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2016 (4) TMI 753 - ITAT CHENNAI

2016 (4) TMI 753 - ITAT CHENNAI - TMI - Revision u/s 263 - CIT(A) restricting claim u/s 36( 1)(viia)only for provision for rural debts and consequently disallowing claim for deduction of provision made of in accordance with the provision of sec 36( I )(viia) - whether deduction u/s.36(1)(vii) and 36(1)(viia) shall be in respect of both bad and doubtful debts irrespective of rural or urban debts? - Held that:- The legislative intention of decision of Catholic Syrian Bank [2012 (2) TMI 262 - SUPRE .....

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of the Commissioner of Income Tax on the issue of rural branches following the Catholic Syrian Bank decision and uphold the order of the Commissioner of Income Tax - Decided against assessee - I.T.A. Nos.496 & 497/Mds/2015 - Dated:- 23-2-2016 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER For The Appellant : Shri. R. Vijayaraghavan, Advocate and Shri.C. Naresh, C.A. For The Respondent : Shri. Shaji P. Jacob, Adl. CIT ORDER PER G. PAVAN KUMAR, JUDICIAL MEMBER: .....

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ssessment year 2010-2011 for adjudication and the assessee raised the following grounds of appeal:- 2.The CIT erred by invoking revisionary powers u/s 263 of the Income Tax Act, by adopting his own interpretation of 'obiter dicta' in the Apex court decision in Catholic Syrian Bank (343 lTR 270), and restricting claim u/s 36( 1)(viia)only for provision for rural debts and consequently disallowing claim for deduction of provision made of in accordance with the provision of sec 36( I )(viia .....

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er that Section should be restricted only to provision for doubtful debts pertaining to rural advances. 5. The CBDT Circular No.464 dated 18.07.1986 and Circular No. 13 of 2014 dated issued in this connection, clearly spell out that deduction u/s.36(1)(viia) should be granted as sum of both amounts viz., 7.5% of gross total income and 10% of the advances on rural branches. As there is no amendment to section 36( 1 )(viia) nor Circular as referred to above has been withdrawn as modified, the deci .....

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ion (v) to sec 36(2) read with Section 36(1)(viia). The issue of quantum of deduction u/s 36(1 )(viia) was neither before the Apex Court nor was it decided in that decision. 7.The Apex Court, after having held that the provisions under Section 36(1 )(viia) and Circular No. 464 clearly explained the intent of the legislature, cannot be said to have held that deduction provided under Section 36(1)(viia) has to be restricted to only one limb of that section. 8.The CIT failed to appreciate that an o .....

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g claimed ever since the introduction of the said clause, and allowed by the department after examining specific provision in section 36(1) (viia), the clarification issued by CBDT and the subsequent amendment made by Finance Act, 2013 and could not have changed her view as to the ambit of said clause all of a sudden based on an obiter dicta and terming the deduction claimed and allowed as erroneous and therefore prejudicial to the Revenue. 10.The CIT ought to have appreciated that the true purp .....

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e quantum of deduction under that section. Under the circumstances, the order of the Assessing officer on this issue merged with that of the First Appellate Authority, and the CIT erred in assuming jurisdiction for revision the same issue. 12.The CIT failed to appreciate IT A T (Bang) in DCIT v ING Vysya Bank Ltd (2014) 149 ITD 61 I (Bang) held that observation of Apex Court in Catholic Syrian Bank case, would not lead to disallowance of claim of deduction under section 36(1)(viia) in respect of .....

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I )(viia) would be ₹ 879.88 Cr as against ₹ 718.45 Cr proposed to be withdrawn in the revisionary order and hence the order of AO was not eventually prejudicial to revenue. 14.The CIT ought not to have rejected the above alternate plea contending that provision for NPA did not tantamount to provision for Bad and Doubtful debt overlooking the jurisdictional ITAT decision in Tamil Nadu State Apex co-operative Bank Ltd v ACIT (2014)43 taxmann.com III (Chen) holding that taxonomy of prov .....

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ot;non rural debts" - in accordance with the provisions of the Act as amended by a declaratory amendment by the Finance Act, 2013 . 3. The Brief facts of the case the assessee bank is a Scheduled Bank assessable as a company for the purpose of Income Tax and in the business of bank. The return of income was filed on 29.9.2010 declaring Nil income. The return was processed u/s.143(1) of the Act and the case was selected for scrutiny under CASS and notice u/s.143(2) of the Act was issued. In .....

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imed considering 7.5% of Gross total income and 10% of rural advances and worked out eligible claim of B810,60,18,384/- as the deduction u/s.36(1)(viia) being on the lower side compared to the debit made in the Profit and Loss. On verification the assessee company has submitted detailed working for calculation of 10% of rural branches advances and filed details and computation specified under Rule 6ABA of the Income Tax Rules alongwith name and address of rural branch and population census and w .....

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ar shall be separated separately ; (b) the sum so arrived at in the case of each such branch shall be divided by the number of months for which the outstanding advances have been taken into account for the purposes of clause (a) ; (c) the aggregate of the sums so arrived at in respect of each of the rural branches shall be the aggregate average advances made by the rural branches of the scheduled bank. Explanation : In this rule, rural branch and scheduled bank shall have the meanings assigned t .....

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on in respect of 49 rural branches were the population figure exceed the threshold figure of ten thousand. The assessee bank also furnished detailed submissions by justifying deduction u/s.36(1)(viia) of the Act. The ld. Assessing Officer considered the provisions of law, material evidences and explanations as per Rule 6ABA has calculated revised deduction u/s.36(1)(viia) of the Act on account of advances made by the rural branches referred at page no.4 of order:- Aggregate advances of all rural .....

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uction as per calculation in the assessment order B162,49,74,682/- and assessee filed appeal against the order with Commissioner of Income Tax (Appeals). 4. Subsequent to the decision of Commissioner of Income Tax (Appeals), the Assessing Officer passed consequential order and the matter pending against the order of Commissioner of Income Tax (Appeals) before the Tribunal. Meanwhile, Commissioner of Income Tax found on perusal of records of assessment found the assessee claimed deduction u/s.36( .....

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n u/s.36(1)(viia) was claimed. The assessee bank has filed an appeal with Commissioner of Income Tax (Appeals) upheld the view of Assessing Officer in respect of re-classification of rural branches and also exclusion of standard advances from bad and doubtful debts and the deduction u/s.36(1)(viia) was reworked to B756,52,13,950/- after giving effect to the directions of Commissioner of Income Tax (Appeals). Against that order, the Assessee and Department are in Cross-appeals before the Tribunal .....

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lative intention behind introduction of Sec.36(1)(viia) to encourage rural advances and to creation of provision for bad debts and further the High Court has decided the case based on the Apex Court decision in the case of Vijaya Bank vs. CIT 323 ITR 166 and Southern Technologies vs. Jt. CIT 320 ITR 577 and also accounting standard AS29 and board s circulars and relevant provisions of law. The ld. Commissioner of Income Tax observed principles laid down by Catholic Syrian Bank in para 4.6 at pag .....

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vii) ensures that in respect of the same rural advances, the bank does not get double deduction, initially on the basis of clause (viia) and again on the basis of actual write -off under clause (vii) Proviso to clause (vii) refers only to rural advances as clause (viia) applies only to rural advances. In respect of bad debts actually written off in the accounts relating to urban advances ,the assessee is entitled to the general deduction u/s 36(1)(vii).This deduction is not affected by the provi .....

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fficer has not called for details regarding provisions made for rural debts and non rural debts included in the provision in the Books of Accounts pertaining to bad debts B886,39,17,650/- in the light of the decision of Supreme Court in the case Catholic Syrian Bank (supra). On the basis of records, the assessee has submitted the provision of B38.07 crores for bad and doubtful debts of rural branches considered in the books. The Commissioner of Income Tax is of the opinion that the deduction gra .....

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in Sec.36(1)(viia), the condition precedent for allowing deduction. Though the Assessing Officer failed to examine the issue on the principles of Apex Court decision of Catholic Syrian Bank (supra) and allowed deduction 36(1)(vii) claimed without examining the same and considered it as order erroneous and prejudicial to the interest of the Revenue. In response to show cause notice, the assessee filed reply dated 05.01.2015 objecting to the proposed provisions and key objections are Apex Court&# .....

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ision in Vijaya bank(323 ITR 166), provisions are to be considered as 'write off 'eligible for deduction u/s 36(1)(vii) . the assessee bank filed detailed submissions at para nos. 7.1 to 7.4.2 at page nos.7 to 9 of Commissioner of Income Tax order. The decision of Catholic Syrian Bank is not applicable as per Explanation 2 to Sec. 36(i)(vii) of the Act as effective from Finance Act, 2013 w.e.f. 01.04.2014 and there cannot be retrospective amendment. The Supreme Court in the case of Govin .....

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o Sec.36(1)(vii) of the Act is very clear that this is not retrospective and also clarification was sought in Finance Bill, 2013 to substantive with the provision is prospective but the provisions of law has a legislative intention and explanations are clear that they are prospective in nature and cannot be applied prior to 01.04.2014. The assessee s contention and objections are rejected by the Commissioner of Income Tax. Similar view was taken in several decisions relying on the ratio of Catho .....

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ection 36(1)(viia) alone is admissible for deduction under section 36(1)(vii)? Similarly in another decision of CIT VS. Canara Bank of Karnataka decided on 13.10.2014 in ITA No.1011 of 2013 thus issue was rendered on the principle and ratio relating to Bad Debts decided in Catholic Syrian Bank. The issue in dispute in assessee s own case in the assessment years 1999-2000 to 20002-03 and assessment years 2006-07 and 2007-08, the Tribunal has remitted the file back to the Assessing Officer to deci .....

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ted and the next ground of dispute whether decision of Supreme Court in Catholic Syrian Bank (supra) is applicable in respect of deduction/s.36(1)(vii) and not in respect of the deduction u/s.36(1)(viia) of the Act. On this issue of question of law, the Apex Court at para 40 of order of Catholic Syrian Bank observed as under:- The proviso to section 36(1)(vii) and Section 36(1)(viia) and 36(2)(v) have to be red and construed together. They form a complete scheme for deductions and prescribe the .....

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the High Courts and Apex Court. On this issue, objection has been rejected. The Commissioner of Income Tax on perusal of the profit and loss account has found that the assessee has been making provision u/s.36(1)(viia) of the Act for both rural debts and urban debts in a consolidated account. The assessee has been claiming double deduction for past several years by not set off bad debts written off against the provisions made to Sec.36(1)(vii) of the Act. Hence, both conditions u/s.36(1)(viia) .....

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Commissioner of Income Tax has relied on the decision of Apex Court in the case of Malabar Industrial Co. Ltd vs. CIT 243 ITR 83, it has been held that CIT within his jurisdiction to set aside the order if it is passed without examination of the relevant details and provision of law. On the decision of Apex Court also the objection of the assessee are not acceptable. Finally alternate contention of the assessee being applicability of Supreme Court decision in Vijaya Bank (supra). The contention .....

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s and also case laws considered in while passing the Vijaya Bank decision. The ld. Commissioner of Income Tax has analyzed the Vijaya Bank case and applied the ratio on consideration of the NPA referred in the Annual Report as per the decision of Catholic Syrian Bank when the rural bad debts is written off, the same has to be first debited to the provision account made for rural advances. The bad debts written off during the year would be adjusted against the opening balance in the previous acco .....

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tion u/s.36(1)(viia) of the Act. 6. At the time of hearing, the ld. Authorised Representative submitted that the Assessing Officer has allowed deduction for provisions non rural advances also. The decision of the Catholic Syrian Bank is in respect of bad debts and also deduction u/s.36(1)(viia). The contention being all debts should be considered for deduction u/s.36(1)(viia) and he relied on the decision of DCIT vs.ING Vysya Bank Ltd 42 Taxmann.Com 303 and also ITAT Co-ordinate Bench decision i .....

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presentative submitted judicial decisions, circulars and notification and read the provisions of Sec. 36(1)(viia) of the Act on the issue of foreign bank was also considered. The misconception of the bank on that provision of bad debts as per Sec. 36(1)(viia) of the Act. The decision of Catholic Syrian Bank is on the basis of Sec.36(1)(vii) and Sec.36(1)(viia) for the purpose of rural branches only. The Apex Court has considered the rural advances benefit given without writing off in the books o .....

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bts irrespective of rural or urban debts. The legislative intention of decision of Catholic Syrian Bank was to protect the rural farmers and also benefit given without actual write off in the actual Books of Accounts though the principle was considered in the earlier years and the Department has accepted and passed the order. On the decision of the allowability of Sec.36(1)(viia) we relied on the Co-ordinate decision of Lakshmi Vilas Bank in ITA Nos.1205 to 1209/Mds/2014 dated 29.01.2016, where .....

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me of the salient findings of the Hon'ble Supreme Court are as follows: A mere provision for bad and doubtful debts is not an allowable deduction in the computation of taxable profits. However, in the case of rural advances, in line with the policy to promote rural banking, a provision may be allowable u/s Sec.36(1)(viia), without insisting on an actual write- off. Provisions of sections 36(1) (vii) and 36(1)(viia) of the Act are distinct and independent items of deduction and they operate i .....

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or 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 under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). In case of rural advances which are covered by clause (viia), there would be no double deduction. The proviso, in its t .....

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r is clear from the scheme of the Act. Proviso to sec 36(1)(vii) would not permit benefit of double deduction, operating with reference to 'rural' loans, while under Section 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. 91. A number of cases decided by the Hon'ble High Courts and also by the Apex Court are cited / referred to in the ab .....

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tandards. 92. The Hon'ble Supreme Court has held in the case of Catholic Syrian Bank that "Mere provision for bad and doubtful debts may not be allowable, but in the case of a rural advance, the same, in terms of section 36(1)(viia) may be allowable without insisting on an actual write off …….in case of rural advances which are covered by clause (viia), there would be no double deduction. The proviso, in its terms, limits its application to the case of a bank to which clau .....

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