2018 (5) TMI 511 - AT - Income Tax

Provision for bad and doubtful debts u/s 36(1)(vii)(a) - Held that - The provisions are not allowable deduction and only the expenditure actually incurred or ascertained as per the system of accounting is the allowable expenditure except the provision for Bad and doubtful debts discussed above. The above classification of the provision clearly shows that it was purely general and contingent in nature. There is no indication of non-recoverability of the debt. Therefore the provision for standard assets cannot be equated with the Provision for bad and doubtful debt and the assessee s argument that only the nomenclature is different is unacceptable. The provision is required only to meet the unexpected eventuality in the interest of the banking, but it is neither an allowable expenditure nor an ascertained liability. We hold that the provision for standard assets is not an allowable deduction and we set a side the order of the Ld.CIT(A) and restore the order of the AO. The appeal of the revenue is allowed on this ground. Provision made against the standard assets u/s 36(1)(viia) under the head provision for bad and doubtful debts - Held that - The assessee made the provision for bad and doubtful debts in aggregate of ₹ 6,12,89,928/- which includes provision made against standard assets amounting to ₹ 69,37,085/-. This issue was discussed in the earlier order for the assessment year 2010- 11 and confirmed the addition made by the AO allowed the appeal of the revenue. The issue in favour of revenue and against the assessee. Revenue s appeal on this ground is allowed. Writing back of excess provision of bad and doubtful debts against non-rural advances - Held that - There is no dispute with regard to the creation of provision for bad and doubtful debts and no dispute with regard to the fact that the assessee bank has rural branches and given rural advances. CIT(A) is squarely applicable to the assessee, hence, we do not see any reason to interfere with the order of the CIT(A). There was a mistake in CIT(A) as discussed in this order earlier which needs verification. The Ld.CIT(A) has directed the AO to verify the provision made in the books of accounts and if it is found any excess provision the same should be brought to tax. Allow the correct deduction for the relevant assessment years and excess if any claimed by the assessee may be disallowed. Accordingly, the issue is remitted back to the file of the AO to work out the correct disallowance as per the directions given in this order. The appeal of the assessee on this ground is allowed for statistical purpose.

Issues Involved:
1. Deduction for provision for bad and doubtful debts under Section 36(1)(viia) of the Income Tax Act.
2. Writing back of excess provision of bad and doubtful debts against non-rural advances.
3. Allowability of provision made against standard assets.

Issue-Wise Detailed Analysis:

1. Deduction for Provision for Bad and Doubtful Debts under Section 36(1)(viia):

The primary issue revolves around whether the provision for standard assets can be considered under the deduction for bad and doubtful debts as per Section 36(1)(viia) of the Income Tax Act. The assessee argued that the provision for standard assets should also be included within the limits prescribed under Section 36(1)(viia). The Assessing Officer (AO) disallowed this provision, considering it a contingent liability and not a deductible expenditure. The AO's decision was based on precedents and guidelines from the RBI, which treat provisions for standard assets as precautionary measures rather than actual bad debts.

Upon appeal, the CIT(A) allowed the deduction, relying on various ITAT decisions and RBI guidelines, asserting that the nomenclature of the provision is immaterial as long as it remains within the prescribed limits of Section 36(1)(viia). However, the Tribunal, after reviewing the provisions and relevant case laws, concluded that the provision for standard assets is not covered under Section 36(1)(viia) as it is contingent in nature and not related to actual bad and doubtful debts. Consequently, the Tribunal set aside the CIT(A)'s order and restored the AO's decision, disallowing the provision for standard assets.

2. Writing Back of Excess Provision of Bad and Doubtful Debts Against Non-Rural Advances:

The AO disallowed a sum of ?9,57,70,177/- related to the writing back of excess provision, applying the Supreme Court's decision in the case of Catholic Syrian Bank Ltd. The AO held that the assessee is entitled to deduction under Section 36(1)(viia) only on rural advances, not on total advances. The CIT(A) partially allowed the assessee's appeal, reducing the disallowance to ?6,37,79,159/- and directing the AO to verify the excess provision.

The Tribunal upheld the CIT(A)'s decision, referring to the ITAT Bangalore Bench's ruling in DCIT vs. ING Vysya Bank Limited, which allows deduction for provision for bad and doubtful debts irrespective of whether they are rural or non-rural advances, subject to the upper limit specified in Section 36(1)(viia). The Tribunal remitted the issue back to the AO to verify the books and apply the correct deduction, ensuring any excess provision is brought to tax.

3. Allowability of Provision Made Against Standard Assets:

The Tribunal reiterated that the provision for standard assets is not an allowable deduction under Section 36(1)(viia). The Tribunal referred to multiple precedents, including decisions from the ITAT Chennai and ITAT Hyderabad, which consistently held that provisions for standard assets are precautionary and contingent, thus not qualifying as bad and doubtful debts. The Tribunal emphasized that the Income Tax Act allows deductions for actual incurred or ascertained liabilities, not for contingent provisions.

Conclusion:

The Tribunal allowed the revenue's appeals, disallowing the provision for standard assets and remitting the issue of excess provision for bad and doubtful debts back to the AO for verification. The assessee's cross objections were dismissed for the assessment year 2010-11 and partly allowed for the assessment year 2011-12 for statistical purposes. The Tribunal's decision underscores the strict interpretation of provisions under Section 36(1)(viia) and the non-allowability of contingent liabilities as deductible expenses.

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