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TMI Blog2025 (1) TMI 1470X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of allowing deduction u/s 36(1)(viia) of the Act. The decisions relied upon by Ld. AR are not applicable because facts in those decisions are different. The issue in these cases pertained to "Provision for bad and doubtful debts" and not "reserve". Therefore, claim of deduction u/s 36(1)(viia) of the Act is not allowable. Therefore, the decision of the CIT(A) is confirmed, and the ground of the assessee is dismissed. Write up u/s 36(1)(vi) of investment in Madhavpura Mercantile Co-Op. Bank (MMCB) - appellant has also taken alternate ground that the same is allowable even without provisions of section 36(1)(vii)/36(1)(viia) - whether investment of FDs written off by a Co-operative Bank is capital or revenue in nature? - HELD THAT:- It is seen that as per section 6 of the Banking Regulation Act, 1949 which deals with the form and business in which the banking companies may engage, dealing in funds is a part of banking business. Apart from accepting deposits and lending money, investing in deposits is also a part of banking business. Accepting deposits and giving of loans and advances, making investments, deposits etc. form part of core activity of banking business. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less Appeal Centre [in short, 'the CIT(A)'], dated 03.10.2023 and 19.10.2023 for the assessment years (AYs) 2013-14 and 2014-15. 2. The ground of appeal raised by the assessee in ITA No.823/SRT/2023 (AY.2013-14) are as follows: "(1) On the facts and in law, the learned CIT(A) was not justified in confirming disallowance of Rs. 35,00,000/- being provisions for bad and doubtful reserve particularly when the appellant was entitled to the relief u/s 36(1)(via) of the Act. (2) All of the above grounds are prejudice to one another. (3) The appellant craves leave to add, alter or vary any of the grounds of appeal." 3. The ground of appeal raised by the assessee in ITA No.824/SRT/2023 (AY.2014-15) are as follows: "(I) Disallowance u/s. 14A of the Act Rs. 7,02,455: (1) On the facts and circumstances of the case and as per law, the learned CIT(A) was not justified in confirming disallowance of Rs. 7,02,455 (2) Without prejudice to the above, disallowance has not been correctly worked out. (II) Investment in Madhavpura Mercantile Bank written off Rs. 7,81,70,034: (1) On the facts and circumstances of the case and as per law, the learned CIT(A) seriously erred in confi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was also submitted that assessee had not claimed any deduction u/s 36(1)(vii) of the Act. 5.1 The AO verified the claim of the assessee and noticed that it had claimed expenses of Rs. 35,00,000/- under the head 'Bad and Doubtful Reserve' u/s 36(1)(viia) of the Act instead of 36(1)(vii) of the Act. The assessee relied on its earlier submission which is discussed in the preceding para. The AO has reproduced provisions of section 36(1)(vii) and 36(1)(viia) and stated that the controversy regarding the double deduction under the above sections have been settled by Hon'ble Supreme Court in case of Catholic Syrian Bank Ltd. vs. CIT, in Civil Appeal No. 1143 of 2011 where the Hon'ble Court held that a Bank is eligible to claim deduction for bad debts u/s 36(1)(vii) and also claim for provision of bad and doubtful debts u/s 36(1)(viia) of the Act. The Hon'ble Court held that provision for bad and doubtful debts u/s 36(1)(vii) is distinct and dependent of section 36(1)(viia) relating to allowance of bad debts. It has stated that in order to prevent double deduction, the proviso to clause (vii) was inserted which states that in respect of bad debts arising out of rural advances, the dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication to ensure that "no provision is made for bad and doubtful debts pertaining to rural advances". He submitted that assessee made no provision for rural advances and hence deduction falls under first leg of section 36(1)(viia)(a) of the Act. He submitted that the law makers have split the erstwhile singular deduction into two deductions. The deduction from total income shall be relevant to all companies as it is independent of requirements of having rural advances. He has relied on the decisions in case of (i) Kodungallur Town Co-operative Bank Ltd., 72 taxmann.com 205 (Cochin Trib), (ii) ING Vysya Bank, 42 taxmann.com 303 (Bangalore Trib) and (iii) State Bank of Hyderabad, 63 taxmann.com 322 (Hyderabad Trib.). 8. On the other hand, the learned Commissioner of Income-tax - Departmental Representative (ld. CIT-DR) for the revenue has relied on the order of the lower authorities. He submitted that assessee has added "bad and doubtful reserve" and claimed the same u/s 36(1)(viia) of the Act. 9. We have heard both the parties and perused the materials available on record. We have also deliberated on the decisions relied upon by both sides. The only issue is disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad and doubtful debts" and not "reserve". Therefore, claim of deduction u/s 36(1)(viia) of the Act is not allowable. Therefore, the decision of the CIT(A) is confirmed, and the ground of the assessee is dismissed. 10. In the result, appeal of the assessee is dismissed. ITA No.824/SRT/2023 for AY. 2014-15: 11. The appellant has not pressed ground No.1 relating to disallowance u/s 14A of the Act of Rs. 7,04,455/-. Hence, the ground is dismissed as not pressed. 12. The next ground is regarding write up u/s 36(1)(vi) of investment in Madhavpura Mercantile Co-Op. Bank (MMCB) of Rs. 7,81,70,034/-. In this regard, the appellant has also taken alternate ground that the same is allowable even without provisions of section 36(1)(vii)/36(1)(viia) of the Act. It is seen that the alternate ground raised by the appellant is purely legal in nature and no additional facts are necessary to adjudicate the same. It emerges from the facts available on record before the lower authorities. It also goes to the root of the matter. The Hon'ble Supreme Court in case of National Thermal Power Co. Ltd. vs. CIT, 229 ITR 283 (SC) held that the power of the Tribunal in dealing with appeals is expressed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of CIT(A), the assessee filed appeal before the Tribunal. The Ld. AR submitted paper books including various details and various decisions in favour of assessee. The Ld. AR submitted that the assessee held FD in MMCB whose license was cancelled by RBI in the year 2012. During the year under consideration, assessee wrote off the FDs of Rs. 7.81 crore held with MMCB. To fund the write off, the bank transferred Rs. 7.81 crore from its past Special Investment Fund (i.e., Reserves) to its P&L account so that its profit for the year is not impaired. The assessee claimed Rs. 7.81 crore as deduction in its return of income as a write off. Regarding double deduction, Ld. AR submitted that the understanding of the AO is misconceived. There were two debits and one credit, resulting in only one deduction. The entries in the books of accounts were as under: 1. Special Investment Reserve A/c Dr. 2,27,50,000 Special Bad & Doubtful Debts Reserve A/c Dr. 1,47,00,000 Bad & Doubtful Debts Reserve A/c Dr. 3,63,00,000 Contingency Fund A/c Dr. 45,00,000 To Special Investment A/c Cr.7,82,50,000 (Being Special Reserve created for write off of Bad debts) 2. Write off (debited to P & L) A/c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue expense. The Ld. CIT-DR submitted that the case of the assessee underscores serious issues related to regulatory compliance, the use of manipulative accounting practices, and the inappropriate application of tax provisions. The failure to adhere to the RBI directive at the appropriate time, the use of creative accounting to disguise the impact of the MMCB exposure, and the invalid tax claims all demonstrate an unsustainable position. The deductions available under the Act are strictly limited to those outlined in Sections 28 to 44, and any deviation from this framework particularly in cases involving financial non-compliance-cannot be justified. Given the need for transparency in the banking sector and the strict standards required when handling public funds, the AO's decision, affirmed by the CIT(A), to disallow the deduction is well-founded and should be upheld by the Tribunal. 16. We have heard both the parties and perused the materials available on record. We have also deliberated the decisions relied upon by the parties. The facts relating to the case are that appellant had FDs with MMCB, aggregating to Rs. 7.81 crore. During the year under consideration, the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x deduction claim by treating the same as bad debts written off. 17. The issue that arises for consideration in the light of the facts narrated above is: (i) whether the FD held by the appellant constitutes capital assets or stock-in-trade; (ii) whether the write off of such FDs is a loss arising in the course of carrying on banking business and (iii) whether a loss can be claimed without debiting the P&L account and different treatment can be given for accounting in the books and for the purpose of computing income as per the Act. On the first issue, the FDs can be treated as stock-in-trade if it forms part of banking business. It is seen that as per section 6 of the Banking Regulation Act, 1949 which deals with the form and business in which the banking companies may engage, dealing in funds is a part of banking business. Apart from accepting deposits and lending money, investing in deposits is also a part of banking business. Accepting deposits and giving of loans and advances, making investments, deposits etc. form part of core activity of banking business. Thus, the deposits placed with MMCB was wholly in the course of and for the purpose of business. Therefore, the deposits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under the head business and profession. The ground was allowed by the ITAT. There is no reason as to why the finding is not applicable to the instant appeal. On the issue of violation of RBI norms, it is for RBI to take appropriate action against the bank, if at all there was any violation in 2011-12. It is further seen that in the subsequent period, the appellant had recovered part of the deposit amount which was also offered to tax. This also strengthens the claim of the appellant as a business loss was incurred in the course of carrying on of banking business. In his brief summary, the Ld. AR submitted that assessee has offered subsequent recovery of Rs. 3,12,72,287/- from MMCB as income and the assessee may recover further amount in future. The assessee has also conceded deduction of Rs. 35,00,000/- out of Rs. 7.81 crore, which pertained to AY.2013-14. In view of the above discussion, the claim of the appellant that write off of FDs with MMCB as a business loss is partly allowed and AO is directed to delete addition of Rs. 7,46,70,034/- [Rs. 7,81,70,034/- (-) Rs. 35,00,000]. Accordingly, the ground of appeal is partly allowed. 18. In the result, appeal of the assessee is p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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