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TMI Blog2016 (5) TMI 1134X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the assessee was selected for scrutiny and statutory notices were served upon the assessee. The details filed by the assessee were examined and after considering the submissions of the assessee, the assessment was completed under section 143(3) of the Act determining total income of the assessee at Rs. .8,48,20,940/- by making various additions. 3. On appeal, the ld. CIT(A) sustained the disallowance of deduction claimed under section 36(1)(viia)(b) of Rs. .42,36,327/-. 4. Aggrieved, the assessee is in appeal before the Tribunal. 5. We have heard both sides, perused the materials on record and gone through the orders of authorities below. With regard to the disallowance of deduction under section 36(1)(viia)(b) of the Act, the relevant provisions of section is reproduced as under: (viia) in respect of any provision for bad and doubtful debts made by- (a) a scheduled bank [not being a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank [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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 1 st day of April, 2005, 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, of an amount not exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year.] 6. The Assessing Officer has observed that as per the section, the assessee company falls under the category (b), wherein, an amount not exceeding 5% of the total Income is allowed as deduction for the provision made for bad and doubtful debts. In the instant case no such provision is made. The argument of the assessee is that the provisions has been made in compliance with the Reserve Bank of India's IRAC norms and in accordance with the Banking Regulations Act was not accepted by the Assessing Officer as these provisions are applicable only for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions made and only the actual write off of bad debts has been claimed as deduction, it is noticed that the appellant claimed both. This will raise another issue for adjudication, "whether the proviso to section 36(1)(vii) limits the deduction in respect of bad debts written off when it exceeds the provision made under section 36(1)(viia)?" 7.2 There is another significant misrepresentation of facts as emanated from the details filed by the appellant during the assessment proceedings. Appellant has claimed deduction u] s. 36(1)(viia)(b) @ 5% of total income i.e. amounting to Rs. 42,36,327/-. The appellant had debited 'Items included under provision and consistencies' amounting to Rs. 4,64,65,785/-. Appellant added the same in computation and claimed deduction for 'provision for bad and doubtful debts' u/s 36(1)(viia)(b) amounting to Rs. 42,36,327/-. The AO took a stand that provisions for NPA can't be equated with provision for bad and doubtful debts and since such provisions was not made, appellant is not entitled for deduction. But the appellant repeatedly claim before the Assessing Officer as well the CIT(A) that provision for Non Performing Assets a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iia). 7.4 Legislative History: Initially the clause 36(viia) was introduced with a view to promoting rural banking and assisting the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances. Effective from the as st. yr. 1987-88, this clause provides for deduction in respect of not only rural advances but also any advances in general and the concession under this clause was extended to banks incorporated outside India, with the result that the deduction is now available to all banks in respect of all their branches. The object of the substitution, as explained in para 5 of the CBDT Circular No. 464, dt. 18th July, 1986 TC15S.1714, was to give the separate deduction, viz., one in respect of rural advances and the other for provision for bad and doubtful debts in general and also to extend the benefit of deduction to all banks including foreign banks. "CIRCULAR NO. 464, DATED 18TH JULY, 1986 ........ Accordingly, by the Amending Act, the deduction presently available under cl. (viia) of sub-so (1) of s. 36 of the IT Act has been split into two separate provisions. One of these limits the ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of bad debts written off when it exceeds the provision made under section 36(1)(viia) are to be examined. 8. Provisions for NPA vs. provision for bad and doubtful debts The assessment order and the grounds of appeal centered on the issue of Provisions for NPA. The AO took a stand that provisions for NPA can't be equated with provision for bad and doubtful debts and since the bad debt provisions were not made, appellant is not entitled for deduction. He is of the view that there exists a clear distinction between what is classified as NPA and Bad debt. At the same time appellant argued that provision for nonperforming assets is a generic expression for provision for bad and doubtful debts and that it is only the head under which it is classified. Even in grounds of appeal the appellant stated: "The word "any provision" should be interpreted liberally and will include provision for non performing assets. It would also be pertinent to state here that to claim that NPA provision is not a provision for bad and doubtful debts will only be ignorance of accounting methods. The ld. DDIT also failed to appreciate that any provision made in the books by whatsoever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 1998 and Companies Act in creating provisions. The deviations are due to differences in creating a provision for all NPAs summarily as against creating a provision only when the debt is doubtful of recovery under the norms of the Accounting Standards issued by the ICAI. These deviations prevail to protect the depositors in the context of income recognition and presentation of the assets and provisions created against them. [para 28, SOUTHERN TECHNOLOGIES LTD. vs. JCIT (2010) 320 ITR 577 ] 8.5 Thus, I held that NPA is not same as bad and doubtful debts and accordingly the requirement of provision for bad and doubtful debts is not satisfied by the appellant. The IT Act deals only with doubtful debt. It is for the assessee to establish that the provision is made as the loan is irrecoverable. Hence the appellant fails on ground no. 1 and 2. However, coming to this conclusion I again reiterated that appellant had made a provision of only Rs. 20,17,436/- under the head provisions for NPA (discussed in para 7.2). 9. RBI's directives and its relevance. The appellant also argued that the provision for NPA has been made in compliance with the Reserve Bank of India's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies Act, do not override the provisions of the IT Act. It is relevant reproduce the observation of Supreme Court in SOUTHERN TECHNOLOGIES LTD. vs. JCIT (2010) 320 ITR 577: "Therefore, in our view, RBI Directions 1998, though deviate from accounting practice as provided in the Companies Act, do not override the provisions of the IT Act. Some companies, for example, treat write offs or expenses or liabilities as contingent liabilities. For example, there are companies which do not recognize mark-to- market loss on its derivative contracts either by creating reserve as suggested by ICAI or by charging the same to the P&L a/c in terms of Accounting Standards. Consequently, their profits and reserves and surplus of the year are projected on the higher side. Consequently, such losses are not accounted in the books, at the highest; they are merely disclosed as contingent liability in the Notes to Accounts. The point which we would like to make is whether such losses are contingent or actual cannot be decided only on the basis of presentation. Such presentation will not bind the authority under the IT Act. Ultimately, the nature of transaction has to be examined. In each case, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. This, obviously, would be subject to satisfaction of the requirements contemplated under s. 36(2)." (emphasis supplied) Examination of records reveal that the assessee had written off Rs. 2,76,55,332/- in its books of accounts, and the write off relates to the account of Ananthmal Kasi Rice Mill. The appellant in its computation deducted the balance lying in provision as per section 36(1)(viia)(b) as on 01.04.2009 amounting to Rs. 77,73,147/-. Further, assessee had also claimed deduction 36(1)(viia)(b) amounting to Rs. 42,76,327/ -. As per the proviso to Section 36(1)(vii) and the above judicial analysis, the said deduction is also not allowable. Hence, the appeal of the on these grounds of appeal (ground no. I & ii) are dismissed." 7. By analysing the issue in detail after verifying the particulars available on record, the ld. CIT(A) has passed the well reasoned order. In view of the above, since the ld. CIT(A) has rightly held that the provisions for Non-Performing Assets cannot be equated with provision for bad and doubtful debts and since ..... X X X X Extracts X X X X X X X X Extracts X X X X
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