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2016 (6) TMI 638 - ITAT HYDERABAD

2016 (6) TMI 638 - ITAT HYDERABAD - TMI - Disallowance of the deduction towards provision for gratuity - assessee has not made the said contribution to the gratuity fund through an approved gratuity fund - Held that:- In the case before us, SBI Life is the other insurer as defined in clause (28BB) of section 2 of the I.T. Act and the assessee admittedly has made the payment directly to SBI Life which is registered with IRDA. Admittedly, the assessee obtained the approval of the concerned authori .....

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oyed in the Section, yet a strict construction of a provision does not rule out the application of the principles of reasonable construction to give effect to the purpose and intention of any particular provision of the Act. (See: Shri Sajjan Mills Ltd. vs. Commissioner of Income Tax, M.P. & Anr. [2008 -TMI - 5911 - SUPREME Court]. From a bare reading of Section 36(1)(v) of the Act, it is manifest that the real intention behind the provision is that the employer should not have any control over .....

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of State Bank of Patiala reported in [2004 (5) TMI 12 - PUNJAB AND HARYANA High Court ] wherein it has been held that it is necessary to make a provision for bad and doubtful debts in the account books in the same previous year in which such provision is claimed as deduction under section 36(1)(viia).- Decided against the assessee - ITA. No. 713/Hyd/2015, ITA. No. 714/Hyd/2015 - Dated:- 14-6-2016 - Smt. P. Madhavi Devi, Judicial Member And Shri S. Rifaur Rahman, Accountant Member For the Assesse .....

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he case are that the assessee, a Regional Rural Bank, established by the Government of India and sponsored by the State Bank of India, filed its return of income for the relevant assessment year on 31.10.2007 admitting total income of ₹ 15,47,84,060. The A.O. completed the assessment under section 143(3) on 31.12.2009 by disallowing the provision for gratuity of ₹ 2,74,49,761. During the original assessment proceedings, the assessee had submitted that the provision was made on actuar .....

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tificate of renewal of registration with IRDA was also furnished. The CIT(A), however, rejected the assessee s claim observing that claim of registration has been made for the first time during the appellate proceedings and that the evidence of registration was an additional evidence which could not be considered. Aggrieved by the order of the CIT(A), the assessee preferred an appeal before the ITAT and the ITAT in ITA.No.502/Hyd/2011 and others dated 29.04.2013 observed that the assessee had su .....

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relied upon the decision of the Hon ble Calcutta High Court in the case of Sree Kamakhya Tea Co. (P.) Ltd., 199 ITR 714 (Cal.). The A.O. however, held that the decision of the Hon ble Calcutta High Court is distinguishable on the facts of the case before him and therefore, disallowed the claim of deduction. Aggrieved, the assessee preferred an appeal before the CIT(A) who confirmed the order of the A.O. and the assessee is in second appeal before us. 3. The Ld. Counsel for the assessee submitte .....

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s Tribunal in assessee s own case for the A.Y. 2010-2011 in ITA.No.1771/Hyd/2014 and 1777/Hyd/2014. 4. The Ld. D.R, on the other hand, supported the orders of the authorities below and submitted that the decision of the Hon ble Calcutta High Court in the case of Sree Kamakhya Tea Co. P. Ltd., (cited supra), is not applicable to the facts of the case before us, as in the said case the Hon ble High Court was dealing with the issue as to when the liability has actually arisen and when the payment w .....

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Hitech (India) P. Ltd., vs. Union of India v. Sony India (P) Ltd., vs. CIT 285 ITR 213 vi. Hindustan Salts Ltd., vs. CIT 185 CTR 542 5. Having regard to the rival contentions and the material on record, we find that the assessee had made payment of ₹ 2,74,49,769 towards group gratuity fund of SBI Life Insurance on 21.05.2007 i.e., before the due date of filing of the return. It is not the case of making the contribution to provision for contribution to the approved gratuity fund but it is .....

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on of the Calcutta High Court in the case of Sree Kamakhya Tea Co. P. Ltd., (cited supra) and also the decision of the jurisdictional High Court in the case of Hitech (India) P. Ltd., vs., Union of India & Others (1997) 227 ITR 446 allowed the said deduction. The relevant portion of the Tribunal s order is reproduced hereunder for ready reference. 14. We have heard both the parties. The conflict between section 40A(7) and section 43B has been considered by the Hon'ble Calcutta High Court .....

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40A(7), for claiming deduction for gratuity payment, the assessee was required to fulfil the conditions laid down in section 40A(7) and without fulfilling the conditions laid down therein, no assessee was entitled to deduction under 36(1)(v). This has undergone a change after the insertion of section 43B for and from the assessment year 1984-85. The provision of section 43B(b) are relevant and apposite in the context of the provisions of section 36(1)(v). Section 43B has overriding effect over .....

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ees in the year in which the liability is actually discharged. We may, however, add that clause (va) has been inserted in sub-section (1) of section 36 by the Finance Act, 1987. The effect of the amendment is that no deduction will be allowed in the assessment of the employer unless such contribution is paid to the fund on or before the due date. The due date in the context means the date by which an employer is required to credit the contribution to the employees' account under the provisio .....

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t;The second provision imposes a further restriction on the allowability of deduction of any sum referred to in clause (b). It provides that unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date, it shall not be allowed as deduction. For this purpose, the definition of 'due date' as given in the Explanation to clause (va) of sub- section (1) of section 36 is adopted. Sub- clause (x) of clause (24) of section 2 inclu .....

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ection 36 in computing the business income under section 28 provided the assessee credits the same to the relevant fund. Under Section 43B, the sum referred to in clause (b) of section 43B is treated differently, as it relates to the sum payable by the assessee as an employer which includes the employer's contribution as well as employees' contribution,. If such contributions which are payable to any provident fund or superannuation fund or any fund are paid within the due date, the empl .....

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the recitals in the show cause notice dated 03.01.2014 reproduced by the A.O. in para 3.1 of his order. According to the A.O, the requirement of clause (b) of section 40A(7) to allow the deduction of payment of gratuity fund is that the contribution should be to an approved gratuity fund, which in turn is empowered to utilize it to contribute to the group gratuity scheme entered into with the LIC of India or any other insurer as defined in clause (28BB) of section 2 of the I.T. Act. In the case .....

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ly and SBI Life has also accepted the same. Whether assessee can make the contribution to group gratuity scheme directly is the question before us. We find that similar question had arisen before the Hon ble Apex Court in the case of CIT vs. M/s. Textool Co. Ltd., in Civil Appeal No.447 of 2003 and the Hon ble Court vide its decision dated 09.09.2009 has held as under : This appeal, by special leave is directed against the judgment, dated 4th February, 2002, rendered by the High Court of Judicat .....

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g the deduction of Rs·55,84,754/- being the payment made by the assessee company directly to Life Insurance Corporation towards Group Gratuity Fund under Section 36 (l)(V) of the Income Tax Act, 1961?" Material facts relevant for the purpose of the present appeal may be stated thus: For the assessment year, 1983-84, for which the relevant previous year ended on 30th April, 1982, the assessee claimed a deduction of ₹ 92,06,978/- as contribution/provision towards the approved gra .....

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ty fund, viz., the Textool Company Ltd. Employees Group Gratuity Fund was approved by the Commissioner of Income Tax, coimbatore, w.e.f 25th February, 1983. While completing assessment, the Assessing Officer allowed a deduction of Rs. '36,22,224/under Section 40A(7) of the Act. However, deduction for the balance amount was disallowed on the ground that payment towards the gratuity fund was made by the assessee directly to the LIC and not to an approved gratuity fund and, therefore, it was no .....

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assessee under the policy issued by it. Upon perusal of the original Master policy issued by the LIC, the Commissioner recorded his satisfaction that the initial contribution as well as annual premium had been credited by the LIC to the Group Life Assurance Scheme on behalf of the Textool Company Ltd. Employees Group Gratuity Fund only, meaning thereby that the insurance policy had been taken in the name of the approved gratuity fund only; this fund was shown as the payee in the policy; vide it .....

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d that by making payment of the amounts in question directly to the LIC, the assessee had not violated any of the conditions stipulated in Section 36(1)(v) of the Act. Accordingly, the Commissioner came to the conclusion that since, on the facts of the case, the objective of the fund was achieved, a narrow interpretation of the provision would be straining the language of Section 36(1)(v) of the Act so as to deny the deduction claimed by the assessee. Consequently, the Commissioner allowed the s .....

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e question, the High Court has observed as follows: "In our opinion, the Commissioner of Income Tax (Appeals) as well as the Tribunal have correctly held that merely because the payments were made directly to the LIC, the company could not be denied the benefit under Section 36(1)(V) and the amount had to be credited in favour of the assessee. Both the Commissioner (appeals) as well as the Tribunal have correctly read the law and have correctly relied upon the aforementioned Supreme Court j .....

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ibution by the assessee towards the gratuity fund was not in an approved gratuity fund the High Court was not justified in affirming the view taken by the Commissioner as also by the Tribunal while answering the reference in favour of the assessee. However, on a query by us as to whether the contribution made by the assessee in the approved gratuity fund credited by the LIC for the employees of the assessee and ultimately the entire amount deposited with the LIC came back to the fund created by .....

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ision does not rule out the application of the principles of reasonable construction to give effect to the purpose and intention of any particular provision of the Act. (See: Shri Sajjan Mills Ltd. vs. Commissioner of Income Tax, M.P. & Anr. (1985) 156 ITR 585). From a bare reading of Section 36(1)(v) of the Act, it is manifest that the real intention behind the provision is that the employer should not have any control over the funds of the irrevocable trust created exclusively for the bene .....

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Section 36(1)(v) of the Act were satisfied. Having regard to the facts found by the Commissioner and affirmed by the Tribunal, no fault can be found with the opinion expressed by the High court, warranting our interference. 6. In our opinion, the assessee s case for the relevant assessment year is similar to the above case. Respectfully following the same, assessee s appeal is allowed. 7. In the result, ITA.No.713/Hyd/2015 of the assessee is allowed. ITA.No.714/Hyd/2015 - A.Y. 2008-2009 8. This .....

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evised computation in this regard. The A.O. held that under section 139(5) of the Act, the assessee was entitled to file a revised return before the end of one year from the end of the relevant assessment year or before completion of the assessment, whichever is earlier and that since the assessee has not filed revised computation within the period of one year from the end of the relevant assessment year, the claim cannot be accepted. The matter was carried in appeal up to ITAT and vide orders d .....

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ITR 270(SC) and Southern Technologies reported in 320 ITR 571(SC) and submitted that a plain reading of section 36(1)(viia) showed that the assessee was entitled to two deductions, firstly basing on provision made by the appellant, not exceeding 10% of the average rural advances, and secondly, a sum not exceeding 7.5% of the total income computed before making any deduction under section 36(1)(viia) and sections 80C to 80U. Assessee further submitted that he has debited 5% of the average rural a .....

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rving that a deduction for provision under clause (viia) of Section 36(1) is meant for rural debts only as per the decision of the Apex Court in the case of Catholic Syrian Bank reported in 343 ITR 270 (SC) (cited surpa) and therefore, that the assessee is entitled to a deduction of the actual amount created in the books of account towards the provision for rural bad and doubtful debt subject to the ceiling specified in section 36(1)(viia) of the Act, he accordingly, issued a show cause notice a .....

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oubtful debts of ₹ 10,46,19,487. On appeal, the CIT(A) confirmed the disallowance giving partial relief to the assessee by observing as under : 5.1. I have considered the facts on record and the submissions of the AR. The appellant had debited a sum of ₹ 9000.42 lakhs in its P & L account consisting of : i. Provision for rural advances ₹ 85,57.00 lakhs ii. Provision towards bad and doubtful debts ₹ 433.73 lakhs iii. Provision towards frauds ₹ 9.69 lakhs. 5.2. Th .....

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pect of the matters dealt with therein, in computing the income referred to in section 28- (viia) in respect of any provision for bad and doubtful debts made by (a) a scheduled bank "', an amount not exceeding seven and one-half per cent of the total income '" and an amount not exceeding ten percent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. " 5.4. In the normal course, provisions are not a deductible expens .....

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ords, the deduction of seven and one-half percent of the total income is not an absolute allowance independent of the entries, if any, in the books of account but is permitted only in respect of a provision actually made by an assessee and is consequently, circumscribed by the extent of such provision. 5.5. This view has also been upheld in the case of State Bank of Patiala where it was held: "The deduction allowable under section 36(1)(viia) of the Income-tax Act, 1961, is in respect of th .....

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by the assessee in its books. 5.6. Similar view has also been taken by the jurisdictional ITAT in the decision cited by the Assessing Officer in the case of State Bank of Hyderabad. 5.7. It follows that not only must the provision for bad debts be debited to the P&L account in order to enable an assessee to claim deduction u/s 36(1)(viia), the amount of deduction allowable is limited by the provision so debited. 5.8. Further, in the case of Catholic Syrian Bank Ltd. vs CIT [2012] 343 ITR 270 .....

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out of the provision of ₹ 433.73 lakhs, Rs,310.00 lakhs related to rural branches. Therefore, the total provision relating to rural branches was ₹ 89903. 73 lakhs. 5.10. Against this, the appellant had claimed the following deductions: 5% on average advance ₹ 85,57,00,000 7.5% on total income as perSec.36(1)(viia) ₹ 10,46,19,487 Total ₹ 96,03,19,487 The deduction allowable u/s 36(1)(viia) must, therefore, be limited to the total provision of ₹ 89903.73 lakhs .....

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ent an actual write-off of the debts in question. Therefore, the appellant was not entitled to a claim u/s 36(1)(vii) for this sum. Secondly, the deduction u/s 36(1)(viia) has been claimed and allowed on the basis of the very same provision and the appellant cannot claim deduction for the same amount u/s 36(1)(viia) without first adding it back. Indeed, the appellant had itself added back the provision of ₹ 85,57,00,000 and there is no reason why the same treatment should not be accorded t .....

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e aggregate average advances made by the rural branches as computed under rule 6ABA. The Assessing Officer is, therefore, directed to re-compute the aggregate average rural advance in accordance with rue 6ABA for the purpose of allowing the deduction. 6.0. In the result, the appeal is partly allowed. 11. Aggrieved, the assessee has filed this appeal before us. 12. The Ld. Counsel for the assessee, while reiterating the submissions made before the authorities below, has also relied upon the decis .....

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he other hand, supported the orders of the authorities below and relied uponthe order of ITAT in the assessee s own case for A.Y. 2009-2010 wherein the disallowance was confirmed. 14. Having regard to the rival contentions and the material on record, we find that the only issue is whether the assessee is eligible for deduction under section 36(1)(viia) of the Act @ 7.5% of the total income without creating a provision for the same in its books of account. 14.1. We find that similar issue had ari .....

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)(viia) of the Income-tax Act, calculated at the rate of 7.5% of the total income. The AO has observed that the deduction was claimed based on statutory provision, without there being any claim in books of account. It was further opined by the AO that any provision created should have a purpose and in the case of assessee provision was created without any necessity as such the provision was unwarranted and the said claim towards bad and doubtful debts under 7.5% category is disallowed to be adde .....

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Karnataka High Court, in the case of DCIT, SR Vs.Karnataka Bank Ltd., to support the argument that deductions u/s. 36(1)(vii) are allowable independently and irrespective of provisions for bad and doubtful debts, without claiming the deduction u/s 36(1)(vii) and 36(1)(viia) simultaneously.. The ld CIT (A) perused the submissions of the assessee and the observations of the AO. The CIT (A) held as follows: As could be seen from the facts of the case brought on record, the assessee claimed a deduct .....

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sions of Income- tax Act. In this context, it may be relevant to hold that, the deduction was claimed, as provided in Sec. 36(1)(viia) of the Act and no infirmity was pointed out by the AO in this regard. The deduction was made by the assessee as per the provisions of the I.T. Act (Sec. 36(1)(viia) restricting to the 7.5% of the total profits, in addition to deduction of ₹ 1,96,65,088 claimed towards the doubtful and bad debts of rural advances, which was allowed by the AO . 18. The Ld CIT .....

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dering the facts of the case that the deduction claimed by the assessee to the extent of ₹ 4,44,52,560 was claimed as per the provisions of section 36(1)(viia) and without claiming any deduction towards bad debts written off as per the provisions of section 36(1)(vii) and also respectfully following the decision of ITAT in the case of SBH vs. DCIT (Supra), The CIT (A) was of the opinion that there is no infirmity in the claim of the assessee. Accordingly the addition of ₹ 4,44,52,560 .....

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………………………. 22. With respect to the issue of claim of deduction u/s36(1)(viia) for an amount of ₹ 4,44,52,560, this issue is also covered by the order of the ITAT Hyderabad Bench in the case of SBH Hyderabad in ITA No.584/Hyd/2013 and also Catholic Syrian Bank Ltd vs. CIT (2012) 248 CTR (S.C). Respectfully following the order of the Coordinate Benches, we dismiss Ground No.4 of Revenue s appeal. 23. In the result, appeal filed b .....

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ld. AR that there is no need for making any provision for bad and doubtful debts for claiming deduction u/s 36(1)(viia) is not acceptable. The Hon ble P & H High Court in case of State Bank of Patiala Vs. CIT (supra) while examining the provisions of section 36(1)(viia) held that for claiming deduction under the said provision, assessee bank has to make a provision for bad and doubtful debts in its books of account and deduction u/s 36(1)(viia) in respect of rural advances can only be allowe .....

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fore making any deduction under S.36(1)(viia) and Chapter VIA and an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. A perusal of the impugned order of the learned CIT(A) however, shows that it was stated by the assessee before the learned CIT(A) that no provision was made towards average rural advances. If it is so, it is not clear as to what is the basis on which the provision of ₹ 22.40 crores (Rs.5.38 .....

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gainst the opening balance of the provision of ₹ 40.13 crores was also made by the assessee for the first time before the learned CIT(A), and the Assessing Officer did not have any opportunity to verify the same. Having regard to all these facts and circumstances of the case, we are of the view that it would be fair and proper and in the interests of justice to restore the issue relating to the assessee s claim for deduction under S.36(1)(viia)to the file of the Assessing Officer for decid .....

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reated any provision for bad and doubtful debts in its books of account in terms with section 36(1)(viia). In case it is found that assessee has made a provision for bad and doubtful debts in its books of account, then, deduction u/s 36(1)(viia) can be allowed to assessee. In case it is found that assessee has not made any provision for bad and doubtful debts in its books of account, then, assessee would not be eligible for any deduction u/s 36(1)(viia) in view of the ratio laid down by the Hon .....

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n 272 ITR 54 wherein it has been held that it is necessary to make a provision for bad and doubtful debts in the account books in the same previous year in which such provision is claimed as deduction under section 36(1)(viia). The Coordinate Bench of this Tribunal in the case of CIT vs. Andhra Bank Ltd., in ITA.No.715/Hyd/2012 for the A.Y. 2007-08 (to which one of us i.e., the J.M. is a signatory) vide orders dated 04.10.2013 has followed the decision cited supra in the case of State Bank of Pa .....

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f the intention of the legislature is that deduction should not be linked to the provision made in the accounts, the language of the section will not have the wording in respect of any provision for bad and doubtful debts made , instead it would have stated that the scheduled bank would be entitled to a deduction of an amount which is an aggregate of 7.5% of the total income and 10% of the aggregate average advances made by the rural branches without reference to any provision. Therefore, I am o .....

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t books in the same previous year in which such provision is claimed as deduction u/s 36(1)(viia). Therefore, it is held that deduction is available only to the extent of the provision made in the books and accordingly the deduction for provisions of bad and doubtful debts as computed u/s 36(1)(viia) is restricted to the amount provided by the appellant in its books and the AO is justified in allowing the provision made of ₹ 97,48,84,948/- u/s 36(1)(viia) of IT Act and disallowing the clai .....

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case of Syndicate Bank (supra) has analysed the issue and concluded as under: 48. As far as Gr.No.3 raised by the Revenue in the original grounds of appeal is concerned, the AO disallowed the entire claim for deduction of ₹ 503,49,00,000/- on the following ground. a) The provision for bad and doubtful debts in respect of rural advances was created by debit to profit and loss account of only a sum of ₹ 295,55,54,682 whereas the claim for deduction actually made u/s.36(1)(viia) of the .....

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O also disallowed the sum of ₹ 295,55,54,682 out of ₹ 503,49,00,000 claimed as deduction u/s.36(1)(viia) of the Act. The reasons given for disallowing claim for deduction of ₹ 295,55,54,682/- u/s.36(1)(viia) of the Act by the AO was that there was already credit balance in the PBDD as on 1.04.2005 Balance B/F was ₹ 912,57,47,169. According to the AO 10% of AARA can be created as provision each year provided there is no brought forward balance as on the first day of the pr .....

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ion of the Assessee which was to the effect that in each year the Assessee can create 10% of AARA and concluded that the expression not exceeding ten percent of the aggregate average advances used in Sec.36(1)(viia)of the Act cannot mean that provision can be created each year irrespective of the available balance in the PBDD account. The AO also referred to a situation where there is no claim for bad debts in a year even then the Assessee will be entitled to claim deduction by way of PBDD which .....

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u/s.36(1)(viia) of the Act. The relevant observations of the Tribunal in the aforesaid decision was as follows: 20. The learned CIT has also acted under the misconception that deduction under cl. (viia) is related to the actual amount of provision made by the assessee for bad and doubtful debts. The true meaning of the clause, as indicated earlier, is that once a provision for bad and doubtful debts is made by a scheduled bank having rural branches, the assessee is entitled to a deduction which .....

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