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2025 (5) TMI 198 - AT - Income TaxDisallowance of deduction claimed u/s. 36(1)(viia) - AO observed that against the provision made for doubtful debts assessee had adjusted debts relating to rural branches whereas the debts relating to non-rural branches have not been adjusted against the provision so made - According to the AO against the provision made u/s. 36(1)(viia) of the Act the debts relating to both rural and non-rural branches have to be adjusted thus concluded that the assessee has claimed excess deduction on account of write off of bad debts - HELD THAT - We find identical issue came up for consideration in assessee s own case before the Bangalore Bench of the Tribunal in 2022 (3) TMI 669 - ITAT BANGALOR following the aforesaid decision of the Hon ble Apex Court M/S. VIJAYA BANK VERSUS COMMISSIONER OF INCOME TAX ANR. 2010 (4) TMI 46 - SUPREME COURT we hold that the assessee bank is eligible to claim and be allowed write off of the bad debts u/s. 36(1)(vii) of the Act and we therefore reverse and delete the disallowance made by the Assessing Officer in this regard. Consequently Ground of the assessee s appeal is allowed. Disallowance u/s. 37(1) - penalty/fine amounts paid by the assessee - AO noticed that under the head other office expenses claimed towards deduction an amount represents penalty/fine paid by the assessee is not admissible as deduction - HELD THAT - Penalty imposed by the Consumer Court for deficiency in service cannot be equated to an offence or an activity prohibited by law. Therefore in our considered opinion the amount cannot be disallowed by referring to Explanation-1 to Section 37(1) of the Act. Therefore in our view the amount has to be allowed as deduction. Similar is the case with regard to penalty on delayed ATM transaction. In our view the amount paid was not as a result of any offence or infraction of law. Hence allowable as deduction. Penalty paid - nature of such penalty is not forthcoming - we restore the issue of disallowance of Rs. 2, 24, 44, 050/- to the AO for factual verification as to whether the amount was paid for any offence or for any activity prohibited by law and thereafter may consider allowability of such expenditure. The assessee must be provided an opportunity of being heard before deciding the issue. Disallowance u/s. 36(1)(va) r.w.s. 2(24)(x) - assessee has not deposited the employee s contribution to provident fund within the stipulated time period - HELD THAT - We are of the view that employee s contribution to NPS cannot be equated to employee s contribution to PF hence cannot be subjected to disallowance u/s. 36(1)(va) of the Act. Therefore the AO is directed to factually verified the composition of the amount and in case it is found that it also includes employee s contribution to NPS such amount should be excluded. From the purview of applicability of Section 36(1)(va) of the Act. Even in respect of employee s contribution to PF the AO is directed to verify the actual delay in depositing the employee s contribution only after factual verification if it is found that there is delay in depositing employee s contribution to PF then disallowance u/s. 36(1)(va) of the Act can be made. Needless to say the Assessing Officer must provide an opportunity of being heard to the assessee before deciding the issue.
1. ISSUES PRESENTED and CONSIDERED
- Whether the disallowance of deduction claimed under Section 36(1)(viia) of the Income Tax Act, 1961, relating to bad debts written off, is justified when the assessee bank adjusted debts relating only to rural branches and not non-rural branches against the provision made. - Whether the penalty/fine amounts paid by the assessee are allowable deductions under Section 37(1) of the Act, specifically distinguishing penalties imposed for deficiency in service versus penalties for infraction of law. - Whether the disallowance under Section 36(1)(va) read with Section 2(24)(x) of the Act of employee's contribution to provident fund (PF) and New Pension Scheme (NPS) on account of alleged delay in deposit is justified. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Disallowance of deduction under Section 36(1)(viia) for bad debts written off Relevant legal framework and precedents: Section 36(1)(viia) allows deduction for bad debts written off by a banking company. The Supreme Court's decision in the assessee's own case (reported at 323 ITR 166) is pivotal, clarifying the manner and conditions under which such write-offs qualify for deduction. The decision distinguishes between mere prudential write-offs and actual write-offs debited to the Profit and Loss account and reduced from advances in the balance sheet. Court's interpretation and reasoning: The Assessing Officer (AO) disallowed part of the deduction on the ground that the assessee had adjusted debts relating only to rural branches against the provision, while non-rural branch debts were not similarly adjusted. The AO held that adjustment must be made against both rural and non-rural debts. However, the Tribunal referred to coordinate bench decisions, including the assessee's own earlier cases, which held that the write-off is valid if it is debited to the Profit and Loss account and reduced from advances in the balance sheet, regardless of whether individual debtor accounts at branch level are closed. The Tribunal emphasized that the AO's apprehension about possible double claim of deduction due to non-closure of individual accounts is speculative. The Supreme Court held that the AO can verify details if there is reasonable belief of double claim but cannot deny deduction merely on apprehension. Further, subsequent recoveries are taxed under Section 41(4) of the Act, preventing escapement of income. Key evidence and findings: The assessee debited bad debts to the 'Bad Debts Written Off Account' (GL Code 163301) included in the Profit and Loss account and reduced advances accordingly in the balance sheet. Recoveries of written-off debts were credited to the Profit and Loss account and offered to tax. This accounting treatment was consistent with the Supreme Court's guidelines. Application of law to facts: The Tribunal applied the Supreme Court's ruling and coordinate bench decisions to hold that the assessee's method of write-off was legitimate and eligible for deduction under Section 36(1)(viia). The AO's disallowance was therefore reversed. Treatment of competing arguments: The AO and Departmental Representative (DR) argued for disallowance due to non-closure of individual accounts and possible double claim. The Tribunal rejected this on the basis of judicial precedents and factual accounting treatment. The DR could not controvert the binding coordinate bench decisions. Conclusion: The disallowance of Rs. 591.79 crores under Section 36(1)(viia) was deleted, allowing the deduction claimed by the assessee. Issue 2: Disallowance of penalty/fine under Section 37(1) Relevant legal framework: Section 37(1) allows deduction of any expenditure (other than those specifically disallowed) incurred wholly and exclusively for business purposes. Explanation 1 to Section 37(1) excludes penalties or fines imposed for violation of law. Court's interpretation and reasoning: The AO disallowed penalty/fine payments amounting to Rs. 2.84 crores, treating them as inadmissible. The First Appellate Authority granted partial relief by allowing penalties imposed by the Reserve Bank of India (RBI) on currency and non-currency chests. The Tribunal analyzed the nature of penalties, distinguishing between penalties imposed for deficiency in service (consumer courts) and penalties for infraction of law. It held that penalties for deficiency in service do not fall within the exclusion under Explanation 1 to Section 37(1) and are therefore allowable deductions. Similarly, penalties for delayed ATM transactions were held to be compensatory rather than punitive for legal infractions. Regarding a large penalty amount of Rs. 2.24 crores, the Tribunal noted that the AO and appellate authorities had not furnished details about the nature of the penalty. Therefore, the issue was restored to the AO for factual verification, with a direction to provide the assessee an opportunity of being heard before deciding allowability. Key evidence and findings: The assessment order's Paragraph 8.2 and the appellate order did not clarify the nature of the major penalty. The Tribunal relied on the assessee's submissions and the absence of contrary evidence. Application of law to facts: Penalties imposed for deficiency in service and delayed transactions are allowable deductions. Penalties for legal infractions require verification before disallowance. Treatment of competing arguments: The AO and DR relied on the general principle of non-allowance of penalties, but failed to demonstrate that the penalties in question were for legal infractions. The Tribunal favored the assessee's submissions and directed factual inquiry. Conclusion: Penalties for deficiency in service and delayed ATM transactions amounting to Rs. 47.21 lakhs and Rs. 25,000 respectively were allowed. The disallowance of Rs. 2.24 crores was restored for further verification. Issue 3: Disallowance of employee's contribution to provident fund under Section 36(1)(va) read with Section 2(24)(x) Relevant legal framework: Section 36(1)(va) disallows deduction for employer's contribution to provident fund if not deposited within the prescribed time. Section 2(24)(x) defines "employer's contribution" for this purpose. The New Pension Scheme (NPS) contributions by employees are distinct from PF contributions. Court's interpretation and reasoning: The AO disallowed Rs. 15.95 crores on the ground of delay in deposit of employee's contribution to PF. The assessee contended that the amount included employee contributions to NPS, which is not PF and hence not subject to disallowance under Section 36(1)(va). Further, the assessee requested factual verification of delay in deposit. The Tribunal agreed that NPS contributions are not PF contributions and cannot be disallowed under Section 36(1)(va). It directed the AO to verify the composition of the amount and exclude NPS contributions from disallowance. Regarding PF contributions, the AO was directed to verify actual delay before making disallowance and to provide the assessee an opportunity of being heard. Key evidence and findings: The AO had not verified the composition of the amount or the factual delay in deposit. The assessee's submissions highlighted the inclusion of NPS contributions. Application of law to facts: The Tribunal applied the statutory definitions and principles to require factual verification before disallowance and exclusion of NPS contributions. Treatment of competing arguments: The DR did not object to restoration of the issue for verification. The Tribunal accepted the assessee's submissions. Conclusion: The issue was restored to the AO for factual verification and appropriate decision, excluding NPS contributions and considering actual delay in PF deposit. 3. SIGNIFICANT HOLDINGS "The assessee bank has debited the bad debts written off to the account 'Bad Debts Written Off Account' (GL Code 163301) which is part of the profit and loss account and has reduced the write off from Gross Advances in the Balance Sheet. The authorities below disallowed the write off on the ground that the individual accounts are not squared off at the branch level. We find that this issue of write off has been settled by the Hon'ble Apex Court in the assessee's own case reported in 323 ITR 166 (SC), wherein at paras 8 & 9 thereof it was held as under: ..." "It is not in dispute that s. 36(1)(vii) of 1961 Act applies both to banking and nonbanking businesses. The manner in which the write off is to be carried out has been explained hereinabove. ... It is always open to the AO to call for details of individual debtor's account if the AO has reasonable grounds to believe that assessee has claimed deduction, twice over. ... In any event, s. 41(4) of 1961 Act, inter alia, lays down that, where a deduction has been allowed in respect of a bad debt or a part thereof under s. 36(1)(vii) of 1961 Act, then, if the amount subsequently recovered on any such debt is greater than the difference between the debt and the amount so allowed, the excess shall be deemed to be profits and gains of business and, accordingly, chargeable to income-tax as the income of the previous year in which it is recovered." "The penalty imposed by the Consumer Court for deficiency in service cannot be equated to an offence or an activity prohibited by law. Therefore, in our considered opinion, the amount cannot be disallowed by referring to Explanation-1 to Section 37(1) of the Act." "Employee's contribution to NPS cannot be equated to employee's contribution to PF, hence cannot be subjected to disallowance u/s. 36(1)(va) of the Act. Therefore, the AO is directed to factually verify the composition of the amount ... and in case it is found that it also includes employee's contribution to NPS such amount should be excluded." Final determinations:
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