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TMI Blog2023 (5) TMI 543X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of deduction u/s. 36(1)(viia) - whether for computing the aggregate average advances made by rural branches, as per Rule 6ABA, only the fresh advances made during the month, or the outstanding loans at the end of each month, should be considered? - HELD THAT:- We notice that the Hon ble Karnataka High Court in the case of CIT, LTU v. Canara Bank [ 2023 (1) TMI 243 - KARNATAKA HIGH COURT] held that amounts of advances as outstanding at the last day of each month would be a fluctuating figure depending on the outstanding as increased or reduced respectively by advances made and repayments received. The assessee might provided for bad and doubtful debts but the deduction would only be allowed at the percentage of aggregate average advance, computation of which is prescribed by rule 6ABA. We find from the amended direction made by the Tribunal that such direction is in terms of rule 6ABA. The ITO has made the computation of aggregate monthly advances taking loans and advances made during only the previous year relevant to assessment year 2009-10 as confirmed by CIT(A). The Tribunal amended such direction, in our view, correctly applying the rule. Applicability of the provisions of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar provisions of the Act and Rs.986,79,76,772 under the MAT provisions.. The return was processed u/s. 143(1) on 5.7.2012 granting refund of Rs.368,88,85,120. Subsequently assessee filed a revised return on 27.11.2012 admitting income of Rs.230,26,47,624 under regular computation after set off of brought forward losses of Rs.289,41,70,061 and current year loss under other sources of Rs.1,14,94,402. MAT income declared is Rs.406,47,28,293. The case was under scrutiny and assessment u/s. 143(3) was made on 22.2.2013 determining total income at Rs.1349,88,63,070 under regular provisions and at Rs.1848,74,25,223 under u/s. 115JB. 5. During the course of scrutiny proceedings for AY 2016-17, it was noted that the assessee bank had been regularly claiming depreciation on consolidated value of land & building including vacant land also at the rate applicable for building. Notice u/s. 148 was issued on 29.3.2018 on the ground that assessee was claiming excess depreciation. The assessee furnished return of income electronically on 21.8.2018 wherein the claim of depreciation was reduced to the extent of Rs.50,25,197. Assessment was completed u/s. 143(3) r.w.s. 147 of the Act on 31.12.2018 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff of bad debts is by way of executive decision, much after the finalization of books of accounts and holding of AGM which indicates that the claim of bad debt is only an afterthought for reducing the tax liability of the assessee. 8. The AO further noted that the assessee did not charge the amount of bad debts written off to the provision for bad and doubtful debts account, even though there was a sufficient credit balance available in the provisions created for the very purpose. The AO relied on the first proviso to section 36(1)(vii) which expressly states that the claim of bad debt written off shall be admissible, only to the extent the same exceeds the credit balance in provisions for bad and doubtful debts. Further Explanation 2 below section 36(1)(vii) makes it amply clear that there shall be only one account of provision for bad and doubtful dets, against which all claims of bad debts actually written off during the year shall be first set off, without any distinction between rural advances and other advances. Thus, only the excess amount of bad debts written off, remaining after such set off, is admissible as deduction u/s. 36(1)(vii). 9. On appeal before the CIT(Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 413,94,00, 446 as deduction u/s. 36(1)(vii) whereas the AO has disallowed an amount of Rs.462,79,56,763, the excess of Rs.48,85,56,317 is the bad debts written off relating to rural branches which is debited to the provisions account and not claimed as deduction. Therefore the disallowance to the extent of Rs.48,85,56,317 is required to be deleted. 13. It was further submitted that any subsequent recovery made in the loan accounts which are written off either at the HO or the branch level are credited to P&L account and shown as income and offered to tax u/s. 41(1) of the Act in the year of recovery. Any recovery made in a loan account which is not written off is credited to that loan account only and not to P&L account. However, recovery made in an account which is written off is credited to P&L account. Thus, the very fact that recovery is credited to the P&L account shows that the loan has been written off. 14. The CIT(Appeals) noted that the AO has disallowed the deduction on the ground that (i) the assessee has not actually written off the bad debts in the individual loan accounts, & (ii) the assessee did not charge the amount of bad debts written off to the provision for ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oted by the assessee (supra) in its own case, the issue has been decided in favour of the assessee as under:- "12.3 We have heard rival submissions and perused the material on record. We notice that the CIT(A) had expressed the view that provision allowed u/s 36(1)(viia) of the Act would apply to nonrural advances also. An identical issue has been examined by the Hyderabad Bench of the ITAT in the case of State Bank of Hyderabad v. DCIT in ITA No.450/Hyd/2015, ITA No.498 and 499/Hyd/2015 (order dated 14.08.2015) wherein the Tribunal had not accepted the above said view expressed by the CIT(A). The Bangalore Bench of the Tribunal in assessee's own case for assessment year 2013-2014 by following the Hyderabad Bench order of the Tribunal in the case of State Bank of Hyderabad (supra), had set aside the view expressed by the CIT(A) that proviso to section 36(1)(vii) which requires adjustment of bad debts against the provisions allowed u/s 36(1)(viia) would apply to non-rural advances also. The relevant finding of the Bangalore Bench of the Tribunal in assessee's own case for assessment year 2013- 2014 reads as follows:- "6.4 We heard the parties on this issue and perused the record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th AO and ld. CIT(A) have misconstrued the statutory provisions while observing that proviso to section 36(1)(vii) would also apply in case of bad debts relating to non-rural advances. The Hon'ble Supreme Court in case of Catholic Syrian Bank Vs. CIT (supra) while analyzing provisions of section 36(1)(vii) and 36(1)(viia) have observed that section 36(1)(viia) applies only to rural advances. The observations made by Hon'ble Apex Court in this regard in paras 26 & 27 of the judgment is extracted hereunder for convenience. "26. The Special Bench of the Tribunal had rejected the contention of the Revenue that proviso to s. 36(1)(vii) applies to all banks and with reference to the circulars issued by the Board, held that a bank would be entitled to both deductions, one under cl. (vii) of s. 36(1) of the Act on the basis of actual write off and the other on the basis of cl. (viia) of s. 36(1) of the Act on the mere making of provision for bad debts. This, according to the Revenue, would lead to double deduction and the proviso to s. 36(1)(vii) was introduced with the intention to prevent this mischief. The contention of the Revenue, in our opinion, was rightly rejected by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the full benefit of the write off of the irrecoverable debt(s) under Section 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under section 36(1)(viia). A reading of the Circulars issued by CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). However, the Revenue disputes the position that the proviso to clause (vii) refers only to rural advances. It says that there are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n off relating to non-rural advances. In the aforesaid view of the matter, we hold that assessee would be eligible to avail deduction of an amount of Rs. 209.94 crore representing actual write off in the books of account of bad debts relating to nonrural/urban advances in terms with section 36(1)(vii), as proviso to the said section would not apply to nonrural advances. Accordingly, we delete the addition made by AO and confirmed by ld. CIT(A)." 6.5 Following the above said decision, we hold that the view expressed by Ld CIT(A) is not legally correct. Accordingly, we set aside the order passed by Ld CIT(A) with regard to his alternative decision, i.e., the view that the proviso to sec. 36(1)(vii) which requires adjustment of bad debts against provision allowed u/s 36(1)(viia) would apply to non-rural advances also. Accordingly, we direct the AO to delete the disallowance of Rs.1258.47 crores." 12.4 In view of the above co-ordinate Bench order of the Tribunal in assessee's own case for assessment year 2013- 2014 (supra), we hold that the view expressed by the CIT(A) is not correct. Therefore, the alternative decision taken by the CIT(A) (i.e. the proviso to section 36(1)(vii) wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based on surmises and conjunctures." 21. During the assessment proceedings for AY 2011-12, the AO noted that the assessee bank has claimed a sum of Rs.901,62,96,929 as deduction in respect of provision made for bad and doubtful debts u/s. 36(1)(viia) of the Act. 10% of the Aggregate Average Advances [AAA] of the rural branches was computed at Rs.810,96,43,882. The AO noticed certain discrepancies in the computation of AAA and issued questionnaire u/s. 142(1) in respect of the same as under:- Details of AAA of rural branches in accordance with provisions of rule 6ABA - branch wise. Basis of classification of rural branches along with details of population as per latest census. Complete details of rural ranches (postal address and classification by RBI). Specific details of rural branches so classified, falling within the ambit of urban agglomeration, though earlier considered as rural. Justification of rural branches as on relevant period based on census 2011 data in view of decision of Hon'ble High Court of Kerala in the case of Lord Krishna Bank. Justify/ revise the claim of rural branches as on the date of claiming deduction and identification of such ranches with evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h rural branch at the end of the last day of each month separately and divided the resultant figure by number of months comprised therein. There was no stipulation in the rule that only the fresh advances during the month should be considered. Reliance was placed on the following decisions:- Canara Bank, 60 ITR (Trib) 1 (ITAT Bang.) Nizambad Dist. Cooperative Central Bank Ltd. 2014 (12) TMI 562 - ITAT Hyderabad DCIT v. Madurai Dist. Central Co-op. Bank Ltd. [2014] 51 taxmann.com 194 (Chennai Trib.) DCIT v. Union Bank Ltd. in ITA No.1485/Mds/07 dated 30.10.2009 PCIT v. Uttarbanga Kshetriya Gramin Bank 2018 (5) TMI 903 - Calcutta High Court. 24. The AO, however, rejected the submissions of the assessee and disallowed the deduction u/s. 36(1)(viia) by observing as under:- "The assessee has claimed the deduction u/s. 36(1)(vii) by not actually writing off in the loan a/cs of the debtors. Without accepting the claim of the assessee that written off, even to claim any deduction u/s. 36(1)(vii) the assessee should have debited the claim of bad debts of Rs.929,03,91,277/- to the provision for bad and doubtful debts account made u/s. 36(1)(viia) and only excess if any should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particular rural branch. First, the advances made by each rural branch, as outstanding at month end, have to be aggregated. Second, average of this aggregated sum has to be taken over the period of months for which the advances have been outstanding. This average figure shall be the amount of average advance made by that particular rural branch. In the third step, the average advances of all rural branches (computed separately for each rural branch) have to be aggregates and that total figure shall be the aggregate average advances made by the rural branches. I find that a plain reading would suggest that for the first step, the fresh advances made by each rural branch only have to considered. The outstanding amounts against such fresh advances have to aggregated month wise, and then the average of the aggregated sum has to be taken for the period of months for which the advance was outstanding. The process of averaging out would take care of the fluctuating balance in a particular account due to repayments and further advances. This construction of the rule is aligned with the legislative intent namely to encourage rural banking. If outstanding loans at the end of each month for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk towards bad and doubtful debts under section 36(1)(viia) in that light. The JAO shall provide a reasonable opportunity to the appellant to adduce the supporting evidence in support of its claim. These grounds of appeal are therefore partly allowed." 28. Aggrieved, the assessee is in appeal before the Tribunal. 29. The ld. AR reiterated the submissions made before the lower authorities and relied on the decision of the Karnataka High Court in the case of Canara Bank in ITA No.207 & 208 of 2019, order dated 27.12.2021 for AY 2013-14 and orders of the Tribunal in the case of Canara Bank in ITA No.1900/Bang/2018 dated 28.9.2018 for AY 2013-14 and in the case of Karnataka Bank in ITA No.1907/Bang/2018 dated 26.5.2022 for AY 2014-15. 30. The ld. DR relied on the order of CIT(Appeals). 31. We have heard the rival submissions and perused the materials on record. We notice that the Hon'ble Karnataka High Court in the case of CIT, LTU v. Canara Bank [2023] 147 taxmann.com 171 (Karnataka) has considered similar issue and held as under:- "6. Insofar as question No. 4 is concerned, adverting to section 36(1)(viia) of the Income-tax Act, 1961, Shri Aravind submitted that the word used i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e High Court of Calcutta, while considering an identical situation as recorded thus, "Mr. Khaitan, learned senior Advocate appeared on behalf of the assessee and submitted that the computation to be made as prescribed by rule 6ABA is for the purpose of fixing the limit of the deduction available under section 36(1)(viia). Clauses (a) and (b) in rule 6ABA cannot be given the restricted interpretation. The amounts of advances as outstanding at the last day of each month would be a fluctuating figure depending on the outstanding as increased or reduced respectively by advances made and repayments received. The assessee might provided for bad and doubtful debts but the deduction would only be allowed at the percentage of aggregate average advance, computation of which is prescribed by rule 6ABA. We find from the amended direction made by the Tribunal that such direction is in terms of rule 6ABA. The ITO has made the computation of aggregate monthly advances taking loans and advances made during only the previous year relevant to assessment year 2009-10 as confirmed by CIT(A). The Tribunal amended such direction, in our view, correctly applying the rule." 11. In view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VI of the Companies Act, 1956, or in accordance with its Regulatory Act. In this regard, AO has analysed the Explanatory Memorandum to the Finance Bill, 2012 and held that the aforesaid Explanation only clarified the position of existing law, and therefore applied retrospectively, on the appellant bank. AO has also relied on section 11 of Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 which provides that every corresponding new bank shall be deemed to be an Indian company for the purposes of Income-tax Act 1961, and held that the provisions of section 115JB, as such, are applicable to all corresponding new banks. 35. Before the CIT(Appeals), the assessee filed written submissions and contended that the provisions of section 115JB are not applicable to banking companies and relied on the following case laws:- 1. ING Vysya Bank Ltd. (2020) (422 ITR 116) (Karnataka) 2. Union Bank of India (2019) (13 ITR --OL 655) (Bombay) 3. Syndicate Bank (ITA No 99 & 100/PAN/2017 dated 23.01.2020) 36. The assessee also submitted that various additions made by the AO while computing book profit under section 115JB are not covered by the Explanation 2 to section 115JB an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied on the decision in the case of Bank of India Vs ACIT (2020) (122 taxmann.com 247 (Mumbai - Trib.), wherein the ITAT, Mumbai has upheld that a bank would be treated as a company for purposes of Income-tax Act, and thus provisions of section 115JB would clearly apply to the assessee bank. He further noted that there is a divergence of opinion on this issue among Courts and various benches of the Tribunal. In view thereof, Hon'ble Supreme Court has admitted the SLP preferred by Revenue and issued notice in various cases, as noted below. The position of law has not yet attained finality on this issue:- - Pr. CIT Vs Central Bank of India (2022) (142 taxmann.com 184) (SC) - CIT v. Karnataka Bank Ld. (2022) 288 Taxman 725 - CIT, LTU v. Vijaya Bank (2021) 22 Taxman 296 - CIT, LTU v. Canara Bank (2022) 287 Taxman 462 40. The CIT(Appeals) also rejected the alternative plea of the assessee that additions to book profits made by the AO are not covered in Explanation 2 to section 115JB on the ground that the assessee has not substantiated this ground. He accordingly sustained the order of the AO. Aggrieved, the assessee is in appeal before the Tribunal. 41. The ld. AR reiterat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se aspects go to the root of the issue, in our view, this issue needs to be examined at the end of Ld CIT(A) afresh. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to his file for examining it afresh." 13.6 In view of the co-ordinate Bench order of the Tribunal in assessee's own case for assessment year 2013- 2014, we restore this issue to the files of the CIT(A). The CIT(A) shall follow the directions contained in the Tribunal order for assessment year 2013-2014 and shall afford a reasonable opportunity of hearing to the assessee before a decision is taken on the issue. It is ordered accordingly." 44. Respectfully following the above decision of the Tribunal, we restore this issue to the file of the CIT(A) with similar directions. This ground of the assessee for the AYs 2011-12 to 2013-14 is allowed for statistical purposes. Accordingly the alternate ground regarding adding various items to arrive at the book profit raised by the assessee for AY 2011-12 to 2013-14 is also restored to CIT(Appeals) for fresh decision in accordance with law. 45. In the result, the appeals are partly allowed for statistical purposes. The common order pas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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