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2019 (12) TMI 978 - AT - Income TaxDeduction u/s 36(1)(viia) of provision for nonperforming assets (NPA) - disallowance on the grounds that no provision made under the head Provision for bad and doubtful debts for the year under consideration - as held by AO that the net balance of other provisions have actually decreased in respect of last year balance and since it shows overall decrease in provisions, the same needs to be disallowed - HELD THAT - The terminology Reserve for NPA has been used by the assessee in accordance with the RBI directions. As is evident from the assessment order, the assessee has indeed created Reserve for NPA . For claiming benefit under the provisions of Section 36(l)(viia)(a) the conditions to be satisfied is that provision for bad and doubtful debts should have been made by the bank eligible to claim such deduction. Cooperative Banks do not strictly follow the provisions of Banking Regulation Act for the purpose of maintaining their Books of Accounts. In our considered opinion, the assessee has created provision for bad and doubtful debts may be under different nomenclature. This will not dis-entitle the assessee for claiming deduction under the provisions of Section 36(l)(viia)(a). The purpose for creation of reserve for NPA is same i.e., creating provision towards bad and doubtful debts. Thus, in view of the facts of the case and judicial pronouncements in the above state cases the assessee will be entitled to deduction u/s 36(l)(viia) to the extent of provision made for bad and doubtful debts . The A.O is therefore directed to allow the full deduction as claimed by the assessee in the computation of income and not to restrict it - Decided in favour of assessee.
Issues Involved:
1. Whether the CIT(A) erred in deleting the addition of ?11,02,79,355/- made by the Assessing Officer due to disallowance of excess claim in respect of the provision for bad and doubtful debts under Section 36(1)(viia) of the Income Tax Act, 1961. 2. Whether the CIT(A) erred in deleting the addition of ?3,70,00,000/- made by the Assessing Officer, allegedly shown as provision for bad and doubtful debts over and above the prudential norms suggested by the RBI. 3. Whether the order of the CIT(A) should be set aside and that of the Assessing Officer be restored. Detailed Analysis: Issue 1: Deletion of Addition of ?11,02,79,355/- The Revenue challenged the CIT(A)'s decision to delete the addition of ?11,02,79,355/- made by the Assessing Officer due to the disallowance of the excess claim for the provision for bad and doubtful debts under Section 36(1)(viia). The Assessing Officer had disallowed this amount on the grounds that no provision was made under the head "Provision for bad and doubtful debts" for the year under consideration. The Assessing Officer argued that the net balance of other provisions had decreased compared to the previous year, indicating that the provision should be disallowed. The assessee argued that the bank is governed by the Banking Regulation Act, 1949, and the balance sheet and profit and loss account are prepared in Forms 'A' and 'B' respectively, as prescribed under the third schedule to the Banking Regulation Act. The provision for bad and doubtful debts is made under the head "provisions and contingencies" and is certified by the statutory auditor of the bank. The assessee also cited several court rulings, including Kedarnath Jute Mfg. Co. Ltd. vs. CIT and State Bank of India vs. CIT, to support the claim that accounting practices cannot override the provisions of the Income Tax Act. The CIT(A) accepted the assessee's explanation and deleted the addition, noting that the assessee had made a provision for bad and doubtful debts of ?16,06,72,355/- during the year, which was reflected in the profit and loss account. The CIT(A) also observed that the Assessing Officer had not considered the entire journey of the accumulated account of provision for bad and doubtful debts and had overlooked relevant facts and figures. Issue 2: Deletion of Addition of ?3,70,00,000/- The Revenue also challenged the CIT(A)'s deletion of the addition of ?3,70,00,000/-, which the Assessing Officer claimed was shown as a provision made for bad and doubtful debts over and above the prudential norms suggested by the RBI. The Assessing Officer disallowed this amount, arguing that the provision was not justified and lacked proper documentary evidence. The assessee argued that the provision for bad and doubtful debts of ?3,70,00,000/- was made in addition to the minimum provisions required by RBI guidelines and was included in the total provision of ?16,06,72,355/- claimed under Section 36(1)(viia). The CIT(A) accepted the assessee's explanation and deleted the addition, noting that the provision was made in line with the legislative intent to encourage rural banking and assist banks in making adequate provisions for risks related to rural advances. Issue 3: Restoration of Assessing Officer's Order The Revenue sought to set aside the CIT(A)'s order and restore the Assessing Officer's decision. The CIT(A) had found that the assessee was entitled to a deduction under Section 36(1)(viia) of ?114.76 crores and had made a provision for bad and doubtful debts of ?16,06,72,355/-, which was much lower than the eligible amount. The CIT(A) concluded that the deduction was correctly claimed by the assessee and directed the Assessing Officer to allow the full deduction. The Tribunal upheld the CIT(A)'s decision, noting that the provision for bad and doubtful debts was duly made and reflected in the profit and loss account, and that the assessee had followed the guidelines and legislative intent behind Section 36(1)(viia). The Tribunal also referred to relevant case laws, including the Supreme Court's decision in DCIT vs. Catholic Syrian Bank, which clarified that the deduction under Section 36(1)(viia) is distinct and independent of Section 36(1)(vii) and is intended to encourage rural banking. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order to delete the additions made by the Assessing Officer. The Tribunal found that the assessee had correctly claimed the deduction for the provision for bad and doubtful debts under Section 36(1)(viia) and had followed the legislative intent and guidelines provided by the Supreme Court and other relevant case laws.
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