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TMI Blog2024 (2) TMI 1036X X X X Extracts X X X X X X X X Extracts X X X X ..... n exempt income from being deducted from other incomes which is includable in the total income for the purposes of chargeability to the tax It is equally well settled that expenditure is a pay out. In order to attract applicability of section 14A of the Act, there has to be a pay out and return of investment or a pay back is not such a debit item. [See: WALFORT SHARE AND STOCK BROKERS (P) LTD [ 2010 (7) TMI 15 - SUPREME COURT] as well as MAXOPP INVESTMENTS LTD [ 2018 (3) TMI 805 - SUPREME COURT] . In the instant case, the assessee has admittedly not incurred any expenditure. Decided in favour of assessee. Deduction u/s 36(1)(vii) - deduction claimed of bad debts of non-rural branches - claim denied as amount was not actually written off in the loan account of the debtors and entire write off (both rural and non rural debts) should be adjusted against the credit balance in the provision a/c u/s 36(1)(viia) and only the excess can be claimed. Since there is no excess amount, the write off is not allowable - HELD THAT:- As decided in own case [ 2022 (1) TMI 583 - ITAT BANGALORE] for AY 2014-15 in favour of the assessee after considering Explanation 2 inserted in section 36 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide assessee s letter dated 5.11.2018 the assessee submitted revised calculation of book profit. In the said calculation the appellant bank had not added the provision for NPA of Rs. 267,17,51,684 and provision for investment depreciation of Rs. 13,16,10,956. The AO did not accept the same. The CIT(A) observed that the appellant failed to furnish any copy of audit report in Form 29B to comply the provision of section 115JB(4) of the Act. Considering the argument of the ld. AR of the assessee, we remit this issue to the AO fresh consideration. Deduction claimed u/s. 36(1)(viia) - assessee has computed deduction u/s 36(1)(viia) being a scheduled bank to the extent of 7.5% of the total income and 10% of the AAA of rural branches - AO noted that the assessee has claimed excessive deduction on two counts, firstly the assessee has not updated its information about categorization of rural branches which has either converted to semi urban branches or where the population has exceeded 10,000 and secondly the assessee has claimed 10% of the entire advances of rural branches including the opening balances - HELD THAT:- As relying on Canara Bank [ 2023 (1) TMI 291 - KARNATAKA HIGH COURT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r exceeded the tax exempt investments. 6. The Assessing Officer after considering the reply of the assessee was not satisfied with the amount of disallowance made by the assessee bank. According to him, the disallowance u/s 14A had to be worked out as per Rule 8D. He therefore, invoked the provisions of Rule 8D and made the following disallowances: Rule Particulars Amount (Rs.) 8D(2)(i) Salary of Treasury Department 1,03,34,547 8D(2)(i) Brokerage 22,39,214 8D(2)(ii) Proportionate Interest expenditure 10,23,99,134 8D(2)(iii) % of Average Investments 75,17,344 Total Disallowance 12,24,90,239 7. On appeal, the CIT(Appeals) following the Hon ble Supreme Court decision in the case of South Indian Bank Ltd. (2021) 438 ITR 1 (SC) deleted the disallowance made u/r 8D(2)(ii) of Rs. 10,23,99,134. However, he noted that the Hon ble Supreme Court decision dealt only w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aras 8 to 10 of the said judgment dated 31.01.2020 passed in the aforesaid case, reads as under: 8. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note of Section 14A of the Act: Section 14A (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-Section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in rei-3tion to income which does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial questions of law Nos_3, 4 and 5 and substantial question of law framed in ITA 99/2010 are rendered academic and need not be answered. So far as substantial; question of law No. 2 in ITA No. 97/2010 is concerned, the same is squarely covered by the decision of the Supreme Court in 'CIT VS. ESSAR TELEHOLOINGS LTD.',(2018) 401 ITR 445, wherein it has been held that provisions of Section 114A read with rule 8D of the Income Tax Rules are prospective in nature and can not be applied to any assessment year prior to Assessment Year 2008-09. Accordingly, the aforesaid substantial question of law is answered against the revenue and in favour of the assessee. 5. In this regard, a memo is also filed by the learned counsel for the appellant, which reads as under: MEMO ON BEHALF OF THE APPELLANT The appellant respectfully submits that in view of the substantial questions of law 2 and 4 having been covered in favour of the assessee in the earlier orders in assessee's own case, it is submitted that substantial questions of law 1 and 3 become academic and need not be answered by this Hon'ble Court. Therefore, it is most humbly prayed that this Hon'ble Court ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces which are delegated to the hierarchy. Branches to not have power to write off. They have to send proposal for write off only in cases where all other avenues for recovering the amount has exhausted and it is not worthwhile to pursue the court proceedings to recover the amount due to the cost and time involved and the chances of recovery. Apart from this, Bank also some times take decision to write off at Head Office level with the balance continue to appear in branch books which is also permitted by the regulator. Recoveries made in both the cases is offered to tax on cash basis. During the A.Y. 2016-17, Bank has offered recoveries made from written off accounts amounting to Rs. 35,78,26,833. . d. The bad debts were written off by debit to the Provision for Bad and Doubtful Advances Account, copy of statement of which is enclosed as Annexure III. In Branch Books, Borrower s account is credited for the amount written off by raising a Debit Advice for debiting the Head Office A/c which is responded at Head Office debiting the Provision for Bad and Doubtful Advances. During the year, Bank had written off Rs. 305.12 core as bad debt by debit to Provision for Loan Loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debts are eligible for deduction u/s. 36(1)(vii) of the act. Deduction u/s. 36(1)(viia) is not a write off of debts but it is only an allowance allowed in computing the taxable income as a percentage of average rural advances and total profit. Further, the write off against the rural loan/advances is set off against the NPA reserve and not claimed as deduction u/s. 36(1)(vii). Thus, there is no double deduction in respect of urban or rural debt written off. The assessee relied on the decision of the ITAT in its own case for AYs 2013-14 in ITA No. 1906/Bang/2018 order dated 27.12.2021 2014-15 in ITA No. 1907/Bang/2018 order dated 26.5.2022. 15. The CIT(Appeals) observed that the ITAT in assessee s own case for AYs 2013-14 relied on the finding of the Supreme Court in the case of Catholic Syrian Bank Ltd. that section 36(1)(viia) of the Act relates to rural branch advances only but failed to the consider the later amendments and clarification issued by the Finance Act, 2013 after the decision of the Hon ble Supreme Court. He held that provision for bad and doubtful debts account made under clause (viia) of section 36(1) and referred to in proviso to clause (vii) of section 36(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 018 dated 26.5.2022 in favour of the assessee after considering Explanation 2 inserted in section 36(1)(vii) by Finance Act, 2013 (after the decision of the Supreme Court in the case of Catholic Syrian Bank) held as under:- 7.7 We heard the Ld D.R and perused the record. Now the core question that arises is whether the bad debts relating to non-rural branches are also required to be first debited to PBDD a/c and then the excess amount over and above the balance available in PBDD alone could be allowed as bad debts u/s 36(1)(vii) of the Act. 7.8 The provisions of sec. 36(1)(vii) allows deduction as under:- 36(1)(vii) Subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year. Provided that in the case of an assessee to which clause (viia) 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 under that clause. .. Explanation 2 For the removal of doubts, it is hereby clarifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in rural branches and another provision account for bad debts in rural branches for which separate accounts are maintained . Referring to the above said observations, the revenue has taken the view that the Hon ble Supreme Court has rendered its decision on the assumption that the banks would be maintaining two separate PBDD a/c, viz., one for rural branches and another one for non-rural branches. 7.10 It is possible that all banks may not be maintaining two separate accounts, as observed by the Hon ble Supreme Court. Hence there was an apprehension in the minds of revenue with regard to the effect of the decision rendered by Hon ble Supreme Court. For instance, if a particular bank is maintaining only a single PBDD a/c for the provision created u/s 36(1)(viia) of the Act and even if that bank is not having any rural branches, then it may try to avail the benefit of decision rendered by Hon ble Supreme Court and may possibly contend that (i) the provision allowed u/s 36(1)(viia) shall apply only to rural branches. (ii) since it does not maintain two separate PBDD a/c for rural and non-rural advances, the bad debts relating non-rural branches need not be reduced from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitutions, NBFC etc. are also eligible to claim deduction towards PBDD u/s 36(1)(viia) of the Act under clauses (b) to (d). In view of the decision rendered in the case of Catholic Syrian bank, it is possible that the assessees covered by clause (b) to (d) may contend that the bad debts written off by them need not be adjusted against PBDD allowed u/s 36(1)(viia) of the Act, since the bad debts relate to non-rural debts . Accordingly, we are of the view that the Explanation 2 has been inserted in order to bring the assesses covered by clauses (b) to (d) within the ambit of the proviso to sec. 36(1)(vii) and sec. 36(2)(v) of the Act. Hence, in our view, advances given by rural and non-rural branches mentioned in Explanation 2 shall apply to the assesses covered by clause (b) to (d) of sec. 36(1)(viia) of the Act. 7.12 At this juncture, we may gainfully refer to the MEMORANDUM EXPLAINING FINANCE BILL 2013 , which brings out the intention of the Parliament in inserting Explanation-2 in sec. 36(1)(vii) of the Act. It is extracted below:- Clarification for amount to be eligible for deduction as bad debts in case of banks:- Under the existing provisions of section 36(1)(v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-clauses i.e. sub-clause (a) refers to rural advances whereas other sub-clauses 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 section 36(1) and referred to in proviso to clause (vii) of section 36(1) and section 36(2)(v) applies to all types of advances, whether rural or other advances. It has also been interpreted that there are separate accounts in respect of provision for bad and doubtful debt under clause (viia) for rural advances and urban advances and if the actual write off of debt relates to urban advances, then, it should not be set off against provision for bad and doubtful debts made for rural advances. There is no such distinction made in clause (viia) of section 36(1). In order to clarify the scope and applicability of provision of clause (vii), (viia) of sub-section (1) and sub-section (2), it is proposed to insert an Explanation in clause (vii) of section 36(1) stating that for the purposes of the proviso to section 36(1)(vii) and section 36(2)(v), only one account as referred to therein is made in respect of provision for bad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 2 inserted in sec. 36(1)(vii), in our view, does not override the above said interpretation given by Hon ble Supreme Court. 7.14 In the Memorandum explaining the purpose of introducing Explanation -2 in Sec. 36(1)(vii), it has been acknowledged that only the clause (a) refers to rural branches . It has also been stated that the foreign banks do not have rural branches. The assesses covered by clause (b) to (d) may not be having rural branches. Hence, the memorandum explains as under with regard to the decision rendered by Hon ble Supreme Court in the case of Catholic Syrian Bank (supra):- However, certain judicial pronouncements have created doubts about the scope and applicability of proviso to section 36(1)(vii) and held that the proviso to section 36(1)(vii) applies only to provision made for bad and doubtful debts relating to rural advances. Because of the interpretation so given by Hon ble Supreme Court, as discussed earlier, there arose a necessity for the Parliament to clarify that the PBDD allowed u/s 36(1)(viia) shall apply to all types of advances including advances made by rural branches. However, as stated earlier, the clause (a) to sec.36(1)(viia) has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... club expenses. The ld. AR submitted that considering the smallness of the amounts in both the years, these grounds are not pressed, though the assessee does not accept it on merits. Accordingly the issues raised in ground Nos.5 6 for both the years are left open. 23. Ground No. 7 in AY 2016-17 relates to additions made by the AO to the book profits u/s. 115JB of the Act as contingent liability which were sustained by the CIT(Appeals) as under:- Sr. No. Particulars Amount (Rs.) 1. Provision for HD Commission 1,75,00,000 2. Provision for exgratia and bonus 18,00,00,000 3. Provision for gratuity to HD Canvassers 14,31,000 4. Provision for gratuity 6,09,00,000 24. The ld. AR made detailed submissions in respect of each of the additions as below:- 7.1.2. Provision for HD Commission Rs. 1,75,00,000/- 7.1.2.1. The Appellant Bank estimated the commission payable to Honey Deposit collectors and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mises conjunctures, hence, liable to be deleted. 7.1.4. Provision for gratuity to HD Canvassers Rs. 14,31,000/- 7.1.4.1. This amount was provided by the Appellant Bank based on the actuarial valuation. The learned Assessing Officer disallowed the same by observing that it is a contingent liability. 7.1.4.2. The learned CIT(A) also upheld the disallowance. Our Submissions: 7.1.4.3. The amount provided is based on the actuarial valuation and is not contingent liability. The addition made by learned Assessing Officer is based on surmises conjunctures and hence, liable to be deleted. 7.1.5. Provision for gratuity Rs. 6,09,00,000/- 7.1.5.1. This amount was provided by the Appellant Bank based on the actuarial valuation. The learned Assessing Officer disallowed the same by observing that it is a contingent liability. 7.1.5.2. The learned CIT(A) also upheld the disallowance even though the audited accounts of the Gratuity Fund which showed the amount due from the Bank as current assets was produced before the learned CIT(A) at the time of the hearing (Refer page 140 of the Appeal Memorandum). The actuarial valuation reports are given in page 128 to 135 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuer therefore the provisions made are to be treated as ascertained liability. This view is fortified by the decision dated 22.02.2022 of the coordinate Bench of the Tribunal in the case of Jeans Knit (P) Ltd. [2022] 138 taxmann.com 480 [Bang. Trib.]. The relevant part is as under:- The AO during the course of asst. proceedings has added back the provisions created towards gratuity, leave encashment and bonus while computing the book profits of the assessee holding that the same to be an unascertained and contingent liabilities. The order of the AO was upheld by the CIT who relied on sec. 43B of the Act. 32. Before us, the Ld.AR submitted that the gratuity and leave encashment provision is made based on the actuarial valuation which is undisputed fact. The Ld.AR submitted that there are judicial pronouncements where it has been held that the provisions credited based on actuarial valuation would be an ascertained liability and cannot be added back for determination of book profits u/s 115JB of the Act. With respect to provision for payment of bonus, the Ld.AR submitted that the provisions is made as per the Payment of Bonus Act 1965 and it is statutory liability and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the same cannot be held as an unascertained liability and cannot be added for the purpose of computing the book profits u/s.115JB. The Hon'ble Jurisdictional High Curt in the case of CIT v. Kirloskar Systems Ltd. [2013] 40 taxmann.com 124/[2014] 220 Taxman 1 (Kar.) held that The Apex Court in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 has held that an assessee who is maintaining the account on mercantile System, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of business, regard being had to the accepted principle of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. The liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. Therefore for that reason it was held that the gratuity payable and encashment of EL is not a contingent liability and the provisions thereof is to be deducted. In the light of the settled principles laid down by the Apex Court no substantial question of law arise for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e revised computation is not tenable. It is prayed that the issue may be remitted to the learned CIT(A) to adjudicate the revised computation on merits. 32. After considering the rival submissions, we noted that during the course of assessment proceeding vide assessee s letter dated 5.11.2018 the assessee submitted revised calculation of book profit. In the said calculation the appellant bank had not added the provision for NPA of Rs. 267,17,51,684 and provision for investment depreciation of Rs. 13,16,10,956. The AO did not accept the same. The CIT(A) observed that the appellant failed to furnish any copy of audit report in Form 29B to comply the provision of section 115JB(4) of the Act. Considering the argument of the ld. AR of the assessee, we remit this issue to the AO fresh consideration. 33. In the result, the appeals of the assessee are partly allowed for statistical purposes. REVENUE APPEAL (ITA Nos. 963 964/Bang/2023) 34. The issue involved in both the appeals are deduction claimed by the assessee u/s. 36(1)(viia) has been allowed by the CIT(A) and the CIT(A) has not appreciated the ration of the decision of Hon ble High Court of Kerala in the case of Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering the amount of advances sanctioned by rural branch during the year incremental averages as provided by the assessee) Rs. 42,14,92,468 02 7.5% of the total income before deduction u/s 36(1)(viia) and Chapter VIA deductions Rs. 61,56,60,417 03 Deduction allowable u/s 36(1)(viia) Rs. 103,71,52,885 04 Deduction claimed u/s 36(1)(viia) Rs. 191,95,54,195 05 Disallowance made being excess claim of deduction u/s 36(1)(viia) Rs. 88,24,01,309 37. The CIT(A) after considering the detailed submissions and following the judgment of the Hon ble jurisdictional High Court in the case of CIT, LTU v. Canara Bank [2023] 147 taxmann.com 171 (Karnataka) dated 5.12.2022 and the decision of ITAT Bangalore in appellant s own case for the AY 2014-15 allowed the deduction claimed by the assessee u/s. 36(1)(viia). For the determination of rural branches of a bank he remitted the issue to the AO to consider the bank branch being a rural branch on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entitled for double benefit because provisions in respect of 10% of the bad debt of provisions of Rs. 1 Crore towards bad debt was already made as on 31-3-2012. Therefore, if the same amount is carried forward for the next F.Y., the assessee will be entitled for the double benefit because it would be making a provision for Rs. 1 Crore in addition to the 10% to the bad debt made in the relevant F.Y. 7. Shri Suryanarayana, adverting to the Para 7 of the impugned order, submitted that in identical circumstances, in assessee's own case, the assessee had made provision in similar manner as made in A.Y. 2013-14. A co-ordinate bench of the Tribunal had accepted the provision made by the assessee benefit in Canara Bank v. Jt. CIT [2018] 99 taxmann.com 357/[2017] 60 ITR (Trib.) 1 (Bengaluru - Trib.). He further submitted that the said order has been followed by the Tribunal in Vijaya Bank v. Jt. CIT [IT Appeal Nos. 915 845 (Bang.) of 2017, dated 5-1-2018] and the said method of making provision has been approved by the Calcutta High Court in Uttarbanga Kshetriya Gramin Bank case. 8. We have carefully considered the rival contentions and perused the records. 9. In Para 7.2 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), not only fresh advances made during year, but also amount of advance outstanding are to be considered. Accordingly, the ground taken by the revenue on this issue is dismissed. 42. In ground No. 2 the revenue has raised that the ld. CIT (A) has not followed the decision of Hon ble High Court of Kerala in the case Lord Krishna for computation of deduction u/s. 36(1)(viia) in respect of classification of rural branches. This issue has been decided by the jurisdictional High Court in the case of State Bank of Mysore v. ACIT [2015] 57 taxmann.com 253 (Karnataka) in which it has been held as under:- The instant case is concerned with the assessment for the assessment years 2003-04 and 2004-05. The first day of the previous year for these assessment years would be 1-4-2002 and 14-2003. For the purpose of computing the deduction under section 36(viia) the population figures available prior to 1-4-2002 is to be considered. [Para 6] If the provisional population totals as published on 27-3-2001 and 1-9-2010 is taken into consideration, then it is the Census figures of 2001, which has to be taken into consideration. If the final population published on December 2003 is taken in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the Census Department. It is not possible for the common man or the bank to know what is the Census figure. Therefore, the said provision stipulates that Census figure has to be published. Therefore, it is only after publication of the Census figures that one may be able to decide whether it is a rural branch as defined under the Act or not. The last stipulated population necessarily would be with reference to particular date. That day is also prescribed as that date before first day of the previous year. Once the publication of census is made before the first day of the previous year, then the said information is in public domain. Therefore, on that basis one could find whether a branch is a rural branch or not. It is no doubt true that the Census Department initially publishes a provisional population total, probably calling objections from the public and after considering those objections, publishes final population total. The legislature has used the words 'bad and doubtful debts' and the words 'provisional' and 'final' conspicuously missing in the said words. The word 'published' has to be understood as final population as contended by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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