2024 (9) TMI 1203 - HC - Income Tax

Claim u/s. 36 (1) (vii) and 36 (1) (viia) - amount written off by the rural branches, the difference between amount written off and doubtful debt account - HELD THAT - Applying the provision of Section 36 (1) (vii) and (viia) as it stands, there does not appear to be any infirmity in the assessee claiming deduction under both the provisions in the manner as done by the assessee. This more particularly for the reason, that it is not the case that a provision being made under clause (viia) in the previous assessment year, (i.e. closing balance as on 31 March, 1993) is not being reduced from the bad debts written off in the next assessment year to reduce the total bad debts as written off for the purpose of claiming deduction The assessee s case appropriately fall within the parameters of the deduction as per the requirements of clause (vii) as also clause (viia) of Section 36 (1). There was nothing erroneous or illegal for the assessee to make an independent provision for bad and doubtful debts under clause (viia), to be adjusted in the subsequent assessment year, so as to claim the benefit under clause (vii) as observed by us. Such approach of the assessee certainly would not fall foul of the stipulation of the proviso below clause (vii) of Section 36 (1). It is not the revenue s case that the assessee had exceeded the deduction beyond the limits as prescribed by the proviso, namely, the amount by which the bad debts or part thereof exceeds the credit balance in the provision, for bad and doubtful debts account, made under clause (viia). For the aforesaid reasons, we hold that the assessee was entitled for the deductions under clauses (vii) and (viia) of Section 36 (1) of the Act for the assessment years in question. We, accordingly, allow the appeals by answering the questions of law in favour of the assessee and against the revenue.

Summary

Issues Involved:
1. Justification of the Appellate Tribunal in rejecting the claim of the appellant under Section 36(1)(vii) and 36(1)(viia) of the Income Tax Act.
2. Correctness of the Appellate Tribunal's decision regarding the amount written off by rural branches without referring to the appellant's claim and calculation.

Issue-Wise Detailed Analysis:

Issue 1: Justification of the Appellate Tribunal in rejecting the claim of the appellant under Section 36(1)(vii) and 36(1)(viia) of the Income Tax Act

The appellant, a Scheduled Commercial Bank with rural branches, follows the practice of writing off bad debts during the year and making provisions on the last day of the accounting year. For the assessment years 1993-94 and 1994-95, the appellant claimed deductions under Section 36(1)(vii) and 36(1)(viia) of the Income Tax Act. The Assessing Officer (AO) allowed only the balance amount of bad debts after reducing the opening balance in the 'provision account' and the provision made at the end of the year. The CIT(A) concurred with the AO, holding that the provisions under Section 36(1)(vii) and 36(1)(viia) are independent and should avoid double deduction for the same amount. The Tribunal, relying on the Kerala High Court decision in South Indian Bank Ltd. vs. CIT, upheld the AO's view, stating that the difference between the amount written off and the doubtful debts account would be allowed.

The appellant contended that the provisions of Section 36(1)(vii) and 36(1)(viia) are independent, allowing separate deductions for bad debts and provisions for bad debts. The appellant claimed that the deductions were made according to the provisions, and the Tribunal failed to provide cogent reasons for rejecting the appeal. The appellant relied on the decisions in The Director of Income Tax (International Taxation) v/s. M/s. Citi Bank NA and Commissioner of Income-tax-I vs. UTI Bank Ltd.

The court noted that Section 36(1)(vii) allows deductions for bad debts written off as irrecoverable, while Section 36(1)(viia) allows deductions for provisions for bad and doubtful debts made by scheduled banks. The court found no infirmity in the appellant's method of claiming deductions under both provisions, as the appellant had adhered to the provisions of Section 36(1)(vii) and (viia). The court rejected the AO's findings, stating that the provisions under Section 36(1)(vii) and (viia) should not be read to require any deduction from the provision for bad debts made under Section 36(1)(viia).

The court relied on the decisions in UTI Bank Ltd. and M/s. Citi Bank NA, which supported the appellant's method of claiming deductions. The court found that the Tribunal's reliance on South Indian Bank Ltd. was misplaced, as the facts in the present case demonstrated a different position. The court concluded that the appellant's method of claiming deductions was correct and within the parameters of the provisions.

Issue 2: Correctness of the Appellate Tribunal's decision regarding the amount written off by rural branches without referring to the appellant's claim and calculation

The Tribunal upheld the AO's decision, which allowed deductions for bad debts to the extent of Rs. 16,62,36,932 against Rs. 2,78,16,936 claimed by the appellant. The appellant contended that the provisions of Section 36(1)(vii) and (viia) are independent and should not be curtailed by each other. The Tribunal, relying on the Kerala High Court decision in South Indian Bank Ltd. vs. CIT, rejected the appellant's appeal.

The court noted that the appellant had made provisions for bad debts under Section 36(1)(viia) and claimed deductions for bad debts under Section 36(1)(vii) according to the prescribed limits. The court found that the appellant's method of claiming deductions was correct and within the parameters of the provisions. The court concluded that the Tribunal's decision was incorrect and the appellant was entitled to the deductions claimed.

Conclusion:
The court allowed the appeals, holding that the appellant was entitled to the deductions under Section 36(1)(vii) and (viia) of the Income Tax Act for the assessment years in question. The court answered the questions of law in favor of the appellant and against the revenue.