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2020 (1) TMI 1498 - AT - Income TaxDisallowance of excess deduction claimed u/s 36(1)(viia) on a/c of Provision for Bad and Doubtful Debts - failure of assessee as well as its statutory auditor in justifying the need of said provision and basis thereof and whereas separate provision towards NPA was already made by the assessee - CIT-A deleted the addition - HELD THAT - We are satisfied that the assessee has made provision and claimed deduction in accordance with the provisions of section 36(1)(viia). The assessee is entitled to the benefit of same. The terminology Reserve for NPA has been used by the assessee in accordance with the RBI directions. As is evident from the assessment order the assessee has indeed created Reserve for NPA . For claiming benefit under the provisions of Section 36(1)(viia)(a) the conditions to be satisfied is that provision for bad and doubtful debts should have been made by the bank eligible to claim such deduction. Co-operative Banks do not strictly follow the provisions of Banking Regulation Act for the purpose of maintaining their Books of Accounts. In our considered opinion the assessee has created provision for bad and doubtful debts may be under different nomenclature. This will not dis-entitle the assessee for claiming deduction under the provisions of Section 36(1)(viia)(a). The purpose for creation of reserve for NPA is same i.e. creating provision towards bad and doubtful debts. Thus in view of the facts of the case and judicial pronouncements in the above state cases the assessee will be entitled to deduction u/s 36(1)(viia) to the extent of provision made for bad and doubtful debts - A.O is therefore directed to allow the full deduction as claimed by the assessee in the computation of income and not to restrict it on 1, 33, 93, 000/. Appeal of the revenue is dismissed.
Issues Involved:
1. Deletion of addition of ?31,99,62,000/- by CIT (A) on account of disallowance of excess deduction claimed under Section 36(1)(viia) of the Income Tax Act, 1961. 2. Justification of the provision for bad and doubtful debts by the assessee and its statutory auditor. 3. Applicability of RBI norms versus Income Tax provisions for computing taxable profit. 4. Previous assessments and judicial precedents supporting the assessee's claim. Issue-wise Detailed Analysis: 1. Deletion of Addition by CIT (A): The Assessing Officer (AO) disallowed ?31,99,62,000/- claimed by the assessee under Section 36(1)(viia) of the Income Tax Act, 1961, citing failure to justify the provision for bad and doubtful debts (PBDD). The AO noted that the assessee and its statutory auditor could not provide a clear mechanism or procedure for calculating the amount. The AO also observed an exponential increase in the provision from ?3.70 Crores in the preceding year to ?26.72 Crores in the current year without adequate explanation. The CIT (A) deleted this addition, relying on previous assessments from 2008-09 to 2011-12, where no such disallowance was made, and on judicial precedents such as ING Vysya Bank Ltd., TNS Estate Apex Cooperative Ltd., and the Supreme Court's decision in Catholic Syrian Bank. 2. Justification of Provision for Bad and Doubtful Debts: The AO's disallowance was based on the assessee's failure to justify the need for the provision and the basis for its calculation. The statutory auditor also failed to provide justification. The CIT (A) found that the assessee had consistently claimed similar deductions in previous years without disallowance and that judicial precedents supported the assessee's position. The ITAT upheld this view, noting that the provision for bad and doubtful debts is allowable as a deduction under the Income Tax Act, as interpreted by the Supreme Court in Catholic Syrian Bank. 3. Applicability of RBI Norms versus Income Tax Provisions: The AO argued that taxable profit should be computed as per the provisions of the Income Tax Act and not as per RBI's income recognition norms. However, the CIT (A) and ITAT found that the provision for bad and doubtful debts made by the assessee was in line with the requirements of Section 36(1)(viia) and supported by judicial precedents. The ITAT emphasized that the legislative intent was to encourage rural advances and that the provision for bad debts in relation to rural branches is distinct and independent of other provisions. 4. Previous Assessments and Judicial Precedents: The CIT (A) and ITAT relied heavily on previous assessments where no disallowance was made and on judicial precedents that supported the assessee's claim. The ITAT referred to CBDT Circular No. 421, UCO Bank Ltd., and Catholic Syrian Bank, among others, to conclude that the provision for bad and doubtful debts is allowable as a deduction. The ITAT also noted that the method for calculating the deduction is defined in the Act and that the assessee had complied with these requirements. Conclusion: The ITAT upheld the CIT (A)'s decision to delete the addition of ?31,99,62,000/- made by the AO. The ITAT found that the provision for bad and doubtful debts claimed by the assessee was justified, in line with previous assessments, and supported by judicial precedents. The appeal of the revenue was dismissed. Order Pronounced in the Open Court on 24/02/2020.
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