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TMI Blog2019 (12) TMI 978X X X X Extracts X X X X X X X X Extracts X X X X ..... as erred in law and fact in deleting the addition of Rs. 3,70,00,000/- made by the Assessing Officer, ignoring the fact that the said amount has been shown as provision made for bad and doubtful debts, during the relevant previous year, over and above the prudential norms suggested by the RBI. 3. Whether in the facts and circumstances of the case, the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer be restored. 4. That the appellant craves leave to add, modify and or delete any ground(s) of appeal." 3. The assessee has claimed deduction u/s 36(1)(viia) of the Income Tax Act, 1961 of Rs. 16,06,72,355/-. The Assessing Officer disallowed this amount on the grounds that no provision made under the head "Provision for bad and doubtful debts for the year under consideration". It is held by the Assessing Officer that the net balance of other provisions have actually decreased in respect of last year balance and since it shows overall decrease in provisions, the same needs to be disallowed. 4. With regard to the disallowance the assessee submitted as under: 1. "The bank is governed by the Banking Regulation Act, 1949. The balance sheet and the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1961 in this regard and accordingly, the same has been claimed in column no. 30 of Schedule BP of ITR. Detailed submission for deduction u/s 36(1)(viia) has already been filed with you on 23.12.2014. 3. &5. As stated above that the bank made the total Provisions for bad and doubtful debts of Rs. 16,06,72,355/- during the year. Out of this, Rs. 1102.81 lakhs was reduced from the Advances and balance of Rs. 503.91 lakhs was shown in schedule 5 -other provisions in the Audited accounts as per Banking Regulation Act. In other words, the outstanding amount of advances as on 31.03.2012 shown in schedule 9 of Balance sheet is net of provision for bad and doubtful debts as on 31.03.2012 and remaining accumulated amount of provision for bad & doubtful debts as on 31.03.2012 has been shown in schedule 5 -other provisions. Besides the above, there can be reduction in the amount of accumulated provisions for bad & doubtful debts as compared to last year due to recovery in accounts, write off and up gradation of accounts etc. As such, the incremental provision for bad and doubtful debts during the year cannot be worked out on comparison of schedule 5-other provisions with the last year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ettled position that RBI guidelines are irrelevant for the purpose of income tax computation under income tax. The bank has made the total provision of bad and doubtful debts of Rs. 16,06,72,355/- during the year which includes the provision of Rs. 3,70,00,000/- as given in the said note. Further, the provision for bad and doubtful debts has also been reduced by the amount of write off or rural advances by Rs. 210.36 lacs as this write off has been made out of the provision for bad and doubtful debts claimed earlier and accordingly, no separate claim of write off bad debts of Rs. 210.36 lacs has been made in the computation of income. In view of the above and considering the merit of the case and provision of the law, deduction claimed u/s 36(1)(viia) cannot be disallowed and the same has been correctly claimed by the bank. It is also relevant to state that this issue was also examined in detail during the course of assessment proceedings of earlier years and there has been no disallowance on this issue in any of the earlier assessment years...." 5. The Assessing Officer disallowed the PBDD (Provision for Bad & Doubtful Debts) on the grounds that the assessee has failed to fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at in respect of each of the rural branches is the aggregate average advances made by the rural branches of the bank which work out to Rs. 1116.57 crores and 10% of the same works out to Rs. 111.66 crores. 7.5% of taxable income before deduction u/s 36(1) (viia) comes to Rs. 3.10 crores. Since the provision for bad & doubtful debts is of Rs. 16.07 crores which is much less than the aforesaid aggregate amount of Rs. 114.76 crores (Rs. 111.66 crores + Rs. 3.10 crores), the bank has claimed the deduction under section 36(1 )(viia) of Rs. 16.07 crores. It is to be noted that Ld AO has duly accepted the calculation of 10% of aggregate average advances made by rural branches of Rs. 111.66 crores as well as 7.5 of total income of Rs. 3.10 aggregating to Rs. 114.76 crores which is the eligible amount for deduction u/s 36(1) (viia). As such only limited dispute has been raised by the LD AO with respect to provision of Rs. 16.07 crores made by the bank for bad & doubtful debts and duly debited to its audited Profit & loss account for the AY 2012-13. The Ld AO without considering the audited profit & Loss account which is a direct document for establishing the creation of provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccumulated) as on 31/03/2012 filed with him and gone with his own calculations of simply doing the comparison of details filed with him of "other provisions" disclosed in Schedule-5 (Other liabilities & provisions) to audited accounts as on 31/03/2011 and 31/03/2012 in isolation which is totally incorrect as detailed above. Further, it has been one item of complete journey of accumulated account of provision for bad & Doubtful debts as on 31/03/2012 fi led with him vide its submission dated 11/02/2015 & shown above and other item vision for bad & doubtful debts netted with gross advances) of same submission (i.e. provision for bad & doubtful debts netted with gross advances) of same submission dated 11/02/2015 was totally ignored by him. Moreover, when the LD AO, in preference to accept the amount of provision for bad & doubtful debts made during the year and duly reflected in audited P& L Account, decided to go with the comparison of accumulated account of provision for bad & doubtful as on 31/03/2011 and 31/03/2012 to work out the incremental provision for bad & doubtful debts during the year, should have considered complete journey of such accumulated account as well as its p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion of first adding the amount in computation of income then claiming separately does not arise at all as for deduction u/s 36(1)(viii), the legislature talks about creation of reserve which is a below line item and is appropriation of prof its. Therefore, the same cannot be equated with deduction u/s 36(1)(viia) where provision has to be created which is a charge on prof its. In any case, it is a settled law that whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. Further, it is also a settled law that accounting practices cannot override the provisions of the Income Tax Act. This has been so held by various courts. Instances are as under: i) Kedarnath Jute Mfg. Co Ltd vs. CIT.(1971) 82 ITR 363(SC) ii) State Bank of India vs. CIT(1986) 1571TR 67 (SC)- Para 11 However, the Ld AO did not deal with the aforesaid case laws in his assessment order which implies that he has been in agreement with our aforesaid contention and cited case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1979 w.e.f. 1st April,1980 and at the time of its insertion, this clause read as under: "(viia) in respect of any provision for bad and doubtful debts made by a scheduled bank in relation to the advances made by its rural branches, an amount not exceeding one and a half per cent of the aggregate average advances made by such branches, computed in the prescribed manner. Explanation: For the purposes of this clause,- ("rural branch" means a branch of a scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; (ii) "scheduled bank" has the same meaning as in the Explanation at the end of cl. (b) of sub-section (2) of section 11, but does not include a co-operative bank." This clause, as explained in para 13 of the CBDT Circular No. 258, dt. 14th June, 1979, was inserted to promote rural banking and to assist the scheduled commercial banks in making adequate provisions in relation to their rural advances. The Circular reads thus:- "Deduction in respect of provisions made for bad and doubtful debts relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of new cl. (viia) of s. 36(1) relating to the deduction on account of provisions for bad and doubtful debts is distinct and independent of the provisions of s. 36(1 )(vii) relating to allowance of the bad debts. In other words, the scheduled commercial banks would continue to get the full benefit of the write off of the irrecoverable debts under s. 36(1 )(vii) in addition to the benefit of deduction of the provision for bad and doubtful debts under s. 36(1)(viia). This provision will take effect from 1st April, 1980 and will accordingly apply in relation to the asst. yr. 1980-81 and subsequent years." By section 1 O(a) of the Finance Act, 1982 in the opening portion of the word (scheduled bank" was substituted with the words "scheduled bank or a non-scheduled bank." Further in the Explanation to this clause, the existing cl. (i) was renumbered as cl. (ia) and the following clause was inserted as cl(i): "Non-scheduled bank" means a banking company as defined in cl. (c) of section 5 of the Banking Regulation Act, 1945 (10 of 1949) which is not a scheduled bank". As explained in para 17 of the CBDT Circular No. 346, dt. 30th June, 1982, the object of the amendment wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This allowance is subject to the fulfilment of the conditions specified in sub-so (2) of s. 36. Sec. 36(1 )(viia) of the IT Act provides for a deduction in respect of any provision for bad and doubtful debts made by a scheduled bank or a non-scheduled bank in relation to advances made by its rural branches, of any amount not exceeding 11/2 per cent of the aggregate average advances made by such branches. Having regard to the increasing social commitments of banks, s. 36(1)(viia) has been amended to provide that in respect of any provision for bad and doubtful debts made by a C./ r scheduled bank [not being a bank approved by the Central Government for the purposes of s. 36(1)(viiia) or a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank, 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, shall be allowed as a deduction in computing the taxable profits. Sec. 36(1)(vii) of the Act has also been amended to provide that in the case of a bank to which s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words "five per cent.", the words "ten per cent." had been substituted. Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess 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 clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l investment corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956) engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of this subsection; vi) "co-operative bank", "primary agricultural credit society" 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" 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. Under the existing provisions of cl. (viia) of sub-s. (1) of s. 36 of the I T 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by rural branches;" It can be seen from the history of Sec.36(1 )(viia) of the Act that at stage-I the deduction was allowed in respect of any provision for bad and doubtful debts (PBOO) made by a scheduled bank in relation to the advances made by its rural branches. At this stage the PBOO had to 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 PBOO 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. PBOO 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 of aggregate average advances (AAA) made by rural branches of such banks had to be computed and the PBOO made in books has to be in relation to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as deduction. the condition that the provision should be in respect of rural advances is not necessary. At stage-II of the provisions of Sec. 36(1 )(viia) of the Act. this condition was done away with and it was only necessary to create PBOO in the books of accounts and debit to profit and loss account. The quantification of the maximum deduction permissible u/s.36(1)(viia) 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 PBOO (irrespective of whether it is rural or non- rural) has to be seen. To the extent PBOO is so created. then subject to the permissible upper limits referred to above. The deduction has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Apex Cooperative Bank Ltd. Vs. ACIT [2014] 62 SOT 113 (Chennai - Trib.) - (refer page 64-67 of PB) iii. Section 36(1)(viia) of the IT Act, 1961 - Bad debts [Cooperative bank] - AY 2008-09 - Whether, cooperative bank is a non-scheduled bank and, thus, entitled to claim benefit of provisions of sec. 36(10(viia)(a)-Held, yes - Whether where assessee, a cooperative bank, had created provision for bad and doubtful debts though under different nomenclature, viz., 'Reserve for NPA' in accordance with RBI directions, this would not disentitle assessee for claiming deduction u/s 36(1)(viia)(a) - Held, yes [Paras 7 & 8] [In favour of assessee] Vellore Dist. Central Cooperative Bank Ltd. Vs. CIT [2013] 36 CCH 597 (Chennai - Trib.) - (refer page 68 - 73 of PB). It is to be noted that bank is not claiming the deduction u/s 36(1) (vii) separately in respect of bad debts and adjusting the such bad debts with the provision claimed u/s 36(1) (viia) so as to avoid the claim of double deduction in this regard. Accordingly, bank is claiming the deduction u/s 36(1) (viia) as per provisions of the law. However, the LD AO misunderstood the provisions of the law and erred in interpreting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Income tax Act, 1961 amounting to Rs. 16,06,72,355/-. The addition of Rs. 11,02,79,355/- made by the AO due to disallowance of excess claim made by the assessee, in respect of provisions of bad and doubtful debts u/s 36(1)(viia) of the I T. Act, 1961. 2. The deduction claimed u/s 36(1)(viia) is to be restricted with the amount of provision made by the assessee for Provision for Bad and Doubtful Debt (read hereinafter PBDD) as the decision of Hon'ble High Court of Punjab and Haryana in the case of State Bank of Patiala vs. CIT(2005) 272. ITR 54 wherein it is held that "making of a provision for bad and doubtful debt equal to the amount mentioned in this section is a must for claiming such deduction." 3. The assessee has not furnished the break-up of Rs. 16,06,72,355/- claimed as deduction towards PBDD u/s 36(1 )(viia). Out of these FIs. 5,03,93,000/- is the difference of closing and opening balances after considering written off debt and provision made over and above RBI Prudential norms. Assessee has tried to explain that the same is the PBDD for the year. 4. For the balance Rs. 11,02,79,355/- (Rs. 16,06,72,3555 - 5,03,93,00), the explanation given was that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentary evidence for its requirement. Therefore, the provision made by the assessee for Rs. 3,70,00,000/- was disallowed and the deduction claimed on this provision was also liable to be disallowed and, accordingly, deduction u/s 36(1)(viia) on this amount was disallowed and added back to the income of the assessee." She also relied on the judgment of Punjab-Haryana High Court State Bank of Patiala Vs. Commissioner of Income Tax And ...on 21 May, 2004, 272 ITR 54 P&H. 1. The assessed has filed this appeal under Section 260A of the Income-tax Act, 1961 (for short the "Act"), against the order of the Income-tax Appellate Tribunal, Chandigarh Bench-A, Chandigarh (for short "the Tribunal"), dated August 4, 2003, whereby the action of the Assessing Officer in restricting its claim for deduction of the provision for bad debts to Rs. 1,19,36,000 under Section 36(l)(viia) has been upheld. 2. The facts of the ease are that in the return of income for the assessment year 1985-86, the assessee had claimed deduction of Rs. 1,94,21,000 under Section 36(l)(viia) of the Act. The Assessing Officer observed that in the books of account pertaining to the relevant assessment year, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly it made up the shortfall irj the provision in the balance-sheet of the subsequent assessment year. Thus} according to him, there was substantial compliance with the requirement of law and accordingly the authorities below were not justified in restricting the claim of the assessee to Rs. 1,19,36,000 only. 5. Section 36(f)(viia) of the Act as applicable to the assessment year 1985-86} reads as under : "in respect of any provision for bad and doubtful debts made by a scheduled ban [not being a bank approved by the Central Government for the purposes of clause (viiia) or a bank incorporated by or under the laws of a country outside India) or a non-scheduled bank, an amount not exceeding ten per cent, of the total income (computed before making any deduction under this clause and Chapter Vl-A) oran an amount not exceeding two per cent, of the aggregate average advances made by the rural branches of such bank, computed in the prescribed manner, whichever is higher." 6. A bare perusal of the above shows that the deduction allowable under the above] provisions is in respect of the provision made. Therefore, making of a provision for} bad and doubtful debt equal to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wable to banks vide CBDT Circular 421 dt. 12.06.1985 which has been mentioned above. After considering the facts and the entire submissions of both the parties, we find that (ii) U/s 119, the CBDT is entitled to issue Circulars to explain or tone down the rigours of law and to ensure fair enforcement of its provisions. These circulars have the force of law and are binding on the income tax authorities, though they cannot be enforced adversely against the assessee. Normally, these circulars cannot be ignored. A circular may not override or detract from the provisions of the Act but it can seek to mitigate the rigour of a particular provision for the benefit of the assessee in certain specified circumstances. So long as the circular is in force, it aids the uniform and proper administration and application of the provisions of the Act (UCO Bank vs. CIT 237 ITR 889 (SC) followed) 9. We have also gone through the guidelines given by the Supreme Court in the case of DCIT vs. Catholic Syrian Bank 88 ITD 185. In that case, the Hon'ble Court had to consider whether a bank was eligible to claim a deduction for bad debts u/s 36(1)(vii) in respect of its (rural & urban) advances and also cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as before AO regarding the entitlement of deduction u/s 36(1)(viia) of Rs. 114.76 crores. There is no dispute as to the correctness of the calculation of the entitlement of deduction u/s 36(1)(viia) of the Act. It is a settled law that only against ascertained liability deduction can be allowed except for specific provisions in Act where deduction is allowed on provisions also. The Act has specifically provided in sec. 36(1)(viia) for deduction for provision made for advances made by the rural branches of the bank. 11. The method of calculating deduction has been defined in the Act. The bank is entitled for deduction for 10% of the aggregate average advances made by the rural branches plus 7.5% of the total income computed before this deduction and amount deductible under sec 80C to 80 U. It is mandatory for all the banks to follow the income recognition norms and assets classification norms as prescribed by Reserve Bank of India. The assessee has also made provision for NPA'S by following the income recognition norms of Reserve Bank of India. The Hon. Supreme Court in the case of Catholic Syrian Bank Ltd laid down that the legislative intent was to encourage the Rural adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its urban branches. The assessee has debited Rs. 2.52 Crores (approximately) (i.e., 7.5% of the gross total income) in P&L A/c creating provision for non-performing assets in accordance with the provisions of section 36(l)(viia) of the Act. The Revenue has disputed the deduction claimed for the reason, that the assessee has not created provision for bad and doubtful debts. In case of Banking Companies, the accounts are made in accordance with the RBI guidelines and the Banking Regulation Act, 1949. Although, the assessee has named the provision as 'Provision for NPA', but in pith and substance the provision has been created for 'Bad and Doubtful Debts' . The taxonomy of the provision has been done by the assessee to keep it in line with the RBI and NABARD guidelines. 14. We are satisfied that the assessee has made provision and claimed deduction in accordance with the provisions of section 36(l)(viia). The assessee is entitled to the benefit of same. 15. Similarity the Hon'ble ITAT Chennai in the case of VELLORE DIST. CENTRAL CO-OPERATIVE BANK LTD. VS. COMMISSIONER OF INCOME TAX - (2013) 145 IDT 0129 (Chennai) has held that the question which arises for determination before us ..... 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