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2022 (6) TMI 896 - AT - Income TaxDisallowance of provision on interest on deposits on the basis of working provided by the assessee - CIT (A) has allowed the relief was allowed merely on the ground of production of certificate by bank - non-verification and non-examination (Assessee s claim) on account of non-observance of the principles of natural justice enshrined in rule 46A - HELD THAT - A provision outside books though not disqualified per se and valid where otherwise in order the subsequent accounting treatment assumes relevance as the same would require an adjustment (to that extent) in computing taxable income of the profit/loss disclosed per the operating statement for the period in which the said interest is accounted for in books. As gives rise to the question of as to how the assessee has accounted for the interest short provided i.e. in the subsequent (succeeding) year/s. This is as the depositor would need to be allowed the contracted interest and which the assessee being obliged to would have surely provided for later even as it following mercantile system of accounting cannot claim the same for the relevant previous year in view of an omission to provide for it for the relevant year. This it needs to be borne in mind is not a case of a provision being made on the basis of the best information available adjusted subsequently on crystallization or resolution of a dispute or the relevant facts. Another related aspect is the applicability of s. 40(a)(ia). Inasmuch as and to the extent the interest provided is subject to tax deduction at source non-deduction thereof would attract disallowance u/s. 40(a)(ia). It needs to be appreciated that the AO disallowed the claim in the absence of any details while implicit in its allowance is it being toward an ascertained liability even if on estimated basis in respect of identified payees. We may though clarify that as the actual provision by the bank (Rs. 300 lacs) is far lower than that exigible (Rs. 540 lacs) the assessee-bank is at liberty to appropriate the provision made against the depositor accounts on which no (or minimal) tax is deductible i.e. with a view to avoid or minimize the incidence of s. 40(a)(ia) subject to which only deduction u/s. 36(1)(iii) is admissible. This however would not disturb the appropriation already made. We though clarify be construed as having issued of any final finding/s but as only highlighting the areas that among others arise for consideration and adjudication. Where and to the extent however there has already been a specific consideration followed by a definite finding/s the same cannot be visited again inasmuch as the AO cannot review his order. The foregoing if anything only points to the vital need for deciding cross appeals together as exhorted by the hon ble higher courts of law time and again as well as by having regard to the due process of law. Allowance of appropriation of profit by the assessee for Statutory Reserve Agriculture Credit Fund and Building Fund i.e. toward certain contingencies and/or applications - CIT(A) allowed the same on the basis that the same were in view and in terms of the guidelines and the directions by the regulatory bodies being RBI and NABARD - HELD THAT - It is not clarified at any stage including before us as to under which provision of law the impugned sums are being claimed as deduction in the computation of income chargeable to tax as income from business assessable u/s. 28. CIT(A) has not clarified the specific guideline or direction where-under the reserve has been created as for example building fund nor has the same been pointed out to us. In fact the nature of the sum/s under reference as an appropriation (of profit) or as reserve is not in dispute. The same is only an appropriation of profit set aside for some specific purpose even if in terms of the guidelines by the regulatory body and not a provision toward any business liability much less ascertained and therefore ineligible for deduction. Even as the law in the matter is well-settled the Revenue relies on the decision in Associated Power Corporation Ltd. v. CIT 1995 (11) TMI 5 - SUPREME COURT - In fact no serious objection thereto was raised before us by Sh. Agrawal. We accordingly have no hesitation in reversing the findings by the ld. CIT(A) allowing the Revenues relevant Ground. Disallowance of Gratuity Payable (GP) u/s. 43B - HELD THAT - As under the circumstances necessarily require being restored to the file of the AO for determination afresh in accordance with law per a speaking order after hearing the assessee. We direct so vacating the findings by the CIT(A) - AO shall to the extent his order is inconsistent with the audit report also seek clarification therefrom as to the basis of their report/s making it a part of his order. He shall also ascertain about the disallowance if any u/s. 40A(7) or u/s. 43B in respect of the opening provision. It may here be relevant to state that regard is to be had in the matter of both sec. 40A(7) and sec. 43B inasmuch as s. 43B applies only to sums otherwise allowable . It is thus only the sum allowable u/s. 37(1) r/w s. 40A(7) that shall be allowed subject to the condition of actual payment as mandated by sec. 43B; the balance getting excluded (disallowed) u/s. 40A(7) itself. The aspect of the provision booked being in accordance with the actuarial valuation (or otherwise scientifically and empirically validated) would also have to be clarified. Disallowance made on the NPA provisions accepting the detailed working of NPA - HELD THAT - As bank would be provisioning in respect of assets obtaining no longer i.e. being not on it s books inasmuch as the same stand since recovered. The provision could continue ad infinitum surpassing in time the total value of the outstanding debt. The same is to be therefore restricted to the incremental advances i.e. where the provision as outstanding at a year-end is as a matter of accounting procedure/method not followed by its reversal on the first day of the year following at the end of which the same would be revisited and provided on the basis of risk assessment at the relevant time/at the per cent prescribed. The provision to the extent it relates to the percentage of income is based only on the income of each year and thus is to continue to obtain in the assessee s accounts increasing each year to the extent of the specified percentage of the income of each following year. The provision account comprising both components is only to be adjusted against actual write off of the bad debts. The reversal of provision as at the beginning of the following year is though to be made for the full amount of the corresponding provision made at the close of the immediately preceding year as outstanding. This is as this only would ensure that the provision is as at the end of each year capped at the prescribed percentage of the advances by the rural branches of the bank other than of course the outstanding part thereof made on the basis of income which is not liable for reversal. Any excess of the actual write off of bad debts u/s. 36(1)(vii) if any in excess of the amount available under provision account is to be debited to the P L A/c for the relevant year.
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