2012 (5) TMI 22 - AT - Income Tax

Deduction u/s 36(1)(viia) of the Act - Provision for bad and doubtful debts - The assessee is assailing the decision of Ld CIT(A) in holding that the Provision for bad and doubtful debts created during the year should be netted off by the amount of provision created in earlier years and written back during the year and the amount of net provision so arrived at is only to be considered for the purpose of allowing deduction u/s 36(1)(viia) of the Act. - held that - the decision in the case of The Lord Krishna Bank Ltd. 2010 (10) TMI 860 - Kerala High Court shall apply to the assessee herein. We agree with the contention of the assessee that the provision for bad and doubtful debts newly created during the year under consideration should not be netted against the amount written back or reversed. However, there might be a situation that the provision created for a particular debt needs enhancement and in that situation, only the enhanced amount should be treated as the new provision for the purpose of sec. 36(1)(viia) of the Act. Hence the claim of quantum of new provision made by the assessee, needs verification at the end of the AO. If the assessee has created a new provision on a particular asset by fully reversing the opening balance of provision relating to that asset, then the net accretion should only be treated as new provision. The appeal of the revenue is allowed and the appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Interpretation of the term "Place" for identifying "Rural Branch" under Section 36(1)(viia) of the Income Tax Act.
2. Determination of the amount of "Provision for bad and doubtful debts" for deduction under Section 36(1)(viia).
3. Applicability of the definition of "Rural Branch" to Co-operative Banks.
4. Netting off provision for bad and doubtful debts created during the year against the provision written back from earlier years.

Issue-wise Detailed Analysis:

1. Interpretation of the term "Place" for identifying "Rural Branch":
The primary issue concerns the interpretation of the term "Place" in the definition of "Rural Branch" under Section 36(1)(viia). The assessee argued that "Place" refers to the "Panchayat Ward" where the bank branch is located, while the Assessing Officer (AO) contended that it includes all "Panchayat Wards" within the service area of the branch. The CIT(A) sided with the assessee, but this interpretation was later reversed by the Hon'ble Kerala High Court. The High Court clarified that "Place" should be interpreted as a "Revenue Village," meaning branches located in villages with populations under 10,000 qualify as rural branches. The Tribunal, respecting the jurisdictional High Court's decision, set aside the CIT(A)'s order and restored the AO's assessment.

2. Determination of the amount of "Provision for bad and doubtful debts":
The second issue pertains to whether the provision created during the year should be netted off against the provision written back from earlier years. The AO and CIT(A) held that only the net provision (new provision minus provision written back) should be considered for deduction under Section 36(1)(viia). The Tribunal noted that the decision to create or write back provisions is based on different sets of facts and should be treated independently. However, it acknowledged that in cases where the provision for a particular debt is enhanced, only the net increase should be considered as the new provision. The Tribunal directed the AO to verify the quantum of new provision created by the assessee, emphasizing that this exercise is academic given the facts of the case.

3. Applicability of the definition of "Rural Branch" to Co-operative Banks:
The assessee raised an alternative plea that the definition of "Rural Branch" under Section 36(1)(viia) does not apply to Co-operative Banks. The Tribunal examined the relevant provisions and concluded that Co-operative Banks fall under the definition of "banking company" as per the Banking Regulation Act, 1949. Consequently, Co-operative Banks are classified as "non-scheduled banks" for the purpose of Section 36(1)(viia). Therefore, the Tribunal held that the decision of the Hon'ble Kerala High Court in the case of Lord Krishna Bank Ltd. applies to the assessee, rejecting the alternative plea.

4. Netting off provision for bad and doubtful debts:
The Tribunal addressed the issue of netting off provisions created during the year against those written back from earlier years. It agreed with the assessee's contention that provisions created and written back are independent decisions. However, it acknowledged that in cases of enhancement of provision for a particular debt, netting off is required. The Tribunal directed the AO to verify the quantum of new provision created by the assessee, emphasizing that this exercise is academic in the current case.

Conclusion:
The appeal of the revenue was allowed, and the appeal of the assessee was partly allowed. The Tribunal upheld the AO's interpretation of "Place" as a "Revenue Village" for identifying rural branches, rejected the alternative plea regarding the applicability of the definition of "Rural Branch" to Co-operative Banks, and directed the AO to verify the quantum of new provision for bad and doubtful debts created by the assessee.