2015 (3) TMI 229 - AT - Income Tax

Deduction u/s 36(1)(viia) - Calculation of correct amount of deduction available to the assessee bank towards provision for bad and doubtful debts - Held that - aggregate average advances made by the rural branches have to be computed by taking the amounts of advances made by each rural branch as outstanding at the end of the last day of each month comprised in the previous year. Thus, it is clear that there is no provision to consider only the advances made during the year under consideration. It is the funding of the Assessing Officer that the assessee has furnished the working as per Rule 6ABA. It is not in dispute that the working is as per Rule 6ABA but the Assessing Officer seems to have interpreted the provision not warranted by law. - computation made by the assessee is as per law and the Commissioner of Income-tax(Appeals) has rightly upheld the computation made by the assessee against the deduction towards provision for bad and doubtful debts - Decided against Revenue. Treatment of the reserve brought down by the assessee and credited in its profit and loss account - much amount of reserve was not necessary to be retained - Held that - at the first instance when the amounts were transferred to reserve as well as at the second instance when such amounts are taken out of the reserves and brought back to the profit and loss account, the transfers were only in the nature of appropriation. The earlier appropriation entry of transferring a portion of the profit to the reserves is reversed by passing a subsequent appropriation entry of transferring the amounts from the reserves to the profit and loss account. Thus, appropriation entries and transfers of funds do not affect the computation of taxable income of the assessee bank either at the time of first appropriation or at the time of second appropriation. Therefore, the view taken by the lower authorities that the credits found in the profit and loss account, as a result of reversal of the reserves is in the nature of taxable income, is not correct. It is not sustainable in law. In that way, the lower authorities are proposing to tax an amount, which has already been suffered tax. It results in double taxation, which is not permissible in law. Lower authorities have made a finding that the assessee bank has not placed before them the appropriate details regarding the transfer and re-transfer out of the reserves and they were not in a position to verify the nature of entries passed by the assessee in the profit and loss account. Therefore, we direct the assessee to furnish before the Assessing Officer the year-wise details of crediting and debiting the reserve account through profit and loss account from year to year. The assessee is also directed to produce before the Assessing Officer the computation statements of income-tax to prove that the amounts transferred to the reserve account have already been suffered tax and the assessee has not claimed any deduction for such amount in computing the taxable income of the respective assessment years. For this limited purpose of verification of details, the file is remitted back to the Assessing Officer. - Matter remanded back - Decided in favour of assessee.

Summary

Issues:
- Interpretation of Rule 6ABA of the Income-tax Rules, 1962 for deduction towards provision for bad and doubtful debts.
- Treatment of reserve brought down by the assessee and credited in its profit and loss account.

Interpretation of Rule 6ABA:
The judgment involved five appeals, three by the Revenue and two by the assessee, against orders passed by the Commissioner of Income-tax(Appeals). The Revenue contended that the Commissioner erred in interpreting Rule 6ABA of the Income-tax Rules, 1962, for determining the deduction available to the assessee bank for bad and doubtful debts. The Revenue argued that the deduction under sec.36(1)(viia) should be based on incremental advances made monthly, not cumulative advances. The ITAT Chennai upheld the Commissioner's order, citing a previous case involving M/s. City Union Bank Ltd., where it was concluded that the deduction calculation by the assessee was correct as per law. Therefore, the Revenue's appeals were dismissed.

Treatment of Reserve:
The two appeals by the assessee focused on the treatment of reserves credited in its profit and loss account. The assessee argued that the reserves were not necessary to be retained and were reversed when deemed unnecessary. The Revenue treated these reversals as taxable income, a decision upheld by the Commissioner. However, the ITAT Chennai found that the transfers to and from reserves were mere appropriations, not affecting taxable income. The ITAT Chennai directed the assessee to provide detailed year-wise information to verify that the amounts transferred to reserves had already been taxed and were not claimed as deductions. Ultimately, the appeals by the Revenue were dismissed, and the appeals by the assessee were allowed.

In conclusion, the judgment addressed the correct interpretation of Rule 6ABA for deduction towards bad debts and the treatment of reserves in the profit and loss account. The ITAT Chennai upheld the Commissioner's decision regarding the deduction calculation and ruled in favor of the assessee concerning the treatment of reserves, emphasizing that the transfers were appropriations and not taxable income. The detailed analysis and direction for verification provided clarity on both issues, resulting in the dismissal of Revenue's appeals and the allowance of the assessee's appeals.