2018 (8) TMI 1062 - AT - Income Tax

Deduction u/s 36(1)(viia) or u/s 36(1)(viii) - creation of special reserve fund - cooperative society doing the business of banking in the district of Mandsaur - AO observed that the assessee is not entitled to a deduction u/s 36(1)(viii) since the bank has not given the long term finance for development of agriculture. Held that - Provision of section 36(1)(viia) relates to provision for bad and doubtful debts which, certain category of assessee s have been referred in the section are allowed to claim the expenditure as in the nature of business as they engaged in to, regular bad debts occur. Specific reserve is not an expenditure but it is an apportionment of the income and statue in order to promote long term finance in various sectors for the benefit of general public of the country gives the benefit of deduction to claim 20% of the available profits to be accumulated under the head special reserve and the claimant is duty bound to use such specific reserves only for the aforesaid purpose for which it has been made and in case of any default the same needs to be brought to tax. From above discussions we are of the view that both the section 36(1)(viia) and 36(1)(viii) of the Act deals with two distinct items namely an expenditure in the name of provision for bad and doubtful debts u/s 36(1)(viia) of the Act and in the nature of income u/s 36(1)(viii) of the Act which is set apart for a specific purpose. In our view both the items expressed in these two sections i.e. 36(1)(viia) and 36(1)(viii) of the Act are different and cannot be equated to each other. The assessee after becaming aware of the fact that it is not eligible for such deduction u/s 36(1)(viii) of the Act, it changed its stand and now is pleading that the set off may be given u/s 36(1)(viia) of the Act relating to provision for bad and doubtful debts giving the reason that it still has unutilized limit of ₹ 9.2 crores. We fail to understand how an item of income can be equated to an item of expenditure. In the instant case the assessee has tried to equate the apportionment of profit against an expenditure for provision for bad and doubtful debts which in our view is not possible. - Decided against the assessee.

Issues Involved:
1. Whether the special reserve created by the bank is deductible under Section 36(1)(viia) or Section 36(1)(viii) of the Income Tax Act.
2. The correctness of the addition of ?1,42,00,000/- made by the Assessing Officer and upheld by the Commissioner of Income-tax (Appeals).

Detailed Analysis:

Issue 1: Deductibility of Special Reserve
The primary contention revolves around whether the special reserve created by the bank qualifies for deduction under Section 36(1)(viia) or Section 36(1)(viii) of the Income Tax Act. The assessee initially claimed the deduction under Section 36(1)(viii) for a special reserve created for long-term finance for agricultural development. However, during the appellate proceedings, the assessee argued that the reserve should be considered under Section 36(1)(viia), which pertains to provisions for bad and doubtful debts.

Section 36(1)(viia) allows deductions for provisions for bad and doubtful debts up to 7.5% of the profit and 10% of the aggregate average advances made by rural branches. The assessee claimed that it was entitled to a further deduction of ?9.2 crores under this section. Conversely, Section 36(1)(viii) pertains to deductions for special reserves created by financial institutions for providing long-term finance for various sectors, including agriculture. The assessee admitted that it did not provide long-term finance for agriculture and thus was not eligible for deduction under Section 36(1)(viii).

Issue 2: Addition of ?1,42,00,000/-
The Assessing Officer (AO) disallowed the deduction claimed under Section 36(1)(viii) on the grounds that the bank did not provide long-term finance for agriculture. The AO added ?1,42,00,000/- to the total income. The Commissioner of Income-tax (Appeals) upheld this addition, stating that the deduction under Section 36(1)(viia) is limited to provisions for bad and doubtful debts, which must be explicitly stated in the Profit & Loss account. The special reserve created by the assessee did not qualify as a provision for bad and doubtful debts and thus could not be considered under Section 36(1)(viia).

Tribunal's Findings:
The Tribunal examined the provisions of both sections. It noted that Section 36(1)(viia) pertains to provisions for bad and doubtful debts, which are considered an expenditure, while Section 36(1)(viii) pertains to special reserves, which are an apportionment of income for a specific purpose. The Tribunal concluded that these two sections deal with distinct items and cannot be equated.

The Tribunal upheld the findings of the Commissioner of Income-tax (Appeals), stating that the assessee made an intentional claim under Section 36(1)(viii) and later attempted to change its stance to Section 36(1)(viia) after realizing the ineligibility. The Tribunal emphasized that benefits and deductions under the Income Tax Act are not charitable in nature and must be substantiated with evidence and proper accounting.

The Tribunal dismissed the appeal, affirming that the assessee could not equate the apportionment of profit under Section 36(1)(viii) with the expenditure for bad and doubtful debts under Section 36(1)(viia).

Conclusion:
The appeal was dismissed, and the addition of ?1,42,00,000/- made by the AO and upheld by the Commissioner of Income-tax (Appeals) was confirmed. The Tribunal ruled that the special reserve created by the bank did not qualify for deduction under Section 36(1)(viia) and that the assessee's claim under Section 36(1)(viii) was correctly disallowed.

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