9911796707
TMI Blog2015 (7) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... was in excess of the provisions made in the accounts by the Assessee. It is the stand of the revenue that the deduction u/s.36(1)(viia) of the Act ought to be allowed only to the extent provision is made in the books of accounts for bad and doubtful debts. The Assessee is a banking company carrying on business of banking. In its return of income the Assessee claimed deduction of a sum of Rs. 200,03,24,219 on account of Provision for Bad and Doubtful Debts in respect of rural advances, u/s.36(1)(viia) of the Act. The provisions of Section 36(1)(viia)(a) of the Act lays down as follows: "viia) in respect of any provision for bad and doubtful debts made by - (a) a scheduled bank not being a bank incorporated by or under the laws of a country outside India] or a co-operative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank, an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es made by the rural branches of the bank. In other words, this is a specific deduction given by the statute irrespective of the quantum provided by the assessee in its accounts towards provision for bad and doubtful debts." 5. The learned DR relied on the decision of the ITAT Bangalore Bench in the case of Canara Bank in ITA No.58/Bang/2004 dated 9.6.2006. In the aforesaid decision this Bench considered the decision of the ITAT in the case of Syndicate Bank 78 ITD 103 (Bang) and the decision of the Hon'ble Punjab and Haryana High Court in the case of State Bank of Patiala (supra) and held that the decision rendered by the Hon'ble High Court has to be followed. The above decision is the decision brought to our notice on the issue rendered after the decision in Assessee's own case. Judicial discipline demands that we follow the later decision which has considered both the decisions on the issue. We therefore respectfully following the decision of the Tribunal in the case of Canara Bank (supra), hold that claim for deduction u/s.36(1)(viia) of the Act cannot be greater than the amount debited to the profit and loss account as provision. 6. The learned counsel for the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was drawn to Rule 11 and 27 of the Appellate Tribunal Rules, 1963, which provides as follows :- Rule-11 provides: "The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal; but the Tribunal, in deciding the appeal, shall not be confined to the grounds set for the in the memorandum of appeal or taken by leave of the Tribunal under this rule : Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground." Rule 27 provides that: "The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him." Reliance was placed by him on the decision of the Hon'ble Gauhati High Court in the case of Assam Company (India) Ltd. Vs. CIT 256 ITR 423 (Gau), where it was held that it is permissible on the part of the Tribunal to entertain a ground beyond those incorporated in the memorandum of appeal though the party urging the said ground had neither appealed before it nor had filed a cross-objection in the appeal filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under s. 254 only to decide the grounds which arise from the order of the CIT(A). Both the assessee as well as the Department have a right to file an appeal/crossobjections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier. ............ Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ten per cent of the total income (computed before making any deduction under the proposed new provision) or two per cent of the aggregate average advances made by rural branches of such banks, whichever is higher. At this stage also the PBDD had to be created and debited to the profit and loss account but it was not required to be done in relation to advances made by Bank's rural branches and can be in relation to any debt. PBDD need not be in relation to rural advances but can be in relation to any advances both rural and non-rural advances. The two percent AAA made by rural branches of such banks had to be computed and the PBDD made in books has to be in relation to rural advances. The other eligible sum which can be considered for deduction u/s.36(1)(viia) of the Act viz., ten per cent of the total income (computed before making any deduction under the proposed new provision) does not require computation in relation to rural advances. Nevertheless the debit of PBDD to Profit and Loss account is necessary of the higher of the two sums to claim deduction u/s.36(1)(viia) of the Act. If the concerned bank does not have rural branches then they could not claim the deduction. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deduction u/s.36(1)(viia) of the Act will not be available to the bank. The second part of the deduction u/s.36(1)(viia) has to be ascertained viz., 7.5% seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A). The above are the permissible upper limits of deductions u/s.36(1)(viia) of the Act. The actual provision made in the books by the Assessee on account of PBDD (irrespective of whether it is rural or non-rural) has to be seen. To the extent PBDD is so created, then subject to the permissible upper limits referred to above, the deduction has to be allowed to the Assessee. The question of bifurcating the PBDD as one relating to rural advances and other advances (Non-rural advances) does not arise for consideration." 13. The facts with regard to the PBDD created by the Assessee in the books of accounts are available on record and therefore there should not be any difficulty in deciding the quantum of deduction that the Assessee should be allowed u/s.36(1)(viia) of the Act. 14. Not content with the above relief, the learned counsel made a further alternate submission that the Assessee should be allowed deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act. 15. We have considered the submissions and are of the view that the same cannot be accepted. The creation of a special reserve u/s.32A or Sec.36(1)(viii) of the Act cannot be equated with creation of PBDD u/s.36(1)(viia) of the Act. Creation of provision u/s.36(1)(viia) of the Act is governed by certain rules like Rule 6ABA of the rules in respect of rural advances. It cannot be created at the bank's whims and fancy. Moreover the Assessee is not making a claim for creation of PBDD in the books of accounts of PY relevant to AY 08-09. The excess reserve created in the subsequent year cannot be equated to the PBDD created in the books for the present AY. The decisions relied upon by the learned counsel for the Assessee do not lay down a proposition that excess provision created in the subsequent year can supplement the inadequate created in an earlier year. The decisions relied upon by the learned counsel for the Assessee lay down proposition that the Assessee should be given liberty to create a reserve in the books of accounts of the relevant AY. For the reasons given above, we reject the second alternate submission made by the learned counsel for the Assessee. Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that just as how the Assessee has adjusted the PBDD in respect of rural advances, it ought to have adjusted PBDD in respect of non-rural advances and claimed only the remaining sum, if any, as bad debts u/s.36(1)(vii) of the Act. The AO accordingly tabulated the figures of PBDD in respect of non- rural branches as under:- Assessment year Optional deduction 10% of loss and doubtful debts 7.5% of total income Optional deduction - premium on buyback of Govt. Securities 2003-04 50,55,36,813 5,88,05,215 0 2004-05 - 42,86,11,182 70,00,40,702 2005-06 - - - 2006-07 - - - Total 50,55,36,813 48,74,16,397 70,00,40,702 Thereafter the AO tabulated the claim for bad debts u/s.36(1)(vii) of the Act made by the Assessee in various AYs as under: Assessment Year Debts written off against optional deduction allowed as 10% of loss and doubtful Debts written off against the provision allowed as 7.5% of total income Debts written off against provision allowed in relation to the income from redemption of securities. 2004-05 3,27,58,000 1,07,94,000 - 2005-06 11,00,95,215 3,69,01,418 15,39,76,237 2006-07 12,52,42,584 6,85,80,516 25,60,40,154 2007-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licable only if the write-off and the provision are in respect of the same class of debts. It was also pointed out that both the allowances envisaged under section 36(1)(vii) and 36(1)(viia) are admissible deductions in computing the income of Banks and are independent of each other is confirmed by the Central Board of Direct Taxes (CBDT) Circular No. 258, dated 14.06.1979, which is still in force. Provisions made under section 36(1)(viia) are in respect of aggregate advances made by rural branches, whereas the writeoff under section 36(1)(vii) is in respect of a separate set of urban branches' debts, i.e., other than the rural debts covered by the provision made under section 36(1)(viia). The proviso clearly indicates that the debts for which provision has been made under section 36(1)(viia), if written off under section 36(1)(vii), would not be allowed to the extent of the provision made for such debt. The proviso does not apply to debts that are independent of the provisions under section 36(1)(viia), viz., urban debts. The restriction laid down by the proviso is to prevent double claims for deduction under both sections 36(1)(vii) and 36(1)(viia) in respect of rural debts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out reason. The Legislature could not be presumed to have intended such a result in the case of scheduled banks. The intention of the Legislature in enacting the proviso to clause (vii) of section 36(1) and clause (v) to section 36(2) simultaneously was only to see that a double benefit in respect of the same bad debt is not being given to a scheduled bank. It was only for the said purpose that the proviso and clause (v) were introduced simultaneously by the Amendment Act, 1985, with effect from April 1, 1985. The scope of the proviso to clause (vii) of section 36(1) of the Act was only to deny the deduction to the extent of bad debt written off in the books with respect to which provision was made under clause (viia) of the Act. If the bad debt written off related to debts other than for which the provision was made under clause (viia), such debts would fall squarely under the main part of clause (vii) which was entitled to deduction, and in respect of that part of the debt with reference to which a provision was made under clause (viia), the proviso would operate to limit the deduction to the extent of the difference between that part of debt written off in the previous year and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so Sec.36(2)(v) of the Act was of the view that the Assessee could not be allowed the deduction claimed because (i) the amount claimed as deduction on account of bad debts was not the excess available in the credit of the Provision for Bad and Doubtful Debts Account created u/s.36(1)(viia)(a) of the Act and (ii) that u/s.36(2)(v) of the Act the amount of bad debts written off should first be debited in the Provision for Bad and Doubtful Debts Account created u/s.36(1)(viia)(a) of the Act. The stand of the Assessee was that since the claim of deduction of Bad debts made by the Assessee was u/s.36(1)(vii) of the Act and pertained to bad debts of non-rural debts, the credit balance in the PBDD account should not be looked into at all because it pertains only to Rural Branches. The Hon'ble Supreme Court held:- (i) The provisions of Section 36(1)(vii) and 36(1)(viia) are separate items of deduction. These are independent provisions and, therefore, cannot be intermingled or read into each other. (ii) Clear legislative intent of the relevant provisions and unambiguous language of the circulars with reference to the amendments to s. 36 demonstrate that the deduction on account of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to allowance of the bad debt(s). In other words, the scheduled commercial banks would continue to get the full benefit of the write off of the irrecoverable debt(s) under s. 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under s. 36(1)(viia). A reading of the circulars issued by CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off. However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of cl. (viia) and also on the basis of actual write off under cl. (vii). This situation is taken care of by the proviso to cl. (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under cl. (viia). CBDT itself has recognized the position that a ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion account made under clause (viia). This so because of the Proviso to Section 36(1)(vii) of the Act which provides that in the case of an assessee to which clause (viia) applies, the amount of the 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. Thus the proviso ensures that there is no double deduction, i.e., firstly getting a deduction when a provision is created and secondly getting a deduction when bad debts are written off. 27. In view of the aforesaid decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank (supra), we are of the view that the CIT(A) was right in directing the AO to allow the claim for deduction made u/s.36(1)(vii) of the Act. We therefore dismiss Gr.No.3 raised by the Revenue. 28. Ground No.4 raised by the Revenue is with regard to the action of the CIT(A) in directing the AO to allow the claim for deduction made by the Assessee on account of depreciation in the value of investments held by the Assessee in the category of HTM (Held to Maturity) holding that even s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts held under the category "Held to Maturity" or "Available for Sale" can be allowed as deduction came up for consideration in Assessee's own case in AY 10-11 in ITA No.1310/Bang/2012 and this Tribunal upheld similar order of CIT(A). The following were the relevant observations of the Tribunal:- "21. We have considered the rival submissions. Similar issue as to whether depreciation on investments held under the category "Held to Maturity" can be allowed as deduction came up for consideration in the case of Syndicate Bank (supra) before the ITAT Bangalore Bench. The Tribunal on the issue held as follows: "58. We have heard the submissions of the ld. DR and the ld. counsel for the assessee. The ld. DR relied on the decision of the Hon'ble High Court of Karnataka in the case of CIT v. ING Vysya Bank Ltd. in ITA No.2886/2005 dated 06.06.2012. In the aforesaid decision, the Hon'ble High Court of Karnataka took a view that the guidelines issued by the RBI will not be relevant while computing income under the Income-tax Act. The Hon'ble Court further took the view that every investment held by a bank cannot be considered as stockin- trade. The Hon'ble High Court fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ITAT in Corporation Bank (supra) has also followed the above decision of the Hon'ble Supreme Court as also the ITAT, Mumbai and ITAT, Chennai. Following the above decisions, we are deciding this issue in favour of the assessee. This ground of appeal by the Revenue is dismissed. 60. Apart from the above, the ld. counsel for the assessee also submitted that the decision rendered by the Hon'ble High Court of Karnataka in the case of ING Vysya Bank (supra) is per incuriam the decision of the Hon'ble Supreme Court in the case of UCO Bank v. CIT, 240 ITR 355 (SC). He brought to our notice that the Hon'ble Supreme Court approved the practice of nationalized bank governed by Banking Regulation Act, following mercantile system of accounting both for book keeping as well for income-tax purposes. The Hon'ble Apex Court upheld the method adopted by the banks valuing stock-in-trade (investments) at cost in balance sheet in accordance with the Banking Regulation Act and valuing the same at cost or market value, whichever was lower for income-tax purposes. The Hon'ble Court took the view that all investments held by a bank are to be regarded as stock-in-trade. 61. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the penalty was not to be allowed as deduction. The question before the Hon'ble Court was as to whether penal interest to RBI for non-compliance with provisions of s. 24 of Banking Regulation Act, 1949, is in the nature of penalty for infraction of law and hence to be disallowed under explanation to sec.37(1) of the Act. The Hon'ble Court observed that if a payment is a penalty for infraction of law it does not qualify for deduction. The Hon'ble Court thereafter found that the Assessee-bank paid 'penalty' though termed as "penal interest" under s. 24(4)(a) and 24(4)(b) of the 1949 Act for non-compliance with the requirement stipulated under s. 24(2A). The Hon'ble Court found that Subs. (6) of s. 24 clearly indicates that the penal interest payable under sub-ss. (4) and (5) is a "penalty" and if the penalty amount is not paid it can be enforced as a decree made by a Civil Court. Further, an opportunity is also provided to the defaulting banking company to satisfactorily explain the non-compliance and to avoid the penalty. According to the Hon'ble Court that shows that the amount in question is not compensatory in nature but definitely penal and that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deciding ground No.3 raised by the Revenue. Ground No.3 is again a claim which was never the case made out by the AO. We are of the view that the additional grounds sought to be raised by the revenue is devoid of any merit. They are therefore dismissed as without merit, not arising out of the order of the AO and not based on the facts as borne out by the records. The additional grounds are thus dismissed. 35. In the result, the appeal by the revenue is partly allowed. ITA NO. 653/Bang/2012 (Assessee's Appeal) 40. Ground No.1 raised by the Assessee is general in nature and calls for no specific adjudication. Ground No.2 & 3 raised by the Assessee is with regard to the action of the CIT(A) in confirming the order of the AO rejecting the claim of the Assessee for deduction u/s.36(1)(viii) of the Act of Rs. 25,00,00,000/-. The provisions of Sec.36(1)(viii) of the Act reads as follows: "Section 36:- Other deductions. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (i) to (vii)...... (viii) in respect of any special reserve created and maintained by a spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of houses in India for residential purposes; (f) "public company" shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956); (g) "infrastructure facility" means- (i) an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed; (ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) or clause (vi) of sub-section (4) of section 80-IA; and (iii) an undertaking referred to in sub-section (10) of section 80- IB; (h) "long-term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;" 41. The computation of deduction u/s.36(1)(viii) of the Act as made by the Assessee was as follows: S.No. & Particulars Amount in Rs. 1. Interest earned from advances made to industrial, agricultural and infrastructure activities 815,24,34,678 2. Total Income for the year ended 31.3.08 4420,56, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the Assessee. The learned counsel for the Assessee submitted that the AO and CIT(A) erred in considering the loss declared by the Assessee under the head "Income from Business or Profession" as the basis on deduction u/s.36(1)(viii) of the Act has to be computed. He pointed out that the provisions of sec.36(1)(viii) of the Act provide that a special reserve has to be created and maintained by a specified entity. Then an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head "Profits and gains of business or profession" (before making any deduction under this clause) carried to such reserve account will be allowed as deduction. According to him it is the profits derived from eligible business computed under the head "profits and gains of business or profession" that has been seen and not that of the entity as a whole, as has been done by the AO and CIT(A). The learned DR relied on the order of the CIT(A). 46. We have considered the rival submissions. A plain reading of the provisions of Sec.36(1)(viii) of the Act clearly shows that what is relevant is profits derived from eligible business computed under the head "Profits and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d have been incurred by the bank since the bank has to hold SLR securities to carry on the business and the expenditure is of fixed in nature. Therefore, there is no expenditure incurred directly by the bank for earning any tax free income. Since the expenditure would have been incurred by the bank even without the earning of tax free income, no part of the expenditure can be related to earning the tax free income. Therefore no disallowance u/s.14A of the Act is warranted. 48. The AO did not agree with the above contention. According to him expenditure relatable to exempt income has to be determined and in the absence of any other acceptable basis on which the same is determined, Rule 8D of the Income Tax Rules, 1962 (Rules) have to be applied. Thereafter the AO invoked Rule 8D(iii) of the Rules and determined a sum of Rs. 2.14 crores as expenditure incurred in relation to income which does not form part of the total income under the Act. 49. On appeal by the Assessee, the CIT(A) confirmed the action of the AO. The CIT(A) however proceeded on the basis that the Assessee had incurred direct expenditure also in the form of interest expenses in earning the tax free income. We have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I Ltd. (supra), we are of the view that no disallowance can be made u/s.14A of the Act. The addition made in this regard is directed to be deleted. The relevant grounds of appeal of the Assessee are allowed. 52. In ground No.6 & 7 the Assessee has challenged the action of the CIT(A) in confirming the action of the AO in rejecting the claim of the Assessee that provisions of Sec.115JB of the Act are not applicable to banking companies and in further rejecting the claim of the Assessee to ascertain book profits as per recasted profit and loss account prepared by the bank as per the provisions of Companies Act, 1956. 53. We have heard the parties on the above issues. The provisions of Sec.115JB of the Act are not applicable to banking companies as held by this Tribunal in the case of Syndicate Bank ITA No.668 & 669/Bang/2010 order dated 19.6.2013. The relevant observations of the Tribunal in this regard are as follows: "95. At the time of hearing, it was submitted by the ld. DR that the issue can be remanded for fresh consideration as was done by the Tribunal in A.Y. 2005-06 in ITA No.504/Bang/2009, order dated 13.01.2012. The ld. counsel for the assessee, however, submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Companies Act. Unless the profit and loss is so prepared, the provisions of Section 115 JB cannot come into play at all. However, the assessee is a banking company and under proviso to Section 211 (2) of the Act, the assessee is exempted from preparing its books of accounts in terms of requirements of Schedule VI to the Companies Act, and the assessee is to prepare its books of accounts in terms of the provisions of Banking Regulation Act . It is thus contended that the provisions of Section 115 JB do not apply in the case of banking companies which are not required to prepare the profit and loss account as per the requirements of Part II and III of Schedule VI to the Companies Act. Since the provisions of Section 115 JB do not apply to the assessee company, the reasons recorded for reopening the assessment are clearly wrong and insufficient. We are urged to quash the reassessment proceedings on this short ground. 6. Learned Departmental Representative, on the other hand, vehemently relies upon the orders of the authorities below and submits that there is no specific exclusion clause for the banking companies, and in the absence of such a clause, it is not open to us to infer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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