2016 (5) TMI 620 - AT - Income Tax

Disallowance of deduction u/s.36(1)(viia) - Held that - Considering the activities of the bank and the provision of NPA and provisions of Bad debts, the judicial decisions and claim u/s.36(1)(viia) of the Act the assessee claim of Bad debts in the books of accounts and Finance bill 2013, we are of the opinion the matter needs to be re-examined in the light of the decision of Catholic Syrian Bank (2012 (2) TMI 262 - SUPREME COURT OF INDIA ) and supporting judicial decisions. So, we remit the issue to the file of the Assessing Officer to verify the claim of the assessee and compliance of the conditions stipulated u/s.36(1)(viia) of the Act

Issues Involved:
1. Validity of reassessment proceedings.
2. Eligibility for deduction under Section 36(1)(viia) of the Income Tax Act.
3. Distinction between Section 36(1)(vii) and Section 36(1)(viia) deductions.
4. Compliance with conditions stipulated under Section 36(1)(viia).

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The reassessment proceedings were initiated by the Assessing Officer (AO) based on the belief that the assessee bank had claimed excess deduction under Section 36(1)(viia) of the Income Tax Act. The AO issued a notice under Section 148 and the assessee responded by treating the original return as the return in compliance with the notice. The Commissioner of Income Tax (Appeals) [CIT(A)] held that the reopening of the assessment was valid, which was not contested further by the assessee.

2. Eligibility for Deduction under Section 36(1)(viia):
The primary contention was whether the assessee, a cooperative bank, was eligible for a deduction of 7.5% of the gross total income under Section 36(1)(viia). The AO disallowed the deduction on the grounds that the provision for bad and doubtful debts was not adequately reflected in the books of accounts. The assessee argued that the provision was made and relied on the Supreme Court decision in Catholic Syrian Bank vs. CIT. However, the AO and CIT(A) maintained that the provision amount must be explicitly made in the books to claim the deduction.

3. Distinction between Section 36(1)(vii) and Section 36(1)(viia) Deductions:
The assessee contended that Section 36(1)(vii) and Section 36(1)(viia) are independent and cannot be intermingled. The Supreme Court in Catholic Syrian Bank vs. CIT clarified that Section 36(1)(vii) pertains to actual bad debts written off, while Section 36(1)(viia) relates to provisions for bad and doubtful debts. The Tribunal acknowledged this distinction and noted that both sections provide separate deductions.

4. Compliance with Conditions Stipulated under Section 36(1)(viia):
The AO and CIT(A) emphasized that for claiming deduction under Section 36(1)(viia), a corresponding provision must be made in the books of accounts. The assessee had made a provision of ?95,50,416 but claimed a higher deduction of ?2,13,92,491. The Tribunal noted that the assessee must comply with the statutory requirement of making a provision equal to the amount claimed as a deduction. The Tribunal remitted the issue back to the AO for re-examination in light of the Supreme Court decision and other judicial precedents. The assessee was directed to provide adequate evidence of compliance with the conditions stipulated under Section 36(1)(viia).

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, remitting the issue back to the AO for re-examination. The assessee was not entitled to deductions for the provision for bad debts of ?60,00,000 for the assessment year 2008-09 and ?1,06,63,566 for the assessment year 2007-08. The AO was instructed to verify the assessee’s compliance with Section 36(1)(viia) based on the Supreme Court decision and other relevant judicial decisions, providing the assessee an opportunity to present their case.

Order Pronouncement:
The appeals for the assessment years 2007-08 and 2008-09 were partly allowed for statistical purposes. The order was pronounced on April 6, 2016, at Chennai.

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