the deduction, therefore, as per the statutory provisions of the Act, the deduction should be allowed to the assessee. For this, Ld. Counsel for the assessee, relied on the following judgments: (i) Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. vs. CIT, [2012] 80CCH 0193 ISCC (ii) Co-ordinate Bench of ITAT, Surat in ITA No.590/Srt/2019 in the case Surat District Co-operative Bank Ltd. Vs. ACIT [2023] 152 taxmann.com 549 (Surat-Trib.) (iii) Co-ordinate Bench of ITAT, Pune in ITA No.167/Srt/2015 in the case Bhaggini Nivedita Sahakari Bank Ltd Vs. DCIT [2018]100 taxmann.com 375 (Pune) (iv) Hon'ble Bombay High Court in the case of Yes Bank Ltd. vs. ACIT [2024] 160 t....
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....continue to apply due to the use of the 'and', its other limb too cannot become zero too, as in the assessee's case, the assessing officer (A.O.) has done and the CIT-A has confirmed. Therefore, ld Counsel contended that the reliance by lower authorities, on decision of Supreme Court, on Catholic Syrian Bank Ltd. vs CIT [2012] 343 ITR 270 (SC) is misplaced for the following reasons: (i) The Court was primarily concerned with the scope and ambit of the proviso to section 36(1)(vii) of the Act and not with the computation of deduction u/s 36(1)(viia) of the Act. (ii) The Court considered the import of provision for non-rural and rural advances for the limited purpose of interpreting section 36(1)(vii), proviso for applying and not for any other purpose. (iii) The judgement cannot be read and applied conversely to mean that section 36(1)(viia), deduction, mandates existence of both rural and non-rural advances, such cannot be read into it; as this is not the 'ratio decidendi' of the judgement. 12. Based on the above facts, ld Counsel for the assessee, argued that if the provision of section 36(1)(viia) of the Act, is to be read, as read by....
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....'s claim under section 36(1)(viia) of the Act, what has to be seen by Assessing Officer, is as to whether provision for bad and doubtful debts (PBDD) is created, irrespective of whether it is in respect of rural or non-rural advances by debiting profit and loss account and, to extent of provision for bad and doubtful debts (PBDD) is so created, assessee is entitled to deduction subject to upper limit of deduction laid down in said section. The detailed findings of the Coordinate Bench are reproduced below: "24. We have considered the rival submissions. To appreciate the contention put forth by the learned counsel for the Assessee, we need 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.....
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.... not include a co-operative bank. The expression "scheduled bank" would, therefore, cover the State Bank of India constituted under the State Bank of India Act, 1955, any subsidiary bank of the State Bank of India as defined in the State Bank of India (Subsidiary Banks) Act, 1959, a nationalised bank as specified in s. 3 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. 13.3 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....
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....eads thus: "Sec. 36(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply - (i) to (iv) ..... (v) where such debt or part of debt relates to advances made by an assessee to which cl. (viia) of sub-s. (1) applies, no such deduction shall be allowed unless the assessee has debited 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." 30. 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 17.1 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-s. (2) of s. 36. 17.2 Sec. 36(1)(viia) of the IT Act provides for a deduction in respect of any provisi....
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.... incorporated by or under the laws of a country outside India] or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an 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 1st day of April, 2005, the provisions of ....
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.... scheduled bank or a non-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 year; (ii) "scheduled bank" means the State Bank of India constituted under the State Bank of India 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 G....
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....ited 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 banks having rural branches would be allowed the deduction upto 2% of the aggregate average advances made by such branches and a further deduction upto 5% of their total income in respect of provision for bad and doubtful debts." 33. 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, ....
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....eeding 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 having rural branches would be allowed the deduction (a) upto 2% (now 10%) of the aggregate average advances made by such branches and (b) a further deduction upto 5% of their total income in respect of provision for bad and doubtful debts. The further deduction of 5% of total income was available to banks which did not have rural branches. 36. 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. 37. Though under Stage-II and Stage-III of the provisions of Sec.36(1)(viia) of the Act, PBDD has to be created by debiting the profit and loss account of the sum claimed as deduction, the condition that ....
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....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 deduction in respect of one and the same debt first as PBDD and thereafter as Bad Debts, the legislature has already provided in Sec.36(2)(v) of the Act that where such debt or part of debt relates to advances made by an assessee to which cl. (viia) of sub-s. (1) applies, no such deduction shall be allowed unless the assessee has debited 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. Further the proviso also limits the claim for deduction u/s.36(1)(vii) of the Act to an Assessee to which Sec.36(1)(viia) of the Act applies to the amount by which such debt or part thereof (written off as Bad debts) exceeds the credit balance in the provision for bad and doubtful debts account made under clause(viia) to Sec.36(1) of the Act. It would be just and fair if the order of CIT(A) is set aside and the AO directed to examine the claim of the Assessee in the light of the discussion made above. Similar ....
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.... 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 accounts of the assessee for the previous year. This benefit is subject only to s. 36(2). It is obligatory upon the assessee to prove to the AO that the case satisfies the ingredients of s. 36(1)(vii) on the one hand and that it satisfies the requirements stated in s. 36(2) on the other. The proviso to s. 36(1)(vii) does not, in absolute terms, control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely under s. 36(1)(viia). The Explanation to s. 36(1) (vii) specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of 'any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee'. Thus, the concept of making a provision for bad and doubtful debts will fall outside the scope of s. 36(1)(vii) simpliciter. (iv) As per the proviso to cl. (vii) of....
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....ecords 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 assess an assessee with reference to a single account maintained in the head office of the concerned bank. This, according to the learned counsel appearing for the Department, would further substantiate the argument of the Department that the interpretation given by the Full Bench of the High Court is the correct interpretation of s. 36(1)(vii). This argument has to be rejected, being without merit. 32. In the normal course of its business, an assessee bank is to maintain different accounts for the rural debts for non-rural/urban debts. It is obvious that the branches in the rural areas would primarily be dealing with rural debts while the urban branches would deal with commercial debts. Maintenance of such separate accounts would not only be a matter of mere convenience but would be the requirement of Accounting Standards. 33. It is contended, and righ....
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.... 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, a bank can write off a loan against the account of 'A' alone where it has advanced the loan to party 'A'. It cannot write off such loan against the account of 'B'. Similarly, a loan advanced under the rural schemes cannot be written off against an urban or a commercial loan by the bank in the normal course of its business.' 41. In the present case, according to the AO, the deduction u/s.36(1)(viia)(a) is allowed only to the extent PBDD in respect of rural advances is created in the books of accounts. According to him, the limits upto to which such deduction is allowed alone is laid down in Rule 6ABA of the Rules. According to the Assessee, it is entitled to deduction of the irrespective of considerations whether PBDD created in the books of accounts is in respect of rural advances or non-rural advances, subject to ....
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.... The CBDT vide Circular No.464, dated 18.07.1986 had clarified the position for bad and doubtful debts made by the banks that under the existing provisions inserted by Finance Act, 1979 provision for bad and doubtful debts made by scheduled or non-scheduled Indian bank was allowed as deduction within prescribed limits. The limit prescribed at the relevant time was 10% of total income or 2% of aggregate average advances made by the rural branches of such banks, whichever was higher. There was representation to the Government that foreign banks were not entitled to any such deduction and further it was also felt that existing ceiling at the relevant time, should be modified. Accordingly, by Amending Act, the deduction presently available under section 36(1)(vii) of the Act was split into two separate provisions. One of these limbs was the deduction to an amount not exceeding 2% of aggregate average advances made to by rural branches of the bank concerned; in this regard, it was clarified that foreign banks do not have rural branches, hence this amendment would not be relevant in the case of foreign banks. The Circular further provided that the other provisions secure that a further d....
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.... before us is in relation to co-operative banks which do not have any rural branches. The question which is to be addressed is whether in the absence of any rural branches, can the benefit of deduction be allowed under section 36(1)(viia) of the Act and that also to the extent of 7.5% of total income. 17. We find that this issue has been elaborately considered and addressed by the Hon'ble High Court of Kerala in The Kodungallur Town Co-Op. Bank Ltd. (supra) and it has been held as under:- "9. Admittedly, appellants/assessees are cooperative banks. With introduction of Finance Act of 2007, coming into effect from 01.04.2007, one has to understand what was the position prior to 1.4.2007 and after 1.4.2007. During the relevant assessment year, admittedly the appellants/assessees were not entitled for any deduction provided under section 80P of the Act. Prior to 1.4.2007, they were enjoying the benefits provided under section 80P. With the introduction of Finance Act 2007 with effect from 1.4.2007, they could claim deductions as provided under section 36(1) of the Act. We are concerned with sub-clause(a) of clause (viia) to section36(1). Prior to Finance Act of 20....
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....ive bank. Section 5(cci) of Banking Regulation Act though has brought in definition of co- operative bank, virtually every bank which is not a scheduled bank would fall under the definition of non- scheduled bank. Reading of definition of non schedule bank along with meaning of rural branch under Explanation to Section 36(1) of the Act, clearly indicate that co-operative bank also falls under the category of non- schedule bank for the purpose of this Section. Therefore, reading of entire Section 36(1)(viia)(a) along with explanation would mean two kinds of deductions referred to in the section will be allowed to all those banks only if they satisfy the terms and conditions referred to in the provision. 13. Therefore, we are of the opinion, authorities below were justified in opining that benefit of deduction of 10% of the aggregate average advances is applicable to co-operative bank also provided their rural branches have advanced such amounts. Such rural branch means a branch as explained under Explanation (ia), as opined in the decision of Lord Krishna Bank's case (supra)." (underline provided by us for emphasis) 18. The Hon'ble High Court of Kerala thus....
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....ssue whether the deduction was allowable to scheduled banks under section 36(1)(vii) of the Act in respect of bad debts written off and had held that the same shall be limited to the extent the said debts credit balance in the provision for bad and doubtful debts account made under clause (viia). It was further observed by the Tribunal that the assessments in the said case related to assessment year 2002-03 and prior years and the Apex Court had considered the law with reference to the fact situation; whereas the assessee before them was co-operative bank, which was included in the category of beneficiaries under clause (viia) by the Finance Act, 2007 w.e.f. 01.04.2007. The Tribunal further goes on to hold that the deduction provided in the first part of clause (viia) (a) of 7.5% of total income, either to enjoyed by the assessee since inclusion of co-operative banks within ambit of clause (viia)(a) by the Finance Act, 2007 is unconcerned with the advances made by rural branches of banks. Further, referring to para 27 of the judgment of Apex Court, the Tribunal held as under:- "7.....The deduction provided in the first part of clause (viia)(a) of 7.5% of the total income, ....
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.... the Act is available to non-scheduled bank i.e. co-operative bank @ 7.5% of total income or in case there are rural branches, then further deduction of 10% of aggregate average advances as per prescribed procedure. 24. The issue before us is similar to the issue before the Hon'ble High Court of Kerala and though the decision is by non-jurisdictional High Court but in the absence of any decision to the contrary by the jurisdictional High Court, the decision of High Court is binding upon the Tribunal. In any case, no other decision of any High Court has been brought to our knowledge contradicting or favouring the view taken by the Hon'ble High Court of Kerala. In such circumstances, we are guided by the proposition laid down by the Hon'ble Bombay High Court in Smt. Godavari devi Saraf (supra), wherein it was held that until a contrary decision is given by any other Competent High Court, which is binding on Tribunal in the State of Bombay, it has to proceed on the footing with the law declared by the High Court, though of another State, is the final law of the land. In the facts before the Hon'ble Bombay High Court, the Tribunal had decided the issue relying ....
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....before. Their Lordships was whether or not decision of one of the High Court's is binding on another High Court, it would appear to us that ratio decidendi in Thana Electricity Co. Ltd. (supra), is on the non binding nature of a High Court's judgment on another High Court. In any case, this Division Bench did not, and as stated in this judgment itself, could not have differed with another Division Bench of the some strength in the case of Godavari Devi Saraf (supra). Therefore, it cannot be open to a subordinate Tribunal like us to disregard any of the judgments of the Hon'ble Bombay High Court, whether in the case of Thana Electricity Co. Ltd. (supra) or in the case of Godavari Devi Saraf. It is indeed our duty to loyally extend utmost respect and reverence to the Hon'ble High Court, and to read these two judgments by the Division Benches of equal strength of the Hon'ble jurisdiction High Court, i.e. in the case of Thana Electricity Co. Ltd. (supra) and Godavari Devi Saraf (supra), in a harmonious manner." 27. Then, analyzing the two decisions of Hon'ble Bombay High Court, it was held that where two interpretations are possible; one in favour of as....