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TMI Blog2024 (6) TMI 872X X X X Extracts X X X X X X X X Extracts X X X X ..... he provision in the books of account was also under the same head thus has a nexus with the issue raised in application u/s 154, and also apparent on the face of the computation of total income, therefore, in our considered opinion the rectification requested by the assessee, which was very much connected to the claim of the assessee for provision for bad and doubtful debts without having been making a provision in the books of accounts, which was allowed earlier whereas the same is not permissible under the provisions of Act. Accordingly, the fact regarding assessee s ineligible claim was a glaring and apparent mistake patent on the face of records, which was correctly undertaken by the Ld. AO and rectified under the provision of Section 154. Regarding the observation of Ld. CIT(A) that similar deduction was allowed by the Ld. AO in himself in the subsequent AY 2014-15, therefore, the claim of assessee should be allowed in the year under consideration also. On perusal of the order of Ld. CIT(A) and relevant documents, it is transpired that during the AY 2014-15, the provision for bad and doubtful debts of the assessee was increased from 14 crores to 17 crores and such amounts were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment are as under: 1. Whether on points of law and on facts and circumstances of the case, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 8,10,72,135/- made by the AO on account of provisions of bad debts u/s 36(1)(viia) of the IT Act preferred in computation sheet without having been provided for in the P/L A/c. ? 2. Whether on points of law and on facts and circumstances of the case, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 8,10,72,135/- made by the AO merely on the ground that opportunity was not given to the assessee before the disallowance although opportunity was given which can be seen from the order sheet of the case record? 3. The order of Ld. CIT(A) is erroneous both in law and on facts. 4. Any other ground that may be adduced at the time of hearing. 3. Brief facts of the case culled out from records are that the assessee is a co-operative bank having head office at Rajnandgaon, constituted under the Co-operative Societies Act, 1960, and its branches are spread across the district of Rajnandgaon, and most of the branches are functioning in the rural areas. The appellant is engaged primarily in providing financial assistance to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income without considering the same in P L Account, which is a mistake apparent from records, therefore, the same is liable to be added back to the income of the assessee. The findings of the Ld. CIT(A) that proper opportunity of being heard was not provided to the assessee during the proceedings u/s 154 was an observation at the instance of assessee without affording an opportunity to the Ld. AO to rebut on this issue. Ld. CIT(A) decided the issue under the misconceived belief, merely on the ground that there was no mention in the rectification order regarding any show cause notice issued to the assessee as required u/s 154(3) of the Act, whereas on perusal of the order sheet of the case it is duly substantiated that the reasonable opportunities were afforded to the assessee. Under such facts and circumstances the order of Ld. CIT(A) is not rational, erroneous both in law and on facts, therefore, the same is liable to be reversed and the addition made by ld. AO deserves to be restored. 7. Ld. AR of the assessee on the contrary in rebuttal to the aforesaid contentions of the revenue has submitted a written submission dated 01.09.2023 regarding the facts of the case and the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there might conceivably be two points of view. 8. With the aforesaid submission, it is argued by the Ld. AR that the provision for bad debts claimed u/s 36(1)(viia) by the assessee in its computation of total income for Rs. 8,10,72,125/- shall be allowed besides provision for bad debts made in the profit and loss account for Rs. 26.95 crores and write back of provision for bad debts to the tune of Rs. 24.95 crores, effectively the assessee has disallowed the provision made for Rs. 2.00 crores (26.95 - 24.95 crores). Ld. AR supporting the decision of Ld. CIT(A) had agitated that the addition made through rectification order u/s 154 is not sustainable for the reason that the issue regarding rectification of mistake which has took place in the original order u/s 143(1) wherein Ld. AO had made an addition of Rs. 24,94,52,582/- on account of bad debts provisions for earlier year wright back by the assessee. The application for rectification of the assessee was duly considered by the Ld. AO and the error was also rectified however, a new issue regarding allowability of assessee s claim regarding provision of bad debts u/s 36(1)(viia) directly in the computation sheet without having been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssibility of deduction has been accepted in the case of the appellant itself. I observe that there is no ambiguity or dispute as regards admissibility of deduction to the appellant on account of provision for bad and doubtful debts u/s 36(1)(viia) is concerned as the same has been accepted in the case of the appellant itself in the subsequent assessment orders i.e. in Assessment year 2014-15 in the scrutiny assessment u/s 143(3) as stated earlier. I also observe that the A.O in the scrutiny assessment order passed u/s 143(3) for A.Y. 2014-15, in para 2 of the order, has specifically observed that the deduction of Rs. 14,00,00,000/- was increased to Rs. 17,00,00,000/- in the Computation of Total Income and after application of mind had made the disallowance of Rs. 3,00,00,000/-. Accordingly the A.O has himself confirmed deduction of Rs. 14,00,00,000/- claimed by the appellant u/s 36(1)(viia). The deduction claimed by the appellant u/s 36(1)(viia) in my view, cannot be said to be constituting or giving rise to a mistake apparent from records. I observe that the A.O in the rectification proceedings himself has deleted the addition made by his predecessor on account of provision for ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 34A of the Banking Regulation Act, 1949, it is not necessary to create a provision for bad and doubtful debts in the books of accounts and the same can be separately claimed in the computation of total income thereby allowing the provisions of Section 36(1)(viia) of the I.T. Act. On this aspect, Ld. AR has made a written submission before us, the same is extracted as under: PART II The assessing officer in his order u/s 154 of the act has stated that provision of Rs. 8,10,72,135/- has not been provided in the P L A/c may not be entertained and the stake being apparent from record. However, we are quoting the abstract of section 34A of the Banking regulation Act 1949 which reads as under: Section 34A - Production of documents of confidential nature 34A. Production of documents of confidential nature (1) Notwithstanding anything contained in Section 11 of the Industrial Disputes Act, 1947 (14 of 1947), or any other law for the time being in force, no banking company shall, in any proceeding under the said Act or in any appeal or other proceeding arising therefrom or connected therewith, be compelled by any authority before which such proceeding is pending to produce, or give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The major types of reserves are legal reserve, statutory reserve, regulated reserve, revaluation reserve, reserve for own shares, optional (or voluntary) reserve, profit/ loss brought forward etc. Reserves can be open or hidden (secret). Open reserves may be defined as reserves which appear in the balance sheet of the company which every stakeholder may be aware of. These types of reserves provide full information to shareholders regarding which amount has gone to reserves or why they are not getting all amount of dividend. On the contrary, secret reserves may be defined as that type of reserves which is not shown in published financial reports of company. In other words, it is neither shown in profit and loss account nor in balance sheet. The purpose behind the creation of such reserve was to reduce the volatility of income. Thus, it is contented that it is not necessary to create a provision of Bad and Doubtful debts in the books of accounts and the same can be separately claimed in the computation of total income thereby allowing the provision of section 36(1)(viia) 2. Source of Secret Reserve Secret reserve can be created by the following methods: By under-valuation of assets m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er shareholders had been receiving appropriate returns, the system of secret reserves protected depositors who could be assured of additional protection beyond that declared in the balance sheet. Even though, he invited comments from shareholders about the idea of sustaining secret reserves, but remarks were received from the audience. However, eventually shareholders and other employees-imposed pressure on HSBC for greater transparency. They argued that secret reserve accounting would mislead financial reports users and precipitate economic efficiencies which were not in the common interest. 4. SECRET RESERVE FROM LEGAL PERSPECTIVE The purpose of preparing financial statements is primarily to represent the true financial position of the company in front of all its stakeholders. There are some accounting concepts and conventions that are generally used as guidelines in preparing financial statements for sound accounting practices. These conventions are known as Generally Accepted Accounting Principle (GAAP) which includes consistency, full disclosure, conservatism, materiality. Disclosure can be refers as the process and methodology of providing the information and making policy de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing utilized properly Since the appellant is a cooperative bank and major lending is to the poor and agricultural sector. The percentage of Bad debts is relatively very high in these sectors. Hence disclosure of entire Bad and Doubtful debts in the published Balance Sheet may shake the confidence of the investors, governments, employees and stakeholders. Hence the separate deduction u/s 36(1)(viia) shall be allowed. 10. In backdrop of aforesaid submissions, it was the prayer of Ld. AR that there was no infirmity in the order of Ld. CIT(A), therefore, the same deserves to be upheld. 11. We have considered the rival submissions, perused the material available on record and case laws relied upon by the parties. In the present case, the assessee had claimed an expenditure regarding provision for bad and doubtful debts by debiting its P/L account for Rs. 26,94,52,582/- and has written back the provision pertaining to earlier years aggregating to Rs. 24,94,52,582/- by crediting the later in the P/L account. Effectively, the claim towards provision for bad and doubtful debts was came to be at Rs. 2.00 crores for year under consideration. While filing the return of income, the assessee su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igible claim was a glaring and apparent mistake patent on the face of records, which was correctly undertaken by the Ld. AO and rectified under the provision of Section 154. 13. Regarding the observation of Ld. CIT(A) that similar deduction was allowed by the Ld. AO in himself in the subsequent AY 2014-15, therefore, the claim of assessee should be allowed in the year under consideration also. On perusal of the order of Ld. CIT(A) and relevant documents, it is transpired that during the AY 2014-15, the provision for bad and doubtful debts of the assessee was increased from 14 crores to 17 crores and such amounts were duly accounted for in the books of the assessee. Nothing is emanated from such observation that the assessee had claimed any deduction under the provisions of Section 36(1)(viia) for an amount which is not recorded in the books of accounts. Considering such facts, the contentions of the assessee that similar deduction was allowed by Ld. AO in the ensuing years is found to be under false impression and contrary to the facts. 14. Apropos, the contention of the Ld. AR that as per Section 34A of Banking Regulation Act, 1949, the assessee is duty bound to keep confidential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is required to make provision and debit the same from the P L account. Hence, the assessee was required to make the provision in accordance with the Act. The copy of P L account submitted by the Ld. counsel prima facie shows that the assessee bank had made the provision for bad and doubtful advances to the extent of Rs. 45,84,000/-. Accordingly, deduction to that extent cannot be denied under the provisions of section 36(viia) of the Act. Since there is no reference of this document in the orders passed by the authorities below, in our considered view the same needs verification by the AO. Hence, in the interest of justice, we set aside the findings of the Ld. CIT(A) and restore the sole ground of appeal 4 ITA No. 53/RPR/2015 Assessment Year: 2010-11 of the assessee to the file of AO to verify the P L Account submitted by the assessee and to allow the deduction to the extent of provision made by the assessee bank in its books of account. 15. In view of the aforesaid finding of the tribunal in assessee s own case, in absence of any objection or contrary material or finding brought on record by either the assessee or by the revenue, we find it appropriate to remit the matter back to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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