2022 (5) TMI 224 - AT - Income Tax

Addition u/s. 36(1)(viia) - maintainability of the provision for bad and doubtful debts, as well as for overdue interest, as claimed by the assessee, a cooperative bank - HELD THAT - All that is relevant is that the provision made in books for bad and doubtful debts is to be allowed in full, subject to it not exceeding the sum worked out with reference to the formula specified in s. 36(1)(viia) (read with provisos thereto). Nothing more, and nothing less. Any loss arising on account of a bad debt is to be adjusted (set-off) against this provision, which is revisited each year-end, making good the shortfall therein, i.e., the provision outstanding in books, as worked out with reference to its assessment (as per the applicable norms) thereat. Alternatively, the provision as made (as at the year-end) is reversed in full on the first day of the following year, increasing the profit (or decreasing the loss) for that year to that extent, which is then made in full at the following year-end. Any bad debt arising during this, following, year is charged to the operating statement (P L A/c). Both the methods are equivalent and equally valid, yielding the same result. The disallowance in respect of provision qua standard assets has, in our view, been therefore rightly deleted by the ld. CIT(A). We decide accordingly. Provision against overdue interest, i.e., the unrealized interest on NPA A/cs, provided for at the whole of the said interest, relief stands allowed by the ld. CIT(A) with reference to sec. 43D - Even granting applicability of sec. 43D, i.e., for the sake of argument, the same would be of little assistance to the assessee in the facts and circumstances of its case. This is as all that it says is for the interest being recognized as income for the year of credit or the year of receipt, whichever is earlier. The assessee having credited the interest income in its accounts for the relevant year/s, the same, even though not received, is to be, in terms of s. 43D itself, regarded as the income for the relevant year/s, i.e., the year/s in which it stands recognized as income by crediting the same to its P L A/c. This would also meet the assessee s reliance on some decisions by Hon ble Courts, referred to by CIT(A), whose orders are sans any reference to this aspect of the matter. In fine, the claim is bizarre, and without reference to the legislative history of the provision, which stands amended retrospectively so that there has been clearly due consideration of its retrospectivity, by FA, 2018; the provision itself, as well as the facts of the case. Reliance on sec. 43D, whichever way one may look at it, thus, does not therefore help the assessee s case. As the total provision (P1 P2) made in accounts does not exceed that exigible u/s. 36(1)(viia) (P3), the claim is admissible u/s. 36(1)(viia) itself, as the provision for overdue interest is also in the nature of provision for bad and doubtful debts - The adjustment, nevertheless, is to be restricted to that relating to the current years interest, so that irrespective of the accounting entries passed in respect of the opening provision, it is only Rs. 4000, being the unrealized interest for the current year, which would stand to be allowed, disallowing the balance Rs. 2000 outstanding as provision for bad doubtful debts. The assessee, assuming such to be the case, may do well to pass transfer entries, so that the correct position is reflected in accounts. There could though be circumstances where the provision for overdue interest, eligible for being allowed or, correspondingly, disallowed, for a year, is also impacted by the opening provision, as where the same, instead of being adjusted (through receipt of interest), continues to obtain and, in fact, increased (as at the relevant year-end) due to re-categorization of the corresponding asset, as, say, from a doubtful asset to a loss asset , qualifying for provision @ 100%, increasing the provision (on this unrealized interest) as at the year-end, going by the same example, from Rs. 2000 to Rs. 4000. This excess provision arising for the reason that unrealized interest on a doubtful asset stands accounted as income in the first place, would therefore need to be excluded. There could be a reverse case as well, as where an account is upgraded, reducing the provision now required in its respect. We understand all this to be no mean task, but the same has arisen directly as a result of, as it appears, a faulty accounting, inconsistent with the standard accounting prescription of not recognizing income on NPAs, so that the borrower account balance is not increased by this sum. The interest, though worked out, is kept in shadow accounts or in memoranda accounts. AO shall, upon due verification, decide in accordance with law, i.e., in conformity with what stands stated by us, per a speaking order, issuing clear and definite findings. We decide accordingly. Validity of reopening of assessment u/s 147 - Claim of provision for bad and doubtful debts, comprising provision for bad and doubtful debts (i.e., toward principal debt due) and for overdue interest - HELD THAT - The assessee claims the same to be a part of the debt due, justifying provisioning in its respect as toward bad and doubtful debts and, in any case, equivalent to non-recognition of income on the interest - The argument is self-contradictory inasmuch as only an amount accrued could form part of the debt/debt due, while the non-recognition of interest is only for the reason that the same has, in the given facts and circumstances, not accrued. Further, the claim of equivalence is a matter of verification, i.e., as to whether the accounting treatment by the assessee is indeed and, in effect, equivalent to not recognising the unrealized income on NPA borrower accounts at all. As explained in Raymond Woollen Mills Ltd. vs. ITO 1997 (12) TMI 12 - SUPREME COURT what is material is a prima facie, honest reason to believe. That the amount believed to have escaped assessment has not been finally added in assessment is another aspect, a matter subsequent, but that would not operate to disturb the bona fide belief as to the escapement of income chargeable to tax for the relevant year, and on the basis of which reassessment stands initiated. Why, in the facts and circumstances of the instant case, the said verification in fact survives even the assessment/s, with we, at the second appellate stage, considering it proper to restore the matter back for the purpose. Rather, inasmuch as it may result in extra provision against overdue interest, as is apparently so on the basis of the admitted facts the provision for overdue interest may have to be disallowed, so that the accounting treatment followed is not, as claimed, equivalent, i.e., in effect. We may though hasten to add that we are not pre-determining the issue, nor be construed as having issued any finding in the matter, but are only justifying the reason recorded on that basis, i.e., as being a genuine reason, held bona fide. The said Ground is thus a valid ground for reopening, even if no disallowance on that count finally materializes in assessment (Central Provinces Manganese Ore Co. Ltd. v. CIT 1991 (8) TMI 4 - SUPREME COURT In fact, in our view, the provision for overdue interest disallowed in assessment that may finally stand to be justified, as also explained hereinabove, is only toward the extra (additional) provision in its respect, i.e., to the extent the interest forms part of the borrowers principal balance and, thus, as provision there-against. The assessee s challenge on this ground, therefore, fails, even as for the other two reasons we are in agreement with Sh. Ganguly as not being valid reasons, nor their sum considered for which the approval u/s. 151 stands obtained.

Summary

Issues Involved:
1. Maintainability of the provision for bad and doubtful debts.
2. Maintainability of the provision for overdue interest.
3. Validity of the reassessment proceedings for AY 2009-10.

Detailed Analysis:

1. Maintainability of the Provision for Bad and Doubtful Debts:
The primary issue in these appeals and cross objections is the maintainability of the provision for bad and doubtful debts claimed by the assessee, a cooperative bank, in its returns of income for the relevant years. The Assessing Officer (AO) disallowed the provision for bad and doubtful debts to the extent it related to standard assets, considering it a provision for a contingent liability, inadmissible under section 37(1). The AO's view was that since the debts were considered good (standard assets), the provision against them was contradictory. However, the CIT(A) allowed the assessee's claims, stating that the provision for bad and doubtful debts was within the limits sanctioned by law under section 36(1)(viia), applicable to cooperative banks from AY 2007-08. The Tribunal upheld the CIT(A)'s decision, stating that the provision against standard assets is as much a provision for bad and doubtful debts as any other and should be allowed in full, subject to the limits specified in section 36(1)(viia).

2. Maintainability of the Provision for Overdue Interest:
The second issue pertains to the provision for overdue interest on Non-Performing Assets (NPAs). The AO disallowed this provision, stating that it had no basis in law, neither under section 36(1)(viia) nor section 37(1). The AO rejected the assessee's claim that the provision was in compliance with RBI's income recognition norms. The CIT(A) allowed the assessee's claim with reference to section 43D, which specifies that interest income on bad or doubtful debts should be recognized in the year it is credited to the profit and loss account or received, whichever is earlier. However, the Tribunal noted that the amendment to section 43D, which included cooperative banks, was made by the Finance Act, 2018, with effect from 01/04/2017, and thus did not apply retrospectively to the relevant assessment years. The Tribunal found no reason to apply the amendment retrospectively and upheld the Revenue's view that the provision for overdue interest was not admissible under section 43D for the relevant years. The Tribunal also noted that the assessee's claim that the total provision (P1 + P2) did not exceed the limit under section 36(1)(viia) was misconceived, as the provision for overdue interest should be treated separately.

3. Validity of the Reassessment Proceedings for AY 2009-10:
The assessee challenged the reassessment proceedings for AY 2009-10 on the ground of invalidity of the reasons recorded. The Tribunal examined the three reasons recorded for reopening the assessment. The first reason was the provision for bad and doubtful debts, which included Rs. 262.57 lakhs for overdue interest. The Tribunal found that the AO's reason, which did not reference section 36(1)(viia), was not valid for reopening the assessment. However, the Tribunal upheld the AO's reason regarding the provision for overdue interest, stating that it was not admissible under sections 36(1)(viia) or 37(1). The Tribunal found that the AO had a bona fide belief of escapement of income chargeable to tax, justifying the reopening of the assessment. The Tribunal agreed with the assessee that the other two reasons recorded were not valid grounds for reopening the assessment.

Conclusion:
The Tribunal allowed the appeals and cross objections for statistical purposes, partially allowing the cross objection for AY 2009-10. The Tribunal upheld the CIT(A)'s decision on the provision for bad and doubtful debts but found that the provision for overdue interest was not admissible under section 43D for the relevant years. The reassessment proceedings for AY 2009-10 were found to be valid based on the provision for overdue interest.