TMI Blog1990 (12) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... ew section 36(1)(viia) introduced with effect from 1-4-1985. Although this section is not applicable to the assessee bank having been incorporated outside India, it was, according to the assessee, applicable under the non-discrimination clause included in the Avoidance of Double Taxation Agreement entered into between the Governments of U.K. and India. The IAC rejected this claim on the ground that there was nothing in the Avoidance of Double Taxable Agreement which was contrary to the provisions of section 36(1)(viia) and, therefore, the assessee could not claim relief under this section. According to the IAC, the assessee cannot be treated as a national being a corporate entity and the provisions of this section which were extended to the assessee bank with effect from 1-4-1987, cannot be made applicable to the assessee for the assessment year 1985-86. 9.1 The CIT(A) has extensively dealt with this issue in para 12 of his order. Before the CIT(A), the assessee placed reliance on the circular of the CBDT issued under Circular No. 333 under Board F.No. 506/42/81-FTD dated 2-4-1982. This circular provided that when the Double Taxation Avoidance Agreement provides a particular mode ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in prime urban area of India were not functioning in the same circumstances or under the same conditions. In fact the apprehension of discrimination in the minds of the appellant company, in my view is not well founded and is not sustainable in law. " These observations are strenuously challenged by the assessee in the last two grounds for both these years. 9.2 Shri Dastur first referred us to Circular No. 333 dated 2-4-1982 (page 100 of the compilation) where, inter alia, it was stated as under:---- " 2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provision will prevail over the general provisions contained in the Income-tax Act. In fact the double taxation avoidance agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the agreement. 3. Thus, where a double taxation avoidance agreement provides for a particular mode of computation of income, the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich are the subject of this Convention ". After referring to the above Article, Shri Dastur pointed out that the assessee was a national of the U.K. because it had its head office in the U.K. and not in India. There was no definition of the term "national" in this Agreement and, therefore, one had to turn to the decision of the Supreme Court in the case of State Trading Corpn. of India Ltd. v. CTO AIR 1963 SC 1811. In this case, the Supreme Court observed that the Corporation may have nationality in accordance with the country of their incorporation but that does not necessarily confer citizenship on them. At para 18 of the judgment (page 1819). Their Lordships observed that a Corporation incorporated in England has a British nationality, irrespective of the nationality of its members, and proceed to distinguish the difference between the concept of 'nationality' and 'citizenship' in the following words: " But the question still remains whether "nationality" and "Citizenship" are interchangeable terms. "Nationality" has reference to the jural relationship which may arise for consideration under international law. On the other hand "citizenship" has reference to the jural relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough the order of the CIT(A) as well as the DTA Agreement. Section 36(1)(viia) as it stood for the relevant assessment years read as under :---- " (viia) in respect of any provision for bad and doubtful debts made by a scheduled bank (not being a bank approved by the Central Government for the purposes of clause (viia) or a bank incorporated by or under the laws of a country outside India) or a non-scheduled bank, an amount not exceeding ten per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) of an amount not exceeding two per cent of the aggregate average advances made by the rural branches of such bank, computed in the prescribed manner, whichever is higher. " Explanation: For the purposes of this clause,---- (i) "non-scheduled bank" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank; (ia) "rural branch" means a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions are fulfilled. However, a mere provision for bad and doubtful debts is normally not allowed as a deduction in the computation of taxable profits. Now, in order to promote rural banking and assisting the scheduled commercial banks in making proper provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act 1979 inserted anew clause (viia) in sub-section (1) of section 36 to provide for a deduction in computation of taxable profits in all scheduled commercial banks in respect of provisions made by them for bad and doubtful debts relating to advances made by their rural branches. Apparently, all co-operative banks as well as banks incorporated by or under the laws of a country outside India were excluded from the purview of this provision. Now, Article 23 of the DTA Agreement between India and the U.K. specifically provides that the nationals of a Contracting State shall not be subjected to the other Contracting State to any taxation or requirement connected therewith which is either more burdensome than the taxation and connected requirements to which nationals of that other State may be subjected. The CIT(A) has not consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to such banks by introduction of clause (b) with effect from 1-4-87. Therefore, we cannot proceed on the assumption that this section was exclusively intended for considering advances effected by the scheduled banks to its rural branches. In that sense, the discrimination existing between Indian banks and foreign banks in respect of allowing deductions in this section on account of provision for bad and doubtful debts has been recognized by the Government, and by introducing clause (b) to section 36(1)(vii) it has only sought to remove such discrimination. If this much is clear i.e., there was a discrimination between the scheduled bank and foreign bank in the matter of deduction under this section prior to 1-4-87, then by virtue of Article 23 of the DTA Agreement, the assessee which is a bank incorporated in the U.K. and therefore a national of one of the Contracting States cannot be subjected to a higher burden of tax by being denied a claim for deduction which was available to Indian banks. Now, it is well settled that a provision of a Double Taxation Avoidance Agreement will prevail over the general provisions contained in the Income-tax Act. The Board has laid down these pri ..... 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