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M/s. Bank of Ceylon Versus The Deputy Director of Income Tax, International Taxation-I

2016 (5) TMI 1134 - ITAT CHENNAI

Disallowance of provision for bad and doubtful debts made under section 36(1)(viia)(b) for provisions for Non-Performing Assets - Held that:- CIT(A) has rightly held that the provisions for Non-Performing Assets cannot be equated with provision for bad and doubtful debts and since such provisions was not made, the assessee is not entitled for deduction, we find no infirmity in the order passed by the ld. CIT(A) - Decided against assessee. - I.T.A. No. 518/Mds/2015 - Dated:- 6-5-2016 - Shri Chand .....

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ard to confirmation of disallowance of Rs. .42,36,327/- representing the provision for bad and doubtful debts made under section 36(1)(viia)(b) of the Income Tax Act, 1961 [ Act in short]. 2. Brief facts of the case are that the assessee, branch of M/s. Bank of Ceylon, Chennai with headquarters at Colombo, Sri Lanka is assessed in India as foreign company. The assessee has filed its return of income declaring income of Rs. .8,04,90,211/-. The case of the assessee was selected for scrutiny and st .....

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e 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 .....

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ed 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, .....

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cordance 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-clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005;] (b) a .....

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nstitution 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 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 .....

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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 the companies incorporated in India and not to a foreign Banking company. It was further argued before the Assessing Officer that the provision for Non performing assets is a generic expression for provision for bad and doubtful debts and that it is o .....

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s, banks that have accumulated too many NPLs are able to sell them on - at a discount - to specially established asset management companies (AMCs), which attempt to recover at least some of the money owed. There exists a clear distinction between what is classified as NPA and Bad debt. Thus the assessee's argument that both are same is not acceptable. The provision of the Act is very clear and there is no ambiguity regarding the same. Since the assessee company has not created any provision .....

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appellant in writing: "Deduction for bad debt written off claimed by the assessee is only in respect of the excess of the amount written off over the deduction already allowed to the assessee u/s 36(1) (viia) every year i.e. 5% of the total income. As already mentioned during the course of hearing, the entire balance in the provisions and contingencies has been added back and offered as income every year. Thus no deduction has been claimed for the provision made, and only the actual write o .....

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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 ₹ 42,36,327/-. The appellant had debited 'Items included under provision and consistencies' amounting to ₹ 4,64,65,785/-. Appellant added the same in computation and claimed deduction for 'provision for bad and doubtful debts' u/s 36(1) .....

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377; 4,64,65,785/- as furnished by the appellant [Annexure-I of this order) are as follows: Sl. No. Description Year Ended 31.03.2009 (Rs.) Year Ended 31.03.2009 (Rs.) 1. Provision for depreciation in investments 18,10,000 38,65,000 2. Provision for Non performing Assets (2,98,48,652) 20,17,436 3. Provision for Standard Assets 9,27,000 - 4. Provision for income tax 5,44,00,000 3,91,69,866 5. Provision for FBT & floating provision etc. 26,82,000 13,47,757 6. Provision for restricted advance 1 .....

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bad debt deduction says that any debt or a part thereof which is written off as irrecoverable in the accounts of the assessee is eligible for deduction. The proviso to the section says that where the assessee is a bank, etc., the amount of deduction shall be limited to the amount by which such debt or part thereof exceeds the credit balance maintained in the provision for bad and doubtful debts. The Explanation to the section says that any debt written off as irrecoverable would not include any .....

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off and deduction is claimed under section 36(1)(vii) of the Act. It will not apply to deduction towards provision made for bad and doubtful debts applicable to banks under section 36(1)(viia). 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. 1987-8 .....

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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 deduction to an amount not exceeding 2% of the aggregate average advances made by rural branches of the banks concerned .....

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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. [Reported in (1986) 161 ITR (St) 66]". 7.5 Quantum of deduction: In the case of banks incorporated outside India, the quantum of deduction available IS 5% of the total Income (computed before making deduction under this clause and chapter VIA). Overruling the decision in .....

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of proviso to cl. (vii) when bad debts written off are also claimed as deduction under cl. (vii), the same is allowable only to the extent it is in excess of the provision created and allowed as deduction under cl. (viia). But in CATHOLIC SYRIAN BANK LTD. vs. CIT (2012) 343 ITR 270 (SC), it was held that provisions of ss. 36(1)(vii) and 36(1)(viia) are distinct and independent items of deduction and operate in their respective fields. But proviso to s. 36(1)(vii) operates in cases falling under .....

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nds 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 a .....

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ed back to the appellant's total income and only the actual write off of bad debt is claimed as deduction. The words "non Performing asset is commonly understood to mean bad debts in banking parlance." 8.2 The contention of the appellant is erroneous. NPA and bad debt are not equal in all respect. Appellant tried to ignore the distinctions between them only to make a case for deductions. Non- Performing Assets (NPAs) for the banks: the loans and advances given to the customers form .....

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d as NPAs, and the availability of the realisable value of securities, they are further classified as sub-standard, doubtful or loss assets. But, a bad debt on loan is termed as a bad debt, when the recovery of the loan becomes impossible. Thus it may possible that all the bad debts may be non-performing assets (NPAs), all the NPAs are not necessarily the bad debts. 8.3 In T.N. Power Finance & Infrastructure Development Corporation Ltd. vs. Jt. CIT (2006) 280 ITR 491 (Mad), assessee engaged .....

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bad and doubtful debts which are predominantly revenue in nature or trade related and not for provision for non-performing assets which are predominantly capital in nature. Thus the Jurisdictional High Court, clearly differentiated the provision for bad and doubtful debts with provision for non-performing assets. 8.4 Even the Supreme Court opined that there are deviations between RBI Directions 1998 and Companies Act in creating provisions. The deviations are due to differences in creating a pro .....

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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 ₹ 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 th .....

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ia's master circular #DBOD #BP. BC.17/21.4.048/2009-10 dated 01.07.2009 for the relevant year] and financial statements are drawn up only in accordance with these guidelines / circulars. It is argued that banks are required to make a provision for "Non Performing Assets", which as per appellant, is provision for bad and doubtful debts only. Such provisioning for bad debts by banks including foreign banks operating in India, is governed by income recognition and asset classification .....

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and correct" profits. However, these Directions have nothing to do with computation of taxable income and deductions. These Directions cannot overrule the "permissible deductions" or "their exclusion" under the IT Act. There are inconsistency between these Directions and Income tax Act in the matter of income recognition and presentation of financial statements. The accounting policies adopted by a Bank cannot determine the taxable income. The entire thrust of RBI Direct .....

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ovided in the Companies 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 whic .....

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es 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 authority has to examine the nature of expense/loss. Such examination and finding thereon will not depend upon presentation of expense/loss in the financial statements of the NBFC in terms of the 1998 Directions. Therefore, in our view, the RBI Directions 1998 and the IT Act ope .....

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he 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. The proviso to s. 36(1)(vii) control the application of this provision and it comes into operation when the case of the assessee which falls under s. 36(1)(viia) of the Act. Sec. 36(1)(viia) provides for a deduction in respect of any provision for bad and doubtful debt made. If the case of the assessee does not fall under s. 36(1)(viia), t .....

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covered under the main part of s. 36(1)(vii), while the proviso will operate in cases under cl. (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previQus year and credit balance in the provision for bad and doubtful debts account made under cl. (viia). The proviso to s. 36(1)(vii) will relate to cases covered under s. 36(1)(viia) and has to be read with s. 36(2)(v) of the Act. Thus, the proviso would not permit benefit of double deduction, .....

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