2019 (4) TMI 373 - HC - Income Tax

Bad debts written off - HELD THAT - The allowance of written off bad debts in non-rural branches will be confined to the excess allowed from the provision made and deduction allowed for non-rural branches. We make it clear that in making the computation there can be no consideration of the provision for bad debts for rural branches as granted under sub-clause (viia) of Section 36. Appellant is not a financial corporation entitled to deduction u/s 36(1) (vii) - HELD THAT - This Court in the Federal Bank Limited v. Assistant Commissioner of Income Tax 2011 (1) TMI 1184 - KERALA HIGH COURT . Hence the question is answered against the assessee and in favour of the revenue. Exemption 10(23G) - HELD THAT - it is only proper that the Assessing Officer considers the certificates produced by the assessee and grant allowance to the extent the claim is substantiated. Revaluation of Interest Rates Swaps (IRS) - interest rates fluctuations in the market - HELD THAT - lower authorities have taken a view that it is only a notional revaluation and there can be no deduction allowed for the same. We confirm the order of the lower authorities and answer the question against the assessee and in favour of the revenue. Addition u/s 14A - HELD THAT - Issue against the revenue and in favour of the assessee in C.I.T. v. Essar Teleholdings Pvt.Ltd. 2018 (2) TMI 115 - SUPREME COURT OF INDIA . It has been held by the Hon ble Supreme Court that the machinery provision for giving effect to Section 14A of the Income Tax Act came into effect only from the assessment year 2008-09. Hence there can be no application of Section 14A to the subject year. The question is answered against the revenue and in favour of the assessee. Deduction u/s 36(1)(vii) - HELD THAT - The procedure as prescribed therein would also be a write off. It is the contention of the assessee Bank that the assessee had actually written off the amounts as has been found in Vijaya Bank 2010 (4) TMI 46 - SUPREME COURT . In such circumstances it is only proper that the Assessing Officer verify the Balance Sheet of the assessee produced for the year and decide the question of deduction under Section 36(1)(vii)of the Act in consonance with Vijaya Bank (supra) and the declaration made therein.

Summary

Issues:
1. Deduction of bad debts written off for urban and rural branches.
2. Eligibility for deduction as a financial corporation under Section 36(1)(vii).
3. Disallowance under Section 10(23G) for lack of approval.
4. Allowability of loss on revaluation of trading stock of interest rate swaps.
5. Retrospective nature of sub-sections (2) and (3) of Section 14A.
6. Calculation of deduction under Section 36(1)(vii) considering write off of bad debts for certain branches.

1. Deduction of Bad Debts:
The Tribunal remanded the matter for reconsideration based on the Full Bench decision, which has since been overruled by the Supreme Court. The Assessing Officer is directed to consider the issue in light of the decision in Catholic Syrian Bank Ltd. v. Commissioner of Income Tax. The computation should exclude provision for bad debts in non-rural branches for previous years to determine the deduction allowed for non-rural branches.

2. Eligibility as Financial Corporation:
The issue is settled by a previous decision of the Court in Federal Bank Limited v. Assistant Commissioner of Income Tax, ruling against the assessee and in favor of the revenue.

3. Disallowance under Section 10(23G):
The disallowance was made due to the absence of substantiating certificates, but the assessee has now obtained them. The Assessing Officer should consider these certificates and grant allowance based on substantiated claims.

4. Loss on Revaluation of Interest Rate Swaps:
The lower authorities deemed the revaluation as notional, disallowing deduction. The Court confirms this decision against the assessee and in favor of the revenue.

5. Retrospective Nature of Section 14A:
The question is decided in favor of the assessee, citing C.I.T. v. Essar Teleholdings Pvt. Ltd. The Supreme Court clarified that Section 14A's machinery provision applies from the assessment year 2008-09, not the subject year.

6. Calculation of Deduction under Section 36(1)(vii):
The Court analyzed the deduction claimed under Section 36(1)(vii) for provision of bad and doubtful debts for rural branches. Discrepancies in the computation of the 10% limit of aggregate advances were addressed, leading to a disallowance and addition back as income. The distinction between write off and provision for bad debts, as established in Vijaya Bank v. Commissioner of Income-Tax, was emphasized. The Assessing Officer is directed to verify the Balance Sheet to determine the deduction under Section 36(1)(vii) accordingly.

The income tax appeals are partly allowed, with each party bearing their respective costs.