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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 ..... is-entitle the assessee for claiming deduction under the provisions of Section 36(l)(viia)(a). The purpose for creation of reserve for NPA is same i.e., creating provision towards bad and doubtful debts. Thus, in view of the facts of the case and judicial pronouncements in the above state cases the assessee will be entitled to deduction u/s 36(l)(viia) to the extent of provision made for bad and doubtful debts . The A.O is therefore directed to allow the full deduction as claimed by the assessee in the computation of income and not to restrict it - Decided in favour of assessee. - ITA No. 1937/Del./2016 - - - Dated:- 18-12-2019 - SH. BHAVNESH SAINI AND DR. B. R. R. KUMAR, JJ. Appellant By : Ms. Ashima Neb, Sr. Dr, Ms. Nidhi Srivastava, Cit Dr Respondent By : Sh. Vivek Gupta, Ca ORDER Dr. B. R. R. Kumar, J. The present appeal has been fi led by the Revenue against the order of the ld. CIT(Appeals), Meerut dated 06.01.2016 pertaining to assessment year 2012-13. 2. Following grounds have been raised by the Revenue: 1. Whether in the facts circumstances of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the banking industry under the head provisions and contingencies given the aforesaid form B and the same has been duly certified by the statutory auditor of the bank. Profit and loss account as required to be filed up in income tax return is nothing but the copy of profit and loss account made by the bank in which provision for bad and doubtful debts have been made under the head provisions and contingencies. For this reason, the amount of provision for bad and doubtful debts of ₹ 16,06,72,355/- was duly filed up in column no. 39 other provisions as per aforesaid prescribed form no. B for Profit and Loss account applicable to banking industry. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed provisions for doubtful debts as on 31/03/2011 Written of f/write back of provision during the year on write off Provision outstanding after write of f/write back Accumulated Provisions for doubtful debts as on 31/03/2012 Provision for bad doubtful debts during the year 1 2 3=(1-2) 4 5=(4-3) Provision for bad doubtful net ted with Gross advances and net advances shown in schedule-9 of audited accounts 1481.11 106.28 1374.83 2477.64 1102.81 Provision for bad doubtful debts shown under schedule 5 of audited accounts 3451.91 210.36 3241.55 3745.47 503.91 Total 4933.02 316. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fill the correct and true figures of PBDD which was not done by the assessee. The matter was taken up to appeal by the assessee before the Ld. CIT(A). 6. Before the Ld. CIT(A), the assessee has reiterated the submissions taken up before the Assessing Officer. The submissions of the assessee are as under: Section 36 (1) (viia) inter-alia provides as under: 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 doubtful debts made by- (a) a scheduled bank [not being a bank incorporated by or under the laws of a country outside India] or a no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is to be noted that Ld AO has duly accepted the calculation of 10% of aggregate average advances made by rural branches of ₹ 111.66 crores as well as 7.5 of total income of ₹ 3.10 aggregating to ₹ 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 ₹ 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 provision for doubtful debts during the year, has gone with comparison of provision for bad doubtful debts account as on 31/03/2011 and 31/03/2012 in isolation and without fully appreciating the fact that for comparing such accumulated account, one has to also look into reversal in this account during the year on account of write off bad debts which has been of ₹ 316.64 lacs during the year. Further, Ld AO also overlooked the fact on record that at the time of preparation of balance sheet, the advances are shown/pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1102.81 Provision for bad debts shown under of audited accounts 3451.91 210.36 3241.55 3745.47 503.91 Total 4933.02 316.64 6223.11 1606.72 However, the LD AO has totally overlooked the facts and figures available on record including the ledger account of Exp. Provision for NPA for the year ended on 31/03/2012 and Sundry Provision NPA (accumulated) 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 othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 7.5 of taxable income. It is not out of place to mention that in case NPA provisions are more as compared to eligible amount under section 36(1)(viia), in that case. the deduction under section 36(1)(viia) is limited to eligible amount under section 36(1)(viia) and excess amount of NPA provision is not allowed at al l. For this, reason, the bank consistently follows the treatment of first adding the NPA Provisions in computation of Income then claiming the deduction u/s 36(1)(viia) after satisfying the conditions under section 36(1)(viia).This treatment has been consistently accepted by the income tax department in scrutiny assessment of earlier years as well. In the case of deduction u/s 36(1 )(viii), the question 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isk involved in granting rural advances, the bank has made additional provision of ₹ 3,70,00,000/- during the year towards rural advances which is within the very purpose of object sought to be achieved by the legislature by inserting the section 36(1) (viia) in the statute. As such, bank is eligible for deduction u/s 36(1) (viia) for said provision of ₹ 3,70,OO,OOOI-also as the total provision of ₹ 16,06,72,355 (including the provision of ₹ 3,70,00,0001-) made by the bank and debited to its profit loss account is much lower as compared to the total eligible amount of deduction u/s 36(1)(viia) of ₹ 114.76 crores as detailed above. To appreciate the provisions of section 36(1)(viia),one needs to look into the history of Sec.36(1 )(viia) as it exists in the present form. Stage-I: Sec. 36(1)(viia) was inserted by the Finance Act, 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he previous year. The expression scheduled bank has the same meaning as in the Explanation below s. 11 (2)(b) of the IT Act but does not include a cooperative bank. The expression scheduled bank would, therefore, cover the State Bank of India constituted under the State Bank of India Act, 1955, any subsidiary bank of the State Bank of India as defined in the State Bank of India (Subsidiary Banks) Act, 1959, a nationalized bank as specified in s. 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or any other bank included in the Second Schedule to the Reserve Bank of India Act,1934. It may be mentioned that all co-operative banks have been excluded from the purview of this provision in view of the position that under s. 80P(2)(a)(i) of the IT Act, the profits and gains of a co-operative society engaged in the business of banking or providing credit facilities to its members are completely exempt from income-tax. It may be relevant to mention that the provisions 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) rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. Simultaneously, Sec.36(2)(v) was introduced by the Finance Act, 1985 and it reads thus: Sec. 36(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply- (i) to (iv) (v) where such debt or part of debt relates to advances made by an assessee to which cl. (viia) of sub-so (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause. As explained in para 17 of the CBDT Circular No. 421, dt. 12th June, 1985, the benefit of deduction under this clause was enhanced having regard to the increasing social commitments of banks. Deduction in respect of provisions made by banking companies for bad and doubtful debts Sec. 36(1 )(vii) of the IT Act provides for a deduction in the computation of taxable profits of the amount of any debt or part thereof which is established to have beco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 doubtful debts made by - (a) a scheduled bank not being a bank incorporated by or under the laws of a country outside India] or a cooperative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction. under this clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner; Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, 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, for an amount not ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e total income (computed before making any deduction under this clause and Chapter VI-A). Explanation: For the purposes of this clause- (i) non-scheduled bank means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) which is not a scheduled bank;] (ia) rural branch means a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according t the last preceding census of which the relevant figures have been published before the first day of the previous year; (ii) scheduled bank means the State Bank of India constituted under the State Bank of India Act, 1955, a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959, a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934; iii) pub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clarified that foreign banks do not have rural branches and the bank concerned. It may be clarified that foreign banks do not have rural branches and hence this amendment will not be relevant in the case of the foreign banks. The other provision secures that a further deduction shall be allowed in respect of the provision for bad and doubtful debts made by all banks not just the banks incorporated in India, limited to 5% of the total income (computed before making any deduction under this clause and Chapter VI-A). This will imply that all scheduled or non-scheduled banks having rural branches would be allowed the deduction upto 2% of the aggregate average advances made by such branches and a further deduction upto 5% of their total income in respect of provision for bad and doubtful debts. To complete the sequence of amendments, we may also make a reference to the Amendment to sec.36(1 )(viia) of the Act by the Finance Act, 2013. By the Finance Act, 2013, in section 36 of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2014, in clause (vii), the Explanation was numbered as Explanation 1 thereof and after Explanation1 as so numbered, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction was consequent to representation to the Government that the existing ceiling in this regard i.e. 10% of the total income or 2% of the aggregate average advances made by the rural branches of Indian banks, whichever is higher, should be modified. Accordingly, by the Amending Act, the deduction presently available under cl. (viia) of sub-so (1) of s.36 of the IT Act has been split into two separate provisions. One of these limits the deduction to an amount not exceeding 2% (as it existed originally, now it is 10%) of the aggregate average advances made by rural branches of the banks concerned. This will imply that all scheduled or non-scheduled banks having rural branches would be allowed the deduction (a) upto 2% (now 10%) of the aggregate average advances made by such branches and (b) a further deduction upto 7.5% of their total income in respect of provision for bad and doubtful debts. The further deduction of 7.5% of total income was available to banks which did not have rural branches. Therefore after 1.4.1987, scheduled or non-scheduled banks having rural branches were allowed deduction., (a) upto 2% (now 10%) of the aggregate average advances made by suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the proviso also limits the claim for deduction u/s.36(1 )(vii) of the Act to an Assessee to which Sec.36(1 )(viia) of the Act applies to the amount by which such debt or part thereof (written off as Bad debts) exceeds the credit balance in the provision for bad and doubtful debts account made under clause(viia) to Sec.36(1) of the Act. Reliance is also placed on the following case laws in this regard: i. In order to allow assessee s claim under section 36(1)(viia), what has to be seen by AO is as to whether provision for bad and doubtful debts (PBDD) is created irrespective of whether it is in respect of rural or non-rural advances by debiting profit and loss account and to extent PBDD is so created, assessee is entitled to deduction subject to upper limit of deduction laid down in said section. DCIT Vs. ING Vysa Bank Ltd. (2014) 62 SOT 26 (Bangalore) (refer page 46-63 of PB) ii. Section 36(1)(viia) of the Income Tax Act, 1961 Bad debts In case of banks (Provision made for bad doubtful debts) Assessment year 2009-10 Assessee bank had claimed provision for non-performing assets in accordance with s. 36(10(viia) AO d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prayed that the disallowance of ₹ 14,72,79,355/- out of ₹ 16,06,72,355/- made by the Ld AO u/s 36(1) (viia) needs to be deleted. Ground No: 4 Without prejudice to ground no 2 3 above, even for the sake of argument it is assumed but not admitted that the provision to the extent of Rs, 14,72,79,355/- out of ₹ 16,06,72,355 was not made for bad doubtful debts during the year, in that case also, Ld AO erred in not allowing the said provision made during the course of business and duly reflected in the audited P L account of the bank without establishing that for what other purpose, the said provision to the extent of ₹ 14,72,79,355/- out of ₹ 16,06,72,355/- was made and why the same is not allowable under section 37, when he has not treated the said provision to the extent of ₹ 14,72,79,355/- as provision for bad and doubtful debts. It is therefore, prayed that said provision to the extent of ₹ 14,72,79,355/- be allowed under section 37 if the same is not allowed under section 36(1) (viia) of IT Act, 1961. 7. Before us, during the arguments the Ld. CIT DR argued that the assessee s accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of provision made by the assessee was amounting to ₹ 11,02,79,355/- disallowed and added back to the total income of the assessee by the AO. 5. Out of the provision of ₹ 5,03,93,000/-(PBDD) made for the previous year, art amount of ₹ 3,70,00,000/- was shown as provision made over and above the PBDD required to be made as per prudential RBI norms. The assessee has submitted^ that provision made by the bank in addition to the minimum provisions required to be made in terms of RBI guidelines and it is a settled position that RBI guidelines are irrelevant for the purpose of Income tax computation under Income Tax. The reply filed by the assessee is not at all acceptable as the provisioning made by the bank, should be derived from true and fair mechanism, which should have uniformity in all years. If there is any alteration/change is made by the bank, It should be properly justifiable and have true and fair grounds for the same. The assessee had made Nil. provision for previous year against total monthly average advance of Rural Branches of the Bank for the Bad and doubtful debts over ana above the PBDD required to be made in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has also upheld the disallowance vide the impugned order dated August 4, 2003. 3. Mr. Akshay Bhan, learned counsel for the appellant, submitted that originally the assessee had filed its return of Income for the assessment year 1985-86 on September 27, 1995, wherein deduction under Section 36(1)(viia) of the Act had been claimed at ₹ 1,19,36,000 which was admissible under that provision as it! existed at the relevant time. 4 he deduction available under that section was at 10 per cent, of the profit or 1/2 per cent, of the aggregate average advances made by the rural branches computed in the prescribed manner whichever was higher/ However, an amendment to Section 36(1) of the Act was introduced in Parliament by the Finance Bill, 1985, whereby deduction was enhanced to 10 per cent, of the profit or 2 per cent, of the aggregate average advances made by the rural branches! of the bank whichever was higher. The Bill attained the assent of the President on May 24, 1985. The amended provisions were given effect retrospectively from; April 1, 1985. 4. Learned counsel pointed out that the previous year of the assessee had ended on/ December 31, 1984, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) applies, the amount) of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in' the! provision for bad and doubtful debts account made under that clause. 7. This also clearly shows that making of provision equal to the amount claimed as, deduction in the account books is necessary for claiming deduction under Section 36(1 )(viia) of the Act. The Tribunal has distinguished various authorities relied) upon by the assessee wherein deductions had been allowed under various! provisions which also required creation of reserve after the assessee had created! such reserve in the account books before the completion of the assessment, it has) been correctly pointed out that in all those cases, reserves/provisions, had been) made in the books of account of the same assessment year and not of the subsequent assessment year. 8. In the present case, the assessee 'has not made any provision in the books of account for the assessment year under consideration, i.e., 1985-86, by making supplementary entries and by revising its balance-sheet. The provision has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad and doubtful debts account made u/s 36(1)(viia) can be claimed. The Special Bench of the Tribunal in DCIT vs. Catholic Syrian Bank 88 ITD 185 held that as s. 36(1)(viia) was confined to rural advances, a claim for bad debts of urban advances was not subject to the limitation of the Proviso to s. 36(1)(vii). However, the Full Bench of the Kerala High Court took a contrary view in CIT vs. South Indian Bank 233 CTR 214 (Ker) (FB) and held that a bank was entitled to claim deduction of bad debts u/s 36(1)(vii) only to extent it exceeded the provision allowed as deduction under s. 36(1) (viia). On appeal to the Supreme Court, HELD reversing the Full Bench of the High Court: Per Court: (i) The clear legislative intent of s. 36(1)(vii) 36(1)(viia) together with the circulars issued by the CBDT demonstrate that the deduction on account of provision for bad and doubtful debts u/s 36(1)(viia) is distinct and independent of s. 36(1)(vii) relating to allowance of bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. The functioning of such banks is such that the rura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing legally entitled and on making actual provisions for such deduction in the books of Account. 12. From the facts of the case and in law, after the decision of Hon ble Supreme Court in the case of Catholic Syrian Bank Vs CIT Thrissur 206 Taxman 182(SC) there is no ambiguity left in the interpretation of provision of sec 36 (1) (viia). The appellant is a Regional Rural Bank sponsored by Punjab National Bank. The assessee has made advances from its rural branches which are not questioned. The provisions of sec 36(l)(viia) are clearly interpreted by Supreme Court in the case of Catholic Syrian Bank. The assessee has claimed deduction of ₹ 16.07 Crores against it s entitlement of ₹ 114.76 Crores in the books it has made provision for Bad Debts of rural branches for ₹ 3,70,00,000/- over and above the provision made for NPA s as per RBI norms. This fact has been stated in the audited balance sheet of the bank in Schedule 17: Principle Accounting Policies Notes on Account, where point 1(IV)(iii) which is reproduced as under: (iii) Bank has made provision of ₹ 3,70,00,000/- (Previous year- Nil) against total monthly average advance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / provision for bad and doubtful debts? The AR has contended that the assessee has created provisions for bad and doubtful debts under the nomenclature Reserve for NPA . The terminology Reserve for NPA has been used by the assessee in accordance with the RBI directions. As is evident from the assessment order, the assessee has indeed created Reserve for NPA . For claiming benefit under the provisions of Section 36(l)(viia)(a) the conditions to be satisfied is: that provision for bad and doubtful debts should have been made by the bank eligible to claim such deduction. Cooperative Banks do not strictly follow the provisions of Banking Regulation Act for the purpose of maintaining their Books of Accounts. In our considered opinion, the assessee has created provision for bad and doubtful debts may be under different nomenclature. This will not dis-entitle the assessee for claiming deduction under the provisions of Section 36(l)(viia)(a). The purpose for creation of reserve for NPA is same i.e., creating provision towards bad and doubtful debts. Thus, in view of the facts of the case and judicial pronouncements in the above state cases the assessee will be entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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