2013 (8) TMI 405 - AT - Income Tax

Disallowance u/s 36(1) (viia) - creation of reserve for bad debts - Held that - as per the provision of section 36(1)(viia), the deduction is allowable in respect of provision for bad and doubtful debts - But assessee has made reserve for bad and doubtful debts towards standard assets, and therefore, the same cannot be said to be akin to the provision for bad and doubtful debts - assessee is not eligible for any further deduction, in the absence of any extra provision for bad and doubtful debts, having been created by the assessee as per the audited accounts available in the paper book - Decided against assessee.

Issues Involved:
1. Disallowance of deduction claimed under Section 36(1)(viia) of the Income Tax Act.
2. Eligibility of provision made against standard assets for deduction under Section 36(1)(viia)(a).
3. Disallowance of provision for bad and doubtful debts and alleged double deduction.
4. Requirement of making provision out of the current year's income for claiming deduction under Section 36(1)(viia).

Detailed Analysis:

1. Disallowance of Deduction Claimed Under Section 36(1)(viia):
The appellant, a co-operative bank, contested the disallowance of Rs.6,00,00,000/- claimed as a deduction under Section 36(1)(viia) of the Income Tax Act. The CIT(A) upheld the AO's decision, disallowing the deduction on the grounds that the provision for bad and doubtful debts did not meet the statutory requirements. The bank had made a provision of Rs.7,34,77,495/- but claimed a deduction of Rs.7,21,42,428/- due to the profit available before claiming the deduction. The bifurcation included Rs.1,00,00,000/- provided from the P&L account credited to the Reserve for Bad and Doubtful Debts, Rs.1,00,00,000/- credited to the Provision for Bad Debts towards standard assets, and Rs.5,00,00,000/- transferred from the Overdue Interest Reserve to the Reserve for Bad and Doubtful Debts.

2. Eligibility of Provision Made Against Standard Assets:
The AO disallowed the Rs.1,00,00,000/- provision credited to the Provision for Bad Debts towards standard assets, stating it was not a provision for bad and doubtful debts but against standard assets. The guidelines from the State and Central Co-operative Banks on Prudential Norms indicated that provisions on standard assets should not be considered as erosion in asset value. The CIT(A) agreed, noting that the deduction under Section 36(1)(viia) applies only to provisions for bad and doubtful debts, not standard assets. The Tribunal upheld this view, emphasizing that the statutory language specifically allows deductions for provisions for bad and doubtful debts, not standard assets.

3. Disallowance of Provision for Bad and Doubtful Debts and Alleged Double Deduction:
The AO also disallowed Rs.5,00,00,000/- transferred from the Overdue Interest Reserve to the Reserve for Bad and Doubtful Debts, arguing it would result in a double deduction. The CIT(A) supported this, referencing the Supreme Court's decision in Escorts Ltd. v. UOI, which prohibits double deductions unless explicitly allowed by law. The Tribunal concurred, noting that the transfer from one reserve to another does not constitute a new provision but merely renames an existing reserve, thus not qualifying for an additional deduction under Section 36(1)(viia).

4. Requirement of Making Provision Out of Current Year's Income:
The appellant argued that the provision for bad and doubtful debts need not be made from the current year's income, citing the judgment in Rural Electrification Corporation Ltd. However, the Tribunal found that the statutory language and the accounting treatment in the appellant's financial statements did not support this claim. The Tribunal emphasized that provisions and reserves are distinct, with provisions representing liabilities and reserves representing the bank's own funds. The Tribunal concluded that the appellant had not created any additional provision for bad and doubtful debts beyond the Rs.1,00,00,000/- already allowed, thus no further deduction was warranted.

Conclusion:
The Tribunal dismissed the appeal, holding that the appellant was not entitled to the claimed deductions under Section 36(1)(viia) beyond the Rs.1,00,00,000/- already allowed. The Tribunal's decision was based on a detailed interpretation of the statutory provisions, the accounting treatment of provisions and reserves, and relevant judicial precedents.

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