2015 (4) TMI 1121 - AT - Income Tax

Claim for deduction under S.36(1)(viia) - Held that - In the present case, being eligible bank, is entitled to claim deduction as per the main provision contained in clause (a) of S.36(1)(viia), in respect of any provision for bad and doubtful debts to the extent of an amount not exceeding 7.5% of the total income computed before making any deduction under S.36(1)(viia) and Chapter VIA and an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. A perusal of the impugned order of the learned CIT(A) however, shows that it was stated by the assessee before the learned CIT(A) that no provision was made towards average rural advances. If it is so, it is not clear as to what is the basis on which the provision of ₹ 22.40 crores (Rs.5.38 crores in respect of urban advances and ₹ 17.02 crores in respect of rural advances) was made by the assessee during the year under consideration. Moreover, all these facts and figures were furnished by the assessee before the learned CIT(A) for the first time and the Assessing Officer therefore, did not have any opportunity to verify the same. The claim of the assessee of having adjusted the amount of ₹ 22.24 crores towards bad debts written off during the year under consideration against the opening balance of the provision of ₹ 40.13 crores was also made by the assessee for the first time before the learned CIT(A), and the Assessing Officer did not have any opportunity to verify the same. Having regard to all these facts and circumstances of the case, we are of the view that it would be fair and proper and in the interests of justice to restore the issue relating to the assessee s claim for deduction under S.36(1)(viia) to the file of the Assessing Officer for deciding the same afresh, in accordance with the provision of S.36(1)(viia) after giving proper and sufficient opportunity of hearing to the assessee and after verifying all the relevant facts and figures Disallowance of claim for deduction on account of salary arrears - Held that - There is no dispute that the amount in question provided by the assessee for salary arrears for the period from 1.11.2007 to 31.3.2009 related to the earlier years and not to the year under consideration. After examining all the relevant aspects of the matter, a finding has been given by the learned CIT(A) in his impugned order that the liability on account of salary arrears in question has arisen vide the proceedings dated 24.7.2010, i.e. much later than the closure of the year under consideration. The said liability thus had neither arisen nor discharged by the assessee during the year under consideration and the learned counsel for the assessee has not been able to bring anything on record to rebut or controvert this finding of fact recorded by the learned CIT(A) in his impugned order. The liability on account of salary arrears in question thus neither related to the year under consideration nor crystallized in that year, and this being so, we find no infirmity in the impugned order of the learned CIT(A) confirming the disallowance made by the Assessing Officer on account of provision made by the assessee for the salary arrears in question. The same is, therefore, upheld on this issue dismissing the appeal filed by the assessee.

Summary

Issues Involved:
1. Deduction of Rs. 9,93,40,015 on account of provision for bad and doubtful debts under Section 36(1)(viia) of the Income Tax Act, 1961.
2. Deduction of Rs. 12,73,60,121 on account of salary arrears.

Issue-wise Detailed Analysis:

1. Deduction of Rs. 9,93,40,015 on account of provision for bad and doubtful debts under Section 36(1)(viia):

The Revenue's appeal (ITA No.51/Hyd/2015) revolves around the assessee's claim for deduction of Rs. 9,93,40,015 under Section 36(1)(viia) of the Income Tax Act, 1961. The Revenue contends that the CIT(A) erred both in law and on facts by allowing this deduction. The CIT(A) had relied on the Supreme Court decision in Catholic Syrian Bank Ltd. vs. CIT, which held that Sections 36(1)(vii) and 36(1)(viia) are distinct and independent items of deduction. The CIT(A) allowed the deduction based on the assessee's claim and the closing balance of bad debts in rural branches.

The assessee, a Regional Rural Bank, filed its return declaring a total income of Rs. 122,51,93,517. The Assessing Officer (AO) initially determined the total income at Rs. 142,04,20,490. The Commissioner revised this assessment, directing the AO to re-examine the claim for salary arrears and provision for bad and doubtful debts due to insufficient enquiry.

Upon re-examination, the AO disallowed the deduction of Rs. 9,93,40,015, citing lack of details and potential double deduction. The CIT(A), however, allowed the deduction, stating that the assessee is entitled to 7.5% of the total income and 10% of the Aggregate Average Advances (AAA) of rural branches. The CIT(A) referenced the ITAT Hyderabad decision in State Bank of Hyderabad vs. DCIT and the Supreme Court decision in Catholic Syrian Bank Ltd. vs. CIT, which clarified the independent operation of Sections 36(1)(vii) and 36(1)(viia).

The Tribunal, after reviewing the arguments and relevant material, noted that the facts and figures were furnished by the assessee for the first time before the CIT(A) and were not verified by the AO. Consequently, the Tribunal restored the issue to the AO for fresh examination, directing the AO to verify all relevant facts and figures and decide the matter afresh.

2. Deduction of Rs. 12,73,60,121 on account of salary arrears:

The assessee's appeal (ITA No.88/Hyd/2015) concerns the disallowance of Rs. 12,73,60,121 claimed as salary arrears. The AO disallowed this deduction, stating that the claim pertained to earlier years (1.11.2007 to 31.3.2009) and was not allowable in the assessment year 2010-11 for an assessee following the mercantile system of accounting.

The CIT(A) upheld the AO's disallowance, noting that the liability for salary arrears had not crystallized during the year under consideration. The liability arose from proceedings dated 24.7.2010, after the closure of the assessment year 2010-11. The Tribunal affirmed the CIT(A)'s decision, finding no infirmity in the disallowance as the liability neither related to nor crystallized in the year under consideration.

Conclusion:

The Tribunal allowed the Revenue's appeal for statistical purposes, directing the AO to re-examine the deduction for bad and doubtful debts. The assessee's appeal was dismissed, upholding the disallowance of the salary arrears deduction. The order was pronounced on 10th April, 2015.