TMI Blog2014 (9) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... 1)(viia) can exceed the amount of provision for bad and doubtful debts - The Assessee made a claim for deduction u/s.36(1)(viia)(a) of the Act of ₹ 23,80,55,247. This was rejected by the AO for the reason that the deduction u/s.36(1)(viia) of the Act is allowed only to the extent PBDD in respect of rural advances is created in the books of accounts. - But CIT(A) allowed the claim of the Assessee - Held that:- What has to be seen by the AO is as to whether PBDD is created (irrespective of whether it is in respect of rural or non-rural advances) by debiting the Profit & Loss A/C. To the extent PBDD is so created, the Assessee is entitled to deduction subject to the upper limit of deduction laid down in Sec.36(1)(viia) of the Act. To avoid possible claim for double deduction in respect of one and the same debt first as PBDD and thereafter as Bad Debts, the legislature has already provided in Sec.36(2)(v) of the Act that where such debt or part of debt relates to advances made by an assessee to which cl. (viia) of sub-s. (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 provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in March, 2006. The CIT in exercise of his powers u/s. 263 of the Act had set aside the order of the AO and directed the AO to examine the crystallization of liability for allowing the deduction in A.Y. 2003-04. It is pursuant to the said order of the CIT that the assessment proceedings were completed by the AO u/s. 143(3) r.w.s. 263 of the Act. 5. The AO found the following details with regard to the claim made by the assessee for deduction on account of provision for frauds and held as under:- Branch Name Date of FIR Amount in lakhs Amount considered as crystallized FIR Vigilance Report Uppal (H) 21 Jun 01 10.55 0.83 0.83 Mount Road 16th Aug 02 6.11 7.16 6.11 Rajahmundry 6th Feb 03 0.32 0.32 0.32 Ernakulam 4th Jan 02 Not stated 18.82 -- Coimbatore NO FIR -- 22.23 -- Chembur 26th Jan 02 5.65 2.99 2.99 Total 22.63 52.35 10.25 6. The AO after going through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd has to be allowed as deduction. The only dispute is with regard to the whether the loss claimed by the assessee can be said to have crystallized during the previous year. In this regard, it is seen that the bank has a vigilance cell, which does an in-house investigation and reports cases of irregularities and embezzlement to the management. The bank also has a system of reporting such irregularities and frauds to the RBI which is also mandatory as per the relevant law governing the banks. A perusal of the order of the AO shows that the AO accepted the fact that the assessee bank has a well placed mechanism to identify frauds and initiate recovery action. The AO has gone by the figures as stated in the FIRs or the Vigilance report, whichever is less. We are of the view that the figures mentioned in the FIR is only a provisional figure which is arrived at for the purpose of filing an FIR immediately on occurrence of the fraud. The vigilance report, on the other hand, is prepared after detailed study. Thus, there is bound to be a difference in the figures between the vigilance report and FIR lodged. Since the vigilance report is prepared after a deeper study, in our view, that figu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit as per profit and loss account in the computation of total income and the deduction on account of PBDD u/s.36(1)(viia) of ₹ 23,80,55,247 was claimed by the Assessee and deduction of ₹ 88,26,10,265 on account of bad debts written off was claimed u/s.36(1)(vii) of the Act. 17. The question before the AO was as to whether the aforesaid sum of ₹ 23,80,55,247 can be allowed as a deduction u/s.36(1)(viia)(a) of the Act while computing total income of the Assessee. The Assessee had also claimed deduction of a sum of ₹ 88,26,10,825 on account of Bad Debts written off in respect of Non-rural advances, u/s.36(1)(vii) of the Act. This was allowed by the AO and there is no dispute regarding the said deduction. There is a discussion about the contention of the Assessee regarding deduction u/s.36(1)(vii) and (viia)(a) of the Act being two different deductions and that they are independent deductions. These discussions are not relevant for the purpose of deciding the issue under consideration for the reason that the case made out by the AO for refusing the claim of the Assessee for deduction u/s.36(1)(viia)(a) of the Act of ₹ 23,80,55,247 rests on a different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the amount of deduction is also subject to the two ceilings laid down in terms of section 36(1)(viia) of the Act. 5. The ld.CIT(A) has erred in allowing the deduction claimed u/s 36(1)(viia) of the Act relying on the decision of Hon ble Supreme Court in the case of M/s Catholic Syrian Bank without appreciating that the facts of the present case are difference than the facts in the case before the Hon ble Supreme Court. 20. In A.Y. 2004-05, the facts are identical. The Assessee made PBDD in respect of non-rural advances of ₹ 51,72,00,000 and in respect of rural advances ₹ 10,00,000. The entire provision of ₹ 51,82,00,000 debited to the profit and loss account was added to the profit as per profit and loss account in the computation of total income. Bad debt written off in respect of non-rural branches was ₹ 88,26,10,825 and non-rural branches was ₹ 1,59,60,631. A sum of ₹ 50,22,39,369 was claimed as deduction u/s.36(1)(vii) of the Act and a sum of ₹ 25,89,19,631 was claimed as deduction u/s.36(1)(viia) of the Act. The Opening balance in the PBDD in respect of rural advances created in the books was ₹ 5,63,835. The provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made by its rural branch was a condition for allowing deduction on account of PBDD. After amendment of Sec.36(1)(viia) by the IT (Amendment) Act, 1985, the requirement that the PBDD should be in relation to rural advances was not a requirement. The PBDD could be in relation to any advance and deduction was allowed only in respect of rural advances since the calculation was mainly based on rural advances. What has to be seen is as to whether the bank had made any provision for bad and doubtful debts. There is no need to bifurcate the same into rural and non-rural debts. Once a bank creates provision for bad and doubtful debt, then the deduction is allowed u/s.36(1)(viia) based on the calculation as provided in the section. It was submitted that in AY 03- 04, the Assessee made a PBDD of ₹ 88,30,47,000. As per the calculation provided in Sec.36(1)(viia) it was entitled to deduction of ₹ 25,15,44,262 but it claimed deduction of ₹ 23,80,55,247. For AY 04- 05, the Assessee made a PBDD of ₹ 51,82,00,000. As per calculation provided in Sec.36(1)(viia), it was entitled to claim deduction of ₹ 25,89,19,631 and had claimed the said sum as deduction. 22. Elabo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss account was added to the profit as per profit and loss account in the computation of total income. Bad debt written off in respect of non-rural branches was ₹ 88,26,10,825 and non-rural branches was ₹ 1,59,60,631. A sum of ₹ 50,22,39,369 was claimed as deduction u/s.36(1)(vii) of the Act and a sum of ₹ 25,89,19,631 was claimed as deduction u/s.36(1)(viia) of the Act. It was claimed that since the PBDD made both rural and non-rural advances was much more than the amount claimed as deduction u/s.36(1)(viia)(a) of the Act, the deduction claimed by the Assessee has to be allowed. It was submitted that the claim was rightly allowed by the CIT(A) and the orders of CIT(A) do not call for any interference. 24. We have considered the rival submissions. To appreciate the contention put forth by the learned counsel for the Assessee, we need to look into the history of Sec.36(1)(viia) as it exists in the present form. Stage-I: Sec.36(1)(viia) was inserted by the Finance Act, 1979 w.e.f. 1st April, 1980 and at the time of its insertion, this clause read as under : "(viia) in respect of any provision for bad and doubtful debts made by a scheduled bank in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed before the first day of the previous year. The expression "scheduled bank" has the same meaning as in the Explanation below s. 11(2)(b) of the IT Act but does not include a cooperative bank. The expression "scheduled bank" would, therefore, cover the State Bank of India constituted under the State Bank of India Act, 1955, any subsidiary bank of the State Bank of India as defined in the State Bank of India (Subsidiary Banks) Act, 1959, a nationalised bank as specified in s. 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or any other bank included in the Second Schedule to the Reserve Bank of India Act, 1934. It may be mentioned that all co-operative banks have been excluded from the purview of this provision in view of the position that under s. 80P(2)(a)(i) of the IT Act, the profits and gains of a co-operative society engaged in the business of banking or providing credit facilities to its members are completely exempt from income-tax. 13.3 It may be relevant to mention that the provisions of new cl. (viia) of s. 36(1) relating to the deduction on account of provisions for bad and doubtful debts is distinct and independent of the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that clause. 29. Simultaneously, Sec.36(2)(v) was introduced by the Finance Act, 1985 and it reads thus: Sec. 36(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply (i) to (iv) . . (v) where such debt or part of debt relates to advances made by an assessee to which cl. (viia) of sub-s. (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." 30. As explained in para 17 of the CBDT Circular No. 421, dt. 12th June, 1985, the benefit of deduction under this clause was enhanced having regard to the increasing social commitments of banks. "Deduction in respect of provisions made by banking companies for bad and doubtful debts 17.1 Sec. 36(1)(vii) of the IT 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 to the fulfilment of the conditions specified in sub-s. (2) of s. 36. 17.2 Sec. 36(1)(vii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being a bank incorporated by or under the laws of a country outside India] or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half 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 manner; Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent. of the amount of such assets shown in the books of account of the bank on the last day of the previous year. Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; (ii) "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955, a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959, a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934; (iii) "public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); (iv) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951) ; (v) "State industrial investment corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5% of the total income (computed before making any deduction under this clause and Chapter VI-A). This will imply that all scheduled or nonscheduled banks having rural branches would be allowed the deduction upto 2% of the aggregate average advances made by such branches and a further deduction upto 5% of their total income in respect of provision for bad and doubtful debts. 33. To complete the sequence of amendments, we may also make a reference to the Amendment to sec.36(1)(viia) of the Act by the Finance Act, 2013. By the Finance Act, 2013, in section 36 of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2014, in clause (vii), the Explanation was numbered as Explanation 1 thereof and after Explanation1 as so numbered, the following Explanation was inserted, namely: Explanation 2. For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 10%) of the aggregate average advances made by rural branches of the banks concerned. This will imply that all scheduled or non-scheduled banks having rural branches would be allowed the deduction (a) upto 2% (now 10%) of the aggregate average advances made by such branches and (b) a further deduction upto 5% of their total income in respect of provision for bad and doubtful debts. The further deduction of 5% of total income was available to banks which did not have rural branches. 36. Therefore after 1.4.1987, scheduled or non-scheduled banks having rural branches were allowed deduction., (a) upto 2% (now 10%) of the aggregate average advances made by such branches and (b) Schedule or non-scheduled banks whether it had rural branches or not a deduction upto 5% of their total income in respect of provision for bad and doubtful debts. Even under the new provisions creating a PBDD in the books of accounts is necessary. 37. Though under Stage-II and Stage-III of the provisions of Sec.36(1)(viia) of the Act, PBDD has to be created by debiting the profit and loss account of the sum claimed as deduction, the condition that the provision should be in respect of rural advances is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o created, the Assessee is entitled to deduction subject to the upper limit of deduction laid down in Sec.36(1)(viia) of the Act. To avoid possible claim for double deduction in respect of one and the same debt first as PBDD and thereafter as Bad Debts, the legislature has already provided in Sec.36(2)(v) of the Act that where such debt or part of debt relates to advances made by an assessee to which cl. (viia) of sub-s. (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. Further the proviso also limits the claim for deduction u/s.36(1)(vii) of the Act to an Assessee to which Sec.36(1)(viia) of the Act applies to the amount by which such debt or part thereof (written off as Bad debts) exceeds the credit balance in the provision for bad and doubtful debts account made under clause(viia) to Sec.36(1) of the Act. It would be just and fair if the order of CIT(A) is set aside and the AO directed to examine the claim of the Assessee in the light of the discussion made above. Similar order would be just and fair in AY 04-05 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercial 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 s. 36(2). It is obligatory upon the assessee to prove to the AO that the case satisfies the ingredients of s. 36(1)(vii) on the one hand and that it satisfies the requirements stated in s. 36(2) on the other. The proviso to s. 36(1)(vii) does not, in absolute terms, control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely under s. 36(1)(viia). The Explanation to s. 36(1)(vii) 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 s. 36(1)(vii) simpliciter. (iv) As per the proviso to cl. (vii) of s. 36(1), the deduction on account of the actual write off of bad debts would be limited to exces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned 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 s. 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 non-rural/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 correctly depict its statement of affairs. This obli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ately get merged into 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. 41. In the present case, according to the AO, the deduction u/s.36(1)(viia)(a) is allowed only to the extent PBDD in respect of rural advances is created in the books of accounts. According to him, the limits upto to which such deduction is allowed alone is laid down in Rule 6ABA of the Rules. According to the Assessee, it is entitled to deduction of the irrespective of considerations whether PBDD created in the books of accounts is in respect of rural advances or non-rural advances, subject to the upper limits laid down in Sec.36(1)(viia)(a) of the Act. Thus the case made out by the AO stands on a totally different footing. Therefore the decision in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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