9911796707
TMI Blog2012 (2) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... iia) of the Act, could not be accepted. Consequently, he observed that the assessee having a provision of Rs. 15,01,29,990/- for bad and doubtful debts under Section 36(1)(viia) of the Act could not claim the amount of Rs. 12,65,95,770/- as deduction on account of bad debts because the bad debts did not exceed the credit balance in the provision for bad and doubtful debts account and also, the requirements of clause (v) of Sub-section (2) of Section 36 of the Act were not satisfied. Therefore, the assessee's claim for deduction of bad debts written off from the account books was disallowed. This amount was added back to the taxable income of the assessee, for which a demand notice and challan was accordingly issued. This order of the assessing officer dated 24th January, 2005, was challenged in appeal by the assessee on various grounds. 2. The Commissioner of Income Tax (Appeals) [hereafter referred to as `the CIT(A)'], vide its order dated 7th April, 2006, partly allowed the appeal, particularly in relation to the claim of the appellant Bank for bad debts. Relying upon the judgment of a Division Bench of the Kerala High Court in the case of South Indian Bank Ltd. v. CIT [(2003) 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or bad and doubtful debts. This view was obviously favourable to the assessee. Noticing these contrary views in the cases of Dhanalakshmi Bank and Federal Bank, the matter in the case of the appellant-Bank, for assessment years 1991-92 to 1993- 1994 was referred to a Special Bench of the ITAT for resolving the issue. The Special Bench, vide its judgment dated 9th August, 2002, had answered the question of law in the affirmative, holding that debts actually written off, which do not arise out of the rural advances, are not affected by the proviso to clause (vii) and that only those bad debts which arise out of rural advances are to be deducted under Section 36(1)(viia) in accordance with the proviso to clause (vii). Finally, the matter, in respect of the appellant-Bank, was ordered to be placed before the assessing officer and with respect to other banks, before the concerned benches of the ITAT. The order of the Special Bench of the ITAT was implemented by the Department and was never called in question. It may be noticed here that in relation to earlier assessments, i.e. right from 1985-1986 to 1987-1988 in a similar case, different banks came up for hearing in appeal before a Div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to sub-section (2) of Section 36 which in clause (v) specifically states that any bad debt written off should be claimed as a deduction only after debiting it to the provision created for bad and doubtful debts. Further, in order to qualify for deduction of the bad debt written off, the requirement of section 36 (2) (v) is that such amount should be debited to the provision created under clause (viia) of claim deduction of provision under sub-clause (viia), but at the same time when bad debt is written off is also claimed deduction under clause (vii), the same will be allowed as a deduction only to the extent it is in excess of the provision created and allowed as a deduction under clause (viia). It is worthwhile to note that deduction under section 36(1) (vii) is subject to sub section (2) of section 36 which in clause (v) specifically states that any bad debt written off should be claimed as a deduction only after debiting it to the provision created for bad and doubtful debts. What is clear from the above provisions is that though Respondent-Banks are entitled to claim deduction of provision for bad and doubtful debts in terms of clause (viia), such Banks are entitled to ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account that are maintained by the bank in the normal course of its business and it is not permissible to interchange these items in accordance with the settled standards of accountancy or even in law. As such, the claim of doubtful and bad debts could not have been added back to taxable income as it was an additional liability of the bank being shown as an independent item. 11. To put it more precisely, the contentious questions of law that have been raised in the present appeals are as follows:- "(j) Whether the Full Bench of the High Court has grossly erred in reversing the finding of the earlier Division Bench that on a correct interpretation of the Proviso to clause (vii) of Section 36(1) and clause (v) to Section 36(2) is only to deny the deduction to the extent of bad debts written off in the books with respect to which provision was made under clause (viia) of the Income Tax Act? (k) Whether the Full Bench was correct in reversing the findings of the earlier Division Bench that if the bad debt written off relate to debt other than for which the provision is made under clause (viia), such debts will fall squarely within the main part of clause (vii) which is entitled to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) Subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year: Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause; Explanation For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assess shall not include any provision for bad and doubtful debts made in the accounts of the assessee. (viia) In respect of any provision for bad and doubtful debts made by - (a) A scheduled bank not being a bank incorporated by or under the laws of a country outside India or a non-scheduled bank, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year), but the Assessing Officer had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year; (iv) Where any such debt or part of debt is written off as irrecoverable in the accounts of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year) and the Assessing Officer is satisfied that such debt or part became a bad debt in any earlier previous year not falling beyond a period of four previous years immediately preceding the previous year in which such debt or part is written off, provisions of sub-section (6) of section 155 shall apply; (v) Where such debt or part of debt relates to advances made by an assessee to which clause (viia) of sub-section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause." 15. The income of an assessee carrying on a business or profession has to be assessed in accordance with the scheme contained in Part `D' of Chapter IV dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount of such debt or part thereof in the previous year to the provision made for that purpose. Effect of Circulars 18. Now, we shall proceed to examine the effect of the circulars which are in force and are issued by the Central Board of Direct Taxes (for short, `the Board') in exercise of the power vested in it under Section 119 of the Act. Circulars can be issued by the Board to explain or tone down the rigours of law and to ensure fair enforcement of its provisions. These circulars have the force of law and are binding on the income tax authorities, though they cannot be enforced adversely against the assessee. Normally, these circulars cannot be ignored. A circular may not override or detract from the provisions of the Act but it can seek to mitigate the rigour of a particular provision for the benefit of the assessee in certain specified circumstances. So long as the circular is in force, it aids the uniform and proper administration and application of the provisions of the Act. {Refer to UCO Bank, Calcutta v. Commissioner of Income Tax, W.B. (1999) 4 SCC 599]}. 19. In the present case, after introduction of Section 36(1) (viia) by the Finance Act, 1979, [(1981) 131 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 36(1)(viia) of the Income-tax Act provides for a deduction in respect of any provision for bad and doubtful debts made by a scheduled bank or a non-scheduled bank in relation to advances made by its rural branches, of any amount not exceeding 1½ per cent of the aggregate average advances made by such branches. 17.3 Having regard to the increasing social commitments of banks, section 36(1)(viia) has been amended to provide that in respect of any provision for bad and doubtful debts made by a scheduled bank [not being a bank approved by the Central Government for the purposes of section 36(1)(viiia) or a bank incorporated by or under the laws of a country outside India] or a nonscheduled bank, an amount not exceeding ten per cent of the total income (computed before making any deduction under the proposed new provision) or two per cent of the aggregate average advances made by rural branches of such banks, whichever is higher, shall be allowed as a deduction in computing the taxable profits. 17.4 Section 36(1)(vii) of the Act has also been amended to provide that in the case of a bank to which section 36(1)(viia) applies, the amount of bad and doubtful debts shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have rural branches and hence this amendment will not be relevant in the case of the foreign banks. The other provisions secure that a further deduction shall be allowed in respect of the provision for bad and doubtful debts made by all banks, not just the banks incorporated in India, limited to 5% of the total income (computed before making any deduction under this clause and Chapter VI-A). This will imply that all scheduled or non-scheduled banks having rural branches would be allowed the deduction up to 2% of the aggregate average advances made by such branches and a further deduction up to 5% of their total income in respect of provision for bad and doubtful debts." 23. Reference usefully can also be made to the Statement of Objects and Reasons for the Finance Act, 1986, wherein, inter alia, it was stated that the amendments were intended to provide a deduction on the provisions for bad debts made by all banks upto 5 per cent of their total income and an additional 2 per cent of the aggregate average advances made by the rural branches of the banks. These percentages stood altered by subsequent amendments in 1993 and 2001. 24. Clear legislative intent of the relevant provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... falls squarely under Section 36(1)(viia) of the Act. We may also notice that the explanation to Section 36(1)(vii), introduced by the Finance Act, 2001, has to be examined in conjunction with the principal section. The explanation specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of `any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee'. Thus, the concept of making a provision for bad and doubtful debts will fall outside the scope of Section 36(1) (vii) simplicitor. The proviso, as already noticed, will have to be read with the provisions of Section 36(1)(viia) of the Act. Once the bad debt is actually written off as irrecoverable and the requirements of Section 36(2) satisfied, then, it will not be permissible to deny such deduction on the apprehension of double deduction under the provisions of Section 36(1)(viia) and proviso to Section 36(1)(vii). This does not appear to be the intention of the framers of law. The scheduled and nonscheduled commercial banks would continue to get the full benefit of write off of the irrecoverable debts under Section 36(1)(vii) in addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atore [(2010) 2 SCC 548] (authored by one of us, Kapadia, J., as he then was), both Sections 36(1)(vii) and 36(1) (viia) were discussed. Then, this Court went on to state how these provisions operate in the case of a Non Banking Financial Corporations (NBFC) vis-à-vis bank covered under Section 36(1)(viia). The Court held as under: "37. To understand the above dichotomy, one must understand "how to write off". If an assessee debits an amount of doubtful debt to the P&L account and credits the asset account like sundry debtor's account, it would constitute a write-off of an actual debt. However, if an assessee debits "provision for doubtful debt" to the P&L account and makes a corresponding credit to the "current liabilities and provisions" on the liabilities side of the balance sheet, then it would constitute a provision for doubtful debt. In the latter case, the assessee would not be entitled to deduction after 1-4-1989. XXX XXX XXX 58. Section 36(1)(vii) provides for a deduction in the computation of taxable profits for the debt established to be a bad debt. Section 36(1)(vii-a) provides for a deduction in respect of any provision for bad and doubtful debt made by a sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf of the Revenue that the Revenue is only concerned with the assessee as a single unit and not with how many separate accounts are being maintained by the assessee and under what items. The Department, therefore, would assess an assessee with reference to a single account maintained in the head office of the concerned bank. This, according to the learned counsel appearing for the Department, would further substantiate the argument of the Department that the interpretation given by the Full Bench of the High Court is the correct interpretation of Section 36(1)(vii). This argument has to be rejected, being without merit. 32. In the normal course of its business, an assessee bank is to maintain different accounts for the rural debts for nonrural/ urban debts. It is obvious that the branches in the rural areas would primarily be dealing with rural debts while the urban branches would deal with commercial debts. Maintenance of such separate accounts would not only be a matter of mere convenience but would be the requirement of accounting standards. 33. It is contended, and rightly so, on behalf of the assessee bank that under law, it is obliged to maintain accounts which would co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto the account of the head office, which will ultimately reflect one account (balance sheet), though containing different items. 37. Another example that would support this view is that, a bank can write off a loan against the account of `A' alone where it has advanced the loan to party `A'. It cannot write off such loan against the account of `B'. Similarly, a loan advanced under the rural schemes cannot be written off against an urban or a commercial loan by the bank in the normal course of its business. 38. The Full Bench of the Kerala High Court expressed the view that the Legislature did not make any distinction between provisions created in respect of advances by rural branches and advances by other branches of the bank. It also returned a finding while placing emphasis on the proviso to Section 36(1)(vii), read with clause (v) of Section 36(2) of the Act that the interpretation given by a Division Bench of that Courts in the case of South Indian Bank (supra) was not a correct enunciation of law, inasmuch as the same would lead to double deduction. It took the view that in a claim of deduction of bad debts written off in non-rural/urban branches in the previous year, by vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to Section 36(1)(vii) will relate to cases covered under Section 36(1)(viia) and has to be read with Section 36(2)(v) of the Act. Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans while under Section 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. This, obviously, would be subject to satisfaction of the requirements contemplated under Section 36(2). 42. Consequently, while answering the question in favour of the assessee, we allow the appeals of the assessees and dismiss the appeals preferred by the Revenue. Further, we direct that all matters be remanded to the assessing officer for computation in accordance with law, in light of the law enunciated in this judgment. IN THE SUPREME COURT OF INDIA CIVIL APPEAL NO. 1143 OF 2011 Catholic Syrian Bank Ltd. Versus Commissioner of Income Tax, Thrissur JUDGMENT S. H. KAPADIA, CJI 1. I have gone throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off. However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). However, the Revenue disputes the position that the proviso to clause (vii) refers only to rural advances. It says that there are no such words in the proviso which indicates that the proviso apply only to rural advances. We find no merit in the objection raised by the Revenue. Firstly, CBDT itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
