2025 (6) TMI 572 - AT - Income Tax

Addition / disallowance u/s 36(1)(viia) - assessee is not eligible to claim deduction for the provisions for bad and doubtful debt as the assessee bank having no rural branches - HELD THAT -Assessee is entitled for claiming deduction u/s 36(1)(viia) of the Act on account of provisions for bad and doubtful debts. Disallowance u/s 36(1)(viii) - Hon ble Supreme Court in cases of Catholic Syrian Bank Ltd. 2012 (2) TMI 262 - SUPREME COURT and Karnataka Bank Ltd. 2013 (2) TMI 40 - SC ORDER has held that provisions of section 36(1)(vii) and 36(1)(viia) of the Act are distinct and independent items of deduction and operate in their respective fields. The banks would continue to get the benefit of write off of irrecoverable debts u/s 36(1)(vii) of the Act in addition to benefit of deduction of the provisions for bad and doubtful debts u/s 36(1)(viia) of the Act. A reading of Clause (viia) of section 36(1) of the Act makes it clear that provisions for bad and doubtful debt made by the eligible banks has two components; (i) amount not exceeding 7.5% of the total income computed before any deduction under the clause (viia) and Chapter VIA and (ii) an amount not exceeding 10% of aggregate average advances made by the rural branches of such bank. It is therefore clear that the first component of the deduction of 7.5% is independently available to the eligible bank and is not dependent on having any rural branches. In view of the clear statutory provisions the appellant-bank was eligible for the first component of the deduction of 7.5% of the total income. Even after ignoring the 10% of average rural advance the assessee was still eligible for deduction of Rs. 2, 09, 11, 408/-. As against the above sum it has claimed deduction of Rs. 50, 00, 000/- u/s 36(1)(viia) of the Act. Hence the CIT(A) has right. Disallowance of deduction u/s 36(1)(viii) - As per provisions of Clause (viii)of sub-section (1) of section 36 of the Act the assessee is eligible for an amount not exceeding 20% of the profit derived from eligible business under the head profits and gains of the business before making any deduction under this clause i.e. 36(1)(viii) of the Act which is carried to a reserve account created and maintained by the specific entity. Therefore what is necessary to claim the deduction under the aforesaid provisions are; (i) that the impugned transfer to the special reserve should not exceed 20% of the profit (ii) the assessee should be a specific entity under Explanation (a) below section 36(1)(viii) of the Act which includes a cooperative bank (iii) the assessee should be engaged in the business of banking and (iv) the assessee is engaged in providing the long-term finance. We find that the assessee fulfils all four conditions required for claiming deduction u/s 36(1)(viii). Accordingly the assessee is eligible for 20% deduction of business profit without any deduction u/s 36(1)(viii).

Summary

The core legal questions considered in this appeal pertain to the allowability of deductions claimed under specific provisions of the Income-tax Act, 1961, namely section 36(1)(viia) relating to provisions for bad and doubtful debts by a cooperative bank, and section 36(1)(viii) concerning deductions for amounts transferred to a special reserve for long-term finance. The issues can be summarized as follows:

1. Whether the assessee, a cooperative bank without any rural branches, is eligible to claim deduction under section 36(1)(viia) of the Act for provisions for bad and doubtful debts.

2. Whether the assessee is entitled to deduction under section 36(1)(viii) of the Act for the amount transferred to a special reserve for long-term finance, despite alleged non-creation of the reserve during the relevant assessment year and absence of supporting documentary evidence.

Issue 1: Eligibility for Deduction under Section 36(1)(viia) of the Income-tax Act

The legal framework governing this issue is section 36(1)(viia) of the Act, which allows a deduction for provisions made by scheduled or non-scheduled banks or cooperative banks (excluding primary agricultural credit societies and primary cooperative agricultural and rural development banks) for bad and doubtful debts. The deduction consists of two components: (i) an amount not exceeding 7.5% of the total income computed before any deduction under this clause and Chapter VI-A, and (ii) an amount not exceeding 10% of the aggregate average advances made by the rural branches of the bank.

Precedents relied upon include the Supreme Court decisions in Catholic Syrian Bank Ltd. vs. CIT and DCIT vs. Karnataka Bank Ltd., which clarified that the provisions of section 36(1)(vii) and 36(1)(viia) are distinct and independent. The Court held that banks are entitled to both the benefit of write-off of irrecoverable debts under section 36(1)(vii) and the deduction for provisions for bad and doubtful debts under section 36(1)(viia).

The Assessing Officer (AO) had disallowed the deduction of Rs. 50,00,000 under section 36(1)(viia) on the ground that the assessee had no rural branches, and the legislative intent was to encourage rural advances. The AO held that the deduction under section 36(1)(viia) is limited to bad debts arising from rural advances, and since the assessee had no rural branches, the deduction was not allowable.

The Commissioner of Income-tax (Appeals) [CIT(A)] reversed this finding, relying on the above Supreme Court precedents and decisions of ITAT Cochin and ITAT Mumbai, and held that the assessee, being a cooperative bank, is entitled to claim deduction under section 36(1)(viia) irrespective of the presence or absence of rural branches.

The Tribunal analyzed the statutory language of section 36(1)(viia) and observed that the deduction has two components: the first component of 7.5% of total income is independent of rural branches, while the second component of 10% relates to advances made by rural branches. The Tribunal noted that the assessee was eligible for the first component of the deduction even without rural branches. It calculated the allowable deduction based on the gross total income and found that the assessee's claim of Rs. 50,00,000 was well within the permissible limit of Rs. 2,09,11,408.

The Tribunal rejected the revenue's argument that the deduction was not allowable due to absence of rural branches, emphasizing the clear statutory provisions and judicial precedents. It upheld the CIT(A)'s order allowing the deduction.

Issue 2: Allowability of Deduction under Section 36(1)(viii) for Transfer to Special Reserve for Long-term Finance

Section 36(1)(viii) of the Income-tax Act permits a deduction for amounts transferred to a special reserve account by certain entities, including cooperative banks, engaged in providing long-term finance. The deduction is limited to 20% of the profits derived from the eligible business before making any deduction under this clause.

The AO disallowed the deduction of Rs. 1,75,00,000 claimed by the assessee on the ground that the assessee had not created the special reserve during the relevant year but merely transferred the reserve from a previous year, and also failed to furnish supporting documentary evidence.

The CIT(A) held that each assessment year is distinct and separate, and the assessee had fulfilled all four conditions required for claiming the deduction under section 36(1)(viii): (i) the transfer to the special reserve did not exceed 20% of the profit, (ii) the assessee is a cooperative bank as specified under the Explanation to the section, (iii) the assessee is engaged in the business of banking, and (iv) the assessee provides long-term finance. Accordingly, the CIT(A) allowed the deduction.

The Tribunal examined the statutory requirements and found that the assessee's gross total income and provisions for long-term finance resulted in profits sufficient to claim a deduction of up to Rs. 5,82,63,754 (20% of profits), whereas the claimed deduction was only Rs. 1,75,00,000. The Tribunal noted that the assessee met all the statutory conditions for claiming the deduction and that the CIT(A) had rightly allowed the claim.

The Tribunal rejected the revenue's contention regarding lack of supporting evidence and the AO's observations about non-creation of the reserve in the relevant year, emphasizing that the statutory conditions were fulfilled and the deduction was properly claimed.

Significant Holdings and Core Principles

On the first issue, the Tribunal held: "A reading of Clause (viia) of section 36(1) of the Act makes it clear that provisions for bad and doubtful debt made by the eligible banks has two components; (i) amount not exceeding 7.5% of the total income computed before any deduction under the clause (viia) and Chapter VIA and (ii) an amount not exceeding 10% of aggregate average advances made by the rural branches of such bank. It is, therefore, clear that the first component of the deduction of 7.5% is independently available to the eligible bank and is not dependent on having any rural branches."

Further, the Tribunal concluded: "Thus, even after ignoring the 10% of average rural advance, the assessee was still eligible for deduction of Rs. 2,09,11,408/-. As against the above sum, it has claimed deduction of Rs. 50,00,000/- u/s 36(1)(viia) of the Act. Hence, the CIT(A) has rightly allowed the claim of the assessee and the same is upheld."

On the second issue, the Tribunal stated: "As per provisions of Clause (viii) of sub-section (1) of section 36 of the Act, the assessee is eligible for an amount not exceeding 20% of the profit derived from eligible business under the head profits and gains of the business before making any deduction under this clause... We find that the assessee fulfils all four conditions required for claiming deduction u/s 36(1)(viii) of the Act."

It further held: "It is, therefore, clear that assessee was eligible for deduction of Rs. 3,82,63,754/- against which the deduction claimed by the assessee is only Rs. 1,75,00,000/-. Therefore, we do not find any infirmity in the order of CIT(A). Accordingly, this ground of appeal raised by the revenue is also dismissed."

The Tribunal's final determinations were to dismiss both grounds of appeal raised by the revenue, thereby upholding the CIT(A)'s order allowing the deductions under sections 36(1)(viia) and 36(1)(viii) of the Income-tax Act.