2014 (1) TMI 444 - AT - Income Tax

Restricting the deduction Expenses claimed under provision for bad and doubtful debts u/s 36(1)(viia) of the Act Held that - Following Kannur District Co-operative Bank Ltd. v. Asst. CIT 2012 (5) TMI 22 - ITAT COCHIN As per Part V of the Banking Regulation Act, 1949, the term banking company also includes a co-operative bank - Thus a co-operative bank falls under the definition of banking company - the definition given in the Explanation under section 36(1)(viia) of the Income-tax Act, a banking company as defined in section 5(c) of the Banking Regulation Act, which is not a scheduled bank, is classified as a non-scheduled bank - a co-operative bank, would be classified as a non-scheduled bank for the purpose of section 36(1)(viia) of the Act. Netting of provisions made for bad and doubtful debts Held that - The provision is created at the end of every year by analysing the quality of advances or debts on certain parameters - the fresh provisions created during the year under consideration alone can be considered for the purpose of provisions of section 36(1)(viia) of the Act - the assessee has credited the entire amount of balance available in the provision for bad and doubtful debts account to the profit and loss account - all the debts on which the provisions were created in the earlier years have become quality assets, meaning thereby the provision is no longer required on those debts - only the net accretion to the provisions account for the purpose of section 36(1)(viia) of the Act - The net accretion has to be ascertained by analysing the quality of each asset decided partly in favour of Assessee.

Issues Involved:
1. Restricting the deduction of expenses claimed under the head "Provision made for bad and doubtful debts" under section 36(1)(viia) of the Act.
2. Netting of the provisions made for bad and doubtful debts.

Issue-wise Detailed Analysis:

1. Restricting the Deduction of Expenses Claimed Under Section 36(1)(viia):

The assessee, a cooperative society engaged in banking, claimed deductions under section 36(1)(viia) of the Income-tax Act for provisions made for bad and doubtful debts. The deductions claimed were:
- 7.5% of the gross total income before claiming deduction under section 36(1)(viia).
- 10% of the aggregate average advances made by rural branches of the bank.

The Assessing Officer disallowed the claim related to advances made by rural branches, reasoning that the assessee did not have any rural branches, thus restricting the deduction to 7.5% of the gross total income. The Commissioner of Income-tax (Appeals) upheld this decision, referencing the Kerala High Court's decision in CIT v. Lord Krishna Bank Ltd. [2011] 339 ITR 606 (Ker), which stated that the additional deduction of 10% is available only for advances made by rural branches.

The assessee contended that it had nine rural branches and was eligible for a deduction of Rs. 9.60 crores. However, the Assessing Officer found that the net provision created during the year was only Rs. 88.48 lakhs, as the assessee had credited the profit and loss account with Rs. 32.32 crores by writing back the opening balance of "Provision for bad and doubtful debts". Consequently, the Commissioner of Income-tax (Appeals) limited the deduction to Rs. 88,48,877.

The Tribunal noted that the definition of "rural branch" had been decided by the Kerala High Court in the Lord Krishna Bank Ltd. case, which stated that "rural branch" refers to branches in rural areas as defined by the census report, and not urban areas. The Tribunal, following the decision in Kannur District Co-operative Bank Ltd. v. Asst. CIT [2013] 1 ITR (Trib)-OL 212 (Cochin), confirmed the decision of the Commissioner of Income-tax (Appeals).

2. Netting of the Provisions Made for Bad and Doubtful Debts:

The tax authorities took the view that the amount of "provision for bad and doubtful debts" debited to the profit and loss account and the amount credited by writing back the opening balance should be netted off to determine the actual provision created by the assessee. The Tribunal, referencing the Kannur District Co-operative Bank Ltd. case, agreed that provisions created and written back are independent decisions based on different sets of facts and should not be netted off.

However, the Tribunal acknowledged the Departmental representative's argument that the assessee did not analyze the quality of each debt before writing back the provisions. The Tribunal emphasized that fresh provisions created during the year should be considered for section 36(1)(viia) purposes and that net accretion to the provisions account should be ascertained by analyzing the quality of each asset.

Since the details were not available on record, the Tribunal set aside the order of the Commissioner of Income-tax (Appeals) on this issue and remanded it to the Assessing Officer for fresh examination.

Conclusion:

The Tribunal partly allowed the appeal for statistical purposes, confirming the restriction on deductions related to rural branches but remanding the issue of netting provisions for fresh examination. The decision was pronounced on May 8, 2013.

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