2014 (10) TMI 1015 - HC - Income Tax

Statutory deduction u/s 36(1)(viia) - provision for bad and doubtful debts in excess of provision made in the account - HELD THAT - If a provision is made in excess of the limits prescribed under the section, the assessee would not be entitled to deduction of the excess amount. At the same time, when the section speaks about the deductions in respect of any provision for bad and doubtful debts made unless such a provision is made, the assessee would not be entitled to the deduction. Once such a provision is made and the said amount is within the limit prescribed under statute, the assessee would be entitled to the amount that is provided for in the accounts. The argument is that when the provision made is less than the amount prescribed under the law, the assessee is entitled to the maximum as prescribed cannot be accepted. The language employed is clear and unambiguous. This is a provision in any fiscal legislation. Therefore, the question of going into the intention or object behind the provision in the light of those clear words would not arise. Therefore, when once a provision is made for bad and doubtful debts and such a provision is less than the limit prescribed under the section what the assessee would be entitled to deduct would be the amount mentioned in the said provision and not the amount prescribed in the section. In that view of the matter, the orders passed by the authorities are not in accordance with law and the judgment of the Tribunal rendered in Syndicate Bank s case on which reliance is placed runs counter to the statutory provision and therefore, the said order passed by the Tribunal does not lay down the correct law. Decided against the assessee. Deduction u/s 36(1)(vii) without adjusting the said amount of bad debts against the provision available under Section 36(1)(viia) of the Act brought forwarded and created during the year - HELD THAT - In view of the judgment of the Apex Court in the case of CATHOLIC SYRIAN BANK LTD., Vs. COMMISSIONER OF INCOME TAX, THRISSUR in 2012 (2) TMI 262 - SUPREME COURT the issue has been correctly answered by the Tribunal in favour of the assessee and against the revenue.

Issues Involved:
1. Deduction under Section 36(1)(viia) of the Income Tax Act.
2. Deduction under Section 36(1)(vii) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deduction under Section 36(1)(viia):

The primary issue revolves around the interpretation of Section 36(1)(viia) of the Income Tax Act, which pertains to the deduction for bad and doubtful debts. The assessee claimed a deduction amounting to Rs. 114,04,57,696 under this section, which includes statutory deduction, 7.50% of Gross Total Income, and an optional deduction for bad and doubtful debts. The assessee argued that since it had rural branches and created a provision for bad debts, it was eligible for the deduction based on the calculation provided in the section. However, the Assessing Authority restricted the deduction to the provision made in the books, which was Rs. 33.24 crores, and added back the excess amount to the income of the assessee.

The Commissioner of Income Tax (Appeals) and the Tribunal upheld the assessee's claim, directing the Assessing Authority to allow the entire claim irrespective of the provision made in the books, subject to the provisions of Section 36(1)(viia) read with Rule 6ABA. The revenue challenged this decision.

The High Court referred to the Punjab and Haryana High Court's judgment in the case of State Bank of Patiala vs. Commissioner of Income Tax, which held that making a provision for bad and doubtful debts equal to the amount claimed as a deduction is a must for claiming such deduction. The High Court agreed with this view, stating that the language of the statute is clear and unambiguous. The deduction is allowed only if a provision is made in the accounts, and the amount of deduction should be limited to the provision made. Therefore, the Tribunal's reliance on the Syndicate Bank case was incorrect.

The High Court set aside the Tribunal's order and answered the first substantial question of law in favor of the revenue, stating that the deduction claimed under Section 36(1)(viia) without making a provision in the accounts is not allowable.

2. Deduction under Section 36(1)(vii):

The second issue pertains to the deduction claimed by the assessee under Section 36(1)(vii) for bad debts written off, amounting to Rs. 1189073982. The Assessing Authority held that as per the proviso to Section 36(1)(vii), the deduction should be limited to the amount by which the bad debts written off exceed the credit balance in the provision for bad and doubtful debts made under Section 36(1)(viia). Consequently, the assessee was eligible for a deduction of Rs. 856673982, and the excess amount was added back to the income.

The Commissioner of Income Tax (Appeals) and the Tribunal held that the bad debts written off pertaining to non-rural branches should be allowed without adjusting the provision made under Section 36(1)(viia). The Tribunal affirmed this finding, and the revenue appealed against this decision.

The High Court referred to the Supreme Court's judgment in the case of Catholic Syrian Bank Ltd. vs. Commissioner of Income Tax, which supported the assessee's claim. The High Court agreed with the Tribunal's decision, stating that the bad debts written off for non-rural branches should be allowed without adjusting the provision made under Section 36(1)(viia).

The High Court answered the second substantial question of law in favor of the assessee and against the revenue.

Conclusion:

The High Court allowed the appeal partly, answering the first substantial question of law in favor of the revenue and the second substantial question of law in favor of the assessee. The High Court directed the respondents' counsel to file the vakalath within four weeks.

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