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2014 (9) TMI 44 - AT - Income TaxProvision towards fraud Crystallization of loss - Whether the deduction can only be allowed if fraud is established and whether the loss claimed by the assessee can be said to have crystallized during the previous year Held that - The AO accepted the fact that the assessee bank has a well placed mechanism to identify frauds and initiate recovery action - the figures mentioned in the FIR is only a provisional figure which is arrived at for the purpose of filing an FIR immediately on occurrence of the fraud - The vigilance report is prepared after detailed study - there is bound to be a difference in the figures between the vigilance report and FIR lodged - Since the vigilance report is prepared after a deeper study, that figure should be considered as a loss to the assessee - the incident which resulted in irregularities/embezzlement occurred during the previous year thus, the loss has to be held to have crystallized during the previous year the order of the CIT(A) is upheld Decided against Revenue. Advances made to rural branches of bank Whether deduction u/s 36(1)(viia) can exceed the amount of provision for bad and doubtful debts - The Assessee made a claim for deduction u/s.36(1)(viia)(a) of the Act of ₹ 23,80,55,247. This was rejected by the AO for the reason that the deduction u/s.36(1)(viia) of the Act is allowed only to the extent PBDD in respect of rural advances is created in the books of accounts. - But CIT(A) allowed the claim of the Assessee - Held that - What has to be seen by the AO is as to whether PBDD is created (irrespective of whether it is in respect of rural or non-rural advances) by debiting the Profit & Loss A/C. To the extent PBDD is so created, the Assessee is entitled to deduction subject to the upper limit of deduction laid down in Sec.36(1)(viia) of the Act. To avoid possible claim for double deduction in respect of one and the same debt first as PBDD and thereafter as Bad Debts, the legislature has already provided in Sec.36(2)(v) of the Act that where such debt or part of debt relates to advances made by an assessee to which cl. (viia) of sub-s. (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause. - Decision in the case of Catholic Syrian Bank (2012 (2) TMI 262 - SUPREME COURT OF INDIA) distinguished. - Decided in favour of revenue.
Issues Involved:
1. Deduction for provision towards frauds. 2. Deduction for provision for bad and doubtful debts (PBDD) under Section 36(1)(viia) of the Income Tax Act, 1961. Issue-Wise Detailed Analysis: 1. Deduction for Provision Towards Frauds: The appellant, a scheduled bank, claimed a deduction of Rs. 67,39,411 under "Provision for Frauds" in its profit and loss account. The assessee argued that losses due to irregularities and embezzlements are incidental to the business and should be allowed as business expenditure. The bank has a vigilance department that reports frauds and suggests recovery actions, and such cases are reported to the RBI. The provision was made after netting recoveries, and FIRs were filed for such frauds, indicating crystallization of liability during the relevant assessment year. Initially, the AO allowed this deduction, but later, the CIT, exercising powers under Section 263, directed the AO to re-examine the crystallization of liability. The AO then allowed only Rs. 10.25 lakhs, based on the lower of the figures from the FIR or vigilance report, disallowing the remaining Rs. 52,39,411. The CIT(A) accepted the bank's claim, stating that the vigilance report, prepared after detailed study, should be considered for crystallization of liability rather than the provisional figures in the FIR. The Tribunal upheld the CIT(A)'s decision, noting that the vigilance report figures should be considered as they are more accurate, and the loss had indeed crystallized during the relevant year. Thus, the revenue's ground was dismissed. 2. Deduction for Provision for Bad and Doubtful Debts (PBDD): For A.Y. 2003-04, the assessee claimed Rs. 23,80,55,247 as a deduction under Section 36(1)(viia)(a) for PBDD in rural advances, while the actual provision in the books was Rs. 10,00,000. The AO allowed the deduction only to the extent of the provision made in the books, rejecting the claim for the higher amount. The CIT(A) allowed the full claim, referencing the Supreme Court's decision in Catholic Syrian Bank, which held that deductions under Section 36(1)(viia) and Section 36(1)(vii) are independent. The Tribunal examined the historical amendments and legislative intent of Section 36(1)(viia), noting that after 1.4.1987, banks could claim deductions up to 10% of aggregate average advances made by rural branches and 7.5% of total income, provided a PBDD is created in the books. The Tribunal concluded that the AO's restriction based on the provision for rural advances alone was incorrect. The deduction should be allowed based on the total PBDD created, irrespective of whether it pertains to rural or non-rural advances, subject to the upper limits specified in Section 36(1)(viia). The Tribunal directed the AO to re-examine the claim in light of this interpretation. For A.Y. 2004-05, similar facts and issues were involved. The Tribunal issued identical directions to the AO for re-examination. Conclusion: The Tribunal dismissed the revenue's appeal regarding the provision for frauds, upholding the CIT(A)'s decision. For the PBDD issue, the Tribunal allowed the revenue's appeal for statistical purposes, directing the AO to re-examine the claims as per the Tribunal's detailed analysis and directions.
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