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TMI Blog2014 (7) TMI 1185X X X X Extracts X X X X X X X X Extracts X X X X ..... vii) and 36(1)(viia) of the Act are distinct and independent items of deduction and operate in their respective fields. The bad debts written off in debts, other than those for which the provision is made under cl. (viia), will be covered under the main part of s. 36(1)(vii), while the proviso will operate in cases under cl. (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under cl. (viia). The proviso to s. 36(1)(vii) will relate to cases covered under s. 36(1) (viia) and has to be read with s. 36(2)(v) of the Act. Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans while under s. 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. This, obviously, would be subject to satisfaction of the requirements contemplated under s. 36(2). We hold that the assessee’s claim for bad debt is to be allowed in terms of observations made by the Hon'ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The identical issues raised in all the appeals of the assessee are as under: i) Disallowance under section 14A; ii) Disallowance of bad debt written off in relation to non rural branches; iii) Exclusion of income earned by the foreign branches in the return of income filed in India on the ground that once the branches are taxable in the foreign country i.e., source country, therefore, the same cannot be taxed in India; and iv) Disallowance of staff welfare expenses which are arising out of Revenue s appeal for the assessment year 2005 06. i) Disallowance under section 14: In the assessment year 2005 06, the assessee in its appeal being ITA no.2927/Mum./2011, has challenged the disallowance of ₹ 238.53 crores under section 14A, as against the exempt income of ₹ 182.33 crores. 4. The Assessing Officer, in the assessment year 2005 06, noted that the assessee has earned following exempt income: i) Interest u/s 10(15)(iv)(c d) Rs. 27,41,00,000 ii) Interest on tax free bonds Rs. 41,07,18,916 iii) Interest on advances u/s 10(23G) Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be adopted looking to the accounts of the assessee and disallowance offered by the assessee has not been disputed, therefore, no further disallowance should be made. 7. The learned Departmental Representative, on the other hand, strongly relied upon the order of the learned Commissioner (Appeals) and submitted that in any case, this matter has been set aside by the Tribunal back to the file of the Assessing Officer in the earlier years, therefore, on the same line, the same should be set aside to the Assessing Officer for fresh adjudication. 8. We have heard the rival contentions and perused the material placed on records. We find that similar issue had come up for consideration before the Tribunal in assessee s own case for the assessment year 2003 04 and 2004 05, wherein the Tribunal has set aside the issue of disallowance under section 14A, back to the file of the Assessing Officer after observing and holding as under: 2.3 We have heard the rival submissions and perused the material before us. We find that initially assessee itself had calculated estimated expenses for earning exempted income at 22.4% amounting to ₹ 205.77 crores. Later on assessee offered on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led the conditions laid down in section 36(1)(vii), 36(1)(viia) and 36(2)(v). According to him, the assessee is eligible to claim bad debt only if the bank has created provisions of bad debt and only the excess amount, which is more than the provisions for bad and doubtful debt as stipulated in section 36(2)(v), can be claimed and also the provision for bad and doubtful debt under section 36(1)(viia), which is limited to 7.5% of the total income before making any deduction under Chapter VIA. Whereas the assessee has added back the total bad debt which included prudential written off, actual right off partial right off and provisions for bad and doubtful debt. He held that this cannot be done under the provisions of the Act and, therefore, bad debts written off are more than the provisions claimed. Accordingly, he allowed the deduction of ₹ 106,60,38,651 under section 36(1)(vii) and disallowed a sum of ₹ 3,70,89,30,961. The relevant observations of the Assessing Officer are as under: 5.7 The assessee has added back total bad debts written off, prudential written off, actual write off, partial write off and provision for bad and doubtful debts. The assessee has claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 106.60 crores, therefore, notice of enhancement under section 251(2) was given to the assessee. In response, the assessee submitted that no enhancement is required as both the deductions, namely, deduction of bad debt under section 36(1)(vii) and deduction of provision of 36(1)(viia) are required to be allowed separately. In support of its contention, following case laws were relied upon: i) Karnataka High Court in the case of DCIT Anr. V/s Karnataka Bank Ltd., [2008] 218 CTR (Kar.) 273, decided that bad debts written off u/ s36(1)(vii) is allowable independently and irrespective of provision for bad and doubtful debts created by assessee in relation to the advances of the rural branches subject to the limitation nthat an amount should not be deducted twice u/s 36(1)(vii) and 36(1)(viia) simultaneously. ii) Similarly Madras High Court in case of CIT v/s City Union Bank Ltd., [2007] 213 CTR (Mad.) 113, also decided that bad debts in relation to non rural branches of the assessee bank is allowable without first setting off against the provision already allowed under section 36(1)(viia) when no distinction between advances relating to non rural and rural has been made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. Secs. 36(1)(vii) and 36(1)(viia) provide for such deductions, which are to be permitted, in accordance with the language of these provisions. A bare reading of these provisions show that ss. 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. It is a settled canon of interpretation of fiscal statutes that they need to be construed strictly and on their plain reading. 17. The provisions of s. 36(1)(vii) would come into play in the grant of deductions, subject to the limitation contained in s. 36(2) of the Act. Any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year is the deduction which the assessee would be entitled to get, provided he satisfies the requirements of s. 36(2) of the Act. Allowing of deduction of bad debts is controlled by the provisions of s. 36(2). The argument advanced on behalf of the Revenue is that it would amount to allowing a double deduction if the provisions of ss. 36(1)(vii) and 36(1)(viia) are permitted to operate independently. There is no doubt that a statute is normally not constr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he accounts of the assessee for the previous year. This benefit is subject only to s. 36(2) of the Act. It is obligatory upon the assessee to prove to the AO that the case satisfies the ingredients of s. 36(1)(vii) on the one hand and that it satisfies the requirements stated in s. 36(2) of the Act on the other. The proviso to s. 36(1)(vii) does not, in absolute terms, control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely under s. 36(1)(viia) of the Act. We may also notice that the Explanation to s. 36(1)(vii), introduced by the Finance Act, 2001, has to be examined in conjunction with the principal section. The Explanation specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of 'any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee'. Thus, the concept of making a provision for bad and doubtful debts will fall outside the scope of s. 36(1) (vii) simpliciter. The proviso, as already noticed, will have to be read with the provisions of s. 36(1)(viia) of the Act. Once the bad debt is actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prehension of the possibility of double benefit to the assessee, this would not by itself be a sufficient ground for accepting its interpretation. Furthermore, the provisions of a section have to be interpreted on their plain language and could not be interpreted on the basis of apprehension of the Department. This Court, in the case of Vijaya Bank vs. CIT Anr. (2010) 231 CTR (SC) 209 : (2010) 37 DTR (SC) 401 : (2010) 5 SCC 416, held that under the accounting practice, the accounts of the rural branches have to tally with the accounts of the head office. If the repaid amount in subsequent years is not credited to the P L a/c of the head office, which is what ultimately matters, then there would be a mismatch between the rural branch accounts and the head office accounts. Therefore, in order to prevent such mismatch and to be in conformity with the accounting practice, the banks should maintain separate accounts. Of course, all accounts would ultimately get merged into the account of the head office, which will ultimately reflect one account (balance sheet), though containing different items. 40. It is useful to notice that in the proviso to s. 36(1)(vii), the Explanation to that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, respectfully following the decision of the Hon'ble Supreme Court, we hold that the assessee s claim for bad debt is to be allowed in terms of observations made by the Hon'ble Supreme Court herein above, subject to satisfaction of requirements contemplated u/s 36(2). We, therefore, direct the Assessing Officer to see the requirements of section 36(2) and allow assessee s claim of bad debts accordingly. 20. This ground is common in the assessment year 2006 07 and 2007 08, which are based on identical facts and, therefore, the aforesaid findings will apply mutatis mutandis in these years also. Accordingly, ground no.2, raised by the assessee in the assessment year 2006 07 and 2007 08 is allowed in terms indicated above. iii) Exclusion of income earned by the foreign branches: The assessee s contention in ground no.3, in the assessment year 2005 06 and 2006 07 is that the foreign branches of the assessee s bank, are subject to tax in the source country i.e., in foreign country, therefore, their income cannot be included in the return of income filed in India. That is, the Resident State does not have right to tax the same income. The relevant ground raised by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has certain branches located in the foreign countries and these branches are tax resident of those countries as per DTAA. Accordingly, the assessee has claimed that income tax paid / payable on the income of such branches in the respective countries should be excluded from the return of income filed in India. This claim was made in view of the Article 7 of the respective DTAAs, wherein the income from such foreign branches is not taxable again along with the income of the assessee in India. The Assessing Officer has allowed the credit / relief for the taxes paid abroad out of the taxes payable in India from the tax payable on the income of the assessee in India. The Assessing Officer further noted that as per section 90(3), Central Government has notified that for granting relief of tax any income of a resident of India the phrase may be taxed in other country has to be interpreted as taxable in India also, as the income of the P.E. is to be included in the total income chargeable to tax in India subject to relief in accordance with the DTAA. Whereas, the assessee s submission before the learned Commissioner (Appeals) was that the income of the branches is taxable only in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2004 05 and also the notification. Thus, this issue is squarely covered in favour of the Department that income of the branches / P.E. shall be included in the total income of the assessee but credit of tax paid in source country would be allowed here in the resident State. The Tribunal has also analysed in detail the phrase may be taxed to come to the conclusion that it does not preclude the Resident State to tax the resident assessee on the income which has been earned by the P.E. in the source country which are liable for tax in such country. 26. We have heard the rival contentions and perused the decisions relied upon by both the parties. The issue of interpretation of phrase may be taxed in other contracting States , as used in different Articles including Article 7 in the DTAA has been discussed in detail by the Tribunal in Essar Oil Ltd. (supra) after taking into consideration various decisions of the High Court, Supreme Court, affect of amendment in section 90(3) and notification dated 28th August 2008, issued by the Central Government. The conclusion arrived by the Tribunal after discussing various aspects are as under: i) The ratio of all the j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the object of this phrase. If phrase is used in a statute, then 'any interpretation given by the High Court or the Supreme Court is binding on all the subordinate Courts and has to be reckoned as law of the land. However, the meaning assigned by Government of India for a phrase or term used in the agreement through notification will prevail at least from the assessment year 2004-05. Because, while interpreting the treaty, the intention of the parties to the agreement has to be given primacy and has to be understood in that manner only. Therefore, the notification is not contrary to the provisions of the Act. Consequently, the earlier judgments rendered in assessee's case prior to assessment year 2004-05, will not have binding precedence in this year or subsequent year; ._ 27. In view of the aforesaid findings / conclusion, we hold that the income of the branches of the assessee shall also taxable in India i.e., it would be included in the return of income filed by the assessee in India and whatever taxes have been paid by the Branches in the other contracting States i.e., the source country, credit of such taxes shall be given. Accordingly, the ground no.3, as raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing the rule of consistency and also the fact that these expenses are incurred in the normal course of business to maintain healthy relationship with the employees, the same is to be treated as allowable business expenditure under section 37(1). Thus, this ground, as raised by the Department, stands dismissed. 32. In the result, Revenue s appeal is dismissed. We now take up Revenue s appeal in ITA no.6018/Mum./2011, for the assessment year 2007 08, vide which, following ground has been raised: On the facts and in the circumstances of the case and in law the learned CIT(A) erred in directing the Assessing Officer to exclude income of foreign branches in violation of Central Government notification no.S.O. 2123(E) dated 28th August 2008, which clearly indicates its inclusion while arriving at the total income. 33. The aforesaid ground has already been decided in the forgoing paragraph and, therefore, in view of the findings given therein, the ground raised by the Revenue is treated as allowed. 34. In the result, Revenue s appeal is dismissed. 35. In the result, assessee s appeal in ITA no.2927/Mum./2011, ITA no.2928/Mum./2011 and ITA no.5735/Mum./2011, are tr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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