2016 (3) TMI 958 - AT - Income Tax

Disallowance u/s 36(1)(vii) on account of bad debts written off relating to non-rural branches - Held that - As decided in assessee s own case as a result of the amendment, the scheduled bank would be entitled to the deduction of the entire bad debt relating to advances made by the urban branches written off in the books and also the difference between the amount written off in the books relating to advances made by the rural branches during the previous year relevant to the assessment year and credit balance in the provisions for bad and doubtful debt account relating to advances made by the rural branches made in clause (viia). Also if the bad debt written off relates to debts other than for which provision is made under clause (viia), such debt will fall squarely under the main part of clause (vii) which is entitled to deduction and in respect of that part of the debt with reference to which the provision is made under clause (viia), the provisos will operate to limit the deduction to the extent of the difference between that part of debt written off in the previous year and the credit balance in the provision for the bad and doubtful debts accounts made under clause (viia). - Decided in favour of assessee

Issues Involved:
1. Disallowance of bad debts under Section 36(1)(vii) for non-rural branches.
2. Adjustment of bad debts against provisions under Section 36(1)(viia).
3. Disallowance of 10% of doubtful and loss assets under the proviso to Section 36(1)(viia).
4. Disallowance of special reserve creation under Section 36(1)(viii).
5. Computation of "Book Profit" under Section 115JB.

Issue-wise Detailed Analysis:

1. Disallowance of bad debts under Section 36(1)(vii) for non-rural branches:
The assessee, a nationalized bank, claimed a deduction for bad debts written off amounting to Rs. 311.77 crores under Section 36(1)(vii). The AO disallowed this, stating that bad debts relating to non-rural branches must be adjusted against the provision for bad and doubtful debts under Section 36(1)(viia). The CIT(A) upheld this view, interpreting that the law intended for all types of advances, including urban ones, to be adjusted against the provision. However, the ITAT reversed this decision, citing previous rulings and the Supreme Court's decision in the Catholic Syrian Bank case, which clarified that bad debts for non-rural branches should be fully allowed under Section 36(1)(vii) without adjustment against Section 36(1)(viia).

2. Adjustment of bad debts against provisions under Section 36(1)(viia):
The CIT(A) and AO held that bad debts must be adjusted against the provision for bad and doubtful debts under Section 36(1)(viia), regardless of whether they pertain to rural or non-rural branches. The ITAT, however, found that only bad debts related to rural branches should be adjusted against the provision under Section 36(1)(viia). This was based on the ITAT's own precedents and interpretations of the relevant sections, which were consistent with the Supreme Court's ruling.

3. Disallowance of 10% of doubtful and loss assets under the proviso to Section 36(1)(viia):
The assessee claimed a deduction of Rs. 96.65 crores under the first and second proviso to Section 36(1)(viia). Both the AO and CIT(A) disallowed this, arguing that the additional deduction is not permissible if the primary deduction under Section 36(1)(viia) has already been allowed. The ITAT upheld this disallowance, referencing its earlier decisions in the assessee's own cases for previous assessment years, which established that the additional deduction cannot be claimed alongside the primary deduction.

4. Disallowance of special reserve creation under Section 36(1)(viii):
The assessee claimed a deduction of Rs. 30 crores for creating a special reserve under Section 36(1)(viii). The AO disallowed this, stating that nationalized banks are statutory bodies and not companies registered under the Companies Act, thus not qualifying for the deduction. The CIT(A) upheld this view. However, the ITAT reversed this decision, concluding that the assessee, being a government company as defined under Section 617 of the Companies Act, qualifies for the deduction. The ITAT also noted that the definition of "financial corporation" is inclusive and should cover the assessee.

5. Computation of "Book Profit" under Section 115JB:
The assessee did not press this ground, and hence, it was dismissed as not pressed.

Conclusion:
The ITAT allowed the appeal in part, reversing the disallowance of bad debts under Section 36(1)(vii) for non-rural branches and the special reserve creation under Section 36(1)(viii), while upholding the disallowance of the additional deduction for doubtful and loss assets under the proviso to Section 36(1)(viia). The appeal related to the computation of "Book Profit" under Section 115JB was dismissed as not pressed.

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