TMI Blog2013 (11) TMI 825X X X X Extracts X X X X X X X X Extracts X X X X ..... of those assets - IDBI has also specified the criteria or basis for classifying the assets in the four categories stated above. According to the said guide lines, the assessee is also required to make provisions against the assets classified as Sub-standard, Doubtful and loss category, possibly these categories bear risk of recovery. According to the said guidelines, the SIDCs are required to determine the amount of provision for bad and doubtful debts. According to the guidelines issued by IDBI, the amount available in the Special Reserve Account u/s 36(1)(viii) of the Act is admissible for provision purposes. SIDCs can take into account the amount available in the Special Reserve Account while determining the amount of provision - The provision for bad and doubtful debts is created only to safeguard the financial institution against bad debts, i.e., the possible bad debts risk is evened out to a number of years. Hence, the permission given by IDBI for utilising the amount available in Special Reserve Account for making provision does not mean that the SIDC has actually utilised the Special Reserve Account. The said relaxation only allows the SIDC to determine the amount of "P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount as expenditure incurred in relation to the dividend income. Accordingly it did not disallow any amount as required by the provisions of sec. 14A of the Act. The AO, by placing reliance on the decision of Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. Mumbai vs. DCIT (328 ITR 81), held that the disallowance is required to be made under Rule 8D. Accordingly, by applying Rule 8D(2)(iii), the Assessing Officer disallowed 0.5% of the average value of investment which worked out to Rs. 24,64,479/-. 3.1 The assessee had claimed deduction for bad debts u/s. 36(1)(vii) of the Act to the tune of Rs.55,99,112/-. The Assessing Officer noticed that the assessee was also claiming deduction for the provision created for bad and doubtful debts u/s 36(1)(viia) of the Act. Hence, as per the proviso to sec. 36(1)(vii) of the Act, the amount of bad debts or part thereof claimed by the assessee is required to 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 sec. 36(1)(viia) of the Act. The AO noticed that the assessee has created the provision for bad and doubtful debts to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Special Reserve account is maintained intact in the books of account. It was further submitted that the assessee is following the above said method of presentation of accounts for the past several years and the same has been accepted by the department. However, the AO did not agree with the contentions of the assessee and held that the amount of Rs.53.96 crores is to be treated as utilisation of amount available in the special reserve account. Accordingly, the AO assessed the sum of Rs. 53.96 crores as income of the assessee under section 41(4A) of the Act. 4. In the appellate proceedings, the Ld. CIT(A) noticed that the Assessing Officer omitted to make disallowance of proportionate interest expenditure relatable to the exempted dividend income u/s. 14A of the Act. The Ld. CIT(A), by placing reliance on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Catholic Syrian Bank Ors. (344 ITR 259) held that interest expenditure is required to b disallowed in terms of Rule 8D(2)(iii) of the Income Tax Rules. Accordingly, the Ld. CIT(A) issued notice for enhancement for making disallowance of proportional interest relatable to the investments. After hearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee has invested into the share capital of many companies in the regular course of business of providing financial assistance. He further submitted that the assessee has used its own funds for making investments in shares. He also submitted that the AO was not right in taking average value of all the investments for the purpose of calculating the disallowance of expenses, instead of the average value of dividend yielding investments. 5.1 However, the Ld D.R submitted that the Ld CIT(A) has followed the decision rendered by the Hon'ble jurisdictional Kerala High Court in disallowing a part of interest expenditure. The Ld D.R further submitted that the claim of the assessee that it did not incur any expenditure in realising the dividend income is not admissible in view of the specific provision contained in sub. Sec. 3 of sec. 14A, wherein it is clearly stated that the provisions of sec. 14A(2) shall apply in relation to a case where an assessee claims that no expenditure has been incurred. 5.3 We have heard the rival contentions on this issue. Though the assessee has contended that it did not utilise borrowed funds for making investments in purchase of shares, yet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is regarding denial of deduction of bad debts written off amounting to Rs.55,99,112 over and above the provision created u/s. 36(1)(viia). In the assessment order, the Assessing Officer has observed that the assessee has not set off the said amount of bad debts written off during the year against the provisions made during the year of Rs.57,00,000 and claimed deduction for both the amounts. He has further stated that the proviso to sec. 36(1)(vii) restricts the write off relating to such debts by putting a restriction that the write off shall be limited to the amount by which such debt exceeds the credit balance in the provisions for bad and doubtful debts made under clause 36(1)(viia). During the course of appellate proceedings, the appellant submitted that as decided by Hon'ble ITAT Delhi Bench in the case of Tourism Finance Corporation of India Ltd. (supra) and Hon'ble Gujarat High Court in the case of UTI Bank Ltd. (supra), the amount of opening balance in the provision for bad and doubtful debt account created u/s. 36(1)(viia) is to be considered and not the closing balance (as done by Assessing Officer) for the purpose of restriction. In the aforesaid case, the Hon'ble Gujara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sec. 36(1)(vii), the amount of deduction claimed by the assessee in respect of bad debts was required to be reduced by the opening balance of provision for bad and doubtful debts created and not the closing balance. As given in the assessment order, the opening balance of provision for bad and doubtful debts is nil and therefore, the entire amount of bad debt of Rs. 55,99,112/- is allowable as deduction. The addition made by the Assessing Officer is therefore, deleted." We notice that the Ld CIT(A) has followed the decision rendered by the Hon'ble Gujarat High Court, wherein the Hon'ble High Court has placed reliance on the circular No.17 of 2008 dated 26th Nov. 2008 issued by the CBDT in deciding this issue. Hence, we do not find any infirmity in the decision of Ld CIT(A) on this issue. 7. The next issue relates to the assessment of Rs.53.96 crores relating to the Special reserve created u/s 36(1)(viii) of the Act. According to the assessee, it has reduced the above said amount from the Special Reserve Account while preparing the Balance sheet for presenting the same to the share holders by making corresponding reduction from the Loans and Advances account. According to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd NPA provision As per RBI guidelines 4,80,803,549 475,200,249 1,834,284,309 2,155,648,098 It can be seen from the above that Special Reserve amount has been deducted from Assets in the forms of secured loan, unsecured loan and soft loan as given in IDBI guidelines discussed below. The appellant has also contended that as per sec. 41(4A), any amount subsequently withdrawn from Special Reserve only is deemed to be income chargeable to tax, therefore, the section comes into play only when any amount is withdrawn from the account. It has been contended that the appellant has not withdrawn any amount from the said amount and only for the purpose of presentation in the balance sheet in schedule 2; amount of loan and advances has been shown as contra and reduced from special reserves. In nutshell the appellant has claimed that the special Reserve created u/s 36(1)(vii) has not been utilized whereas the case of AO is that assessee has made utilization out of the said Reserve. The question to be answered is whether the action of appellant in making provision for bad debts as per IDBI guidelines amounts to withdrawal out of said reserve or not. In this regard note (3) of circular n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s required to compute provision for bad and doubtful debts as per the norms prescribed by IDBI. While determining the amount of provision required to be made, the assessee is permitted to take into account the amount available in Special Reserve Account. According to the said guidelines, the Assets and Liabilities should be reduced to the extent of Provision utilised from the cumulative balance of reserves created u/s 36(1)(viii), i.e., the assets are to be shown as net of provisions. Hence, in the Balance Sheet, the assessee has reduced Special reserve account and Loans and Advances account with the amount of provision. On the contrary, the Ld D.R submitted that the assessee has adopted colourable device to circumvent the provisions of Income tax Act, which was strongly refuted by Ld A.R. 7.4 There should not be any dispute that the books of original entry and evidences supporting the transactions recorded in the books assume primary significance. It is also a well settled proposition that the entries recorded in the books alone are not determinative factors for the purpose of computing true income of the assessee. Hence, the tax authorities are required to determine the correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I. As per the said guidelines, the assessee is required to classify its assets, mainly loans and advances, into four categories, viz., Standard assets, Sub-standard assets, Doubtful assets and Loss assets. The purpose of classification of the assets in the above categories appears to be to ascertain about the intrinsic strength of those assets. We notice that the IDBI has also specified the criteria or basis for classifying the assets in the four categories stated above. According to the said guide lines, the assessee is also required to make provisions against the assets classified as Sub-standard, Doubtful and loss category, possibly these categories bear risk of recovery. According to the said guidelines, the SIDCs are required to determine the amount of provision for bad and doubtful debts. According to the guidelines issued by IDBI, the amount available in the Special Reserve Account u/s 36(1)(viii) of the Act is admissible for provision purposes. The meaning of this guideline, in our view, is that the SIDCs can take into account the amount available in the Special Reserve Account while determining the amount of provision. Let us explain this by a small example. Let us assume ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
