TaxTMI 
TaxTMI 
2026 (5) TMI 947
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.... Body of Banks?" Brief Facts 2.1 The instant four appeals have been filed by the assessee against separate orders of learned first appellate authority for Assessment Years (AY) 2011-12, 2012-13, 2014-15 & 2015-16 dated 03-11-2016, 04-01-2017, 25-07-2018 & 16-01-2019 respectively. The erstwhile assessee 'M/s Malwa Gramin Bank' has now merged with M/s Punjab Gramin Bank and revised Form Nos.36, for all the years, reflecting such change has been placed on record. Admittedly, the facts and issues, on all vital points, are quite identical in all the four years. However, for the purpose of determination / facility of reference, the facts from case records of AY 2012-13 have been culled out in the order. 2.2 The case records of Assessment Year (AY) 2012-13 would reveal that the erstwhile assessee 'The Malwa Gramin Bank' is a regional rural bank and a scheduled bank being covered under Second Schedule to RBI Act, 1934. The assessee is stated to be engaged in banking business. The assessee filed its return of income on 19-09- 2012 declaring income of Rs. 14,30,49,669/- which was picked up for scrutiny assessment proceedings. The assessment was finalized u/s 143(3) on 17-03-2015 whe....
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....ibed Sec.36(1)(viia). 2.4 The assessee fortified its claim by stating that it has made provisions against loans and advances as per binding prudential guidelines of Reserve Bank of India (RBI). The guidelines mandate creation of provisions even against 'standard assets' since in the banking industry, there would always be doubts that even some portion of 'standard assets' may go bad in future. It was further explained that the loans and advances as granted by the assessee to its customers would be categorized / classified as different assets as per RBI norms. The provision of doubtful debts would be made against differently classified assets as per RBI norms by applying prescribed percentage under each category of assets. The expression 'doubtful' has very wider meaning and the same represents the decision of the assessee-bank as to how doubtful debts are to be identified. Merely because the assets were classified as 'standard assets', the same would not mean that it could not be a doubtful asset from assessee's point of view. 2.5 However, going by the provisions of Sec.36(1)(viia), Ld. AO opined that plain reading of the provision would indicate that the provisions made on a....
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....bunal. 2.7 When the appeal of the assessee came up before the Division Bench, the Division bench noted contrary decisions of the various benches of Tribunal and vide order dated 20-03-2020, has required the aforesaid issues to be placed before a Special Bench. Accordingly, this issue has come up for determination before this Special Bench. Rival Submissions 3. We have heard Smt. Kusum Bansal, Ld. CIT-DR and Shri Rohit Kapoor and Shri Inderjeet Abhilashi, learned counsels for the assessee. With their able assistance, we have gone through the records and various contrary decisions of Tribunal. The clarifications were sought by the bench from time to time which was duly being addressed to by both the sides. Having heard rival submissions and upon perusal of case records, case laws as well as written submissions as filed by the respective parties, the question is determined as under. Consideration 4. We have given our anxious consideration to the rival submissions made before us. It is undisputed fact that the assessee is eligible to lay claim on impugned deduction u/s 36(1)(viia) on account of provision made for bad and doubtful debts. The issue that falls for our consi....
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....o op. Bank Ltd. ITAT AMRITSAR 2019 (1) TMI 96 - ITA NO. 453/ASR/2015 Punjab & Haryana No appeal has been filed Vikramaditya Nagrik Sahkari Bank Maryadit Versus ACIT Ujjain-ITAT INDORE 2018 (3) TMI 1516 Madhya Pradesh No appeal has been filed Pali Central Co-Operative Bank Ltd. Versus CIT- ITAT JODHPUR, 2017 (5) TMI 706 Rajasthan No appeal has been filed M/s Nagaur Urban Co-operative Versus Asstt. CIT, Bank Limited, Circle-Nagaur ITAT JODHPUR 2013 (11) TMI 1696 Rajasthan No appeal has been filed DCIT, Vellore Versus The Little Kancheepuram Cooperative Urban Bank Ltd ITAT CHENNAI 2013 (3) ΤΜΙ 787 Madras No appeal has been filed Dy. CIT, Circle-IV, Jalandhar Vs. M/s Punjab Gramin Bank, Kapurthala in ITA No. 134(Asr)/2015; dated 22.06 ITA No. 134(Asr)/2015 Punjab & Haryana No appeal has been filed DCIT vs. Punjab Gramin Bank (ITA No.731/Asr/2017) (ITA No.731/Asr/2017) Punjab & Haryana No appeal has been filed It has further been stated that in the case of Andhra Bank (supra) (as per Serial No.3 of reference for Constitution of Special bench dated 27- 01-2020), where the decision was adverse to the assessee, the ....
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.... assets. The provision is allowable based on anticipated credit losses in respect of all advances including standard assets. The Ld. AR further argued that the RBI Circular No. 258 dated 14-06-1979, explaining the intent behind the introduction of Section 36(1)(viia), unequivocally states that the deduction was introduced to promote rural banking and that provision was required to be made on aggregate rural advances. In fact, Hon'ble Karnataka High Court in the case of Bellad Bagewadi Urban Souhard Sahakari Bank Niyamit v. CIT (2018 (3) TMI) restored the matter to the Tribunal while observing that the assessee was bound to follow RBI guidelines. While doing so, the Hon'ble Court observed that any contrary view taken by the Income Tax Authorities would disentitle the assessee from claiming deduction u/s 36(1)(viia) of the Act which was not justified. With these observations, the matter was remanded back to Tribunal with a direction to the assessee to support its claim with relevant documents. Finally, as per RBI Circular dated 01-07-2010, Non-Performing Assets (NPAs) - which include Sub- standard, Doubtful and Loss Assets - are defined as accounts where instalments are overdue for m....
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....ad and doubtful debts in relation to advances made by its rural branches subject to the maximum limit of one and half percent of the aggregate average advances made by such branches, computed in the prescribed manner. The rational to introduce the same (as contained in Memorandum explaining the provisions in the Finance Bill, 1979) was to encourage commercial banks particularly public sector banks to reach out in rural areas and to expand the rural credit. In order to promote rural banking and assist the scheduled commercial banks in making adequate provisions from their current income to provide for risks in relation to the rural advances, these new provisions were inserted in the Act. The proposed deduction was to be limited to 1 ½ percent of the aggregate average advances made by rural branches as defined. This deduction was available from AY 1980-81 onwards. Thus, the whole objective was to encourage commercial banks, especially public sector banks, to expand rural credit and make adequate provisions for risks associated with rural advances. 8. These provisions came to be amended from time to time and at present, the provisions read as under: - (viia) in resp....
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....fore making any deduction under this clause and Chapter VI-A); (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) : Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, of an amount not exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year; (d) a non-banking financial company, an amount not exceeding five per cent of the total income (computed before making any deduction under....
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....sent) of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding 10% (at present) of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. This new methodology of computation was brought into effect by Finance Act, 1986. The effect of amendment, as explained in CBDT Circular No.464 dated 18-07-1986, was under: - Modification in respect of deduction on provision for bad and doubtful debts made by the banks. 5.1 Under the existing provisions of clause (viia) of sub-section (1) of section 36 of the Income-tax Act inserted by the Finance Act, 1979, provision for bad and doubtful debts made by scheduled or a non-scheduled Indian bank is allowed as deduction within the prescribed limits. The limit prescribed is 10 per cent of the total income or 2 per cent of the aggregate average advances made by the rural branches of such banks, whichever is higher. It had been represented to the Government that the foreign banks were not entitled to any deduction under this provision and to that extent, they were being discriminated against. Further, it was felt that the ....
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....ould be deducted by the assessee in computing its income. This mismatch led to denial of deductions of PBDD. Accordingly, these provisions were introduced and after various amendments to Sec.36(1)(viia), the scheduled banks (not being foreign banks) and cooperative banks (excluding primary agricultural credit societies or primary co-operative agricultural and rural development banks) were allowed deduction subject to overall ceiling of 8.5% of total income (before deductions under Chapter VI-A and this section) and 10% of aggregate average advances made by rural branches of the bank. The provisions of Sec. 36(1)(viia) thus supports banks in maintaining prudential provisioning norms and provide a tax incentive for provisioning which is essential in managing credit risk. It also helps bank align the financial reporting with RBI regulations without adverse tax consequences. The first proviso to Sec. 36(1)(viia) provide an option to the assessee to claim deduction in respect of any provisions made by it for any assets classified by the RBI as doubtful assets or loss assets in accordance with RBI guidelines subject to the condition that such deduction would not exceed 5% of amount of su....
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....-04-2006 relating to provisioning requirements pertaining to advances, the assessee is required to classify its loan & advances into 'Standard Assets' and non-performing assets (NPA). The 'standard assets' are performing assets for the bank. The remaining loans, on the other hand, are considered as non-performing assets (in short 'NPA'), The NPAs are further classified into sub-standard assets, doubtful assets and loss assets. 'Standard Assets' are those assets which do not disclose any problem and the recovery of the same do not carry more than normal risk attached to assessee's business. The NPAs carry more than normal business risk for the assessee and accordingly, require adequate provisions against them. The sub-standard assets are those assets which have remained NPA for a period of less than 12 months. The doubtful assets are those assets which have remained NPA for a period of more than 12 months whereas loss assets are those assets which have been identified to be not recoverable at all. Against NPAs, the assessee is required to maintain provisions at specified percentages. The same ranges between 10% to 20% for sub-standard assets whereas the same ranges from 25% to 100% ....
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....xpression used is 'provision for bad and doubtful debts' and the prudential norms of RBI require the assessee to mitigate potential losses though the same may be remote one and may arise on 'standard assets' also. The said observation is fortified by the fact that an account continues to be classified as 'standard asset' even if the amount is overdue until such overdue exceeds 90 days. Even this period is not uniform for crop loans. The classification as standard asset merely indicates that either the advances are regular or the period of default has not yet crossed the regulatory threshold period as prescribed by RBI. Therefore, all the 'standard assets' are not inherently completely free from credit risk and always bear risk of going bad in future which necessitate provisioning against these assets also to safeguard the bank from potential losses. Recognizing the inherent and continuing credit risk, RBI mandate banks to create provision on 'standard assets' at prescribed rates ranging from 0.25% to 1% depending upon the nature of advances. These provisions are intended to cover the inherent risk of default and anticipated loss as even performing assets may exhibit early signs of ....