2017 (4) TMI 1493 - AT - Income Tax

Rectification of mistake u/s 154 - total income for the purpose of deduction u/s.36(1)(viia)(c) - applicability of the provisions of Sec.72 of the Act in the context of allowing deduction u/s.36(1)(viia)( c) - HELD THAT - It is not in dispute before us that the Assessee is an Industrial Investment Bank of India Ltd. In computing its total income it is entitled to deduction on account of provision for bad and doubtful debts at the rates specified in Sec.36(1)(viia)(c) of the Income Tax Act 1961 (Act) i.e. an amount not exceeding 5% of the total income (computed before making any deduction under clause Sec.36(1)(viia)( c) Firstly income is categorized under various heads of income. This is laid down in Section 14 of the Act which lays down that save as otherwise provided by this Act all income shall for the purposes of charge of income-tax and computation of total income be classified under the following heads of income Salaries income from house property profits and gains of business or profession capital gains income from other sources. Chapter V then brings income of other persons which are to be included in the total income of an Assessee and this is contained in section 60 to 65 of the Act. Chapter-VI (containing sec. 66 to 80) then lays down provisions regarding aggregation of income and set off or carry forward of loss. It is thus clear that carried forward loss has to be deducted to arrive at the total income. Sec.36(1)(viia) ( c) of the Act uses the expression total income and therefore total income as understood and defined in the Act has to be adopted. We do not think that the issue is debatable as contended by the learned counsel for the Assessee. An issue to become debatable should have a possibility of another view on the plain language of the statutory provisions referred to above we do not think there can be any dispute or debate on the proposition that effect to Sec.72 has to be given before allowing deduction u/s.36(1)(viia) ( c) of the Act. Alternative contention raised by the Assessee is concerned we are of the view that the claim for deduction under the provisio to Sec.36(1)(viia)( c) of the act though made for the first time before the Tribunal deserves examination. After all the purpose of tax proceedings is to determine the correct tax liability in accordance with law. If an option is available to an Assessee to claim deduction u/s.36(1)(viia)(c) proviso of the Act then that option when exercised at any stage of the proceedings should be examined and if found correct allowed. The fact that the Assessee did not make a claim before the revenue authorities cannot stand in the way. The tax liability of a taxpayer has to be determined in accordance with law and cannot arise by reason of default. We therefore set aside the order of the CIT(A) and remand the issue to the AO. The Assessee will put forth its claim for deduction in the alternative under the proviso to Sec.36(1)(viia) (c) of the Act and the AO will consider the same in accordance with law. - Appeal filed by the assessee is allowed for statistical purposes.

Issues Involved:
1. Computation of deduction under Section 36(1)(viia)(c) of the Income Tax Act, 1961.
2. Applicability of brought forward losses in computing total income for deduction purposes.
3. Validity of rectification order under Section 154 of the Act.
4. Claim for higher deduction under the proviso to Section 36(1)(viia)(c) of the Act.

Issue-wise Detailed Analysis:

1. Computation of Deduction under Section 36(1)(viia)(c):
The Assessee, a public sector undertaking Bank, claimed a deduction for bad and doubtful debts under Section 36(1)(viia)(c) of the Income Tax Act, 1961. The deduction was initially allowed by the Assessing Officer (AO) but later rectified. The AO observed that the deduction should be 5% of the total income computed before making any deduction under this clause and Chapter VI-A. The AO argued that the total income should be computed after adjusting brought forward losses, which was not done initially, leading to an erroneous deduction.

2. Applicability of Brought Forward Losses:
The core dispute was whether the total income for computing the deduction under Section 36(1)(viia)(c) should be considered before or after adjusting brought forward losses. The CIT(A) upheld the AO's view, stating that the total income, as defined under Section 2(45) of the Act, should be computed in the manner laid down in the Act, including the adjustment of brought forward losses as per Section 72. The CIT(A) emphasized that total income is arrived at after reducing deductions under Chapter VI-A from the gross total income, which includes set-off of brought forward business losses.

3. Validity of Rectification Order under Section 154:
The Assessee argued that the issue of considering total income for the purpose of deduction under Section 36(1)(viia)(c) was debatable and thus, the rectification order under Section 154 was not valid. However, both the AO and CIT(A) rejected this argument, stating that the provisions of the Act clearly define the term 'total income,' leaving no room for alternate interpretations. The CIT(A) ruled that an issue could only be considered debatable if there were more than one plausible view, which was not the case here.

4. Claim for Higher Deduction under the Proviso to Section 36(1)(viia)(c):
During the appeal before the Tribunal, the Assessee raised an additional argument for claiming a higher deduction under the proviso to Section 36(1)(viia)(c). This proviso allows a public financial institution to claim a deduction of up to 10% of the amount of doubtful or loss assets classified by the Reserve Bank of India for any of the two consecutive assessment years commencing on or after April 1, 2003, and ending before April 1, 2005. The Tribunal noted that the Assessee had not claimed this higher deduction in its return of income, but it should still be considered as the Assessee is entitled to it under the law.

Tribunal's Decision:
The Tribunal rejected the Assessee's argument regarding the non-applicability of brought forward losses for computing total income under Section 36(1)(viia)(c), affirming the AO and CIT(A)'s interpretation that total income should be computed after adjusting brought forward losses. However, the Tribunal accepted the Assessee's alternative claim for a higher deduction under the proviso to Section 36(1)(viia)(c) and remanded the case to the AO to examine this claim. The Tribunal emphasized that the purpose of tax proceedings is to determine the correct tax liability in accordance with the law, and the Assessee's entitlement to the higher deduction should be considered even if it was not claimed initially.

Conclusion:
The appeal was allowed for statistical purposes, with the case remanded to the AO to consider the Assessee's claim for a higher deduction under the proviso to Section 36(1)(viia)(c) of the Act. The Tribunal's decision underscored the importance of computing total income in accordance with the statutory provisions, including the adjustment of brought forward losses, and acknowledged the Assessee's right to claim deductions as per the law.

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