TMI Blog2014 (12) TMI 562X X X X Extracts X X X X X X X X Extracts X X X X ..... has not exceeded the provision for bad and doubtful debts u/s 36(1)(viia) - the amount was waived at the direction of the State Govt. Department has not controverted this fact - the waiver of interest at the instance of the State Government, has to be allowed as business expenditure u/s 37(1) - the order of CIT(A) is upheld in deleting addition – Decided against revenue. Deletion of provision of audit fee – Held that:- AO has disallowed the deduction claimed for the reason that the provision has been created for an unascertained liability whereas CIT(A) has allowed assessee’s claim by holding that the liability has already accrued - as on 31/03/06, there is an outstanding demand of ₹ 39,36,734 on account of audit fees whereas an amount of ₹ 14,41,903 was raised during the FY 2006- 07 - the audit fee does not relate to the current AY -without examining as to whether the expenditure relates to the current year, CIT(A) was not justified in allowing assessee’s claim – thus, the order of the CIT(A) is set aside and the matter is remitted back to the AO for verification – Decided partly in favour of revenue. Eligibility of deduction on long term advances u/s 36(1)(viii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve account should not exceed twice the amount of paid up share capital and general reserve - Therefore, it cannot be said that the items appearing in the miscellaneous reserve cannot be treated as special reserves as there is nothing in the provision to suggest that only statutory reserves can be treated as special reserve - considering the fact that assessee is eligible to claim deduction u/s 36(1)(viii) to the extent of ₹ 79,39,000 out of which an amount of ₹ 14,21,432 has already been allowed, assessee is entitled to claim deduction of the balance amount of ₹ 65,17,568 – the AO is directed to allow the deduction – Decided in favour of assessee. - ITA No. 905/H/13, 906/H/13, 721/H/13, 722/H/13, 1161/H/11 - - - Dated:- 10-12-2014 - Shri P. M. Jagtap And Shri Saktijit Dey,JJ. For the Petitioner : Shri D. Balaji For the Respondent : Shri P. Soma Sekhar Reddy ORDER Per Saktijit Dey, J. M. These are set of five appeals both by the department and assessee. While there are cross appeals for AY 2008-09 and 2009- 10, appeal relating to AY 2007-08 is by the department alone. As issues are common and assessee is also same, these appeals are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requiring assessee to justify the deduction claimed. AO pointed out that assessee can write off bad debts only to the extent of the amount exceeding the reserve already created. AO observed that as the bad debt written off has not exceeded the reserve created, it cannot be allowed. Further, AO observed that the actual deduction u/s 36(1)(viia) on the aggregate average advances by the rural branches works out to ₹ 65,14,333 as against ₹ 5,16,46,978 claimed by assessee. AO was also of the view that deduction claimed u/s 36(1)(viii) of ₹ 1,22,04,590 including the provisions for suspense account of ₹ 54,89,959 towards special reserves cannot be accepted since such deduction is applicable only to financial corporations but not cooperative banks. In response to the show cause notice, assessee filed its reply, objecting to the proposed disallowances but AO did not find merit in the submissions of assessee. AO disallowed the waiver of interest amount of ₹ 18,79,704 by observing that the said amount has not exceeded the reserve created for bad debts, hence, not allowable. As far as deduction claimed u/s 36(1)(viia) is concerned, AO held that such deduction has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und of appeal is accordingly allowed. As far as the disallowance of deduction claimed u/s 36(1)(viia), ld. CIT(A) after considering the facts in the light of statutory provisions noted that the deduction has to be computed in two different ways and the aggregate of the two is to be considered for deduction. She noted that firstly, 7.5% of the profit from banking business before allowing deduction under Chapter VIA has to be considered. Secondly, the said amount is to be increased by 10% of the aggregate average rural advances computed in accordance with rule 6ABA of the IT Rules. She found that the dispute between the assessee and the department is only with regard to the working of the 10% of the aggregate average rural advances with reference to application of Rule 6ABA. While, AO was of the view that the reserve for bad debt has to be worked out based on the advances made in the rural areas during the year, assessee claimed that the same has to be worked out on the basis of the aggregate of the advances outstanding in the rural area during the year. Ld. CIT(A) referring to the provisions of rule 6ABA, was of the view that the 10% of aggregate average rural advances has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision on BDR account to 5,03,09,683. (Rs. 4,84,29,979 + ₹ 18,79,704). Hence, the amount will be still allowable u/s 36(1)(viia) as it is within the reserve created. In so far as deduction claimed u/s 36(1)(viia) is concerned, ld. AR submitted that there cannot be any grievance with the order passed by ld. CIT(A) as she has followed the statutory provisions contained u/s 6ABA of the Act. Ld. AR submitted that as per Rule 6ABA 10% deduction has to be worked out on the total outstanding advance and not the advances made during the year. Ld. AR submitted that as the deduction claimed by assessee is well within the reserve worked out in terms with section 36(1)(viia) read with rule 6ABA, ld. CIT(A) was justified in deleting the addition. In support of his aforesaid contention, ld. AR submitted the following computation working out the deduction claimed in reference to the reserve created: Note No.1: Reserves created upto 31/03/2006 (page No. 44 of the balance sheet): BDR (41252713-10622940) 30629773.00 Reserve for BDR.NPA 44963503.00 Total 75593276.00 X ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viso to 36(1)(vii). As can be seen from the working submitted by ld. AR, the provision created during the year u/s 36(1)(viia) read with rule 6ABA, amounts to ₹ 16,35,55,829.00 whereas assessee has claimed deduction of ₹ 5,16,46,976, which is well within the provision permissible under section 36(1)(viia). Therefore, there cannot be any doubt with regard to the allowability of deduction claimed by the assessee u/s 36(1)(viia). Accordingly, we do not find any infirmity in the order of ld. CIT(A) in deleting addition of ₹ 3,88,25,673. However, as far as deduction of ₹ 18,79,704 is concerned, the same cannot be allowed u/s 36(1)(vii) considering the fact such amount has not exceeded the provision for bad and doubtful debts u/s 36(1)(viia). At the same time, alternative claim of the assessee that it is to be allowed u/s 37(1), in our view, is acceptable. On a perusal of the assessment order and the facts and materials available on record, it is quite evident that the amount was waived at the direction of the State Govt. Department has not controverted this fact. Therefore, in our view, the waiver of interest at the instance of the State Government, has to be all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een created for an unascertained liability where as ld. CIT(A) has allowed assessee s claim by holding that the liability has already accrued. On a perusal of the letter dated 25/09/07 of the Govt. of AP cooperation Department, on which, learned AR relied upon, it is seen that as on 31/03/06, there is a outstanding demand of ₹ 39,36,734 on account of audit fees whereas an amount of ₹ 14,41,903 was raised during the FY 2006- 07. From this letter, it appears that the audit fee does not relate to the current AY. Ld. AR was also not able to explain to which AY it relates and why it remains outstanding. Further, it is not known whether the provision created is towards discharge of audit fee as mentioned in the said letter. Therefore, without examining as to whether the expenditure relates to the current year, ld. CIT(A) in our view was not justified in allowing assessee s claim. In aforesaid view, we are inclined to set aside the order of ld. CIT(A) on this issue and remit the matter back to the AO to verify, assessee s claim and allow the expenditure claimed if it pertains to the AY under consideration and has accrued as an expenditure. This ground is partly allowed for sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt, department s appeal is dismissed. ITA No. 722/Hyd/13 21. The department has raised the following three effective grounds: 1. The CIT(A) erred in adopting the income of ₹ 13,94,75,750 as per assessment order instead of adopting gross total income of ₹ 4,15,92,798 for the purpose of computing the eligible deduction u/s 36(1)(viia). 2. The CIT(A) erred in not considering the 10% of aggregate average advances being long term advances granted during the relevant financial year for the purpose of computing the eligible deduction u/s 36(1)(viia). 3. In respect of deduction u/s 36(1)(viii), the CIT(A) erred in calculating the eligible deduction at the rate of 20% of profits on long term loans advanced in earlier years also instead of restricting the same to the long term loans advanced during the relevant AY. 22. In ground No.1, the grievance of the department is ld. CIT(A) should have adopted gross total income of ₹ 4,15,92,798 instead of ₹ 13,94,75,710 while computing eligible deduction u/s 36(1)(viia). 23. In the assessment order passed for the impugned AY, AO while computing deduction u/s 36(1)(viia) of the Act, worked out 7.5% of gros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll as other materials on record. Similar issue arose in department s appeal in ITA No. 1161/Hyd/2011 decided by us hereinbefore. While dismissing ground raised by the department we have held that 10% of the average aggregate advances would also include the advances made earlier and remaining outstanding and not to be confined only to the advances made during the month. In view of the above, we uphold the order of ld. CIT(A) on this issue. Ground raised by department is dismissed. 28. In Ground No. 3, department has challenged the decision of ld. CIT(A) in allowing assessee s claim of deduction u/s 36(1)(viii) @ 20% on long term loan advanced even in earlier years and not restricting the same to long term loans advanced during relevant AY. 29. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. Similar issue was also decided while considering department s appeal in ITA No. 721/Hyd/2013. Following our decision therein paragraph 20 of the order, we uphold the order of ld. CIT(A) by dismissing the ground raised. 30. In the result, department s appeal is dismissed. ITA No. 905/Hyd/13 31. Tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure allowable u/s 37(1). It was submitted even if it is considered as bad debt u/s 36(1)(vii), the proviso to section 36(1)(vii) will not apply, since the said amount is to be debited to provision/reserve for bad debt reserve account and if it is so debited, then, the same will still be allowable u/s 36(1)(viia). Having considered the submissions of the parties, we are of the view that similar issue was decided by us in department s appeal in ITA No. 1161/Hyd/11. Following our finding in para hereinbefore, we hold that assessee s claim of deduction of the interest waived amounting to ₹ 5,84,360 deserves to be allowed. Accordingly, we direct AO to delete the addition made. This ground is allowed. 35. The next issue as raised in ground No. 3 is in respect of deduction claimed u/s 36(1)(viia). 36. Briefly the facts are, assessee during the year claimed deduction u/s 36(1)(viia), of an amount of ₹ 34,58,567, which was also accepted by AO while completing the assessment, though AO computed the eligible deduction of ₹ 90,65,767 being 10% of the outstanding amount of aggregate average advances in addition to the claim of ₹ 8,34,857 being 7.5% of the to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lent/made by the bank during the year only and such decision was confirmed for the AY 2009-10 in the case of the same appellant, wherein it was clearly held that 100/0 of AAA should be confined to the advances made during the year but not the outstanding amounts at the end of the year. Accordingly, there is no ground for the assessee to raise this issue against the allowances allowed by the A.O and as such, the provisions for bad and doubtful debts are restricted to ₹ 34,58,567/- as claimed by the assessee in his computation. Accordingly, this ground of appeal is treated as dismissed. 37. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. At the time of hearing, ld. AR could not advance any substantive argument in support of the ground raised. Even otherwise also, there is no dispute to the fact that assessee himself has created a reserve of ₹ 34,58,567 which has been claimed as deduction u/s 36(1)(viia) in the return of income filed for the impugned AY. Only because AO while computing the deduction u/s 36(1)(viia) has computed the figure of eligible deduction at ₹ 90,65,767, wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not at all in the nature of bad debt. Explaining further, it was submitted that the amount claimed as deduction is not actually interest waived but a relief package given to the PACS under the agricultural debt waiver and debt relief scheme (ADWDRS), 2008. It was submitted that as per the said scheme, assessee being a district level bank has to disburse loss of interest on waived amount to PACS as per the various schemes formulated by the Central Govt., State Governments and AP State cooperative bank. It was submitted that as per the scheme the loss to PACS on account of waiver of interest to small and marginal farmers from 01/03/08 has to be borne by APCOB and District Cooperative banks at the sharing ratio of 70:30% therefore the amount claimed as deduction is 30% share in the relief package borne by assessee bank. It was, thus, submitted that as the amount paid to the PACS is in the nature of expenditure laid out for the purpose of business as per the scheme formulated, the same has to be allowed u/s 37(1). 45. The ld. DR, on the other hand, submitted that as the interest waiver is in the nature of bad debts written off the provisions of section 36(1)(vii) would apply. 46. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the instructions of the RBI. Further, the allowances claimed under section 36(1)(viii) by the appellant to the extent of ₹ 14,21,432 was related to specific reserves such as agricultural credit stablisation fund (Rs. 9,16,042) and cooperative education fund (Rs. 5,05,390) whereas the amounts claimed now/subsequently are not statutory reserve as defined, but are only general reserves. Considering these facts, the claim of the appellant to set off these provisions against the balance of the provision available u/s 36(1)(viii) to the extent of ₹ 65,17,568 is not tenable and acceptable. Under the circumstances, I am of the considered opinion that the disallowance of ₹ 2,77,81,782 made by the AO which represented the reserves of miscellaneous items, is justified and confirmed. Accordingly, this ground of appeal is treated as dismissed. 50. Ld. AR submitted before us that assessee is conducting an eligible business in terms of section 36(1)(viii) which is not disputed even by the department. Therefore, as per the terms of section 36(1)(viii) any special reserve created and maintained by a special entity is to be allowed. The only requirement is, it should be belo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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