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TMI Blog2016 (6) TMI 638X X X X Extracts X X X X X X X X Extracts X X X X ..... fect to the purpose and intention of any particular provision of the Act. (See: Shri Sajjan Mills Ltd. vs. Commissioner of Income Tax, M.P. & Anr. [2008 -TMI - 5911 - SUPREME Court]. From a bare reading of Section 36(1)(v) of the Act, it is manifest that the real intention behind the provision is that the employer should not have any control over the funds of the irrevocable trust created exclusively for the benefit of the employees – deduction allowed since the conditions stipulated in Section 36(1)(v) of the Act were satisfied.- Decided in favour of assessee. Disallowance of deduction claimed @ 7.5% of the gross total income under section 36(1)(viia) - Held that:- We find that this issue is now covered in favour of the Revenue and against the assessee by the decision of the Hon’ble High Court of Punjab & Haryana in the case of State Bank of Patiala reported in [2004 (5) TMI 12 - PUNJAB AND HARYANA High Court ] wherein it has been held that it is necessary to make a provision for bad and doubtful debts in the account books in the same previous year in which such provision is claimed as deduction under section 36(1)(viia).- Decided against the assessee - ITA. No. 713/Hyd/2015, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e date of filing of the return of income. The ITAT therefore, remitted the matter to the A.O. for examination of the evidence afresh. 2.2. During the consequential assessment proceedings, the assessee, while reiterating the submissions made before the authorities below, had also relied upon the decision of the Hon ble Calcutta High Court in the case of Sree Kamakhya Tea Co. (P.) Ltd., 199 ITR 714 (Cal.). The A.O. however, held that the decision of the Hon ble Calcutta High Court is distinguishable on the facts of the case before him and therefore, disallowed the claim of deduction. Aggrieved, the assessee preferred an appeal before the CIT(A) who confirmed the order of the A.O. and the assessee is in second appeal before us. 3. The Ld. Counsel for the assessee submitted that the assessee has actually has not made any provision for payment of gratuity but has made the payment to SBI Life Insurance fund directly on 22.05.2007 i.e., before the due date of filing of the return and the provision was made on actuarial valuation basis. The Ld. Counsel for the assessee further relied upon the judgment of the Hon ble Calcutta High Court in the case of Sree Kamakhya Tea Co. P. Ltd., (c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Tribunal s order is reproduced hereunder for ready reference. 14. We have heard both the parties. The conflict between section 40A(7) and section 43B has been considered by the Hon'ble Calcutta High Court in the case of Sree Kamakhya Tea Co. (P) Ltd. (supra) and the relevant portion of the Judgment is reproduced below (extracted from head note at page 718 to 199 ITR) : Under section 36(1)(va), deduction is allowed in respect of any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund, as defined in section 2(5) of the Act, created by the employer for the exclusive benefit of his employees under an irrevocable trust. After the insertion of section 40A(7), for claiming deduction for gratuity payment, the assessee was required to fulfil the conditions laid down in section 40A(7) and without fulfilling the conditions laid down therein, no assessee was entitled to deduction under 36(1)(v). This has undergone a change after the insertion of section 43B for and from the assessment year 1984-85. The provision of section 43B(b) are relevant and apposite in the context of the provisions of section 36(1)(v). Section 43B has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er would be 'income' in his hands and that would be allowed as permissible deduction under clause (va) of sub-section (1) of section 36 in computing the business income under section 28 provided the assessee credits the same to the relevant fund. Under Section 43B, the sum referred to in clause (b) of section 43B is treated differently, as it relates to the sum payable by the assessee as an employer which includes the employer's contribution as well as employees' contribution,. If such contributions which are payable to any provident fund or superannuation fund or any fund are paid within the due date, the employer will be able to avail of the benefit of deduction under section 43B . 18. Hence we dismiss the ground of the Revenue. 5.1. Hence, we find that in the earlier year, disallowance was deleted by following the decision in the case of Sree Kamakhya Tea Co. (P) Ltd. (supra). Now, coming to the facts of the case for the relevant assessment year, the ground on which A.O. has disallowed the claim of the assessee is that the payment is not routed through the approved gratuity fund as is evident from the recitals in the show cause notice dated 03.01.2014 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on towards the approved gratuity fund. As per the breakup of the said amount, an amount of ₹ 5,84,754/- was paid as annual premium to the Life Insurance Corporation ( LIC for short); a sum of ₹ 50,00,000/- was paid to the LIC as initial contribution in the group Life Assurance Scheme framed by the LIC for the benefit of the employees of the assessee and the remaining amount of ₹ 36,22,224/ - was shown as provision for initial contribution. It is common ground that assessee company's gratuity fund, viz., the Textool Company Ltd. Employees Group Gratuity Fund was approved by the Commissioner of Income Tax, coimbatore, w.e.f 25th February, 1983. While completing assessment, the Assessing Officer allowed a deduction of Rs. '36,22,224/under Section 40A(7) of the Act. However, deduction for the balance amount was disallowed on the ground that payment towards the gratuity fund was made by the assessee directly to the LIC and not to an approved gratuity fund and, therefore, it was not allowable under Section 36(1)(v) of the Act. Being aggrieved, the assessee preferred appeal to the Commissioner of Income Tax (Appeals). The Commissioner observed that the init ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion, the Commissioner of Income Tax (Appeals) as well as the Tribunal have correctly held that merely because the payments were made directly to the LIC, the company could not be denied the benefit under Section 36(1)(V) and the amount had to be credited in favour of the assessee. Both the Commissioner (appeals) as well as the Tribunal have correctly read the law and have correctly relied upon the aforementioned Supreme Court judgment. In our opinion, since the finding of fact is that all the payments made were only towards the Group Gratuity Fund, there would be no question of finding otherwise. Learned counsel appearing on behalf of the Revenue has submitted before us that the provisions of Section 36(1)(v) of the Act have to be construed strictly and for claiming deduction, conditions laid down in Section 36(1)(v) of the Act must be fulfilled. It is urged that since during the relevant previous year the contribution by the assessee towards the gratuity fund was not in an approved gratuity fund the High Court was not justified in affirming the view taken by the Commissioner as also by the Tribunal while answering the reference in favour of the assessee. However, on a query ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 10,46,19,487 claimed @ 7.5% of the gross total income under section 36(1)(viia) of the I.T. Act, 1961. 9. Brief facts of the case are that during the course of assessment proceedings for the relevant assessment year, the assessee filed a letter dated 6.10.2010 claiming deduction under section 36(1) (viia) of the I.T. Act and it also filed a revised computation in this regard. The A.O. held that under section 139(5) of the Act, the assessee was entitled to file a revised return before the end of one year from the end of the relevant assessment year or before completion of the assessment, whichever is earlier and that since the assessee has not filed revised computation within the period of one year from the end of the relevant assessment year, the claim cannot be accepted. The matter was carried in appeal up to ITAT and vide orders dated 29.04.2013 in ITA.No.502 and 967/2011 the ITAT directed the A.O. to examine the claim of deduction made by the assessee under section 36(1)(viia) and decide the same in accordance with law, after considering all the material and evidence that may be produced by the assessee. 10. During the proceedings before the A.O. under section 143(3) re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debited a sum of ₹ 9000.42 lakhs in its P L account consisting of : i. Provision for rural advances ₹ 85,57.00 lakhs ii. Provision towards bad and doubtful debts ₹ 433.73 lakhs iii. Provision towards frauds ₹ 9.69 lakhs. 5.2. The appellant had submitted the following revised computation of income : Profit after depreciation as per Income Tax Act. 53,92,26,496 Add: 5% of average aggregate rural advances. 85,57,00,000 Total income before deduction u/s.36(1)(viia) 1,39,49,26,494 Less: 5% on average advance 85,57,00,000 7.5% on total income 10,46,19,487 96,03,19,487 Total Income : 43,46,07,009 5.3. Sec.36(1)(viia) provides as follows : 36(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- (viia) in respect of any provision for bad and dou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court that Sec. 36(1)(viia) applies only to rural advances. Therefore, the deduction under this sub-section must be limited to the amount of provision relating to rural advances in the books of the appellant. 5.9. As noted above, the total provision debited by the appellant was 9000.42 lakhs. Of this, provision of ₹ 8557 .00 lakhs was made as 5% of the average aggregate rural advances. The appellant had also submitted before the Assessing Officer that out of the provision of ₹ 433.73 lakhs, Rs,310.00 lakhs related to rural branches. Therefore, the total provision relating to rural branches was ₹ 89903. 73 lakhs. 5.10. Against this, the appellant had claimed the following deductions: 5% on average advance ₹ 85,57,00,000 7.5% on total income as perSec.36(1)(viia) ₹ 10,46,19,487 Total ₹ 96,03,19,487 The deduction allowable u/s 36(1)(viia) must, therefore, be limited to the total provision of ₹ 89903.73 lakhs created by the appellant relating to rural branches. 5.11. It is also seen from the revised computation of income filed by the appellant that while the appellant had added back the sum of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uponthe order of ITAT in the assessee s own case for A.Y. 2009-2010 wherein the disallowance was confirmed. 14. Having regard to the rival contentions and the material on record, we find that the only issue is whether the assessee is eligible for deduction under section 36(1)(viia) of the Act @ 7.5% of the total income without creating a provision for the same in its books of account. 14.1. We find that similar issue had arisen in the case of Deccan Grameena Bank, Hyderabad for the A.Y. 2010-2011 and the Tribunal had held in favour of the assessee as under: Addition on account of disallowance of deduction claimed u/s. 36(l)(viia) of IT Act ₹ 4.44,52,560/-15. While computing the total income for the year under reference the AO has disallowed the claim of ₹ 4,44,52,560/-, made by the assessee in the computation furnished along with the return of income.Such claim was made as per the provisions of Sec.36(1)(viia) of the Income-tax Act, calculated at the rate of 7.5% of the total income. The AO has observed that the deduction was claimed based on statutory provision, without there being any claim in books of account. It was further opined by the AO that any provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntext it is relevant to refer to the decision of the ITAT Hyderabad, in the case of State Bank of Hyderabad vs. DCIT dated 28.11.2008 in ITA No.1232/Hyd/2006 wherein the Tribunal held that deduction u/s 36(1)(viia) of the Income Tax Act, not exceeding 7.5% of the total income computed, is to be allowed for provision of bad and doubtful debts. Considering the facts of the case that the deduction claimed by the assessee to the extent of ₹ 4,44,52,560 was claimed as per the provisions of section 36(1)(viia) and without claiming any deduction towards bad debts written off as per the provisions of section 36(1)(vii) and also respectfully following the decision of ITAT in the case of SBH vs. DCIT (Supra), The CIT (A) was of the opinion that there is no infirmity in the claim of the assessee. Accordingly the addition of ₹ 4,44,52,560 was held to be unsustainable and this ground of appeal was treated as allowed by the CIT(A). 19. Aggrieved, the Department is in appeal before us and raised the following grounds : 1 .. 2 .. 3 . 4. Whether the Ld CIT (A) is correct in allowing law in deduction claimed u/s 36(1)(viia) of IT Act ₹ 4,44,52,560 . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not clear as to what is the basis on which the provision of ₹ 22.40 crores (Rs.5.38 crores in respect of urban advances and ₹ 17.02 crores in respect of rural advances)was made by the assessee during the year under consideration. Moreover, all these facts and figures were furnished by the assessee before the learned CIT(A) for the first time and the Assessing Officer therefore, did not have any opportunity to verify the same. The claim of the assessee of having adjusted the amount of ₹ 22.24 crores towards bad debts written off during the year under consideration against the opening balance of the provision of ₹ 40.13 crores was also made by the assessee for the first time before the learned CIT(A), and the Assessing Officer did not have any opportunity to verify the same. Having regard to all these facts and circumstances of the case, we are of the view that it would be fair and proper and in the interests of justice to restore the issue relating to the assessee s claim for deduction under S.36(1)(viia)to the file of the Assessing Officer for deciding the same afresh, in accordance with the provision of S.36(1)(viia) after giving proper and sufficient opp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 If the intention of the legislature is that deduction should not be linked to the provision made in the accounts, the language of the section will not have the wording in respect of any provision for bad and doubtful debts made , instead it would have stated that the scheduled bank would be entitled to a deduction of an amount which is an aggregate of 7.5% of the total income and 10% of the aggregate average advances made by the rural branches without reference to any provision. Therefore, I am of the opinion that any provision in the section refers to any provision made in the accounts of the assessee bank and debited the amount of such debt or part of the debt in that previous year to the provision for bad and doubtful debts account made under that clause. Reliance is placed on the decision of the Hon ble High Court of P H in the case of State Bank of Patiala Vs. CIT 272 ITR 54 where it has been held that it is necessary to make a provision for bad and doubtful debts in the account books in the same previous year in which such provision is claimed as deduction u/s 36(1)(viia). Therefore, it is held that deduction is available only to the extent of the provision made in the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er revised census of 2001 was 352.53 crores. According to the AO even if Bad debts written off of ₹ 179,21,88,992 is reduced still the balance in the PBDD account was ₹ 733,35,58,177/-. Since the balance so available in PBDD account was more than 10% of AARA, the AO held that deduction on the basis of new provision of ₹ 295,55,54,682/- cannot be allowed. In this regard the AO referred to the contention of the Assessee which was to the effect that in each year the Assessee can create 10% of AARA and concluded that the expression not exceeding ten percent of the aggregate average advances used in Sec.36(1)(viia)of the Act cannot mean that provision can be created each year irrespective of the available balance in the PBDD account. The AO also referred to a situation where there is no claim for bad debts in a year even then the Assessee will be entitled to claim deduction by way of PBDD which according to the AO would not be the intention of the legislature. The AO thus refused to allow the claim of the Assessee for deduction of 10% of AARA. 49. The CIT(A) deleted the addition made by the AO by following the decision of the decision of the ITAT in Assessee s o ..... 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