TMI Blog2021 (1) TMI 956X X X X Extracts X X X X X X X X Extracts X X X X ..... s not available u/s.36(1)(vii). The rider created by the legislature by way of insertion of proviso to section 36(1)(vii) of the Act raises a clear-cut bar on the allowability of claim of the assessee made before the AO during the original assessment proceedings under the head loss on OTS account in a situation, when the amount standing in the balance sheet as provision for bad doubtful debts is higher than the amount of bad debts shown as loss on OTS a/c. . We are inclined to hold that since the AO has ignored the relevant provisions of the Act before allowing the claim of the assessee of loss on OTS account and without making proper and adequate enquiry and the view taken thereafter was also not sustainable, therefore, the impugned order passed by ld Pr. CIT revising the order u/s.263 is fully justified and correct alleging the impugned assessment order as erroneous and prejudicial to the interest of the revenue and there is no valid reason to interfere with the same. - Appeal of the assessee is dismissed. - ITA No.184/CTK/2019 - - - Dated:- 22-1-2021 - Shri Chandra Mohan Garg, Judicial Member And Laxmi Prasad Sahu, Accountant Member For the Assessee : Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of revenue. Accordingly, the ld PCIT show caused the assessee by issuing notice u/s.263(1) of the Act calling upon to explain as to why the assessment order be not cancelled/modified. The submission of the assessee is that loss on OTS is nothing but the claim of deduction of bad debt during the previous year and same is allowable as a deduction u/s.36(1)(vii) of the Act. It was submitted that the Government of India issued a revival, reform and restructuring packages for handloom sector and, accordingly, OTS for the weaver co-operative societies coming under the assessee co-operative bank has been declared during the financial year 2013-14. The salient features of the packages are : recapitalization of all viable and potentially viable apex and primary handloom weavers co-operative societies under a Top Down approach as on 31.3.2010 under a sharing arrangements between Government of India, State Government in the ratio of 75:25 for Apex Society and 80:20 for primary society (90:10) for special category states) and financing banks who will share 75% of overdue interest and full penal interest charged, if any. Committed receivables to the societies from the Central and Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit and loss account as loss on OTS. Ld A.R further explained that loss on OTS is nothing but the bad debt written off during the year claimed as deduction u/s.36(1)(vii) of the Act. Ld A.R. further submitted that during assessment proceedings, the AO raised query, which was properly replied by the assessee which was not found unacceptable by the AO and accepted without making any addition in this regard and allowing the claim of the assessee regarding loss on OTS. 6. Ld A.R. submitted that the Pr. CIT issued notice u/s.263 of the Act on two issues viz; loss on OTS and provision for bad and doubtful debts but while passing the order u/s.263 of the Act, Ld PCIT as per deliberation in paras 10 11 dropped the proceedings on the issue of provisions for bad and doubtful debts accounts but Pr. CIT by appreciating wrong facts held that the assessment order is erroneous and prejudicial to the interest of the revenue and directed the AO to modify his assessment order dated 9.12.2016 by making disallowance claimed under the head loss on OTS in the light of provisions of section 36(1)(vii), its first proviso and its Explanation -2 read with section 36(1)(viia) and 36(2) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of bad debt neither exceeded the credit balance in the provision for bad and doubtful debts account nor the said amount was debited to the provisions for bad and doubtful debts account , hence the claim was required to be disallowed and added back to the total income of the assessee. Ld A.R. submitted that the provisions of section 36(1)(vii) and Section 36(1)(viia) are separate, distinct and independent from each other and cannot be pressed into service in the identical facts and circumstances and this proposition has been rendered by Hon ble Supreme Court in the case of Catholic Syrian Bank Ltd (supra). Further, drawing out attention towards para 6 of the order of ITAT Delhi in the case of Kangra Co-operative Bank(supra), ld A.R. submitted that the Tribunal after considering the principles laid down by Hon ble Supreme Court in the case of Catholic Syrian Bank Ltd (supra) held that the provisions of section 36(1(vii) and 36(1)(viia) are separate, distinct and independent from each other. Ld A.R. further submitted that provisions of section 36(1)(vii) governing the allowance of bad debts are not controlled or limited by the provisions of section 36(1)(viia) but once the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ually not a loss for the assessee bank because after write off in its books for assessment year 2013-14 and submitted the utilization certificate before NABARD through OSCB, the bank has been compensated by Government of India through NABARD by the same amount in the very next year and these facts have not been submitted before the AO during assessment proceedings and only during revisionary proceedings before Ld PCIT, therefore, it is clear that the AO had not made any efforts to collect full facts during assessment proceedings regarding claim of the assessee of loss on OTS and the AO has failed to take cognizance of Explanation 2 to Section 36(1)(vii), which was introduced w.e.f. 1.4.2014 by Finance Act, 2013, therefore, the assessment order has to be held as erroneous and prejudicial to the interest of the revenue. 11. Placing rejoinder to above submission of ld CIT DR, ld A.R. submitted that as per said scheme implemented during the financial year2013-14 by the assessee co-operative bank as per the direction of NABARD, bank will allow share 75% of overdue interest and remaining 25% was compensated by the Government of India. He strenuously contended that the assessee bank ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on recoverable However, in the present proceedings, the assessee's A.R., while agreeing that loss on OTS is nothing but bad debt written off during the year and allowable as a deduction u/s 36(1) (vii), has submitted further evidence on the nature of the claim. According to it, Hon'ble Union Finance Minister had announced a financial package for the Handloom Sector in the budget speech of 2011-12 with the aim of putting the handloom sector on an even keel which continues to be the second largest employment generator in rural areas after agriculture. Thereafter, the Ministry of Textiles, Government of India finalized the package, according to which, NABARD was appointed as the implementing agency for this Modified Revival, Reform and Restructuring Packages for Handloom Sector and institutional credit component of integrated Handlooms Development Scheme (IHDS) . This scheme had a financial package of ₹ 3000 crore for loan waiver of the handloom sector. The idea was that the banks, which had given loans to the weavers, would give a One Time Settlement (OTS) to these weavers and after giving such waiver, NABARD would release equal amount to these banks as a compensatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee had furnished some reply on the issue before him, although full facts were never presented. The real question is not whether the AO applied his mind to the issue, but the real issue is whether the decision of the AO to allow the claim u/s 36(1 )(vii) of the Act, is sustainable in law in the light of the facts of the case and other related provisions such as 1st proviso to S. 36(1)(vii), Section 36(1)(via) and Section 36(2) of the IT Act. On careful considerations of the entire factual matrix of the case, it has been found that the view taken by the AO in this regard is absolutely unsustainable in law. The reason for holding so is given hereunder. 13. Thus, Pr. CIT in this case, firstly noted that the AO failed to conduct complete enquiry/verification of the claim made by the assessee on loss on OTS account and, therefore, this omission had made the assessment order erroneous and prejudicial to the interest of the revenue. Secondly, Pr. CIT has held that in the light of the facts of the case and other related provisions i.e. first proviso to section 36(1)(vii), 36(1)(via) and section 36(2) of the Act, the view taken by the AO absolutely unsustainable in law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. 20. On a conjoint reading of 1st proviso to S.36(1)(vii) and S.36(1)(viia) together, it would be clear that the only restriction in the case of assessees, falling in the category of scheduled banks/non-scheduled banks cooperative banks, is that the amount of bad debts relating to rural debts should be first set-off against the Provision for bad and doubtful debts created u/s. 36(1)(viia), and if the bad debts so remaining thereafter are more than the provision created therefor, the excess portion can only be claimed u/s.36(1)(vii) as bad debt . 21. This is the position of law, which emerges from a combined reading of Section 36(1)(vii) and its first proviso, Section 36(1)(viia) and Section 36(2)(v) of the Act. I propose to briefly discuss the above provisions for better clarity. Section 36(1)(vii), which allows deduction towards bad debts, is subject to the provisions of Section 36(2). The first proviso to Section 36(1)(vii), which was introduced w.e.f. 01.04.1985, further provides that in the case of scheduled banks/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6(1)(vii) says that in the case of banks, who are eligible for deduction u/s 36(1)(viia), deduction on account of bad debts relating to rural advances shall be first set off against credit balance in the provisions for bad doubtful debt account and deduction would be allowed to the extent bad debt relating to rural debt exceeds the credit balance available in the provision for bad doubtful debt created u/s 36(1)(viia) maintained by the assessee. In the present case, the assessee already had credit balance of ₹ 38,43,38,064/- in its provision for bad and doubtful account , as appearing in its balance sheet as on 31.03.2014. Therefore, the Loss on OTS , which is in the nature of rural bad debt (₹ 17,03,22,962/-) having been extended to weavers in rural areas, should have been first set off against the credit balance of ₹ 38,43,38,064/- available under the provision for bad and doubtful account . Since credit balance of ₹ 38,43,38,064/- available under the provision for bad and doubtful account , was more than the actual rural bad debt of ₹ 17,03,22,962/-, the AO should not have allowed any deduction u/s 36(1 )(vii) of the IT Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed under clause (viia ). The proviso, by and large, protects the interests of the revenue. In case of rural advances which are covered by clause (viia), there would be no such double deduction. The proviso, in its terms, limits its application to the case of a bank to which clause (viia ) applies. Indisputably, clause (viia) applies only to rural advances. [Para 27] As far as foreign banks are concerned, under section 36(1) (viia )(b) and as far as public financial institutions or State financial corporations or State industrial investment corporations are concerned, under section 36(1)(viia)(c), they do not have rural branches. Thus, it can safely be inferred that the proviso is self indicative that its application is to bad debts arising out of rural advances. [Para 28] The scope of the proviso to clause (vii) of section 36(1) has to be ascertained from a cumulative reading of the provisions of clauses (vii), (viia) of section 36(1) and clause (v) of section 36(2) and only shows that a double benefit in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any, of the write off over the amount standing to the credit of the account created under clause (viia).... 27. In fact, in its written submission dated 12.02.2019, the A.R. of the assessee has also relied on the same decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. v CIT(2012) 343 ITR 270(SC) in favour of its claim that bad debt of ₹ 17,03,22,962/- (OTS Loss) should be allowed. However, on applying the facts of this case to the ratio of the decision of Catholic Syrian Bank Ltd. v CIT(2012) 343 ITR 270(SC), I find that the Supreme Court's decision actually does not help the cause of the assessee. Rather on the peculiar facts of this case, it goes in favour of revenue. 28. How it is so, I proceed to discuss hereafter: It is no doubt true that in the above case, the Supreme Court has held that in addition to deduction for provision for bad and doubtful debts u/s 36(1 )(viia), banks are also entitled to benefit of write-off of irrecoverable debts u/s 36(1 )(vii) of the Act. However, there is a caveat. In this decision, the Supreme Court also held that this double benefit was restricted only to urban debts , but not to other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subsection (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; 31. In Catholic Syrian Bank's case cited supra, the assessee-bank had claimed that it was maintaining two separate accounts, (i) one being a provision for bad and doubtful debts in urban branches and (ii) another provision account for bad debts in rural branches. After the above amendment by insertion of Explanation -2 u/s 36(1)(vii) w.e.f. A.Y.2014-15 onwards, the banks are allowed 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. Since the assessment year under consideration in the present revision proceedings relate to A.Y.2014-15, the above Explanation-2 would also apply to this case. 32. The true import of this amendment by way of inser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l institutions are entitled to claim deduction for bad debt actually written off under section 36(1)(vii) of the Income-tax Act only to the extent it is in excess of the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia) of the said Act. However, certain judicial pronouncements have created doubts about the scope and applicability of proviso to clause (vii) of subsection (1) of section 36 of the Income-tax Act and held that the proviso to clause (vii) of sub-section (1) of section 36 of the Income-tax Act applies only to provision made for bad and doubtful debts relating to rural advances. 11.5 Section 36(1)(viia) of the Income-tax Act contains three subclauses, i.e. sub-clause (a), sub-clause (b) and sub-clause (c) and only one of the sub-clauses i.e. sub-clause (a) refers to rural advances whereas other subclauses do not refer to the rural advances. In fact, foreign banks generally do not have rural branches. Therefore, the provision for bad and doubtful debts account made under clause (viia) of sub-section (1) of section 36 and referred to in proviso to clause (vii) of sub-section (1) of section 36 and clause (v) of sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad debts of ₹ 17,03,22,962/- (Loss on OTS) relate to urban debt , the same cannot be allowed after A.Y. 2014-15. n34. In the light of the above discussion, it is held that assessee's bad debts of ₹ 17,03,22,962/- (Loss on OTS) claimed u/s 36(1)(vii) could not have been allowed in view of outstanding credit balance of ₹ 38,43,38,064/-in its provision for bad and doubtful account as on 31.03.2014. The case of the assessee is hit by the decision of the Supreme Court in the case of Catholic Syrian Bank Ltd. v CIT(2012) 343 ITR 270(SC), where it has been held that in the case of bad debts relating to rural debts , the same can be allowed u/s 36(1)(viia) only to the extent it exceeds the credit available under the provision for bad and doubtful debts created under section 36(1 )(vii) of the Act. Admittedly, in this case, the assessee had a credit balance of ₹ 38,43,38,064/- in its provision for bad and doubtful account and therefore bad debts of ₹ 17,03,22,962/-, which pertained to rural debts , being loans extended to weavers, could not have been allowed by the AO after the decision of the Hon'ble Supreme Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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