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TMI Blog2016 (5) TMI 1134X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. .42,36,327/- representing the provision for bad and doubtful debts made under section 36(1)(viia)(b) of the Income Tax Act, 1961 [ Act in short]. 2. Brief facts of the case are that the assessee, branch of M/s. Bank of Ceylon, Chennai with headquarters at Colombo, Sri Lanka is assessed in India as foreign company. The assessee has filed its return of income declaring income of Rs. .8,04,90,211/-. The case of the assessee was selected for scrutiny and statutory notices were served upon the assessee. The details filed by the assessee were examined and after considering the submissions of the assessee, the assessment was completed under section 143(3) of the Act determining total income of the assessee at Rs. .8,48,20,940/- by making various additions. 3. On appeal, the ld. CIT(A) sustained the disallowance of deduction claimed under section 36(1)(viia)(b) of Rs. .42,36,327/-. 4. Aggrieved, the assessee is in appeal before the Tribunal. 5. We have heard both sides, perused the materials on record and gone through the orders of authorities below. With regard to the disallowance of deduction under section 36(1)(viia)(b) of the Act, the relevant provisions of section is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the total income (computed before making any deduction under this clause and Chapter VIA);] [(C) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) :] [Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1 st day of April, 2005, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, of an amount not exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year.] 6. The Assessing Officer has observed that as per the section, the assessee company falls under the category ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee u/s 36(1) (viia) every year i.e. 5% of the total income. As already mentioned during the course of hearing, the entire balance in the provisions and contingencies has been added back and offered as income every year. Thus no deduction has been claimed for the provision made, and only the actual write off of bad debts has been claimed as deduction. (emphasis ours) Even though, it was stated that no deduction has been claimed for the provisions made and only the actual write off of bad debts has been claimed as deduction, it is noticed that the appellant claimed both. This will raise another issue for adjudication, whether the proviso to section 36(1)(vii) limits the deduction in respect of bad debts written off when it exceeds the provision made under section 36(1)(viia)? 7.2 There is another significant misrepresentation of facts as emanated from the details filed by the appellant during the assessment proceedings. Appellant has claimed deduction u] s. 36(1)(viia)(b) @ 5% of total income i.e. amounting to ₹ 42,36,327/-. The appellant had debited 'Items included under provision and consistencies' amounting to ₹ 4,64,65,785/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts of the assessee is eligible for deduction. The proviso to the section says that where the assessee is a bank, etc., the amount of deduction shall be limited to the amount by which such debt or part thereof exceeds the credit balance maintained in the provision for bad and doubtful debts. The Explanation to the section says that any debt written off as irrecoverable would not include any provision for bad and doubtful debts made in the accounts of the assessee. Section 36(1)(viia) is meant for deduction towards provision for bad and doubtful debts for scheduled banks and the quantum of deduction is with reference to 7.5% of the total income computed before any deduction under Chapter VI-A and an amount not exceeding 10% of the aggregate average advances made by the rural branches of such banks. Section 36(2) imposes the conditions which are to be satisfied when a debt is written off and deduction is claimed under section 36(1)(vii) of the Act. It will not apply to deduction towards provision made for bad and doubtful debts applicable to banks under section 36(1)(viia). 7.4 Legislative History: Initially the clause 36(viia) was introduced with a view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in CIT vs. South Indian Bank Ltd. 326 ITR 174 (Ker)(FB) held that banks which are entitled to claim deduction of provision for bad debts in terms of cl. (viia) of s. 36(1) are covered by the proviso to cl. (vii) irrespective of the nature of advances with respect to which the bad debt written off is claimed as deduction; in view of proviso to cl. (vii) when bad debts written off are also claimed as deduction under cl. (vii), the same is allowable only to the extent it is in excess of the provision created and allowed as deduction under cl. (viia). But in CATHOLIC SYRIAN BANK LTD. vs. CIT (2012) 343 ITR 270 (SC), it was held that provisions of ss. 36(1)(vii) and 36(1)(viia) are distinct and independent items of deduction and operate in their respective fields. But proviso to s. 36(1)(vii) operates in cases falling under cl. (viia) to limit the deduction to the extent of difference between the debt or part thereof written off in the previous year and the credit balance in the provision for bad and doubtful debts made under cl. (viia). Thus whether the proviso to section 36(1)(vii) limits the deduction in respect of bad debts written off when it exceeds the provision made under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t all the bad debts may be non-performing assets (NPAs), all the NPAs are not necessarily the bad debts. 8.3 In T.N. Power Finance Infrastructure Development Corporation Ltd. vs. Jt. CIT (2006) 280 ITR 491 (Mad), assessee engaged in the business of long-term finance for infrastructure development. The company had made provision for nonperforming assets as per directives of Reserve Bank of India and had debited the said provision to profit and loss account and had claimed deduction as bad debt. It was held the mere provision was not deductible under section 36(1)(vii) and as far as section 36(1)(viia) was concerned, it stipulated a deduction not exceeding five per cent of the total income only in respect of provision for bad and doubtful debts which are predominantly revenue in nature or trade related and not for provision for non-performing assets which are predominantly capital in nature. Thus the Jurisdictional High Court, clearly differentiated the provision for bad and doubtful debts with provision for non-performing assets. 8.4 Even the Supreme Court opined that there are deviations between RBI Directions 1998 and Companies Act in creating provisions. The deviati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orms deal essentially with income recognition. They force the banks to disclose the amount of NPA in their financial accounts. They force the banks to reflect true and correct profits. However, these Directions have nothing to do with computation of taxable income and deductions. These Directions cannot overrule the permissible deductions or their exclusion under the IT Act. There are inconsistency between these Directions and Income tax Act in the matter of income recognition and presentation of financial statements. The accounting policies adopted by a Bank cannot determine the taxable income. The entire thrust of RBI Directions is on presentation of NPA provision in the balance sheet of Bank. Presentation/ disclosure is different from computation/taxability of the provision for Bank. The nature of expenditure under the IT Act cannot be conclusively determined by the manner in which accounts are presented in terms of Master Circular. There are cases where on facts Courts have taken the view that the socalled provision is in effect a write off. Therefore, RBI Directions, though deviate from accounting practice as provided in the Companies Act, do not override the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the assessee does not fall under s. 36(1)(viia), the proviso/limitation would not come into play. In the instant case the appellant fall under clause (b) of s. 36(1)(viia). The Apex Court in CATHOLIC SYRIAN BANK LTD. vs. CIT (2012) 343 ITR 270 (SC) held: 41. To conclude, we hold that the provisions of ss. 36(l)(vii) and 36(l)(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 previQus 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(l)(vii), the assessee would be entitled to general deduction upon an account having ..... X X X X Extracts X X X X X X X X Extracts X X X X
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