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The Churu Central Cooperative Bank Ltd. Versus The DCIT, Circle, Jhunjhunu.

Restriction of claim of deduction under section 36(1)(viia) - Held that:- From the bare perusal of the provisions, it is clear that the statute has provided that the provision for bad debt is required to be made by the scheduled Bank. Further, it is also provided in the section under consideration that the rate of 7.5% and 10% was dependent on the aggregate advances made. Thus the focal point of the section is made. The assessee is required to made the provision in the computation about the bad .....

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d that:- The assessee is entitled to Bad and Doubtful Debts as claimed in the Balance Sheet for the relevant year. The AO is, therefore, directed to verify the Bad and Doubtful Debts claimed by the assessee in the revised computation of income. The assessee is also directed to produce all the documents to substantiate Bad and Doubtful Debts made by it either in the computation of total income or under Profit & Loss account. The AO shall decide the matter on merit without being influenced by the .....

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IT (A)-III, Jaipur dated 17.11.2014 for the A.Y. 2010-11. The grounds of appeal states as under :- 1. The ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in restricting the claim of deduction u/s 36(1)(viia) at ₹ 11,17,000/- i.e provision for bad & doubtful debts debited to P&L a/c in the year under consideration as against ₹ 72,71,317/- claimed by assessee by not accepting the claim of assessee that provision made in earlier years for which deduction i .....

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accumulated profit of earlier years apart from ₹ 11,17,000/- allowed by the AO. Ground No. 1 : 2. The assessee is a Co-operative Society Bank engaged in banking activities. Ground No. 1 pertains to the restriction of claim of deduction under section 36(1)(viia) of the I.T. Act. In this regard, the AO in the assessment order has mentioned as under :- 3. As regards, provisions for bad debts, the assessee vide above referred letter dated 28.02.2013 submitted that the Tax consultant who origi .....

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he assessee bank also furnished a revised computation of income by way of which the deduction u/s 36(viia) in respect of provisions made for bad and doubtful debts was claimed at ₹ 91,07,187/-. The submission of the assessee alongwith the computation of the aggregate average advances and the computation of the total deduction u/s 36(viia) has been carefully considered. At the outset, it needs to be pointed out that the deduction u/s 36(viia) is admissible only to the extent of the actual p .....

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nd provisioning of the amount of debts considered to be bad and doubtful is a primary requirement. In a case where the computation of the aggregate deduction available u/s 36(viia) exceeds the actual provision made, the deduction available to the assessee in such a case would be limited to the actual provision made. In the instant case, the actual provision made for bad and doubtful debts in the balance sheet is only ₹ 11,17,000/-, therefore even while the computation of the deduction has .....

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ly considered the findings of the AO as also the submission of the appellant. First of all it may be mentioned that the appellant has not filed any additional evidence on this issue and therefore the submission of the AO that additional evidence may not be accepted is neither correct nor relevant to the issue under consideration. It may be noted that the assessee has debited ₹ 11,17,000/- in the P&L account on account of provisions of bad and doubtful debts as per provisions of sec. 36 .....

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)(a). Alternatively it is also contended that even during the assessment year under consideration provisions was made for ₹ 22,77,154/- in as much as apart from the provision for bad and doubtful debts in the balance sheet for ₹ 11,17,000/-, another reserve under the head Special Bad Debts Reserves amounting to ₹ 6,96,092/- and Bad and Doubtful Debts Reserves amounting to ₹ 4,64,062/- were also created and therefore the total reserves created during the year under conside .....

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l income of the assessment year under consideration as also in the revise computation of income the provision for Bad and Doubtful Debts was claimed only for ₹ 11,17,000/-. Therefore the AO has rightly allowed deduction on account of Bad and Doubtful Debts u/s 36(1)(vii)(a) of such amount. In other words provision for Bad and Doubtful Reserves of earlier years which were not allowed to the assessee can not be given credit against the total income of assessment year under consideration. Acc .....

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he ld. CIT (A) has wrongly held that in the computation of the total income as also the revised computation, the provision for bad and doubtful debts was claimed only for ₹ 11,17,000/-. In fact, this is not the amount claimed but it is the amount which is added in computing the income. Against this the claim for bad and doubtful debts was made at ₹ 91,07,187/-. The ld. A/R further submitted that without prejudice to above, in case deduction u/s 36(1)(viia) is held allowable in respec .....

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to the tabulation mentioned in the written submission. The same is reproduced herein below :- Particulars Contingency Standard Assets Special Bad Debts Reserve Bad and Doubtful Debt Reserves Provision for NPA Total Opening Balance as on 01.04.2006. 32,83,000 23 48,42,610 61,73,149 1,42,98,782 Add: Provision made during 2006-07 - Closing Balance as on 31.03.2007 32,83,000 23 48,42,610 61,73,149 1,42,98,782 Add: Provision made during 2007-08 - Closing Balance as on 31.03.2008 32,83,000 23 48,42,6 .....

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permitted for the total purchases made in the books of account. 4.2. Per contra, the ld. D/R for the revenue has submitted that the claim of the assessee before this Tribunal is not maintainable on various grounds including (1) that the assessee has not claimed deduction under section 36(1)(viia) in the original return of income filed by it and has only submitted the revised computation of income by way of which the deduction under section 36(1)(viia) for bad and doubtful debit was claimed at &# .....

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ome of banks under the head 'Profit and Gains of Business & Profession', deductions of large amounts under different sections are being allowed by the Assessing Officers without proper verification, leading to substantial loss of revenue. It is, therefore, necessary that assessments in the cases of banks are completed with due care and after proper verification. In particular, deductions under the provisions referred to below should be allowed only after a thorough examination of the .....

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bts under section 36(1)(vii), the assessing officer should allow only such amount of bad debts written off as exceeds the credit balance available in the provision for bad & doubtful debt account created under section 36(2)(viia) of the Act, The credit balance for this purpose will be the opening credit balance i.e., the balance brought forward as on 1st April of the relevant accounting year. (iii) Section 36(2)(viia) (a) of the Act provides that in respect of any provisions for bad and doub .....

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income of the year should be worked out after adjusting brought forward losses, if any, but before making any deductions under Chapter VI A of the Act. (b) The deduction for provision for bad and doubtful debts should be restricted to the amount of such provision actually created in the books of the assessee in the relevant year or the amount calculated as per provisions of section 36(1)(viia), whichever is less. (c) For working out the aggregate average advances by rural branches, the Assessing .....

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the preceding two provisos, for an amount upto the income derived from redemption of securities made in accordance with a scheme framed by Central Government. Before allowing deduction under this provision, it should be ensured that such income has been disclosed in the return of income under the head "Profits and gains of business or profession". (v) Section 44C of the Act provides that in the case of a non-resident, head office expenditure be allowed at the rate of five percent of th .....

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e in India, the AO should carefully examine the claim for Head office expenses in the light of these provisions as also the relevant clause(s) of the applicable DTAA, before allowing such claims. (vi) In cases where an assessee bank purchases securities under capital account at a price inclusive of any accrued interest, the entire purchase consideration is in the nature of capital outlay. Therefore, any interest element included in the purchase consideration is not allowable as expenditure again .....

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amortised over the period remaining to maturity. In the case of HFT and AFS securities forming stock in trade of the bank, the depreciation / appreciation is to be aggregated scrip wise and only net depreciation, if any, is required to be provided for in the accounts. The latest guidelines of the RBI may be referred to for allowing any such claims. (viii) Section 14A of the Act read with rule 8D of the I.T. Rules, 1962, provides that for the purpose of computing total income under the Act, no de .....

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asis. Therefore, it should be verified as to whether the expenditure claimed in respect of above heads has actually been met. (x) Section 35DDA of the Act provides that where an assessee incurs any expenditure by way of payment of, any sum to an employee at the time of his retirement in accordance with any scheme of voluntary retirement, one fifth of the amount so paid shall be deducted in computing the profit and gains of the business and the balance shall be deducted in equal instalments for e .....

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fferent accounts, probably under the RBI guidelines [e.g. Provision for wage arrears for which negotiations are yet to be finalized, provision for standard asset etc...]. A contingent liability cannot constitute deductible expenditure for the purposes of Income Tax Act. Thus, putting aside of money which may become expenditure on the happening of an event would normally not constitute an allowable expenditure under the Income Tax Act. The AOs should verify such claims as to whether these are adm .....

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t this system is strictly followed by the Banks (in respect of all sources of income). This may be brought to the notice of all concerned for strict compliance. 4.3. The ld. D/R has also relied upon the judgment of Hon ble Punjab & Haryana High Court in the matter of State Ban of Patiala vs. CIT (2005) 272 ITR 54 (P&H), the Hon ble High Court after relying upon the Circular and after giving the legal interpretation to section 36(1)(viia) has held as under :- 6. A bare perusal of the abov .....

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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 . 7. This also clearly shows that making of provision equal to the amount claimed as deduction in the account books is necessary for claiming deduction under section 36(1)(viia) of the Act. The Tribunal has distinguished various authorities relied upon by the assessee wherein ded .....

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r consideration, ie.1985-86, by making supplementary entries and by revising its balancesheet. The provision has been made in the books of account of the subsequent year. In the light of the above, the ld. D/R has submitted that the issue no. 1 of the assessee is required to be dismissed. 4.4. We have heard the rival contentions and perused the material on record. In our view the provisions of section 36(1)(viia) provides as under :- (viia) in respect of any provision for bad and doubtful debts .....

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e 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 a .....

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its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government : Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession" : Explanation - For the purposes of this sub-cl .....

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vestment corporation, an amount not exceeding five per cent. of the total income (computed before making any deduction under this clause and Chapter VI-A) : Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, deduction in .....

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required to be made by the scheduled Bank. Further, it is also provided in the section under consideration that the rate of 7.5% and 10% was dependent on the aggregate advances made. Thus the focal point of the section is made. The assessee is required to made the provision in the computation about the bad and doubtful debts, is dependent upon the aggregate average advances made in the relevant year. The language of the statute is clear and unambiguous and is not capable of any other interpretat .....

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