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TMI Blog2018 (5) TMI 511X X X X Extracts X X X X X X X X Extracts X X X X ..... this ground. Provision made against the standard assets u/s 36(1)(viia) under the head ‘provision for bad and doubtful debts’ - Held that:- The assessee made the provision for bad and doubtful debts in aggregate of ₹ 6,12,89,928/- which includes provision made against standard assets amounting to ₹ 69,37,085/-. This issue was discussed in the earlier order for the assessment year 2010- 11 and confirmed the addition made by the AO allowed the appeal of the revenue. The issue in favour of revenue and against the assessee. Revenue’s appeal on this ground is allowed. Writing back of excess provision of bad and doubtful debts against non-rural advances - Held that:- There is no dispute with regard to the creation of provision for bad and doubtful debts and no dispute with regard to the fact that the assessee bank has rural branches and given rural advances. CIT(A) is squarely applicable to the assessee, hence, we do not see any reason to interfere with the order of the CIT(A). There was a mistake in CIT(A) as discussed in this order earlier which needs verification. The Ld.CIT(A) has directed the AO to verify the provision made in the books of accounts and if it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubtful debts u/s 36(1)(viia) is within the limit prescribed under I.T.Act, hence requested the AO to allow the same as deduction. Not being convinced with the explanation of the assessee the AO held that the provision made against the standard assets is contingent liability, cannot constitute deductible expenditure for the purpose of Income Tax Act. Provision for standard assets is not against any debt which has become doubtful. Accordingly, the AO disallowed a sum of ₹ 47,93,922/- for the AY 2010-11 and ₹ 69,37,085/- for the A.Y.2011-12. The AO relied on the decision in the case of Southern Technologies Ltd. Vs. JCIT(SC) 320 ITR 577 and the decision rendered by ITAT, Chennai in the case of Bhart Overseas Bank Vs. CIT (139 ITD 154) and the Instruction No.17/2008 of CBDT dated 26.11.2008. 3. Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and furnished the computation of provision for bad and doubtful assets and the deduction entitled by the assessee as per section 36(1)(viia) r.w.rule 6ABA of IT Rules which is as under : Sl. No. Particulars Amount (Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubt of recovery. When the bank itself has treated the such assets as good and recoverable any provision made on such assets cannot be considered as a provision for bad and doubtful debts and hence not allowable as deduction u/s 36(1)(viia) on the standard assets, thus argued that the AO has rightly made the disallowance which required to be upheld. 5. On the other hand, Ld.AR submitted that the assessee is a bank engaged in the finance of rural advances as well as urban banking. The assessee is entitled for deduction in respect of provision for bad and doubtful debts at 7.5.% on the total income but not exceeding 10% of aggregate average advances made by the rural branches computed in the manner specified under the Rule 6ABA of Income Tax Rules. The nomenclature is not material and it is enough if the assessee debits the expenditure in the Profit Loss account. The only requirement is the provision should not exceed the limits prescribed u/s 36(1)(viia). Even Circular No.17/2008 dated 26.11.2008 supports the allowability of provision for bad and doubtful debts. Rule 6ABA prescribed the manner in which aggregate advances is computed for the purpose of deduction u/s 36(1)(viia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation and disclosure standards notified under sub-section (2) of section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purposes of this clause.] [Explanation 1].-For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee;] [Explanation 2.-For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;] a scheduled bank [not being [***] a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank [or a co-operative ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rudential Norms NPAs and Bad and doubtful debts are classified as under: Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, RBI/2014-15/74, DBOD.No.BP.BC.9/21.04.048/2014-15, July 1, 2014 2.1 Non performing Assets 2.1.1 An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank. 2.1.2 A non performing asset (NPA) is a loan or an advance where; i. interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan, ii. the account remains out of order as indicated at paragraph 2.2 below, in respect of an Overdraft/Cash Credit (OD/CC), iii. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, iv. the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops, v. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops, vi. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted on a realistic basis. ii. In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful: From the above norms of RBI it is clarified that the Non performing assets and the Doubtful debts constitute the debt in cases of non recoveries of principal and interest or the Interest or the principal for certain period of time. For this purpose the assessee has to identify each asset and classify the same in the correct head. Since the recovery is doubtful in the case of NPAs, Bad and doubtful debts they are identified by asset wise and are covered under section 36(1)(viia) and allowable as deduction. Though prudential norms of the RBI are mandatory for classification of assets and to compile the financial statements of the assessee they are guidelines for the purpose of computation of profit and loss account and balance sheets of the assessee but not binding on the income tax for computing the income. Even if the aggregate amount of Bad and doubtful debts exceed the limit, the maximum allowable deduction is limited to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r an ascertained liability. The Ld.CIT(A) relied on the decision of DCIT Vs. The Gurdaspur Central Co-op Circle, Pathankot Bank Ltd. in ITA No.99/ASR/2011 dated 07.05.2012 and in the cited case the coordinate bench of ITAT set aside the issue and remitted the matter back to the file of the AO, hence the case law relied up on the Ld.CIT(A) does not help the assessee. The assessee relied on the decision of this tribunal in Krishna District Cooperate Central Bank Ltd. in ITA No.120 and 121/Viz/2013 and the issue involved in the appeal is NPA at branch level and the expenses incurred as legal charges, notice charges etc.. of NPA advances. The ITAT held that the NPA the debt includes the expenses incurred for recovery and allowable so long as the limit is within section 36(1)(viia)but it does not relate to provision on standard assets. Hence the case law relied up on by the Ld.AR is distinguishable on facts and not applicable. The AO relied on the decision of ITAT,Chennai in Bharat Overseas Bank Ltd vs CIT, 139 ITD 154 where in the coordinate bench held as under: It is clear from the above that it is not a standard allowance which is given, but, the allowance is subject to the actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as sub- standard, with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable. A loss asset is one where loss has been identified which has not been written off fully. Such an asset is considered as uncollectible and of such little value that its continuance as a bankable asset is not warranted. As against these, standard assets are performing assets. In other words, they are neither bad nor doubtful of recovery. Non-performing assets have well defined creditworthiness that jeopardize the liquidation of the debt and there is distinct possibility that the bank will sustain loss if deficiencies are not corrected. On the other hand, performing assets are such which have not ceased to generate income for the bank. Nonetheless, as a matter of prudence, the RBI has directed the banks to make a general provision of a minimum of 0.25% on standard assets w.e.f. the year ending 31-3-2000. This is only, in our opinion, a safety measure or an over-cautious approach to take care of a standard asset becoming non-standard in future. But certainly, the provision for standard asset cannot be equated with a provision for a bad and do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and doubtful debts against non- rural advances. The AO during the assessment proceedings disallowed a sum of ₹ 9,57,70,177/- relating to the writing back of the excess provision. During the assessment proceedings, the AO asked the assessee to furnish the provisions created and allowed in respect of rural advances and non-rural advances u/s 36(1)(viia) in the light of Hon ble Apex court s decision in the case of Catholic Syrian Bank Ltd(343 ITR 270). The assessee furnished the details according to which the assessee is entitled for deduction u/s 36(1)(viia) on rural advances and the in respect of non- rural advances and the excess claim worked out to ₹ 10,75,01,184/- as under : Claim / Allowable Breakup Statement Year wise Financial Year Details Claim Allowable Excess Claim 2006-07 25241116 0 25241116 2007-08 35940626 6771163 29169463 2008-09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer allowed the provision made on Rural advances excluding the provision for standard assets. The AO restricted the net provision for Bad and Doubtful debts to the extent of provision made on rural advances. The AO is of the view that the assessee is entitled for deduction u/s 36(1)(viia) only on rural advances and worked out the excess claim under provision for bad and doubtful debts to the extent of ₹ 9,57,70,177/- relating to the assessment year 2007-08 to 2011-12 and the same was added back to the total income. The assessee s case is that the assessee is entitled for provision for bad and doubtful debts not only on Rural debts but also on non-rural advances. He argued that the deduction claimed is within the limit of section 36(a)(viia) and the same is allowable as deduction. The Coordinate Bench of ITAT Bangalore in the case of DCIT, Circle-11(4) Vs.ING Vysya Bank Limited (supra) held that what is to be seen by the AO is whether the provision for bad and doubtful debts is created, whether it is in respect of rural or non-rural advances by debiting profit and loss account and to the extent provision for doubtful debts so created, the assessee is entitled for deduction s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government: Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head Profits and gains of business or profession . Explanation : For the purposes of this sub-clause, relevant assessment years means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005. (b) a bank, being a bank incorporated by or under the laws of a country outside India, 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 1st day of April, 2005, deduction in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iety and primary co-operative agricultural and rural development bank shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P.' 32. The object of the substitution, as explained in para 5 of the CBDT Circular No. 464, dt. 18th July, 1986, was to give the separate deduction, viz., one in respect of rural advances and the other for provision for bad and doubtful debts in general and also to extend the benefit of deduction to all banks including foreign banks. Modification in respect of deduction on provision for bad and doubtful debts made by the banks. 5.1 Under the existing provisions of cl. (viia) of sub-s. (1) of s. 36 of the IT Act inserted by the Finance Act, 1979, provisions for bad and doubtful debts made by a scheduled or a non-scheduled Indian bank is allowed as deduction within prescribed limits. The limit prescribed is 10% of the total income or 2% of the aggregate average advances made by the rural branches of such banks, whichever is higher. It had been represented to the Government that the foreign banks were not entitled to any deduction under this provision and to that extent they were being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be linked to the advances made by Bank's rural branches. At stage-II of Sec.36(1)(viia), the deduction while computing the taxable profits was allowed of an amount not exceeding 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iia) of the Act had to be done. Firstly it has to be ascertained as to what is 10% of the aggregate average advances made by rural branches, if the Bank has rural branches, otherwise that part of 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. 14. In the instant case there is no dispute with regard to the creation of provision for bad and doubtful debts and no dispute with regard to the fact that the assessee bank has rural branches and gi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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