2008 (3) TMI 324 - HC - Income Tax

Advances Bad Debts held that - According to the Tribunal the assessee-bank is entitled to the deduction under clause (vii) only of the difference between the provision made under clause (viia) and the bad debts written off in the accounts without making any distinction in respect of debts relating to urban advances or rural advances. According to us the Tribunal has not approached the issue in the proper perspective with reference to the provisions of sections 36(1) (vii) (viia) and 36(2)(v) of the Act. Now that we have explained the scope of the provisions of the proviso to clause (vii) of section 36(1) of the Act we are of the view that the matter requires fresh consideration in the light of the said interpretation.

Issues Involved:

1. Deduction under section 36(1)(vii) of the Income-tax Act.
2. Application of Circular No. 258 to the assessment year 1993-94.
3. Loss on account of revaluation of permanent assets.
4. Claim for depreciation of flats without ownership or registered sale deed.

Detailed Analysis:

1. Deduction under section 36(1)(vii) of the Income-tax Act:

The primary issue was whether the deduction under section 36(1)(vii) is allowable independently and irrespective of the provision for bad and doubtful debts created by the assessee in relation to advances of the rural branches, subject to the limitation that an amount should not be deducted twice under sections 36(1)(vii) and 36(1)(viia) simultaneously. The court referred to the amendments made by the Finance Act, 1985, and subsequent amendments, which clarified that the proviso to clause (vii) of section 36(1) was intended to prevent double deductions for the same bad debt. The court cited judgments from the Kerala and Madras High Courts, which elucidated that the deduction under clause (vii) should be allowed for debts other than those for which provision was made under clause (viia). The court concluded that the Tribunal had not approached the issue correctly and remanded the matter to the Tribunal to ascertain whether the bad debts claimed pertained to rural or urban branches.

2. Application of Circular No. 258 to the assessment year 1993-94:

The second issue was whether the Tribunal was correct in applying Circular No. 258, dated June 14, 1979, to the assessment year 1993-94, despite section 36(2) being amended by the Finance Act, 1985, effective from April 1, 1985. The court did not provide an extensive discussion on this specific issue but implied that the Tribunal's application of the circular was not in line with the legislative amendments. The court's decision to remand the matter to the Tribunal for reconsideration implicitly addressed this concern.

3. Loss on account of revaluation of permanent assets:

The Revenue raised the issue of whether the Tribunal was right in allowing the loss on account of the revaluation of permanent assets, arguing that permanent assets are capital assets. The court noted that the Tribunal had already addressed this issue in favor of the assessee, relying on the Supreme Court judgments in CIT v. Podar Cement P. Ltd. and Mysore Minerals Ltd. v. CIT. Therefore, the court did not find it necessary to re-examine this issue.

4. Claim for depreciation of flats without ownership or registered sale deed:

The final issue was whether the Tribunal was correct in allowing the claim for depreciation of flats for which the assessee was not the owner and no registered sale deed existed. Similar to the previous issue, the court observed that the Tribunal had resolved this in favor of the assessee based on Supreme Court precedents. Consequently, the court did not consider this issue further.

Conclusion:

The court answered the first two substantial questions of law in favor of the assessee and remanded the matter to the Tribunal for further examination, particularly to determine whether the bad debts claimed were related to rural or urban advances. The latter two questions of law were deemed already resolved by the Supreme Court judgments and did not require further consideration. The appeals were disposed of accordingly.

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