TaxTMI 
TaxTMI 
2024 (11) TMI 1666
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....ordingly deduction under the said section should be allowed in computing the total income. 2.1 The CIT(A) failed to appreciate that deduction u/s 36(1) (viia) is to be allowed based on total income and rural advances in respect of "any" provision made and hence the eligible deduction as per said section should be allowed if the appellant had made any provision towards bad and doubtful debts and not necessarily equivalent to the provision made as held by Hon'ble ITAT Delhi in case of Pratima Bank (58 ITR (Trib) 1). 2.2 Without prejudice to the above, the CIT(A) should have allowed the alternate claim of the appellant that the deduction should be based on the provision held in the accounts as held by Hon'ble ITAT Ahmedabad in the case of DCIT V Sarvodhaya Sahakari Bank Ltd (2014 48 Taxman.Com 82) and should not have dismissed the claim by stating that the Act requires provision to be made in previous year even when there are no such words in the Act. 2.3 Without prejudice to the above, the CIT(A) ought to have atleast allowed the claim of the appellant that the deduction should be based on gross provision made and not the net provision made. Relianc....
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....hich was processed under section 143(1) of the Income Tax Act, 1961 ("the Act") and selected for scrutiny under CASS. The Assessing Officer made assessment on total income of Rs. 50,81,436, by making addition of Rs. 97,06,79,200, as disallowance under the provisions for bad and doubtful debt under section 36(1)(viia) of the Act, Rs. 17,39,54,837, as addition on account of interest accrued but not due on Government and other securities, Rs. 2,68,07,020, as disallowance on account of deduction under section 36(1)(viii) of the Act and addition of Rs. 2,77,22,160 on account of bad debts written-off under section 41(4) of the Act claimed by the assessee Bank. The assessee being not satisfied with the order passed by the Assessing Officer, filed appeal before the first appellate authority. 4. Aggrieved, the assessee carried the matter in appeal before the learned CIT(A), but without complete success. The learned CIT(A) partly allowed the assessee's appeal based on the following ground-wise decisions :- "Decision: 6.0 Ground No. 1: Allowing deduction u/s 36(1)(viia) at Rs.7,00,00,000/- instead of the eligible amount at 7.5% of total income and 10% of aggregate ave....
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....cting the deduction to the extent of provision made in books. Therefore, the provision made by the appellant is included and absorbed in the allowances made by the said section. Therefore once a provision is made by the scheduled bank, it is entitled to a deduction which is quantified not with reference to the provision made in the accounts but with difference to a certain percentage of total income and a certain percentage of the aggregate average advances of rural branches. Similar view is found in the decision of ITAT Delhi in the case of Prathma Bank Vs DCIT (78 ITD 103). 6.3 This issue is decided by various courts of laws through several interpretations. In order to decide the issue, it is necessary to understand the intention of the legislature for enacting this provision. Originally the provision of section 36(1)(viia) was inserted by Finance Act, 1979, so as to allow the deduction of provision made towards bad and doubtful debts in the rural branches of the scheduled banks. The original provision reads in Finance Act 1979 reads as under: Finance Act, 1979 Deduction in respect of provisions made for bad and doubtful debts relating to rural branches....
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....visions of new clause (vila) of section 36(1) relating to the deduction on account of provisions for bad and doubtful debts is distinct and independent of the provisions of section 36(1) (vii) relating to allowance of 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 section 36(1)(vii) in addition to the benefit of deduction of the provision for bad and doubtful debts under section 36(1)(viia). 13.4 This provision will take effect from 1-4-1980 and will, accordingly, apply in relation to the assessment year 1980-81 and subsequent years. The said section was enacted in the income tax act being inserted by the Finance Act, 1979, w.e.f. 1-4-1980 which reads as under. Sec. 36 [(viia) in respect of any provision for bad and doubtful debts made by a scheduled bank in relation to 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,- (1) "rural branch means a branch of a sche....
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....bove provisions is in respect of the provision made. Therefore, making of a provision for bad and doubtful debt equal to the amount mentioned in this section is a must for claiming such deduction. The Tribunal has rightly pointed out that this issue stands further clarified from the proviso to sub- clause (a) of clause (vii) of section 36 (1) of the Act, which reads as under:" "Provided 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 accounts made under that clause." It is rightly pointed by the Punjab & Haryana High Court that, the deduction is available only to the extent of the provisions made in the books of accounts. The proviso to section 36(1)(vii) for the year under consideration i.e. AY 2014-15 is no different, and hence, the judgment of the Hon'ble Court still applies. Therefore, mere claim of deduction u/s 36(1)(viia) in the computation of income shall not be allowed unless the same is accounted for and claimed in the books of acc....
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....d and confirmed. Ground no. 1 is dismissed. 7.0 Ground No.2: Addition of the interest accrued but not due on securities amounting to Rs.17,39,54,837/-. The appellant had claimed deduction in respect of the interest accrued but not due on the Government and other approved securities. It is argued that the interest on these securities are payable only on respective due dates and therefore they accrue only on the said due dates. The appellant contended that it does not have a right to claim the interest before the due dates specified in the bonds and hence the interest on these securities become income only on the said due dates. Therefore, the interest accrued but not due cannot be or of axed. 7.1 The AO had disallowed the claim on the basis that since the appellant is following accrual basis, the interest accrued is chargeable to tax. Further this issue has been decided by the various High Courts and Income Tax Appellate Tribunals in a number of cases. It is also noted that SLP filed by the department on this issue has been rejected by the Hon'ble Supreme Court. Therefore, the action of the AO to rely on mercantile system of accounting for making the addition i....
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....h prompted the assessee to purchase the Securities, the price paid for them was in the nature of a capital outlay and no part of it can be set off as expenditure against income accruing on those securities. Subsequently, when these securities yielded income by way of interest, such income attracted Section 18." (emphasis supplied). 7.5 In the nutshell, the right to receive interest on the Government securities vested in the appellant only on the due date mentioned in the securities. Consequently, interest accrued on the securities is only on the due dates and cannot be said to have accrued to the appellant on any date other than the date stipulated therein. The contention of the AO that interest accrues for broken periods between two consecutive dates stipulated in the agreement/instrument for payment of interest is without any basis in law. Following the Apex Court's decision on this issue, the addition made by the AO is deleted. Ground no 2 is allowed. 8.0 In the 3rd Ground of Appeal, the AO has rejected the claim of the appellant for Rs.2,68,07,020/- as deduction of 20% of profit on creation of special reserve u/s 36(1) (viii). The appellant has to....
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....re allowed from such business income and one such deduction is laid down in section 36(1) (vii) of the Act. The said section provides a deduction not exceeding 20% of the profits derived from eligible business computed under the head 'Profits and gains of business or profession', in respect of any special reserve created and maintained by a specified entity and the said amount having been carried to such reserve account. The condition of maintaining the special reserve was incorporated with effect from 1-4-1998 by the Finance Act, 1997. The wordings of sub-section are that special reserve should be created and maintained by a specified entity from the profits of the eligible business for the relevant previous year from which deduction is to be claimed. The section further provides that the amount should be carried to such reserve account. In other words, it is specified that entries are to be made in the books of account by way of a creation of a special reserve in order to claim the deduction under section 36(1)(viii) of the Act which, in turn, would not exceed 20% of the profits derived from the eligible business. Further, certain restrictions are provided in the proviso ....
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....write off of bad debt has not been claimed as deduction, the recovery out of the said bad debt written off cannot be brought to tax. On the issue of deduction being allowed u/s 36(1) (viia) the provisions of section 41(4) can be invoked only if deduction has been allowed u/s 36(1)(vit) and hence the deduction allowed u/s does not result in the recovery being taxed u/s 36(1) (viia) or 41(4). 9.2 It is necessary therefore to verify the reason why in the first place, recovery of bad debts is being credited to profit and loss account, instead of simply verifying the applicability of the section 36(1)(vii) or 36(1)(vviia)or 41(4). As per accounting principles, for the purpose of recovery in bad debts account, such recovery should have been credited to the loan account of the borrower only. There also cannot be a situation of excess recovery of loan if the outstanding balance loan is the only recoverable amount of loan. An excess recovery can only be of any other charges received and such excess recovery are revenue / income only. The other reason for such excess recovery in loan account is that the bank may have reduced the loan account outstanding by either Write-off of loan, ....
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....other taxes. The appellant has not pressed the ground in its submission even though it is a legal ground, and accordingly the AO is directed to allow credit of income tax paid if any, as legally allowable to the appellant. This ground is allowed for statistical purpose. 11.0 Additional Ground no 1: The appellant has raised an additional ground of appeal for deduction u/s.80P of the Income Tax Act, 1961. As per appellant, it is a Regional Rural Bank established as a corporate body with perpetual succession. The relevant Section 22 of Regional Rural Bank Act, reads as under. "22. Regional Rural Bank to be deemed to be a co-operative society for purpose of the Income-tax Act, 1961 For the purpose of the Income-tax Act, 1961(43 of 1961), or any other enactment for the time being in force relating to any tax on income, profits or gains, a Regional Rural Bank shall be deemed to be a co- operative society." 11.1 However, in this regards, the CBDT has specifically issued a circular No.06/2010 dated 20/09/2010 clarifying not to consider the Regional Rural Banks as co-operative societies. The said circular is reproduced hereunder: Section....
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.... The field officers may take note of this position and take remedial action, if required. 11.2 It is well settled law that the circulars issued by the Board are statute in nature and hence will prevail over the Act. Since the circular 06/2010 has clarified that the Regional Rural Banks are not to be treated as co-operative societies for the purpose of section 80P, hence no deduction is allowed under the said section. Therefore, the request of appellant to allow deduction u/s. 80P is rejected. 11.3 Moreover, the AO has in his remand report on the allowability of deduction U/s.80P informed that in appellant's own case for A.Y. 2011- 12 i.e. "Wainganga Krishan Gramin Bank Ltd. which is subsequently amalgamated with Vidharbha Konkan Gramin Bank w.e.f. 28-2-2013, the Ld. CIT(A)-7, Pune while deciding the appeal of the assessee has observed as under: "The appellant has contended that, appellant is not co-operative bank and therefore provision of section 80P(4) does not apply. The appellant is Regional Rural Bank and claimed that, it is Primary Agriculture Credit Society or Primary Agriculture and Rural Development Bank. CBDT Circular No. 6/2010 specifically....
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.... was further held by the Assessing Authority in paragraph 2.5 of the Assessment Order that the Regional Rural Banks are not eligible for deduction under section 80P of the Act, 1961 from the Assessment Year 2007-08, as by Circular No. 319 dated 11-1-1982 issued by the Central Board of Direct Taxes, deeming status of the Regional Rural Banks as Cooperative Society stands withdrawn w.e.f. Assessment Year 2007-08. 5. In the assessment order, the assessing authority has held in para no. 4 and 5, as under :- 4. The stand taken by assessee on this issue is not correct due to following reason :- a. Regional Rural Bank Act, 1976 has not overriding power over Income- tax Act, 1961 Circular No. 319 dated 11-1-1982 allowing deeming provision of cooperative society has been withdrawn by Board CIRCULAR NO. 6/2010 (F. No. 173 (3)/44/2009-IT (A-1) DATED 20/9/2010 w.e.f. assessment year 2007-08, And a clarification has been also given in this circular that Regional Rural Bank are not entitled for deduction u/s 80P of I.T. Act Circular has been typed in paragraph 3.1 (B) of assessment order. b. A sub-section 80P(4) was introduced by Finance Act, 2006 w.e.f. 1-4-2....
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....for deduction u/s 80P (1) of I.T. Act and claiming disallowed and added back to the total income. Penalty notice u/s 271(1) (c) is being issued separately. 6. Sections 22 and 32 of the Regional Rural Banks Act, 1976 provides as under :- 22. Regional Rural Bank to be deemed to be a cooperative society for purpose of the Income-tax Act, 1961 .- For the purpose of the Income- tax Act, 1961 (43 of 1961), or any other enactment for the time being in force relating to any tax on income, profits or gains, a Regional Rural Bank shall be deemed to be a cooperative society. 32. Act to override the provisions of other laws. The provisions of this Act shall have effect notwithstanding anything to the contrary in any other law for the time being in force or in any contract, express or implied, or in any instrument having effect by virtue of any law other than this Act, and notwithstanding any custom or usage to the contrary. 7. Sub-section (4) of section 80P of the Act. 1961 (incorporated by Finance Act. 2006 w.e.f. 1-4-2007 provides as under. Para 1.644 (4) The provisions of this section shall not apply in relation to any cooperative bank o....
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.... income earned from the 'business of Banking' or 'providing credit facilities to its members, to various types of Cooperative Societies as mentioned in sub-clauses (i) to (vii) of clause (a) of sub section 2 of 80P had been given. It clearly meant that, while enacting sections 22 r.ws. 32 of Regional Rural Bank Act, 1976, the Parliament was fully aware of the provisions contained in the newly substituted section 80P, in place of erstwhile regime of granting rebate as had been provided under section 81 of the Act. Yet the said RRB Act had granted 'Regional Rural Banks' 1961, the status of "cooperative society", for the purposes of "taxation of its income or any other enactment for the time being in force, related to any tax on its income, profits or gain as derived by specified categories of co operative societies, from Banking Business". The term Banking Business' itself is a connotation of very wide import. The said statute, namely RRB Act 1976, as a whole had been given the status of 'overriding nature, as per section 32 thereof. Therefore, as per simple rule of interpretation, the Regional Rural Bank Act, 1976, overrides the substituted section 80P of....
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.... is what gives the colour. Neither Can be Ignored. Both are important. That interpretation is best which makes the textual interpretation match the Contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole and then section by section, clause by clause, phrase by phrase and word by word. If a statute is looked at in the context of its enactment, with the glasses of the statute maker provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context. With those glasses we must look at the Act as a whole and discover what each section, each clause, each phrase and each word is meant and designed to say as to fit into the scheme of the entire Act. No part of a statute and no word of a statute can be construed in isolation. Statutes have to be construed so that every word has a place and everything is in its place. It is by looking at the definition as a whole in the setting of the entire Act and by reference to what preceded the enactment and the reasons for it that the court cons....
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....off Kerala (1957 8 STC 561; AIR 1957 SC 657, the Supreme Court of bullin stared the principle as follows (page 661 of AIR 1957 SC): "If the Revenue satisfies the court that the case falls strictly within the provisions of the law, the subject can be taxed. If on the other hand, the case is met covered within the four corners of the provisions of the taxing statue no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by considering what was the substance of the matter. Where the language of a provision is plain, Courts cannot ordinarily concern themselves with the policy behind the provision, or the intention off the Legislature. As Land Watson said in A. Salomon V. A. Salomon and Co. (1897) AC 22, 38 (HL) "intention of the Legislature is a common but slippery phrase". In ITO v. TS Devastha Nadar [1968] 68 (TR 252: AIR 1968 SC 623, the Supreme Court of India observed that the rule that (page 257): "we must look to the general scope and purview of the statute, and at the remedy sought to be applied, and consider what was the former state of the law, and what it was that the Legislature contemplated' was....
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....- section (4) of section 80P of the Act. The facts of the said case were, that it was a "cooperative society" registered under the Andhra Pradesh Mutually Aided Cooperative Societies Act 1955. In that case, the said cooperative society had violated the provisions of Andhra Pradesh Mutually Aided Cooperative Societies Act 1955. It was under these circumstances, that the Hon'ble Supreme Court had approved the judgment, adverse to the assessee, as had earlier been delivered by Hon'ble Andhra Pradesh High Court. As against this, it is stated that this is not even the case of the revenue that the appellant had carried on the banking business, in violation of any of the provisions of Regional Rural Bank Act 1976. On the other hand, the revenue's case, had been that the appellant carried on the "business of banking", like that of any other bank which did not enjoy the benefit of exemption under section 80P(2)(a)(i). Succinctly speaking, present is the case where the appellant RRB had been carrying on the 'business of Banking' as per enabling provisions, as contained in section 18 of Regional Rural Bank Act, 1976 and it had been specifically given the status of a 'C....
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....ome after allowing deduction under section 80P(2)(a)(i), as per our findings given hereinfore. 58. Before parting with the issue of appellant's claim case for exemption under section SOP(2)(a) (i), we also hold that the case laws referred to and relied upon by the ld. "CIT(A), while upholding the denial of claim for exemption of income derived from "banking business", she has referred to and relied upon various case laws, as have been discussed by us in para 47 hereinfore. Such case laws are not applicable on the facts of the present case. Surprisingly enough, the underlying principle in all such case laws support the appellant's claim for exemption as it had achieved the objective for which it had come into existence in the year 1976. As stated above, the "appellant RRB had come into existence for development and growth of agricultural sector which had always been on the priority list of the Government of India. In such a situation, the claim for exemption from income-tax, gets fully fortified. 61. Thus, we fully concur with the view expressed by the Coordinate Bench at Allahabad in the case of 'appellant RRB' in order dated 8-1- 2018 and reverse ....
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....hout any specific mentioning in grounds of appeal, his argument is baseless. We find that this is a peculiar case where the Bank never claimed to be a Co-operative Society even before the Assessing Officer, but just because loss is converted to a positive income during the assessment, the provisions of The Regional Rural Bank Act, 1976, was being pressed before the appellate forum. The learned Authorised Representative even did not bring the financial statements before us to buttress his conclusions. In view of the nebulous facts, we leave the matter wide open and direct the Assessing Officer to re-adjudicate the issue afresh and to take a considered call in this matter after considering tax treatment of similar Regional Rural Development Banks. 8. Insofar as the other grounds of appeal are concerned, in this regard, it may be mentioned here that the learned CIT(A) did not have the benefit of the aforesaid judgment of the Hon'ble Allahabad High Court in Hon'ble High Court of Allahabad in Baroda Uttar Pradesh Gramin Bank (supra) when the first appellate order was passed and, therefore, the matter is set aside to the file of the Assessing Officer to review and re-consider ....
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....ite Special Reserve from profits chargeable to tax for that year and hence based on the decision of ITAT Delhi in the case of Power Finance Corporation Ltd (2008-TIOL-475-ITAT-DEL) the claim of the appellant should have been allowed. The CIT(A) erred in relying on decision of Sharda Sahakari Bank where the issue was allowability of deduction u/s 36(1)(viii) without transferring any amount to special reserve. 4. The CIT(A) erred in confirming order of AO to tax the recovery in respect of bad debts written off even when the bad debts written off was never allowed as deduction in any earlier year on the ground that deduction is allowed u/s 36(1)(viia) without appreciating that the provision allowed is already reduced by the amount of bad debts written off. The appellant submits when bad debts written off is not allowed as deduction, the recovery cannot be taxed. 5. The CIT(A) erred in confirming the disallowance of interest u/s 201(1A) without appreciating that it is in the nature of compensatory payment and as held by Hon'ble ITAT Kolkatta in the case of Narayani Ispat (P) Ltd (ITA 2127/Kol/2014), the same should have been allowed. Your appellant craves....