2019 (3) TMI 1654 - AT - Income Tax

Disallowance of deduction u/s 36(1)(viia) - provision for bad and doubtful debts - HELD THAT - In the case the assessee is a rural cooperative bank and entitled for deduction under section 36(1)(viia) in respect of provision for bad and doubtful debt. The said provision has specified the limit of deduction which could be allowed to the eligible assessee. Under the provisions the deduction in respect of any provision for bad and doubtful debts made by the cooperative bank of an amount not exceeding seven and one half percentile (7 %) of the total income and an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. Issue as decided in own case in the favour of assessee as relying on THE LITTLE KANCHEEPURAM CO OPERATIVE URBAN BANK LTD. 2013 (3) TMI 787 - ITAT CHENNAI

Summary

Issues:
1. Jurisdiction of Assessing Officer and CIT(A) under section 143(3)
2. Deduction under section 36(1)(viia) for provision of bad and doubtful debts

Analysis:

Issue 1: Jurisdiction of Assessing Officer and CIT(A) under section 143(3)

The appeal was against the order passed by the Ld. Commissioner of Income-tax (Appeals)-1 for assessment year 2010-11. The assessee challenged the jurisdiction of the Assessing Officer (AO) and the CIT(A), claiming the order under section 143(3) dated 31.03.2013 was beyond the AO's jurisdiction. The case was selected for scrutiny, and the assessment was completed after making certain disallowances. The Ld. CIT(A) dismissed the appeal, leading to the assessee's appeal before the Tribunal. The grounds raised were related to the disallowance of deduction under section 36(1)(viia) of the Act.

Issue 2: Deduction under section 36(1)(viia) for provision of bad and doubtful debts

The assessee, a rural cooperative bank, sought deduction under section 36(1)(viia) for the provision of bad and doubtful debts. The deduction is subject to specific limits based on the total income and average advances made by the bank. The computation of aggregate average advances by rural branches is governed by Rule 6ABA of the Income Tax Rules, 1962. The Assessing Officer disallowed the deduction claimed for standard advances, arguing that they were not in the nature of bad and doubtful debts as regular interest was received on them. The Ld. CIT(A) upheld this decision based on previous tribunal rulings. However, the assessee's counsel cited a favorable tribunal decision for a different assessment year, emphasizing that the provision under section 36(1)(viia) is not limited to bad debts but includes anticipated default on loans and advances.

The Tribunal, following precedent, allowed the deduction for the provision of bad and doubtful debts, deleting the addition made by the authorities. The decision was based on the interpretation that the deduction under section 36(1)(viia) encompasses provisions for anticipated default on total assets, including standard assets. Therefore, the addition was directed to be deleted, aligning with the earlier tribunal rulings. Consequently, the appeal of the assessee was allowed.

In conclusion, the Tribunal's decision favored the assessee, allowing the deduction under section 36(1)(viia) for the provision of bad and doubtful debts, based on the interpretation that the provision extends beyond bad debts to anticipated defaults on total assets, including standard advances.