2023 (8) TMI 595 - HC - Income Tax

Deduction u/s 36(1)(vii) - excess provision made in the accounts towards NPA that was not allowable as a deduction as per Explanation -1 to Section 36 (1)(vii) - While the assessee had initially not claimed the said amount while computing the loss that was returned, it had subsequently claimed the said amount towards bad debts written off in terms of Section 36(1)(vii) - ITAT found the assessee entitled to the deduction under Section 36(1)(vii) relying on the judgment of the Supreme Court in Vijaya Bank 2010 (4) TMI 46 - SUPREME COURT - HELD THAT - Since we found force in the submission of learned Standing counsel for the Income Tax Department that the Appellate Tribunal had not examined the factual aspect as to whether or not the respondent assessee in the instant case had actually reduced the amount representing bad debts from the value of its assets in the balance sheet and had merely adopted the ratio of Supreme Court judgment in Vijaya Bank 2010 (4) TMI 46 - SUPREME COURT , we requested assessee to make available a copy of the audited balance sheet and profit and loss account of the company for the assessment year in question so as to verify the factual aspects therein. Tribunal was clearly in error in allowing the appeal preferred by the assessee through a mere application of a ratio in Vijaya Bank (Supra). In our view, the Tribunal ought to have ascertained whether the factual situation that was established in Vijaya Bank (Supra) existed in the instant case. We, therefore, find that the substantial questions of law raised by the revenue in this appeal has to be answered in favour of the revenue and against the assessee. AO directed to re-do the assessment.

Summary

Issues involved:
The judgment involves issues related to the disallowance of provision for non-performing assets (NPA) under Section 36(1)(vii) of the Income Tax Act, the authority of the Principal Commissioner to revise the assessment order, and the interpretation of the Supreme Court judgment in Vijaya Bank v. Commissioner of Income-Tax.

Issue 1: Disallowance of NPA Provision:
The respondent, a scheduled bank, filed its return of income for the assessment year 2015-2016, declaring a net loss. The assessment under Section 143(3) disallowed an amount under Section 14A. The Principal Commissioner found an excess provision made towards NPA, not allowable as a deduction under Section 36(1)(vii). The Income Tax Appellate Tribunal allowed the assessee's appeal, relying on the Vijaya Bank case.

Issue 2: Revision of Assessment Order:
The revenue appealed against the Tribunal's decision, questioning the legality of the Principal Commissioner's order and the Tribunal's interference with it. The revenue argued that the failure to consider the excess provision for NPA as non-deductible under Section 36(1)(vii) made the assessment order erroneous and prejudicial to the revenue's interests, justifying the revision by the Principal Commissioner.

Issue 3: Interpretation of Vijaya Bank Case:
The Court discussed the Vijaya Bank case, emphasizing the requirement for banks to close individual debtor accounts or reduce the Loans and Advances Account for bad debts. The revenue contended that the Tribunal erred by not verifying if the assessee had reduced the value of assets by the bad debts claimed as irrecoverable. The Court found that the Tribunal should have verified this factual aspect and set aside the Tribunal's decision in favor of the revenue.

Separate Judgment:
The judgment was delivered by Honourable Mr. Justice A.K. Jayasankaran Nambiar and Honourable Mr. Justice Mohammed Nias C.P. The Court set aside the Tribunal's decision, directing the Assessing Officer to re-do the assessment based on the Principal Commissioner's order and the documents provided by the assessee's counsel to substantiate the reduction of asset value due to bad debts/provisions written off.