2018 (12) TMI 1268 - HC - Income Tax

Entitlement to deduction of provision made in respect of doubtful and loss assets u/s 36(1)(viia)(c) - assessee did not have any positive profits to set it off from - scope of amendment - Tribunal allowed claim - Held that - We are unable to accept the stand taken by the Revenue for the reason that the proviso to sub-Clause (c) in Section 36(1)(viia) uses the word at its option . The proviso provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in sub-Clause (c) in Section 36(1)(viia) shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after 1st April 2003 and ending before 1st April 2005, deduction in respect of any provision made by it for any assets classified as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, of an amount exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year. Thus, in our view, the proviso carves out an exception from the stipulation in sub-Clause (c) otherwise, the use of the expression at its option would loose its significance. The amendment was brought into the Act by inserting the said proviso with effect from 01.04.2003 and this was with an object of granting incentive for debt/capital market and financial sector by which, the Central Government directed fiscal incentive for provisioning in respect of bad and doubtful debts in the case of banks and financial institutions. Therefore, the proper method of interpreting the proviso is to give life to the proviso and the intention behind the insertion of the proviso. A similar proviso is contained under sub-Clause (a) of Section 36(1)(viia) which apply to schedule bank and non-schedule bank and this proviso was inserted with effect from 01.04.2000. Thus, the Central Government proposes the amendment to give a retrieve for State industrial corporation, public financial institution and State financial Corporation giving them an option to claim deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets. The proviso also place another condition that those assets should be classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by the Reserve Bank of India. Thus, the interpretation given by the CIT(A) and the Tribunal is perfectly valid. - Decided in favour of the assessee

Summary

Issues:
Interpretation of Section 36(1)(viia)(c) proviso for deduction of provision made in respect of doubtful and loss assets without positive profits.

Analysis:
The appeal before the Madras High Court concerned the interpretation of Section 36(1)(viia)(c) proviso under the Income-tax Act, 1961. The appellant, the Revenue, challenged the order of the Income-tax Appellate Tribunal regarding the deduction claimed by the assessee, a wholly owned Government of Tamil Nadu company, for the assessment year 2003-04. The primary issue was whether the assessee was entitled to a deduction under the proviso to Section 36(1)(viia)(c) despite declaring a loss in its income tax returns.

During the assessment proceedings, the Assessing Officer disallowed the deduction claimed by the assessee under Section 36(1)(viia)(c) on the grounds that it was only allowable if the assessee had positive income before any deduction under the said Clause or Chapter VI-A of the Act. The Commissioner of Income-tax (Appeals)-III accepted the case of the assessee and allowed the deduction. Subsequently, the Tribunal also upheld the decision of the CIT(A), leading to the Revenue's appeal before the High Court.

The Revenue contended that the proviso to sub-Clause (c) in Section 36(1)(viia) required positive income for the deduction to be applicable. However, the High Court disagreed with this interpretation. The Court noted that the proviso used the term "at its option," indicating that it provided an exception to the stipulation in sub-Clause (c). The Court emphasized that the amendment aimed to incentivize provisioning for bad and doubtful debts in the financial sector, and the proviso should be interpreted in line with this objective.

Furthermore, the Court highlighted a similar proviso under sub-Clause (a) of Section 36(1)(viia) applicable to scheduled and non-scheduled banks. The amendment aimed to extend the benefit of deduction to State industrial corporations, public financial institutions, and State financial corporations. The Court also emphasized that the assets should be classified as doubtful or loss assets according to Reserve Bank of India guidelines.

Ultimately, the High Court upheld the decisions of the CIT(A) and the Tribunal, ruling in favor of the assessee. The Court dismissed the Revenue's appeal, emphasizing the validity of the interpretation given by the lower authorities. The substantial question of law was answered in favor of the assessee, with no costs awarded.