2009 (5) TMI 610 - AT - Income Tax

Business expenditure - Bad debts written off recovered - Deduction u/s 36(1)(viia) or 41(4)? - assessee-Bank declared the amount written off as bad debts in the earlier years which has been subsequently recovered. However, same has not been offered to tax. Argument of the assessee Bank was that what was not claimed as deduction u/s 36(1)( vii ), if subsequently recovered, need not be offered to tax u/s 41(4) - CIT(A) have appreciated the fact that the recoveries from such bad debts written off do not constitute income u/s 41. HELD THAT - We observe that by virtue of section 36(1)(viia) certain assessees like the appellant-bank are allowed to provide in a particular manner provision for bad and doubtful debts as a charge to P L account, irrespective of the actual bad debts. If bad debts exceed the reserve, the excess amount alone can be charged to P L account as per section 36(1)(vii), in such event section 41(4) comes to play, when the excess amount so charged to P L account u/s 36(1)(vii) is subsequently recovered from bad debts. In this given case, the assessee asserts that the actual amount is adjusted against the reserve created by virtue of section 36(1)(viia) and had not exceeded the reserve account. Therefore, the assessee claims no amount was charged to P L account by invoking section 36(1)(vii). Since the assessee has not claimed bad debts u/s 36(1)(vii), but purely adjusted the amount against the reserve created u/s 36(1)(viia), section 41(4) cannot be invoked. Therefore, we are in agreement with the contentions of the assessee. Accordingly, this issue goes in favour of the assessee-Bank. We remitted back on the file of AO to verify the other issues.

Issues Involved:
1. Provision for frauds
2. Provision made on transfer of securities from Available for Sale (AFS) category to Held to Maturity (HTM) category
3. Recoveries from bad debts written off in earlier years
4. Broken period interest
5. Disallowance of interest under section 14A
6. Share income from sponsored rural banks
7. Expenses for current category of investments

Issue-wise Detailed Analysis:

1. Provision for frauds:
The assessee-Bank's first ground concerning the provision for frauds was remanded back to the Assessing Officer (AO) by the CIT(A) with directions to allow the loss claimed on account of frauds to the extent it is actually crystallized and written off as irrecoverable. The Committee on Disputes (COD) deemed the appeal to ITAT premature, leading the assessee-Bank to not press this ground. Consequently, this issue was not considered for adjudication.

2. Provision made on transfer of securities from AFS to HTM category:
The AO disallowed the expenses claimed as diminution in value of AFS securities upon their conversion to HTM, questioning the valuation method and suspecting a deliberate tax reduction attempt. The CIT(A) upheld the AO's decision, stating that the valuation made on 2-11-2004 (not the end of the financial year) cannot be recognized for computing total income. The ITAT, however, allowed the assessee's claim, referencing RBI guidelines and judicial precedents, affirming that the diminution in value of Rs. 127,21,17,913 on account of the transfer from AFS to HTM is an allowable business expense.

3. Recoveries from bad debts written off in earlier years:
The CIT(A) upheld the AO's addition of Rs. 39,38,25,324 as income, arguing that since the assessee claimed deduction for provision for bad debts under section 36(1)(viia), the recovered amount should be taxed. The ITAT, however, agreed with the assessee that section 41(4) does not apply since the bad debts were adjusted against reserves created under section 36(1)(viia) and not claimed under section 36(1)(vii). The issue was remitted back to the AO to verify specific facts regarding the reserve and recovery.

4. Broken period interest:
The revenue's appeal contended that the CIT(A) erred in deleting the addition of Rs. 29,52,23,240 on account of broken period interest and directing the AO not to assess the broken period interest loss of Rs. 28,31,75,841 on an accrual basis. However, the ITAT did not adjudicate on this issue due to the lack of COD's permission for the revenue's appeal.

5. Disallowance of interest under section 14A:
The revenue argued that the CIT(A) should not have restricted the disallowance of interest under section 14A to 2% of the declared amount. This issue was also not adjudicated by the ITAT due to the absence of COD's permission.

6. Share income from sponsored rural banks:
The revenue claimed that the CIT(A) erred in deleting the addition of Rs. 2,19,51,300 received from sponsored rural banks, arguing that such share income should be taxed in the hands of the assessee as per section 86. The ITAT did not address this issue due to the lack of COD's permission.

7. Expenses for current category of investments:
The revenue contended that the CIT(A) erred in directing the AO to allow expenses of Rs. 92,89,000 for the current category of investments based on Board's Circular No. 665. This issue was also not adjudicated by the ITAT due to the absence of COD's permission.

Conclusion:
The ITAT partly allowed the assessee-Bank's appeal, specifically granting relief on the provision for depreciation on the transfer of securities from AFS to HTM and remitting the issue of recoveries from bad debts for further verification. The revenue's appeal was dismissed as not maintainable due to the lack of COD's permission.

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