Syndicate Bank v. Dy. CIT - Taxpublishers.in

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The Tax PublishersITA Nos. 668 & 669/Bang/2010 & 708 & 709/Bang/2010 2013 TaxPub(DT) 2319 (Bang-Trib) : (2013) 026 ITR (Trib) 0501 Syndicate Bank v. Dy. CIT INCOME TAX ACT, 1961 --Appeal [Tribunal]--Additional groundIssue concluded in assessment--As issue raised by revenue as additional ground was already concluded in assessment, the same could not be admitted. Income Tax Act, 1961 Section 254(1) INCOME TAX ACT, 1961 --Business deduction under section 36(1)(viia)--Bad debtsProvision for bad and doubtful debts --Assessee was a banking company. In its return for assessmentyear 2006-07, it claimed deduction of a sum of Rs. 1,70,6286,285 on account of debts written off under section 36(1)(vii), out of which a sum of Rs. 57,66,26,877 was bad debts written off by non-rural branches out of income, and a sum of Rs. 1,12,96,59,608 was out of provision. Assessee also claimed deduction of a sum of Rs. 5,03,49,,00,000 on account of provision for bad and doubtful debts in respect of rural advances, under section 36(1)(viia) comprised of two amount (i) 10 per cent average rural advances Rs. 4,65,68,72,477 and (ii) 7.5 per cent of gross total income (7.5% of 50,40,03,66,972), i.e., a sum of Rs. 37,80,27,523. Since the provision made for bad and doubful debts in respect of rural advances was created by debiting to P&L account of only a sum of Rs. 2,95,55,682 whereas the claim for deduction actually made under section 36(1)(viia) was a sum of Rs. 5,03,49,00,000, the AO disallowed the difference of Rs. 2,07,93,45,318. The AO also disallowed the sum of Rs. 2,95,55,54,682 out of Rs. 5,03,49,00,000 claimed as deduction under section 36(1)(viia) on ground that 10 per cent of average aggregate rural advances could be created as provision for each year provided there was no brought forward balance as on first day of previous year in the provision for bad and doubtful debts account and since even if bad debts written off of Rs. 1,79,21,88,992 was reduced, the balance in the provision for bad and doubtful debts account was still Rs. 7,33,35,58, 117 which was more that 10 per cent of average aggregate rural advances. Thus, AO held that deduction on the basis of new provision of Rs. 2,95,55,682 could not be allowed. AO, however, allowed a sum of Rs. 37,80,37,523 being deduction of 7.5 per cent of the total income as contemplated by section 36(1)(viia). *Held:* Not proper. Provision for bad and doubtful debts account was not relevant while deduction under section 36(1)(vii) in respect of bad debts of non-rural branches written off. Deduction on account of provision for bad and doubtful debts in respect of NPAs contemplated by first proviso to section 36(1)(viia) is based on classification of NPAs in accordance with prudential norm of RBI. AO did not dispute classification as made by assessee in its books of account. The deduction under first proviso to section 36(1)(viia)(a) is in addition to what is allowed under section 36(1)(viia)(a) and the assessee is given the option to claim deduction under the proviso under section 36(1)(vii). Therefore, contention of revenue that total income should be restricted to total income of rural branches or to amount as prescribed under RBI prudential norms was contrary to provision of the Act. Thus, disallowance to the extent of 2,07,83,45,338 being difference between the sum claimed as deduction as provision for bad and doubtful debts in respect of rural advances and sum debited to P&L Account was to be restored. The section clearly lays down that deduction of 7.5 per cent of the total income has to be allowed as deduction. The plea of the Departmental representative to restrict the allowance to 7.5 per cent of the total income of the rural branches is contrary to the provisions of the Act. The deduction on account of provision for bad and doubtful debts in respect of non-performing assets contemplated by the first proviso to section 36(1) (viia)(a) is based on classification of non-performing assets as per the prudential norms of the Reserve Bank of India. The AO did not dispute the classification as made by the assessee in its books of account. The deduction under the first proviso to section 36(1)(viia)(a) is in addition to what is allowed under section 36(1) (viia) (a) and the assessee is given the option to claim deduction under the proviso. The above being the purport of the provisions, there is no basis for additional ground No. (iii) sought to be raised by the revenue. Ground No. (iii) is, therefore, held to be unsustainable on merits and does not even require an admission for adjudication as it does not arise out of the order of the AO or the CIT(A). [Para 49] The AO disallowed the claim for deduction on account of bad debts written off in respect of non-rural debts. The AO did not allow the claim of the assessee by applying the proviso to section 36(1) (vii) which lays down that bad debts written off should first be adjusted towards provision created under section 36(1) (viia) and only if the bad debts written off is more than the credit balance in the provision for bad and doubtful debts account can deduction under section 36(1)(vii) be allowed to the extent of such excess. He thereafter found that the credit balance in the provision for bad and doubtful debts as on 1-4-2005 balance brought forward was Rs. 9,12,57,47,169 and the provision created during the year as on 31-3-2006 provision for NPA's Rs. 2,95,55,54,682 making a total credit balance of Rs. 12,08,13,01,851. He found that the assessee had claimed bad debts written off of rural advances of Rs. 8,59,02,507 and even if that is adjusted, still there would be sufficient credit balance in the provision for bad and doubtful debts account which would be in excess of the sum of Rs. 1,70,62,86,485 claimed as deduction under section 36(1)(vii) by the assessee. The AO, therefore, held that the deduction under section 36(1) (vii) claimed by the assessee cannot be allowed. The CIT(A) deleted the addition holding that provision for bad and doubtful debts account is not relevant when bad debts are written off in respect of non-rural debts. With the decision of the Supreme Court in the case of Catholic Syrian Bank Ltd. (2012) 343 ITR 270 (SC), the order of the CIT(A) on this issue has to be upheld. The Departmental representative, however, sought to put forth a plea with regard to bifurcation of provision for bad and doubtful debts account into one in relation to rural branches and the other relating to non-rural branches. [Para 50] The AO disallowed the entire claim for deduction of Rs. 5,03,49,00,000 on the following grounds. (a) The provision for bad and doubtful debts in respect of rural advances was created by debit to the profit and loss account of only a sum of Rs. 2,95,55,54,682 whereas the claim for deduction actually made under section 36(1) (viia) was a sum of Rs. 5,03,49,00,000. The AO was of the view that as laid down by the Punjab and Haryana High Court in the case of State Bank of Patiala v. CIT (2005) 272 ITR 54 (P&H), claim for deduction under section 36(1)(viia) cannot be greater than the amount debited to the profit and loss account as provision. The AO, therefore, proposed to disallow a sum of Rs. 2,07,93,45,318 (difference between Rs. 5,03,49,00,000 and Rs. 2,95,55,54,682). (b) Apart from the above the AO also disallowed the sum of Rs. 2,95,55,54,682 out of Rs. 5,03,49,00,000 claimed as deduction under section 36(1) (viia). The reasons given for disallowing claim for deduction of Rs. 2,95,55,54,682 under section 36(1)(viia) by the AO was that there was already credit balance in the provision for bad and doubtful debts as on 1-4-2005 balance brought forward was Rs. 9,12,57,47,169. According to the AO, 10 per cent, of aggregate average rural advances can be created as provision each year provided there is no brought forward balance as on the first day of the previous year in the provision for bad and doubtful debts account. 10 per cent of the aggregate average rural advances as admitted by the assessee as per revised Census of 2001 was Rs. 352.53 crores. According to the AO, even if bad debts written off of Rs. 1,79,21,88,992 is reduced, still the balance in the provision for bad and doubtful debts account was Rs. 7,33,35,58,177. Since the balance so available in the provision for bad and doubtful debts account was more than 10 per cent, of aggregate average rural advances, the AO held that deduction on the basis of new provision of Rs. 2,95,55,54,682 cannot be allowed. In this regard, the AO referred to the contention of the assessee which was to the effect that in each year the assessee can create 10 per cent, of aggregate average rural advartces and concluded,that the expression 'not exceeding ten per cent of the aggregate average advances' used in section 36(1)(viia) cannot mean that provision can be created each year irrespective of the available balance in the provision for bad and doubtful debts 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 provision for bad and doubtful debts which according to the AO would not be the intention of the Legislature. The AO, thus, refused to allow the claim of the assessee for deduction of 10 per cent, of aggregate average rural advances. The CIT(A) deleted the addition made by the AO by following the decision of the Tribunal in the assessee's own case reported in 78 ITD 103 wherein it was held that irrespective of the debit to the profit and loss account on account of provision for bad and doubtful debts (PBDD), an assessee is entitled to 10 per cent, of the aggregate average rural advances as deduction under section 36(1)(viia). [Para 52] SUBSCRIBE FOR FULL CONTENT

The Tax PublishersITA Nos. 668 & 669/Bang/2010 & 708 & 709/Bang/2010
2013 TaxPub(DT) 2319 (Bang-Trib) : (2013) 026 ITR (Trib) 0501

Syndicate Bank v. Dy. CIT

INCOME TAX ACT, 1961

--Appeal [Tribunal]--Additional groundIssue concluded in assessment--As issue raised by revenue as additional ground was already concluded in assessment, the same could not be admitted.

Income Tax Act, 1961 Section 254(1)

INCOME TAX ACT, 1961

--Business deduction under section 36(1)(viia)--Bad debtsProvision for bad and doubtful debts --Assessee was a banking company. In its return for assessmentyear 2006-07, it claimed deduction of a sum of Rs. 1,70,6286,285 on account of debts written off under section 36(1)(vii), out of which a sum of Rs. 57,66,26,877 was bad debts written off by non-rural branches out of income, and a sum of Rs. 1,12,96,59,608 was out of provision. Assessee also claimed deduction of a sum of Rs. 5,03,49,,00,000 on account of provision for bad and doubtful debts in respect of rural advances, under section 36(1)(viia) comprised of two amount (i) 10 per cent average rural advances Rs. 4,65,68,72,477 and (ii) 7.5 per cent of gross total income (7.5% of 50,40,03,66,972), i.e., a sum of Rs. 37,80,27,523. Since the provision made for bad and doubful debts in respect of rural advances was created by debiting to P&L account of only a sum of Rs. 2,95,55,682 whereas the claim for deduction actually made under section 36(1)(viia) was a sum of Rs. 5,03,49,00,000, the AO disallowed the difference of Rs. 2,07,93,45,318. The AO also disallowed the sum of Rs. 2,95,55,54,682 out of Rs. 5,03,49,00,000 claimed as deduction under section 36(1)(viia) on ground that 10 per cent of average aggregate rural advances could be created as provision for each year provided there was no brought forward balance as on first day of previous year in the provision for bad and doubtful debts account and since even if bad debts written off of Rs. 1,79,21,88,992 was reduced, the balance in the provision for bad and doubtful debts account was still Rs. 7,33,35,58, 117 which was more that 10 per cent of average aggregate rural advances. Thus, AO held that deduction on the basis of new provision of Rs. 2,95,55,682 could not be allowed. AO, however, allowed a sum of Rs. 37,80,37,523 being deduction of 7.5 per cent of the total income as contemplated by section 36(1)(viia). Held: Not proper. Provision for bad and doubtful debts account was not relevant while deduction under section 36(1)(vii) in respect of bad debts of non-rural branches written off. Deduction on account of provision for bad and doubtful debts in respect of NPAs contemplated by first proviso to section 36(1)(viia) is based on classification of NPAs in accordance with prudential norm of RBI. AO did not dispute classification as made by assessee in its books of account. The deduction under first proviso to section 36(1)(viia)(a) is in addition to what is allowed under section 36(1)(viia)(a) and the assessee is given the option to claim deduction under the proviso under section 36(1)(vii). Therefore, contention of revenue that total income should be restricted to total income of rural branches or to amount as prescribed under RBI prudential norms was contrary to provision of the Act. Thus, disallowance to the extent of 2,07,83,45,338 being difference between the sum claimed as deduction as provision for bad and doubtful debts in respect of rural advances and sum debited to P&L Account was to be restored.

The section clearly lays down that deduction of 7.5 per cent of the total income has to be allowed as deduction. The plea of the Departmental representative to restrict the allowance to 7.5 per cent of the total income of the rural branches is contrary to the provisions of the Act. The deduction on account of provision for bad and doubtful debts in respect of non-performing assets contemplated by the first proviso to section 36(1) (viia)(a) is based on classification of non-performing assets as per the prudential norms of the Reserve Bank of India. The AO did not dispute the classification as made by the assessee in its books of account. The deduction under the first proviso to section 36(1)(viia)(a) is in addition to what is allowed under section 36(1) (viia) (a) and the assessee is given the option to claim deduction under the proviso. The above being the purport of the provisions, there is no basis for additional ground No. (iii) sought to be raised by the revenue. Ground No. (iii) is, therefore, held to be unsustainable on merits and does not even require an admission for adjudication as it does not arise out of the order of the AO or the CIT(A). [Para 49] The AO disallowed the claim for deduction on account of bad debts written off in respect of non-rural debts. The AO did not allow the claim of the assessee by applying the proviso to section 36(1) (vii) which lays down that bad debts written off should first be adjusted towards provision created under section 36(1) (viia) and only if the bad debts written off is more than the credit balance in the provision for bad and doubtful debts account can deduction under section 36(1)(vii) be allowed to the extent of such excess. He thereafter found that the credit balance in the provision for bad and doubtful debts as on 1-4-2005 balance brought forward was Rs. 9,12,57,47,169 and the provision created during the year as on 31-3-2006 provision for NPA's Rs. 2,95,55,54,682 making a total credit balance of Rs. 12,08,13,01,851. He found that the assessee had claimed bad debts written off of rural advances of Rs. 8,59,02,507 and even if that is adjusted, still there would be sufficient credit balance in the provision for bad and doubtful debts account which would be in excess of the sum of Rs. 1,70,62,86,485 claimed as deduction under section 36(1)(vii) by the assessee. The AO, therefore, held that the deduction under section 36(1) (vii) claimed by the assessee cannot be allowed. The CIT(A) deleted the addition holding that provision for bad and doubtful debts account is not relevant when bad debts are written off in respect of non-rural debts. With the decision of the Supreme Court in the case of Catholic Syrian Bank Ltd. (2012) 343 ITR 270 (SC), the order of the CIT(A) on this issue has to be upheld. The Departmental representative, however, sought to put forth a plea with regard to bifurcation of provision for bad and doubtful debts account into one in relation to rural branches and the other relating to non-rural branches. [Para 50] The AO disallowed the entire claim for deduction of Rs. 5,03,49,00,000 on the following grounds. (a) The provision for bad and doubtful debts in respect of rural advances was created by debit to the profit and loss account of only a sum of Rs. 2,95,55,54,682 whereas the claim for deduction actually made under section 36(1) (viia) was a sum of Rs. 5,03,49,00,000. The AO was of the view that as laid down by the Punjab and Haryana High Court in the case of State Bank of Patiala v. CIT (2005) 272 ITR 54 (P&H), claim for deduction under section 36(1)(viia) cannot be greater than the amount debited to the profit and loss account as provision. The AO, therefore, proposed to disallow a sum of Rs. 2,07,93,45,318 (difference between Rs. 5,03,49,00,000 and Rs. 2,95,55,54,682). (b) Apart from the above the AO also disallowed the sum of Rs. 2,95,55,54,682 out of Rs. 5,03,49,00,000 claimed as deduction under section 36(1) (viia). The reasons given for disallowing claim for deduction of Rs. 2,95,55,54,682 under section 36(1)(viia) by the AO was that there was already credit balance in the provision for bad and doubtful debts as on 1-4-2005 balance brought forward was Rs. 9,12,57,47,169. According to the AO, 10 per cent, of aggregate average rural advances can be created as provision each year provided there is no brought forward balance as on the first day of the previous year in the provision for bad and doubtful debts account. 10 per cent of the aggregate average rural advances as admitted by the assessee as per revised Census of 2001 was Rs. 352.53 crores. According to the AO, even if bad debts written off of Rs. 1,79,21,88,992 is reduced, still the balance in the provision for bad and doubtful debts account was Rs. 7,33,35,58,177. Since the balance so available in the provision for bad and doubtful debts account was more than 10 per cent, of aggregate average rural advances, the AO held that deduction on the basis of new provision of Rs. 2,95,55,54,682 cannot be allowed. In this regard, the AO referred to the contention of the assessee which was to the effect that in each year the assessee can create 10 per cent, of aggregate average rural advartces and concluded,that the expression 'not exceeding ten per cent of the aggregate average advances' used in section 36(1)(viia) cannot mean that provision can be created each year irrespective of the available balance in the provision for bad and doubtful debts 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 provision for bad and doubtful debts which according to the AO would not be the intention of the Legislature. The AO, thus, refused to allow the claim of the assessee for deduction of 10 per cent, of aggregate average rural advances. The CIT(A) deleted the addition made by the AO by following the decision of the Tribunal in the assessee's own case reported in 78 ITD 103 wherein it was held that irrespective of the debit to the profit and loss account on account of provision for bad and doubtful debts (PBDD), an assessee is entitled to 10 per cent, of the aggregate average rural advances as deduction under section 36(1)(viia). [Para 52]