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State Bank of India Versus CIT-2, Mumbai

2016 (10) TMI 164 - ITAT MUMBAI

Revision u/s 263 - Deduction u/s. 36(1)(viii)eligibility - Held that:- No material indicating any query – that being the ground on which jurisdiction stands assumed by the ld. CIT in the instant case, was also led during hearing. We, accordingly, uphold the same; it being the settled law that absence or lack of enquiry, in-as-much as it exhibits non application of mind, would result in the result order being erroneous.We, accordingly, uphold the invocation of section 263 qua the relevant issues. .....

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s share holding is 51% or more. This is as the assessee is not a company in the first place. Both the terms ‘public company’ and ‘Government company’ are defined under the Companies Act, 1956 (refer sections 2(10), 2(18), 3 and 617 thereof). It is not necessary to go into those definitions, and suffice to state that the term stands defined per section 2(10) of the Companies Act, 1956 to mean a company as defined u/s. 3 thereof, i.e., a company formed and registered under the said Act, including .....

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me (stated at ₹ 5509.44 cr. – at net of all deductions, save u/s. 36(1)(viii), i.e., prior to deductions under Chapter VI-A), to the gross business income (refer: CIT vs. Kerala State Industrial Development Corporation [1998 (2) TMI 6 - SUPREME Court ] . This ratio is to be applied to the gross income from the eligible activity – providing of long-term finance to industry and agriculture. This would yield the taxable income from this activity/s, 40% of which, subject to the creation of the .....

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rs of the deduction stand provided in the section itself, i.e., for a sum not exceeding 7.5% of the total income (before allowing any deduction under this clause and Chapter VI-A) and an amount not exceeding 10% of the aggregate average advances made by the rural branches of the bank computed in the prescribed manner. The deduction, it may be appreciated, is qua a provision, general in nature, toward the loss that may arise to the bank on account of its rural advances being not realized in whole .....

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idering that a provision for risk of loss of an asset cannot exceed the value of the asset under risk itself. We may here also clarify that the provision is to be adjusted against the actual write off on the debt becoming irrecoverable – and accordingly claimed u/s. 36(1)(vii), applicable to all the assessees, including Scheduled Banks as the assessee falling under section 36(1)(viia)(a). - I.T.A. No. 3145/Mum/2009 - Dated:- 6-9-2016 - Shri Sanjay Arora, AM And Shri Pawan Singh, JM Appellant by .....

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hile upholding the assumption of revisionary jurisdiction by the Ld. CIT on the ground of non-application of mind by the assessing authority, i.e., qua the relevant issue/s, it - on merits, upheld the exigibility to deduction under section 36(1)(viii) - denied on the basis of that the assessee is not a financial corporation within the meaning of the term in the said section, following the decision by the Tribunal in Union Bank of India vs. Asst. CIT [2012] 49 SOT 32 (Mum). As regards the quantif .....

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at year, rendered definite findings qua the said withdrawal, directing so, so that the issue ought to have been decided by the tribunal itself. This was the assessee s contention in its Miscellaneous Application. The assessee s petition was disposed by the Tribunal by recalling its order on that ground (in MA No. 170/Mum/2013 dated 04/6/2014) for a decision on merits. The assessee had in the meanwhile also moved the Hon ble High Court under its appellate jurisdiction (in Income Tax Appeal No.148 .....

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the IT Act, but on the merits of the claim as well. Merely because such an opportunity is given by us does not mean that the Tribunal is obliged to uphold any of the grounds. It is only the partial revival of the Appeal and in the manner done by the Tribunal which has forced us to take this unusual step. We do not think that interest of justice and equity is served by non consideration of vital materials by the last fact finding authority, namely the Income Tax Appellate Tribunal. That the Trib .....

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its own merits and in accordance with law, permitting the Assessee to raise all grounds that are to be found in Memo of Appeal. The Tribunal shall apply its mind afresh to the contentions raised by both sides and uninfluenced by its prior observations and conclusions and dispose of the Appeal on its own merits and in accordance with law. This direction issued by us in the exercise of our further appellate and inherent powers should serve as a reminder to the Tribunal that the matters of vital i .....

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contentions and the Appeal shall be decided by the Tribunal on its own merits and in accordance with law, without being influenced by any observations. We further clarify that this order passed today does not oblige the Tribunal to either allow the Appeal in entirety or partially. All courses and open in law can be adopted by the Tribunal. The assessee s appeal was accordingly posted for hearing and heard afresh, i.e., on all grounds. We observe no dispute qua the primary facts of the case lead .....

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as it exhibits non application of mind, would result in the result order being erroneous. Case law in the matter is legion, even as the ld. DR would before us rely on the decision in the case of Horizon Investment Co. Ltd. v. CIT (in ITA No. 1593/Mum/2013 dated 27/6/2014/ copy on record), and which stands further rendered relying on a host of decisions by the higher courts of law including the Hon ble Apex Court. We, accordingly, uphold the invocation of section 263 qua the relevant issues. Dedu .....

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company . The Government company is further specified to have the same meaning as assigned to it u/s. 617 of the Companies Act, 1956, which reads as under: Definition of Government company 617. For the purposes of this Act Government company means any company in which not less than fifty-one per cent. of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments and inclu .....

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mport Bank of India and Industrial Development Bank of India, both established under separate Acts of Parliament, as required for eligibility of financial corporations u/s. 36(1)(viii) prior to AY 2000-01. Reliance is placed on the decision in The Federal Bank Ltd. v. Asst. CIT [2011] 198 Taxman 491 (Ker). The assessee, on the other hand, relies on the decision by the Tribunal in Union Bank of India (supra). 4.1 The matter stands agitated with reference to whether the assessee-bank is a financia .....

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ion is admissible to Financial Corporations engaged in extending long-term finance to industrial and agricultural development and development of infrastructure facility. The assessee being a banking company cannot be considered as a financial corporation within the meaning of section 36(1)(viii). Therefore, the allowance of ₹ 230.45 crores as deduction under that section is erroneous. It would be relevant to reproduce the relevant provision, which we do as under: Other deductions 36. (1) T .....

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ain object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance (computed under the head Profits and gains of business or profession before making any deduction under this clause) carried to such reserve account: Provided that where the aggregate of the amounts carried to such reserve account from time to t .....

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in section 617 of the Companies Act, 1956 (1 of 1956); (d) infrastructure facility means- (i) An infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed; (ii) An undertaking referred to in clause (ii) or clause (iii) or clause (iv) of sub-section (4) of section 80-IA; and (iii .....

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tion eligible for deduction under section 36(1)(viii). 4.2 We may next discuss if the assessee could be considered as a financial corporation , i.e., within the meaning of the term under section 36(1)(viii), failing which its case would stand ousted at the threshold. We begin by considering the scope of the term, defined inclusively. The term Financial Corporation stands defined per section 2(b) of the State Financial Corporations Act, 1951 to mean a Financial Corporation established under secti .....

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International Finance Corporation and State Financial Corporation (refer ss. 2(c), 2(cb) and 2(fi) thereof), to none of which categories also the assessee belongs. Rather, the assessee is separately defined per section 2(eb) thereof, and referred to therein as State Bank . The defining attribute of these finance/financial corporations, however, is that they stand incorporated or established under a separate statute for the purpose of providing long-term funding, i.e., for a term exceeding a mini .....

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considered as a Scheduled Bank (Explanation (iii) to section 36(1)(via)). The definition of a Scheduled Bank under the Act is more comprehensive, including banks considered as Schedule Banks under the RBI Act, i.e., included in the second schedule to that Act. The assessee is thus clearly a Scheduled Bank. The question is if it could also be regarded as a financial corporation. The word corporation or body corporate is defined in section 2(7) of the Companies Act, 1956 to include a company inco .....

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ct, engaged in provision of longterm finance as its principal business. We are, when we say so, conscious of the definition being inclusive and not restrictive and, accordingly, the meaning ascribed thereto by us conforms to the generality of the term. True, the definition is extended - by way of amendments, to include a public company and a government company as well. That, however, only reflects or signifies the form of the organization and does not suggest anything about or impinge on its fun .....

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as delineated above. 4.3 We next consider if the assessee bank, a banking company, i.e., to which Banking Regulation Act, 1949 applies, could be regarded as a financial corporation, i.e., as delineated above. In our considered view, the answer is in the negative. The term is used, as sought to be explained earlier, for special purpose vehicles, incorporated or established to fund industry or agriculture or set up infrastructure facilities, on a long-term basis. Reference in this context may be .....

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tions be set up in States to supplement the work of the Industrial Finance Corporation. State Government also expressed that the State Corporations be established under special statute in order to make it possible to incorporate in the Constitution necessary provisions in regard to majority control by the Government, guaranteed by the State Government in regard to the payment of principal. In order to implement the views expressed by the State Governments the State Financial Corporation Bill was .....

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e Corporations will confine their activities to financing medium and small scale industrial and will, as far as possible, consider only such cases as are outside the scope of the Industrial Finance Corporation. The State Governments also consider that the State Corporations should be established under a special Statute in order to make it possible to incorporate in the Constitution necessary provisions in regard to majority control by Government, guaranteed by the State Government in regard to t .....

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ain features of the Bill are as follows:- (i) The Bill provides that the State Government may, by notification in the Official Gazette, establish a Financial Corporation for the State. (ii) The share capital shall be fixed by the State Government but shall not exceed ₹ 2 crores. The issue of the shares to the public will be limited to 25 per cent, of the share capital and the rest will be held by the State Government, the Reserve Bank, Scheduled Banks, Insurance Companies, Investment Trust .....

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the country was felt. Traditionally, the sourcing thereof is by pension and life insurance funds, which mobilize savings by the household sector on a long-term basis, to finance long gestation projects in-as-much as such funds are generated on a long-term basis, primarily with a view to support/supplement the superannuated/old-age funding requirement of individuals. And are used to finance long gestation projects, as in the areas of irrigation, power, energy, public health, public utilities, su .....

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p in the 1950s to step up industrialization as India began its journey as a new, young republic. The purpose was to strengthen the financial health of such like corporations, the funding of which itself has necessarily to be on a long-term basis, as by the Central/State Government; International Development Funds; long-term household sector savings, et. al. The provision was introduced, firstly in the 1922 Act, considering their risk profile. A look at the legislative history, which we have exam .....

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d to the risk the activity is prone to. Only those approved by the Central Government were considered as eligible. By Finance (No. 2) Act, 1970, agricultural development was also included as the objective/purpose of the provision of the long term finance to qualify as an eligible activity. Finance Act, 1979 extended the benefit of the provision to approved public companies engaged in providing long-term finance for the housing sector; the deduction being in the meanwhile (by Finance Act, 1974) e .....

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respect of income derived from activities other than those specified in the section, for which there was no justification, the provision was amended by Finance Act, 1995 to limit the deduction to 40% of the income derived from long-term finance from the specified activities, so that the income derived from other business activities or other source would not be taken into account for computing the deduction u/s. 36(1)(viii). This position stands in fact confirmed in Power Finance Corporation Ltd .....

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r section 36(1)(viii). The salient features of the provision stand brought forth therein are deemed very relevant for our purpose, and are therefore stated as under: 21.2 The provisions regarding this special deduction also existed in the Income-tax Act, 1922 and were retained in the Income-tax Act, 1961. The objective of this deduction originally was to stimulate industrial development of the country. The scope of the provisions of the said clause was later on widened by the Finance (No.2) Bill .....

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of this special deduction and subsequent widening of its scope, high tax incidence on companies has come down substantially. The benefit of this deduction was also intended to enable corporations to augment their initial low equity base on account of limited accessibility to capital market. In the wake of liberalisation, from the beginning of the nineties, there has been considerable expansion and deepening of the capital market. Accessibility to capital market has markedly improved. 21.4 The F .....

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tively therefore the specified entities are not adversely affected in the long term. 21.5 The provision has also been restructured to provide for different categories of entities (which now also includes co-operative banks) and their respective activities for eligibility of the deduction under the said clause. For claiming deduction under the said clause, (i) a financial corporation specified in section 4A of the Companies Act or a financial corporation which is a public sector company or a bank .....

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ther financial corporation including a public company, has to be engaged in the business of providing long-term finance for development of infrastructure facility in India. It may be clarified that a financial corporation specified in section 4A of the Companies Act shall include such corporations specified under sub-section (1) and under sub-section (2) of section 4A of the Companies Act. 21.6 The amendment made by the Finance Act, 2007 also provides definitions of the expressions "banking .....

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cular thus charts or traverses the rationale of the provision, making reference also to the amendment explaining the Finance (No.2) Bill, 1971, per which the object and purpose of the provision stands also explained. It also explains the need for restructuring the provision, expanding its scope, which is now extended to cover a host of entities, named as specified entities , explaining also the rationale of the same as well as of the substantial scaling down of the deduction, i.e., to 20% of the .....

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s does the Tribunal in Union Bank of India Ltd. (supra), we are afraid, may not, in light of the foregoing, represent a correct view. We are in this regard in agreement with the decision in the case of The Federal Bank Ltd. (supra), which being by a higher court even otherwise carries a higher precedence value. Why, it was precisely on account of inadequacy of commercial banks that need for such institutions, to meet the long term funding requirements of industry, agriculture and infrastructure, .....

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hich specialize in and are engaged in business of banking, which includes a wide spectrum of activities, including financial intermediation, but to only those corporations whose core activity is long-term funding. The placement of the provision (section 36(1)(viii)) also assumes significance in this regard. In fact, an analogous provision (section 36(1)(viiia)) was inserted in the Act by Finance Act, 1982 to extend a benefit to Scheduled Banks (other than foreign banks) approved by the Central G .....

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orporation instead the Legislature intended to exclude banks from the ambit of the provision. Even if the benefit was intended to be extended to a larger set of bodies, why could not a banking company, specifically defined under the Act and, further, a term adopted in the analogous provisions, could be employed. It is noteworthy that both the immediately preceding and the succeeding sections, i.e., section 36(1)(viia) and 36(1)(viiia), refer to Scheduled Banks, with the former referring to non-s .....

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After hearing both sides and after going through the orders of the Tribunal, we feel the conclusion drawn by the Tribunal that assessee is not a financial corporation falling under section 36(1)(viii) of the Act during the relevant year is perfectly correct. In fact, if we go through the scheme of various deductions provided under sub-sections of section 36(1), it would be seen the deductions are specifically oriented to certain types of assessees. Even though Scheduled Banks are also public com .....

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ion is given an inclusive definition covering public companies and Government companies. It is not as if the Legislature was unaware of the fact that Scheduled Banks are registered under the Companies Act. When the Legislature makes special provisions for deductions admissible to different types of assessees and when Scheduled Banks are specifically referred to in the sections made applicable to them, it cannot be assumed that the Legislature wanted to cover Scheduled Banks within the meaning of .....

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ion 36(1)(viii) of the Act. As already pointed out by us, the Legislature made specific provisions in section 36(1)(viia) for Scheduled Banks and made certain provision for deduction exclusively for financial corporations under section 36(1)(viii). Even though Scheduled Banks and financial corporations engaged in business of analogous character, the Banking Companies are not generally referred as financial corporations. Normally financial corporations are either statutory corporations created un .....

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vering Banking Companies also for the purpose of deduction provided therein. So much so, we feel the provisions of section 36(1)(viii) until it was amended by Finance Act, 2006 did not include Banking Companies governed by the provisions of the Banking Regulation Act. In this view of the matter, we uphold the order of the Tribunal and dismiss the assessee s appeal. Juxtapose this with the fact that the banks are nowhere defined as financial corporations in any Legislation, i.e., as brought to ou .....

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anks are conspicuous by their absence in the said list which is restricted to some renowned corporations established under different Central Acts. Why, the term Indian company is itself defined u/s. 2(26) of the Act to include a Corporation established by or under a Central or State or Provincial Act, so that the Legislature has used different terms to convey different meanings or address different constituents/entities. Banks are in fact ubiquitous in the financial sector, so that the omission .....

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only those engaged - principally, if not wholly, in long-term lending for specific activities, that are eligible under the provision. Banks are neither dedicated nor in fact geared to provide such specialized services, which, as afore-stated, extends to, for larger sized projects yielding returns/social benefits over the long term, decades, resulting in the need for creation or institution of such special bodies to meet this vital need of the core sectors of the economy. The risk profile and the .....

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Ltd. (supra). We may before parting also add that the assessee is not, as contended, a Government company, which is only a company in which the Central Government s share holding is 51% or more. This is as the assessee is not a company in the first place. Both the terms public company and Government company are defined under the Companies Act, 1956 (refer sections 2(10), 2(18), 3 and 617 thereof). It is not necessary to go into those definitions, and suffice to state that the term stands defined .....

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of the deduction; the assessee claiming at ₹ 230.45 crs. In the Revenue s opinion, the same works to ₹ 117.03 cr, to which therefore the same is directed to be in any case restricted to. The assessee s working is as under: The deduction under section 36(1)(viii) claimed and allowed in the assessment at ₹ 230.45 crores has been worked out by the assessee as under: Total income in respect of Long Term finance to Industrial & Agriculture Development (A) ₹ 22,01,49,94,72 .....

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on of special reserve under Section 36(1)(viii) (40% of above) Rs.2,30,45,29,648 (refer: para 4.4 of the impugned order) This stands rejected by the Revenue as the basis thereof is the whole bank income, and which includes income assessable under other heads of income as well, i.e., which are not assessable as business income. The assessee s alternate claim is as under: Whole Bank income including interest and other income Rs.32,183.61 cr. Taxable income as per assessment order dtd. 20.3.08 Rs.5 .....

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f the impugned order) This again did not find acceptance as the taxable income includes income assessable, besides under Chapter IV-D, under other heads of income as well. The Revenue s computation is as under: Whole Bank Income including interest and other Income Tax Rs.43183.61 cr. (A) Total income from long term finance as per Annexure 15 to computation of Income Tax Rs.2201.50 cr. (B) Income from business as a whole 55,09,43,82,963 Add: Amount of deduction allowed u/s. 36(1)(viii) 2,30,45,29 .....

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venue s concern is for eliminating the influence of the other income in computing the deduction u/s. 36(1)(viii). The concern is valid. In our view the appropriate ratio would be the proportion of taxable business income (stated at ₹ 5509.44 cr. - at net of all deductions, save u/s. 36(1)(viii), i.e., prior to deductions under Chapter VI-A), to the gross business income (refer: CIT vs. Kerala State Industrial Development Corporation [1998] 233 ITR 197 (SC)). This ratio is to be applied to .....

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proportion applied only for the indirect costs (refer: Power Finance Corporation Ltd. (supra)). We decide accordingly. Provision for bad and doubtful debts u/s. 36(1)(viia) 7. The assessee claimed and stood allowed in assessment deduction u/s. 36(1)(viia) on account of provision for bad and doubtful debts at ₹ 405.17 cr. As the same included that in respect of standard assets, i.e., assets considered good, the same was considered excessive to that extent and, accordingly, ordered for dele .....

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on the decision by the Tribunal in Bharat Overseas Bank Ltd. vs. CIT (in ITA No. 1191/Mds/2012/copy on record). 8. We have heard the parties, and perused the material on record. We begin by reproducing the relevant provision: Other deductions 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 - (i).............. (ii) ............ (viia) in respect of any provision for bad a .....

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The Tribunal in the case of Bharat Overseas Ltd. (supra) clarified that deduction was not in the nature of a standard allowance but qua a provision for bad and doubtful debts. The same must therefore necessarily exclude that in relation to standard assets, which are considered good and, thus, realizable in full. The RBI norms are only prudential in nature. In our considered opinion reference to the prudential norms by RBI, even if mandatory for the banks, as contended, is unwarranted. Deduction .....

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[2010] 320 ITR 577 (SC). The parameters of the deduction stand provided in the section itself, i.e., for a sum not exceeding 7.5% of the total income (before allowing any deduction under this clause and Chapter VI-A) and an amount not exceeding 10% of the aggregate average advances made by the rural branches of the bank computed in the prescribed manner. The deduction, it may be appreciated, is qua a provision, general in nature, toward the loss that may arise to the bank on account of its rura .....

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vided on a yearly basis, and upon considering that a provision for risk of loss of an asset cannot exceed the value of the asset under risk itself. We may here also clarify that the provision is to be adjusted against the actual write off on the debt becoming irrecoverable - and accordingly claimed u/s. 36(1)(vii), applicable to all the assessees, including Scheduled Banks as the assessee falling under section 36(1)(viia)(a). So, however, we may also clarify that we are in principle in agreement .....

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