2022 (4) TMI 113 - HC - Income Tax

Non-rural bad debts written off u/s 36(1)(vii) - HELD THAT - In the present case, though there was no double deduction, as alleged by the appellant / Revenue, there was no clear vision about the advances made by the rural and non-rural branches of the bank and the quantum of deduction was not properly determined by the assessing officer based on the materials furnished by the respondent / assessee. The quantum of deduction arrived at by the AO was not based on the documents produced by the respondent / assessee. The CIT(A) as well as the Tribunal also, did not look into those aspect, while allowing the deduction claimed by the respondent / assessee. Therefore, this court is of the opinion that for that limited purpose, the matter has to be re-examined by the assessing officer and the same has also been agreed upon by the learned counsel appearing for both sides. In such view of the matter, the order of the Tribunal, which is impugned herein, is set aside and the matter is remitted to the assessing officer for quantification of the deduction allowable to the respondent. The assessing officer shall complete the said exercise, after providing due opportunity to the respondent for submission of both oral and documentary evidence, if any, and pass appropriate orders, on merits and in accordance with law, within a period of three months from the date of receipt of a copy of this judgment.

Issues Involved:
1. Deduction of ?12.63 crores in respect of non-rural bad debts written off under Section 36(1)(vii) of the Income Tax Act.
2. Deduction of ?8.53 crores under Section 36(1)(viia) relating to the provision for bad and doubtful debts.

Issue-wise Detailed Analysis:

1. Deduction of ?12.63 crores in respect of non-rural bad debts written off under Section 36(1)(vii):

The respondent, a banking company, filed its return of income for the assessment year 2003-04, admitting a total income of ?5269.64 lakhs. The Assessing Officer (AO) processed the return and determined the taxable income at ?102,59,90,180/- by making certain additions, including the disallowance of ?12.63 crores for bad debts written off.

The respondent appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who partly allowed the appeal, stating that the assessee was entitled to deduction for bad debts written off under Section 36(1)(vii) read with Section 36(2). The CIT(A) deleted the addition made by the AO, which was upheld by the Income Tax Appellate Tribunal (ITAT).

The Revenue challenged this decision, arguing that the Tribunal should have restored the disallowance since no distinction is made between rural and non-rural advances in Section 36(1)(vii). The respondent countered that the provision for bad debts on rural advances only was claimed under Section 36(1)(viia), and the non-rural advances were disallowed by the assessee itself for income tax purposes.

The court referred to the decisions in *Commissioner of Income-tax v. City Union Bank Ltd* and *Catholic Syrian Bank Ltd v. Commissioner of Income-tax*, which held that the provisions of Sections 36(1)(vii) and 36(1)(viia) are distinct and independent. It concluded that the bad debts written off for non-rural advances are allowable under Section 36(1)(vii) without double deduction, thus ruling in favor of the assessee.

2. Deduction of ?8.53 crores under Section 36(1)(viia) relating to the provision for bad and doubtful debts:

The CIT(A) allowed the deduction of ?8.53 crores under Section 36(1)(viia), which was confirmed by the ITAT. The Revenue contended that the aggregate average should be computed based on advances made during the year to avoid double deduction. The respondent argued that the computation should be based on the amounts outstanding at the end of each month, as per Rule 62ABA of the Income Tax Rules.

The court cited the decision in *Principal Commissioner of Income Tax, Jalpaiguri v. Uttarbanga Kshetriya Gramin Bank*, which supported the respondent's interpretation of Rule 62ABA. However, the court noted that the AO did not properly determine the quantum of deduction based on the materials furnished by the respondent, and the CIT(A) and ITAT did not adequately address this issue.

The court concluded that the matter should be re-examined by the AO to accurately quantify the allowable deduction. The AO is directed to complete this exercise within three months, providing the respondent an opportunity to submit both oral and documentary evidence.

Judgment:

The court set aside the order of the Tribunal and remitted the matter to the AO for re-examination and quantification of the deduction allowable to the respondent. The AO is to provide due opportunity to the respondent and pass appropriate orders on merits and in accordance with law within three months from the date of receipt of the judgment. The tax case appeal was disposed of with no costs.

← Previous Next →