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2023 (1) TMI 426 - AT - Income TaxDisallowance u/s 36(1)(viia) - Provision for bad and doubtful debts under Section 36(1)(viia) against the advances of rural branches - assessee raised ground of appeal raising the plea that the assessing officer not allowed additional deduction of 10% on advances made by rural branches of assessee-bank as prescribed under section 36(1)(viia) by holding that the assessee is a co-operative bank and the definition of non-schedule bank does not include co-operative bank for the purpose of deduction of 10% - assessee also raised ground of appeal that the assessing officer erred in not considering an amount of Rs.1.66 Crore for deduction under section 36(1)(viia) being bad and doubtful debts appropriated from the profit loss account as per the guidelines of Reserve Bank of India (RBI) towards statutory bad and doubtful debts reserve i.e. 15% of profit on the ground that no such provision is made in the profit loss account. HELD THAT - All cooperative bank all over India follows such practice of appropriation from the net profit which they get approved by the members, only after approval of accounts and director s report, the return of income is filed. Thus, appropriation made by the assessee bank for bad and doubtful debts is nothing but providing for bad and doubtful debts from the profit and loss accounts. After introduction of section 36(1)(viia) by the finance Act, 1979, with effect from April 1,1980, Circular No. 258, dated June 14, 1979, was issued by the Central Board of Direct Taxes to clarify the application of the new provisions. The provisions were introduced in order to promote rural banking and assist scheduled commercial banks in making adequate provision from their current profits for risks in relation to their rural advances. The deductions were to be limited as specified in the section. The circular mentions that the provisions of new clause (viia) of section 36(1), relating to the deduction on account of provisions for bad and doubtful debts, is distinct and independent of the provisions of section 36(l)(vii) relating to allowance of deduction of the bad debts. Scheduled commercial banks would continue to get the benefit of the write off of the irrecoverable debts under section 36(1)(vii) in addition to the benefit of deduction of the provision for bad and doubtful debts under section 36(1)(viia) While considering the similar issues in assessee's own case for earlier year, which is followed by ld CIT(A) in the impugned order, we have followed the decision of Kannur District Co-operative Bank 2012 (3) TMI 691 - ITAT COCHIN - It is settled position under the tax jurisprudence that where there is two divergent view of two different High Court on the same issue, the decision favourable to the assessee must be adopted. Similar principal was recognized in the case of CIT Vs Vegetable Products Ltd. 1973 (1) TMI 1 - SUPREME COURT - Thus, in view of afforesaid factual and legal discussion, we affirm the order of ld CIT(A), with these additional observations. In the result, the grounds of appeal raised by the revenue is dismissed.
Issues Involved:
1. Deduction under Section 36(1)(viia) of the Income Tax Act for bad and doubtful debts. 2. Classification of the assessee as a non-scheduled bank or cooperative bank for the purpose of deductions. 3. Requirement of actual provision in the books of accounts for claiming deductions. Detailed Analysis: Issue 1: Deduction under Section 36(1)(viia) of the Income Tax Act for bad and doubtful debts The primary issue in these appeals is the deduction claimed by the assessee under Section 36(1)(viia) of the Income Tax Act. The assessee claimed a deduction of Rs. 6,66,39,443/- for the A.Y. 2013-14, which includes Rs. 4,90,98,930/- @ 10% of average advances made by rural branches and Rs. 1,66,39,443/- as statutory bad debt reserve provision @ 15% of net profit. The Assessing Officer (AO) allowed only Rs. 1.75 Crore being 7.5% of the gross total income and disallowed the rest. The Tribunal noted that this issue was covered in favor of the assessee by its earlier decisions for A.Y. 2009-10 to 2014-15. The Tribunal reiterated that the nomenclature or treatment in the books of accounts is not decisive or conclusive for a particular deduction otherwise allowable under the law, citing the Supreme Court's decision in Kedarnath Jute Manufacturing Company Vs CIT. Issue 2: Classification of the assessee as a non-scheduled bank or cooperative bank for the purpose of deductions The Tribunal examined whether the assessee, a cooperative bank, qualifies for the deduction under Section 36(1)(viia). The AO argued that the definition of rural branches in the explanation to Section 36(1)(viia) does not cover cooperative banks. However, the Tribunal referred to the Kerala High Court's decision in Kannur District Cooperative Bank Limited Vs CIT, which held that cooperative banks fall under the category of non-scheduled banks for the purpose of this section. The Tribunal affirmed that the assessee is eligible for the deduction of 10% of the aggregate average advances made by its rural branches. Issue 3: Requirement of actual provision in the books of accounts for claiming deductions The AO contended that the assessee did not make the actual provision in its books of accounts, which is a prerequisite for claiming the deduction. The Tribunal, however, rejected this argument, emphasizing that the statutory bad debts reserve created during the year at the rate of 15% of the net profit as per the Gujarat State Cooperative Societies Act is an appropriation of net profit. The Tribunal highlighted that the financial statements are subject to statutory audit and approval by the Registrar of Cooperative Societies, thus supporting the assessee's claim. Conclusion: The Tribunal dismissed the revenue's appeals, affirming the CIT(A)'s order allowing the deductions claimed by the assessee. The Tribunal held that the assessee, being a cooperative bank, is eligible for the deductions under Section 36(1)(viia) and that the statutory bad debts reserve created as per the Gujarat State Cooperative Societies Act qualifies for the deduction. The Tribunal relied on its earlier decisions and the Kerala High Court's ruling, emphasizing the principle of consistency and the Supreme Court's directive to adopt the view favorable to the assessee when divergent views exist. Separate Judgments: No separate judgments were delivered by the judges in this case. The order was delivered by the Tribunal as a consolidated decision for all the appeals.
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