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TMI Blog2002 (8) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 36(1)(vii) would apply only in respect of rural advances written off as bad and therefore notwithstanding the fact that the actual amount written off is less than the provision for bad and doubtful debts the assessee would be entitled to the deduction. This contention was not accepted by the Assessing Officer who rejected the claim. 3. On appeal, the CIT(A) accepted the assessee's contention for all the years. His view was that the intention of the Legislature in enacting both clauses (vii) and (viia) of section 36(1) was that the banks should not get away with a double deduction in respect of the same amount-one, under the head "general provision for bad and doubtful debts" and again as a provision made for bad and doubtful debts in respect of advances made by their rural branches. Since in the present case, the latter (i.e., the provision made in respect of rural advances) is not included in the former (i.e., the general provision for bad and doubtful debts), there is no justification for disallowing the claim made by the assessee which is only in respect of non-rural advances. In this view of the matter, he allowed the claim of the assessee. 4. In respect of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not concerned in these appeals. The proviso is as under: "Provided that in the case of an assessee to which clause (viia) applies, the amount of deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause." Clause (viia) insofar as it is relevant for our purpose, is as under: "in respect of any provision for bad and doubtful debts made by(a) a scheduled bank..........an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding two per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner." 8. The question for our consideration is whether on a proper interpretation of the provisions extracted above, it is permissible to hold that the proviso to section 36(1)(vii) refers only to the rural advances so that only the bad debts arising out of rural advances can be controlled or restricted to the excess of the amount written off over the amount of provision for bad an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or any other bank included in the Second Schedule to the Reserve Bank of India Act, 1934. It may be mentioned that all co-operative banks have been excluded from the purview of this provision in view of the position that under section 80-P(2)(a)(i) of the Income-tax Act, the profits and gains of a co-operative society engaged in the business of banking or providing credit facilities to its members are completely exempt from income-tax. 13.3 It may be relevant to mention 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(1)(vii) relating to allowance of bad debts. In other words, the scheduled commercial banks would continue to get the full 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). 13.4 This provision will take effect from 1st April, 1980, and will accordingly apply in relation to the assessment year 1980-81 and subsequent years'." It may be noted from the Circular that the object of clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 1985) explaining the amendments made to clause (vii) of sub-section (1) of section 36 and sub-section (2) of the section and clarifying the position vis-a-vis the provisions of clause (viia) of section 36(1). This Circular is reproduced below: "17.1 'Deduction il1 respect of provisions made by banking companies for bad and doubtful debts.--Section 36(1)(vii) of the Income-tax Act provides for a deduction in the computation of taxable profits of the amount of any debt or part thereof which is established to have become a bad debt in the previous year. This allowance is subject to the fulfilment of the conditions specified in sub-section (2) of section 36. 17.2 Section 36(1)(viia) of the Income-tax Act provides for a deduction in respect of any provision for bad and doubtful debts made by a scheduled bank or a non-scheduled bank in relation to advances made by its rural branches, of any amount not exceeding 1 h per cent of the aggregate average advances made by such branches. 17.3 Having regard to the increasing social commitments of banks, section 36(1)(viia) has been amended to provide that in respect of any provision for bad and doubtful debts made by a scheduled bank not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (vii) refers only to rural advances and says that there arc no words therein which would lead to such an interpretation, viz., that it applies only to rural advances. We are unable to uphold the objection firstly because the Board itself has recognized the position that a bank would be entitled to both the deductions--one, under clause (vii) on the basis of the actual write-off and another, on the basis of clause (viia) in respect of a mere provision. This may lead, as noted earlier, to the result that in respect of the same advance the assessee may get a double deduction, one on the basis of the write-off and again on the basis of the provision. It was to prevent this that the proviso to clause (vii) was inserted which says that in respect of the bad debt arising out of rural advances the deduction on account of the actual write-off would be limited to the excess of the amount written off over the amount of the provision which has already been allowed under clause (viia). The proviso has been introduced to protect the Revenue but it would be meaningless to invoke the same where there would be no threat of double-deduction. In the case of rural advances, which arc covered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot affected, controlled or limited in any way by the proviso to clause (vii). We hold accordingly. 15. In our opinion, the view taken in the orders passed by the Cochin Bench of the Tribunal in the case of Federal Bank Ltd. and the recent order of the Madras Bench of the Tribunal in the case of Karur Vysya Bank Ltd. [IT Appeal No. 1410 (Mad.) of 1993 dated 21-3-2002] (copy filed) appear to reflect the correct legal position. The contrary view expressed by the Cochin Bench in the case of Dhanalakshmi Bank Ltd., does not, in our opinion, reflect the correct view. 16. We therefore answer the question referred to the Special Bench in the affirmative and hold that the debts actually written off which do not arise out of rural advances are not affected by the proviso to clause (vii) and that only those bad debts which arise out of rural advances are to be limited in accordance with the proviso. 17. As regards the actual application of the provisions of both clauses (vii) and (viia) to the case, we find that the CIT(A) has found that the assessee bank is maintaining two separate accounts, one for bad and doubtful debts other than the provision for bad debts in rural branches for whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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