2022 (6) TMI 896 - AT - Income Tax

Disallowance of provision on interest on deposits on the basis of working provided by the assessee - CIT (A) has allowed the relief was allowed merely on the ground of production of certificate by bank' - non-verification and non-examination (Assessee s claim) on account of non-observance of the principles of natural justice enshrined in rule 46A - HELD THAT - A provision outside books, though not disqualified per se , and valid where otherwise in order, the subsequent accounting treatment assumes relevance as the same would require an adjustment (to that extent), in computing taxable income, of the profit/loss disclosed per the operating statement for the period in which the said interest is accounted for in books. As gives rise to the question of as to how the assessee has accounted for the interest short provided i.e., in the subsequent (succeeding) year/s. This is as the depositor would need to be allowed the contracted interest, and which the assessee, being obliged to, would have surely provided for later, even as it, following mercantile system of accounting, cannot claim the same for the relevant previous year in view of an omission to provide for it for the relevant year. This, it needs to be borne in mind, is not a case of a provision being made on the basis of the best information available, adjusted subsequently on crystallization or resolution of a dispute or the relevant facts. Another related aspect is the applicability of s. 40(a)(ia). Inasmuch as and to the extent the interest provided is subject to tax deduction at source, non-deduction thereof would attract disallowance u/s. 40(a)(ia). It needs to be appreciated that the AO disallowed the claim in the absence of any details, while implicit in its allowance is it being toward an ascertained liability, even if on estimated basis, in respect of identified payees. We may though clarify that as the actual provision by the bank (Rs. 300 lacs) is far lower than that exigible (Rs. 540 lacs), the assessee-bank is at liberty to appropriate the provision made against the depositor accounts on which no (or minimal) tax is deductible, i.e., with a view to avoid or minimize the incidence of s. 40(a)(ia), subject to which only deduction u/s. 36(1)(iii) is admissible. This however would not disturb the appropriation already made. We though clarify, be construed as having issued of any final finding/s, but as only highlighting the areas that, among others, arise for consideration and adjudication. Where and to the extent, however, there has already been a specific consideration, followed by a definite finding/s, the same cannot be visited again inasmuch as the AO cannot review his order. The foregoing, if anything, only points to the vital need for deciding cross appeals together, as exhorted by the hon ble higher courts of law time and again, as well as by having regard to the due process of law. Allowance of appropriation of profit by the assessee for Statutory Reserve, Agriculture Credit Fund and Building Fund i.e., toward certain contingencies and/or applications - CIT(A) allowed the same on the basis that the same were in view and in terms of the guidelines and the directions by the regulatory bodies, being RBI and NABARD - HELD THAT - It is not clarified at any stage, including before us, as to under which provision of law the impugned sums are being claimed as deduction in the computation of income chargeable to tax as income from business, assessable u/s. 28. CIT(A) has not clarified the specific guideline or direction where-under the reserve has been created, as for example building fund , nor has the same been pointed out to us. In fact, the nature of the sum/s under reference as an appropriation (of profit) or as reserve is not in dispute. The same is only an appropriation of profit, set aside for some specific purpose, even if in terms of the guidelines by the regulatory body, and not a provision toward any business liability, much less ascertained, and therefore ineligible for deduction. Even as the law in the matter is well-settled, the Revenue relies on the decision in Associated Power Corporation Ltd. v. CIT 1995 (11) TMI 5 - SUPREME COURT - In fact, no serious objection thereto was raised before us by Sh. Agrawal. We, accordingly, have no hesitation in, reversing the findings by the ld. CIT(A), allowing the Revenues relevant Ground. Disallowance of Gratuity Payable (GP) u/s. 43B - HELD THAT - As under the circumstances, necessarily require being restored to the file of the AO for determination afresh in accordance with law per a speaking order after hearing the assessee. We direct so, vacating the findings by the CIT(A) - AO shall, to the extent his order is inconsistent with the audit report, also seek clarification therefrom as to the basis of their report/s, making it a part of his order. He shall also ascertain about the disallowance, if any, u/s. 40A(7) or u/s. 43B, in respect of the opening provision. It may here be relevant to state that regard is to be had in the matter of both sec. 40A(7) and sec. 43B inasmuch as s. 43B applies only to sums otherwise allowable . It is thus only the sum allowable u/s. 37(1) r/w s. 40A(7) that shall be allowed subject to the condition of actual payment, as mandated by sec. 43B; the balance getting excluded (disallowed) u/s. 40A(7) itself. The aspect of the provision booked being in accordance with the actuarial valuation (or otherwise scientifically and empirically validated), would also have to be clarified. Disallowance made on the NPA provisions accepting the detailed working of NPA - HELD THAT - As bank would be provisioning in respect of assets obtaining no longer, i.e., being not on it s books inasmuch as the same stand since recovered. The provision could continue ad infinitum , surpassing, in time, the total value of the outstanding debt. The same is to be therefore restricted to the incremental advances, i.e., where the provision as outstanding at a year-end is, as a matter of accounting procedure/method, not followed by its reversal on the first day of the year following, at the end of which the same would be revisited and provided on the basis of risk assessment at the relevant time/at the per cent prescribed. The provision to the extent it relates to the percentage of income is based only on the income of each year and, thus, is to continue to obtain in the assessee s accounts, increasing each year to the extent of the specified percentage of the income of each following year. The provision account, comprising both components, is only to be adjusted against actual write off of the bad debts. The reversal of provision as at the beginning of the following year is though to be made for the full amount of the corresponding provision made at the close of the immediately preceding year, as outstanding. This is as this only would ensure that the provision is, as at the end of each year, capped at the prescribed percentage of the advances by the rural branches of the bank, other than of course the outstanding part thereof made on the basis of income, which is not liable for reversal. Any excess of the actual write off of bad debts u/s. 36(1)(vii), if any, in excess of the amount available under provision account, is to be debited to the P L A/c for the relevant year.

Summary

Issues Involved:

1. Non-compliance with Rule 46A of the Income Tax Rules, 1962.
2. Allowance of appropriation of profit for statutory reserves and other funds.
3. Disallowance of gratuity payable under Section 43B of the Income Tax Act, 1961.
4. Disallowance of NPA provision for bad and doubtful debts.

Issue-wise Detailed Analysis:

1. Non-compliance with Rule 46A of the Income Tax Rules, 1962:

The Revenue claimed non-compliance with Rule 46A regarding the disallowance of provision on interest on deposits. The CIT(A) allowed part relief based on a bank certificate without giving the Assessing Officer (AO) an opportunity to verify the claim. The Tribunal noted that the CIT(A) did not record any finding that the assessee's case fell under any clauses of Rule 46A and did not seek the AO's comments or cause verification. The Tribunal remitted the matter back to the CIT(A) to comply with Rule 46A and decide after allowing due opportunity of hearing to both sides.

2. Allowance of appropriation of profit for statutory reserves and other funds:

The Revenue raised an issue regarding the allowance of appropriation of profit by the assessee for statutory reserves, agriculture credit fund, and building fund. The CIT(A) allowed these appropriations based on guidelines from regulatory bodies like RBI and NABARD. The Tribunal observed that the income chargeable to tax should be computed as per the provisions of the Act and noted that the CIT(A) did not clarify the specific guidelines or directions under which the reserves were created. The Tribunal reversed the findings of the CIT(A) and allowed the Revenue's ground, emphasizing that these appropriations were not provisions toward any business liability and thus ineligible for deduction.

3. Disallowance of gratuity payable under Section 43B of the Income Tax Act, 1961:

The Revenue challenged the allowance of gratuity payable, arguing that the AO was not given an opportunity to verify the claim. The CIT(A) allowed the assessee's claim, stating that there was no provision for Rs. 109.37 lacs for the relevant year and that no fresh provision had been booked during the year. The Tribunal noted inconsistencies between the AO's findings and the CIT(A)'s observations and highlighted the need for proper verification. The matter was remitted to the AO for fresh determination in accordance with the law, with directions to verify the provision's basis and ensure compliance with Sections 40A(7) and 43B.

4. Disallowance of NPA provision for bad and doubtful debts:

The Revenue contended that the CIT(A) deleted the disallowance made on NPA provisions without giving the AO an opportunity to verify the claim. The AO had allowed the provision at Rs. 22.76 lacs, disallowing the balance Rs. 697.24 lacs, based on the auditors' report which indicated improper identification of NPA accounts. The CIT(A) justified the claim under Section 36(1)(viia) at Rs. 720 lacs. The Tribunal noted that proper identification of NPA accounts is essential for provisioning and that the CIT(A) did not address the AO's concerns. The Tribunal remanded the matter to the AO for verification and fresh determination, emphasizing the need for proper classification of NPA accounts and compliance with RBI norms.

Conclusion:

The Tribunal allowed the Revenue's appeal for AY 2013-14 and allowed the appeal for AY 2014-15 for statistical purposes, directing further verification and compliance with relevant rules and provisions of the Income Tax Act. The detailed analysis highlights the importance of proper verification, compliance with procedural rules, and accurate classification of financial provisions in tax assessments.