Sec 36(1)(viia) applies to bad debts arising out of rural advance of a bank

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH “A”, KOLKATA

[Before Hon’ble Sri C.D.Rao, AM & Hon’ble Sri George Mathan, JM]

ITA No.1349/Kol/2009

Assessment Year: 2001-02

Allahabad Bank,

Kolkata

(PAN: AACCA 8464 F)

(APPELLANT)

-Versus-

D.C.I.T., Circle-6,

Kolkata

(RESPONDENT)

For the Appellant: Shri B.K.Ghosh

For the Respondent: Shri L.K.S.Dehiya

Date of Hearing: 14.05.2012.

Date of Pronouncement: 16.05.2012.

ORDER

Per Shri C.D.Rao, AM

This is an appeal filed by the assessee against order dated 29.05.2009 of CIT(A) –VI, Kolkata pertaining to A.Yr. 2001-02.

2. The assessee has raised the following grounds of appeal :-

“1.That on facts as well as on law, the Learned CIT(A) has erred in confirming disallowance of provision for bad and doubtful debts to the extent of Rs.63,45,02,440 claimed by the appellant under the first Proviso to sub- clause (a) of clause (viia) of sub-section (1) of section 36.

2. That on facts as well as on law, the Learned CIT(A) has erred in confirming the view of the Learned Assessing Officer that the deduction for provision for doubtful debts for an amount not exceeding 5% of doubtful assets or loss assets as per the first Proviso to sub-clause (a) of clause (viia) of sub-section (1) of section 36 is an optional deduction and not an additional deduction as claimed by the appellant.

3. That on facts as well as on law, the Learned CIT(A) has erred in confirming disallowance of Rs. 44,10,54,680 in respect of bad debt written off pertaining to nonrural branches claimed under section 36(1 )(vii) in total disregard of the judicial pronouncements and the circulars of the CBDT.

4. That on facts as well as on law, the Learned CIT(A) has erred in concurring with the view of the Learned Assessing Officer that the Proviso to clause (vii) of sub-section (1) of section 36 applies to both rural and non-rural branches of the appellant bank.

6. That your appellant begs your leave to urge any additional ground or modify any other grounds at the time of hearing.”

2. The first two grounds are relating to the disallowance of provision of for bad and doubtful debts.

3. At the time of hearing before us, both the parties fairly conceded that this issue is covered against assessee in assessee’s own case for A.Yr. 2003-04 vide ITA No.2486/Kol/2007. Therefore we dismiss ground No.1 and 2 by respectfully following the Tribunal’s order in assessee’s own case dated 30th September, 2009. The relevant observations of the ld. Tribunal are as under :-

7. We have carefully considered the orders of the authorities below and the submissions of the learned Representatives of the parties. We have also considered the provisions of Section 36(l)(viia) of the Act. We are of the considered view that the claim of 10% of doubtful assets and loss as provided in first proviso to Section 36(1)(viia)(a) of the Act as amended by the Finance Act, 2002 w.e.f. 1.4.2003 and applicable to the Assessment Year under consideration as an alternate claim and the additional deduction could not be allowed if the claim of the assessee under clause (a) of Section 36(1)(viia) has been allowed. Since the Department has allowed the deduction to the assessee u/s.36(1)(viia)(a) of the Act, we held that the learned CIT(A) has rightly confirmed the action of the Assessing Officer to disallow the additional claim of Rs.l,40,30,70,000 of the assessee. Hence, ground No.1 is rejected.”

3.1. Since the facts involved in this case are similar to that of the one decided by the Tribunal, we find no reason to deviate from the orders of the Tribunal taken in assessee’s own case.

4. In the result ground nos.1 and 2 raised by assessee are dismissed.

5. As regarding ground nos. 3 and 4 the issue involved relates to bad debts written off pertaining to non-rural branches claimed u/s 36(1)(vii) of the IT Act. 6. At the time of hearing before us, the ld. Counsel before us has submitted that this issue has been considered by the Tribunal in the same order for A.Yr.2003-04 in ITA No.2486/Kol/2007 and allowed the appeal of assessee. He further relied on the decision of Hon’ble Supreme Court’s decision in the case of Catholic Syrian Bank Ltd. vs CIT, Thrissur vide Civil Appeal No.1143 of 2011 along with several civil appeals decided by Hon’ble Supreme Court by Swatanter Kumar, Judge on 17.02.2012 as reported in Tax India Online.com (2012-TIOL-16-SC-IT-LB).

7. On the other hand, the ld. DR, appearing on behalf of the revenue could not contradict the above submission of assessee.

8. After hearing the rival submissions and on careful perusal of materials available on record, we consider it fit to reproduce the observations made by the Tribunal in assessee’s own case for A.Yr.2003-04 vide ITA NO.2486/Kol2007 dated 30.09.2009 which are placed at para 10 and 10.1 are as under :-

“10. We have carefully considered the submissions of the learned Representatives of the parties and the orders of the authorities below. We have also gone through the cases cited by the learned AR of the assessee (supra). On consideration of the provisions of Section 36(1)(viia), as also section 36(2)(v) and also considering the provisions of Section 36(1)(vii) of the Act, we find substance in the submissions of the learned AR of the assessee. Hon’ble Kerala High Court has held that the scope of the proviso to clause (vii) of section 36(1)(vii) has to be ascertained from a cumulative reading of the provisions of clauses (vii) & (viia) of Section 36(1) and clause (v) of Section 36(2) of the Act. It was held that the intention of the Legislature in enacting the proviso to clause (vii) of Section 36(1) and clause (v) of Section 36(2) simultaneously is only to see that a double benefit in respect of the same bad debt is not given to a scheduled Bank. A scheduled bank may have both urban and rural branches and advances given from both branches. It was also held that as a result of the amendment, the scheduled Bank would be entitled to the deduction of the entire bad debt relating to advances made by the urban branches written off in the books and also the difference between the amount written off in the books relating to advances made by the rural branches during the previous year relevant to the Assessment Year and credit balance in the provisions for bad and doubtful debt account relating to advances made by the rural branches made in clause (viia). It was held that if the bad debt written off relates to debts other than for which provision is made under clause (viia) , such debt will fall squarely under the main part of clause (vii) which is entitled to deduction and in respect of that part of the debt with reference to which the provision is made under clause (viia) , the proviso will operate to limit the deduction to the extent of the difference between that part of debt written off in the previous year and the credit balance in the provision for the bad and doubtful debts accounts made under clause (viia). Further, the Special Bench of the ITAT in the case of Catholic Syrian Bank Ltd (supra) has held that the debts actually written off which do not arise out of the rural advances are not affected by the proviso to clause (vii) and that only those bad debt which arises out of the rural advances are to be limited in accordance with the proviso.

10.1. Considering the above decisions and also the findings given by the ITAT in assessee’s own case in AYs 1994-95, 1996-97 and 1997-98 and also considering the details placed on pages 26 to 39 of the Paper Book, we allow the claim of the assessee by reversing the orders of the authorities below. Hence, ground No.2 taken by the assessee is allowed.”

8.1. It is further observed that while passing the order in the case of Catholics Syrian Bank Ltd. vs CIT the Hon’ble Apex Court Judge Shri Swatanter Kumar has observed as under :-

“36. Merely because the Department has some apprehension of the possibility of double benefit to the assessee, this would not by itself be a sufficient ground for accepting its interpretation. Furthermore, the provisions of a section have to be interpreted on their plain language and could not be interpreted on the basis of apprehension of the Department. This Court, in the case of Vijaya Bank v. Commissioner of Income Tax & Anr. [(2010) 5 SCC 416], held that under the accounting practice, the accounts of the rural branches have to tally with the accounts of the head office. If the repaid amount in subsequent years is not credited to the profit and loss account of the head office, which is what ultimately matters, then there would be a mismatch between the rural branch accounts and the head office accounts. Therefore, in order to prevent such mismatch and to be in conformity with the accounting practice, the banks should maintain separate accounts. Of course, all accounts would ultimately get merged account into the account of the head office, which will ultimately reflect into acocunt (balance sheet), though containing different items.

37. Another example that would support this view is that, a bank can write off a loan against the account of A’ alone where it has advanced the loan to party A’. It cannot write off such loan against the account of ‘B’. Similarly, a loan advanced under the rural schemes cannot be written off against an urban or a commercial loan by the bank in the normal course of its business.

38. The Full Bench of the Kerala High Court expressed  the view that the Legislature did not make any distinction between provisions created in respect of advances by rural branches and advances by other branches of the bank. It also returned a finding while placing emphasis on the proviso to Section 36(1) (vii), read with clause (v) of Section 36(2) of the Act that the interpretation given by a Division Bench of that Courts in the case of South Indian Bank (supra) was not a correct enunciation of law, inasmuch as the same would lead to double deduction. It took the view that in a claim of deduction of bad debts written off in non-rural/urban branches in the previous year, by virtue of proviso to Section 36(1) (vii), the banks are entitled to claim deduction of such bad debts only to the extent it exceeds the provision created for bad or doubtful rural advances under clause (viia) of Section 36(1) of the Act. We are unable to persuade ourselves to contribute to this reasoning and statement of law.

39. Firstly, the Full Bench ignored the significant expression appearing in both the proviso to Section 36(1) (vii) and clause Section 36(1)(vii) and clause (v) of Section 36(2), i.e., assessee to which clause (viia) of sub-section (1) applies’. In other words, if the case of the assessee does not fail under Section 36(1) (viia), the proviso/limitation would not come into play.

40. It is useful to notice that in the proviso to Section 36(1) (vii), the explanation to that Section, Section 36(1) (viia) and 36(2) (v), the words used are ‘provision for bad and doubtful debts’ while in the main part of Section 36(1) (vii), the Legislature has intentionally not used such language. The proviso to Section 36(1) (vii) and Sections 36(1) (viia) and 36(2) (v) have to be read and construed together. They form a complete scheme for deductions and prescribe the extent to which such deductions are available to a scheduled bank in relation to rural loans etc., whereas Section 36(1) (vii) deals with general deductions available to a bank and even non— banking businesses upon their showing that an account had become bad and written off as irrecoverabie in the accounts of the assessee for the previous year, satisfying the requirements contemplated in that behalf under Section 36(2). The provisions of Section 36(1) (vii) operate in their own field and are not restricted by the limitations of Section 36(1) (viia) of the Act. In addition to the reasons afore-stated, we also approve the view taken by the Special Bench of ITAT and the Division Bench of the Kerala High Court in the case of South Indian Bank (supra).

41. To conclude, we hold that the provisions of Sections 36(1) (vii) and 36(1) (viia) of the Act are distinct and independent items of deduction and operate in their respective fields. The bad debts written off in debts, other than those for which the provision is made under clause (viia), will be covered under the main part of Section 36(1) (vii), while the proviso will operate in cases under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia) . The proviso to Section 36(1) (vii) will relate to cases covered under Section 36(1) (viia) and has to be read with Section 36(2) (v) of the Act. Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans while under Section 36(1) (vii), the assessee would be entitled to general deduction 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 Section 36.”

8.2. While concluding with the view of the Hon’ble Apex Court Judge Shri Swatanter Kumar it is further observed that

“2. Under Section 36(1) (vii) of the ITA 1961, the tax payer carrying on business is entitled to a deduction, in the computation of taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act, inserted clause (viia) in sub— section (1) of Section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debt(s) relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the IT Rules, 1962. Thus, the provisions of clause (viia) of Section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of Section 36(1) (vii)relating to allowance of the bad debt(s). In other words, the scheduled commercial banks would continue to get the full benefit of the write off of the irrecoverable debt(s) under Section 36(1) (vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under Section 36(1) (viia) . A reading of the Circulars issued by CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off. However this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause (vii) . This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). However, the Revenue disputes the position that the proviso to clause (vii) refers only to rural advances. :It says that there are no such words in the proviso which indicates that the proviso apply only to rural advances. We find no merit in the objection raised by the Revenue. Firstly, CBDT itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia) . Thus, the proviso to clause (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the Circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if :he amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii) 3. Accordingly, the above question is answered in the affirmative, i.e., in favour of the assessee(s) . For the above reasons, I agree that the appeals filed by the assessees stand allowed and the appeals filed by the Revenue stand dismissed with no order as to costs”

8.3. Keeping in view of the tribunal order in assessee’s own case and the decisions of Hon’ble Apex Court in the case of Catholics Syrian Bank Ltd. vs CIT (supra) we find no justification on the part of revenue to disallow the claim of assessee. Respectfully following the same, we set aside the orders of the revenue on this issue and direct AO to give relief of Rs.44,10,54,680/- in respect of bad debt written off pertaining to non-rural branches u/s 36(1)(vii) of the IT Act.

9. Ground No.5 raised by assessee being general in nature does not require any adjudication. Hence the same is dismissed.

10. In the result the appeal of assessee is allowed in part.

Order pronounced in the court on 16.05.2012.

                                                                Sd/-                     Sd/-

                                                   [George Mathan]        [C. D. Rao]

                                                   Judicial Member    Accountant Member

Date: 16.05.2012.

R.G.(.P.S.)

Copy of the order forwarded to:

1. Allahabad Bank, 2, Netaji Subhas Road, Kolkata-700001.

2 The D.C.I.T., Circle-6, Kolkata

3. The CIT-

4. The CIT(A)-VI, Kolkata

5. DR, Kolkata Benches, Kolkata

True Copy,

By order,

Deputy /Asst. Registrar, ITAT, Kolkata Benches