TMI Blog2012 (2) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... the proviso would not permit benefit of double deduction, operating with reference to rural loans. Therefore, we hold that provisions of Sections 36(1)(vii) and 36(1)(viia) are distinct and independent items of deduction and operate in their respective fields – Decided in favor of assessee. - CIVIL APPEAL NO. 1143 OF 2011, 1147 of 2011, 1151 OF 2011 - - - Dated:- 17-2-2012 - A.K. Patnaik, Swatanter Kumar, JJ. JUDGMENT Swatanter Kumar, J. 1. The assessee in C.A. No. 1143 of 2011, a Scheduled Bank, filed its return of income for the assessment year 2002- 2003 on 24th October, 2002, declaring total income of Rs. 61,15,610/-. The return was processed under Section 143(1) of the Income Tax Act, 1961 (for short `the Act') and eligible refund was issued in favour of the assessee. However, the assessing officer issued notice under Section 143(2) of the Act to the assessee, after which the assessment was completed. Inter alia, the assessing officer, while dealing, under Section 143(3) of the Act, with the claim of the assessee for bad debts of Rs. 12,65,95,770/-, noticed that the argument put forward on behalf of the assessee, that the deduction allowable under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant and other banks. 5. M/s. Dhanalakshmi Bank Ltd., one of the appellants before us, had also raised the same issue before the ITAT in Income Tax Appeal Nos.602-605 (Coch.) of 1994 and 190 (Coch.) of 1995, in relation to earlier assessment years. A view had been expressed that there was no distinction made by the Legislature in the proviso to Section 36(1)(vii) between rural and non-rural advances and, therefore, its application cannot be limited to rural advances. Under clause (viia) also, a bank was held to be entitled to deduction in respect of the provisions made for rural and non-rural advances, subject to limitations contained therein. Thus, the contention of the assessee in that case, for deduction of bad debts from urban branches under Section 36(1)(vii), was rejected. The earlier view taken by the Tribunal in the case of Federal Bank in ITA Nos. 505, 854(Coch.) of 1993, 376(Coch.) of 1995 and 284(Coch.) of 1995 held that the proviso to clause (vii) only bars the deduction of bad debts arising out of rural advances, the actual right to set off bad debts in respect of non-rural and urban advances cannot be controlled or restricted by application of the proviso and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of South Indian Bank (supra) was not a correct exposition of law. While dissenting therefrom, the Bench directed the matter to be placed before a Full Bench of the High Court. 8. That is how the matter came up for hearing before a Full Bench of the High Court of Kerala at Ernakulam and vide its judgment dated 16th December, 2009, the Full Bench not only answered the question of law but even decided the case on merits. While setting aside the view taken by the Division Bench in South Indian Bank (supra) and also the concurrent view taken by the CIT(A) and the ITAT, the Full Bench of the High Court held as under:- "5...What is clear from the above is that provision for bad and doubtful debts normally is not an allowable deduction and what is allowable under main clause is bad debt actually written off. However, so far as Banks to which clause (viia) applies are concerned, they are entitled to claim deduction of provision under sub-clause (viia), but at the same time when bad debt written 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). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly to the extent it exceeds the provision created and allowed as deduction under clause (viia) of the Act. 6. In the normal course we should answer the question referred to us by the Division Bench and send back the appeals for the Division Bench to decide the appeals consistent with the Full Bench decision. However, since this is the only issue that arises in the appeals, we feel it would be only an empty formality to send back the matter to the Division Bench for disposal of appeals consistent with our judgment. In order to Avoid unnecessary posting of appeals before the Division Bench, we allow the appeals by setting aside the orders of the Tribunal and by restoring the assessments confirmed in first Appeals." 9. Dissatisfied from the judgment of the Full Bench of the Kerala High Court, the assessee has filed the present appeal purely on question of law. 10. The basic question of some significance, that arises for consideration in the present appeals, is regarding the scope and ambit of the proviso to clause (vii) of sub-section (1) of Section 36 of the Act. According to the contention raised on behalf of the assessee, the view taken by the Full Bench of the Kerala High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Special Bench of the ITAT and attained finality for that relevant year. Equally, it is true that though the Full Bench of the Kerala High Court specifically overruled the Division Bench judgment of that very Court in the case of South Indian Bank (supra), it did not notice any of the contentions before and principles stated by the Special Bench of the ITAT in its impugned judgment. As already noticed, the question raised in the present appeal go to the very root of the matter and are questions of law in relation to interpretation of Sections 36(1)(vii) and 36(1)(viia) read with Section 36(2) of the Act. Thus, without any hesitation, we reject the contention of the appellant banks that the findings recorded in the earlier assessment years 1991-1992 to 1993- 1994 would be binding on the Department for subsequent years as well. 14. Now, we would proceed to examine the provisions of Sections 36(1)(vii), 36(1)(viia) and 36(2) of the Act and their scope. It would be appropriate for this Court to notice the relevant provisions of the Sections at this stage itself. "Section 36 (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a scheme framed by the Central Government. Explanation. - For the purposes of this sub-clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005. Section 36 (2) In making any deduction for a bad debt or part thereof, the following provisions shall apply (i) No such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or moneylending which is carried on by the assessee; (ii) If the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made; (iii) Any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year (being a previous year relevant to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat they need to be construed strictly and on their plain reading. 17. The provisions of Section 36(1)(vii) would come into play in the grant of deductions, subject to the limitation contained in Section 36(2) of the Act. Any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year is the deduction which the assessee would be entitled to get, provided he satisfies the requirements of Section 36(2) of the Act. Allowing of deduction of bad debts is controlled by the provisions of Section 36(2). The argument advanced on behalf of the Revenue is that it would amount to allowing a double deduction if the provisions of Sections 36(1)(vii) and 36(1)(viia) are permitted to operate independently. There is no doubt that a statute is normally not construed to provide for a double benefit unless it is specifically so stipulated or is clear from the scheme of the Act. As far as the question of double benefit is concerned, the Legislature in its wisdom introduced Section 36(2)(v) by the Finance Act, 1985 with effect from 01.04.1985. Section 36(2)(v) concerns itself as a check for claim of any double deduction and has to be read in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le debts under Section 36(1)(vii) in addition to the benefit of deduction of the provision for bad and doubtful debts under Section 36(1)(viia). 20. The Finance Act, 1985, which was given effect from 1st April, 1985, added the proviso to Section 36(1)(vii), amended Section 36(1)(viia) and also introduced clause (v) to Section 36(2) of the Act. To complete the history of amendments to these clauses, we may also notice that proviso to Section 36(1) (viia)(a) was introduced by Finance Act, 1999 with effect from 1st April, 2000 and explanation to Section 36(1)(vii) was introduced by Finance Act, 2001 with effect from 1st April, 2001. 21. A Circular No.421 dated 12th June, 1985 [(1985) 156 ITR (St.) 130] attempted to explain the amendments made to Section 36 and also explained the provisions of clause (viia) of Section 36(1). It reads as under : "Deduction in respect of provisions made by banking companies for bad and doubtful debts. 17.1 Section 36(1)(vii) of the Income-tax Act provides for a deduction in the computation of taxable profits of the amount of any debt or part thereof which is established to have become a bad debt in the previous year. This allowance is subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f deduction on provisions for bad and doubtful debts made by the banks 5.1 Under the existing provisions of clause (viia) of sub-section (1) of section 36 of the Income-tax Act inserted by the Finance Act, 1979, provision for bad and doubtful debts made by scheduled or a non-scheduled Indian bank is allowed as deduction within the prescribed limits. The limit prescribed is 10% of the total income or 2% of the aggregate average advances made by the rural branches of such banks, whichever is higher. It had been represented to the Government that the foreign banks were not entitled to any deduction under this provision and to that extent, they were being discriminated against. Further, it was felt that the existing ceiling in this regard, i.e., 10% of the total income or 2% of the aggregate average advances made by the rural branches of Indian banks, whichever is higher, should be modified. Accordingly, by the Amending Act, the deduction presently available under clause (viia) of subsection (1) of section 36 of the Income-tax Act has been split into two separate provisions. One of these limits the deduction to an amount not exceeding 2% of the aggregate average advances made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent deductions specifically provided under the provisions of the Act. To put it simply, the deductions permissible under Section 36(1)(vii) should not be negated by reading into this provision, limitations of Section 36(1)(viia) on the reasoning that it will form a check against double deduction. To our mind, such approach would be erroneous and not applicable on the facts of the case in hand. Interpretation and Construction of Relevant Sections 25. The language of Section 36(1)(vii) of the Act is unambiguous and does not admit of two interpretations. It applies to all banks, commercial or rural, scheduled or unscheduled. It gives a benefit to the assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. This benefit is subject only to Section 36(2) of the Act. It is obligatory upon the assessee to prove to the assessing officer that the case satisfies the ingredients of Section 36(1)(vii) on the one hand and that it satisfies the requirements stated in Section 36(2) of the Act on the other. The proviso to Section 36(1)(vii) does not, in absolute terms, control the application of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deductions. Further, it concluded that the proviso had been introduced to protect the Revenue, but it would be meaningless to invoke the same where there was no threat of double deduction. 27. As per this proviso to clause (vii), the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed under clause (viia). The proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by clause (viia), there would be no such double deduction. The proviso, in its terms, limits its application to the case of a bank to which clause (viia) applies. Indisputably, clause (viia)(a) applies only to rural advances. 28. As far as foreign banks are concerned, under Section 36(1)(viia)(b) and as far as public financial institutions or State financial corporations or State industrial investment corporations are concerned, under Section 36(1)(viia)(c), they do not have rural branches. Thus, it can safely be inferred that the proviso is self indicative that its application is to bad debts arising out of rural advances. 29. In a recent judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l debt is given the benefit of deduction, however, subject to the ceiling prescribed as stated above. Lastly, the provision for NPA created by a scheduled bank is added back and only thereafter deduction is made permissible under Section 36(1)(vii-a) as claimed." 30. The scope of the proviso to clause (vii) of Section 36(1) has to be ascertained from a cumulative reading of the provisions of clauses (vii), (viia) of Section 36(1) and clause (v) of Section 36(2) and only shows that a double benefit in respect of the same debt is not given to a scheduled bank. A scheduled bank may have both urban and rural branches. It may give advances from both branches with separate provision accounts for each. 31. It was neither in dispute earlier, nor dispute before us, that the assessee bank is maintaining two separate accounts, one being a provision for bad and doubtful debts other than provisions for bad debts in rural branches and another provision account for bad debts in rural branches for which separate accounts are maintained. This fact is evinced by the entries in the profit and loss account, balance sheet and break up details. We need not deliberate this aspect with reference to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t relate to the original provision are adjusted against it. Adjusting expenditures against a provision that was originally recognised for another purpose would conceal the impact of two different events." 35. The above clauses justify maintenance of distinct and different accounts. 36. Merely because the Department has some apprehension of the possibility of double benefit to the assessee, this would not by itself be a sufficient ground for accepting its interpretation. Furthermore, the provisions of a section have to be interpreted on their plain language and could not be interpreted on the basis of apprehension of the Department. This Court, in the case of Vijaya Bank v. Commissioner of Income Tax Anr. [(2010) 5 SCC 416], held that under the accounting practice, the accounts of the rural branches have to tally with the accounts of the head office. If the repaid amount in subsequent years is not credited to the profit and loss account of the head office, which is what ultimately matters, then there would be a mismatch between the rural branch accounts and the head office accounts. Therefore, in order to prevent such mismatch and to be in conformity with the accounting practi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form a complete scheme for deductions and prescribe the extent to which such deductions are available to a scheduled bank in relation to rural loans etc., whereas Section 36(1)(vii) deals with general deductions available to a bank and even nonbanking businesses upon their showing that an account had become bad and written off as irrecoverable in the accounts of the assessee for the previous year, satisfying the requirements contemplated in that behalf under Section 36(2). The provisions of Section 36(1)(vii) operate in their own field and are not restricted by the limitations of Section 36(1)(viia) of the Act. In addition to the reasons afore-stated, we also approve the view taken by the Special Bench of ITAT and the Division Bench of the Kerala High Court in the case of South Indian Bank (supra). 41. To conclude, we hold that the provisions of Sections 36(1) (vii) and 36(1)(viia) of the Act are distinct and independent items of deduction and operate in their respective fields. The bad debts written off in debts, other than those for which the provision is made under clause (viia), will be covered under the main part of Section 36(1)(vii), while the proviso will operate in cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m their current profits to provide for risks in relation to their rural advances, the Finance Act, inserted clause (viia) in subsection (1) of Section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debt(s) relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the IT Rules, 1962. Thus, the provisions of clause (viia) of Section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of Section 36(1)(vii) relating to allowance of the bad debt(s). In other words, the scheduled commercial banks would continue to get the full benefit of the write off of the irrecoverable debt(s) under Section 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under Section 36(1)(viia). A reading of the Circulars issued by CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is writt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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