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Income Tax Appellate Tribunal, CUTTACK BENCH, CUTTACK
Before: SHRI CHANDRA MOHAN GARG & LAXMI PRASAD SAHU
IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK
BEFORE SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER AND LAXMI PRASAD SAHU, ACCOUNTANT MEMBER
ITA No.184/CTK/2019 Assessment Year : 2014-15
Cuttack Central Co-operative Vs. Pr. CIT, Cuttack Bank Ltd., Nimchouri, Chandini Chowk, Cuttack PAN/GIR No.AAOPD 1277 G (Appellant) .. ( Respondent)
Assessee by : Shri N.R.Biswal, AR Revenue by : Shri M.K.Gautam, CIT, DR
Date of final Hearing : 21/10/2020 Date of Pronouncement : 22 /1/2021
O R D E R Per C.M.Garg,JM This is an appeal filed by the assessee against the order passed
under section 263 of the Income tax Act, (in short ‘The Act’) of the Pr.
CIT(A), Cuttack dated 29.3.2019 for the assessment year 2014-15.
In the grounds of appeal, the only grievance of the assessee is that
the ld Pr. CIT, Cuttack is not justified in invoking section 263 of the Act
considering the order passed under section 143(3) is erroneous and
prejudicial to the interest of the revenue, in as much as the Assessing
Officer has not enquired about the loss on OTS A/c claimed by the assessee
during the relevant assessment year.
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The parties are ad idem that this is the only surviving dispute inter
se. The relevant facts of the case are that the assessee is a
co-operative bank. Subsequent to finalization of assessment under
section 143(3) of the I.T.Act (in short ‘the Act’) on 9.12.2016, the
ld Pr. Commissioner of Income tax, Cuttack (PCIT) sought to
subject the assessment revision. In the impugned revisionary
order, ld PCIT states that on verification of profit and loss account
for the year ending 31st March, 2014, it is found that the assessee
had debited Rs.17,03,22,962/- towards “ loss of OTS A/c”. Further,
On verification of balance sheet for the previous year, it is found
that the assessee had credit balance of Rs.38,43,38,064/- as on
31.3.2013 as well as on 31.3.2014 in its “provision for bad &
doubtful debts’ account. From the above facts, ld PCIT observed
that the claim of assessee bank towards “loss on OTS” or “claim of
deduction of bad debt” neither exceeded the credit balance in the
“provision for bad & doubtful account nor the said amount was
debited to the provision for bad & doubtful debt account. Hence,
the claim of the assessee was required to be disallowed and added
back to the total income of the assessee in the light of provisions
of section 36(1)(vii) and its first proviso together with its
Explanation-2 read with sections 36(1)(via) and 36(2) of the
Income tax Act. Ld PCIT held that the AO completed the
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assessment by allowing deduction Rs.17,03,22,962/- u/s.36(1)(vii)
without referring to its first proviso and applying the provisions of
section 36(1)(via) read with section 36(2), had rendered the
assessment erroneous and prejudicial to the interest of revenue.
Accordingly, the ld PCIT show caused the assessee by issuing
notice u/s.263(1) of the Act calling upon to explain as to why the
assessment order be not cancelled/modified. The submission of
the assessee is that “loss on OTS is nothing but the claim of
deduction of bad debt during the previous year and same is
allowable as a deduction u/s.36(1)(vii) of the Act. It was
submitted that the Government of India issued a revival, reform
and restructuring packages for handloom sector and, accordingly,
OTS for the weaver co-operative societies coming under the
assessee co-operative bank has been declared during the financial
year 2013-14. The salient features of the packages are :
recapitalization of all viable and potentially viable apex and
primary handloom weavers co-operative societies under a “Top
Down” approach as on 31.3.2010 under a sharing arrangements
between Government of India, State Government in the ratio of
75:25 for Apex Society and 80:20 for primary society (90:10) for
special category states) and financing banks who will share 75%
of overdue interest and full penal interest charged, if any.
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Committed receivables to the societies from the Central and State
Governments will have to be released separately unfront.
Accordingly, the said scheme is implemented during the F.Y. 2013-
14 by the assessee co-operative bank. As per the scheme
financing banks will share 75% of overdue interest of full penal
interest charged in the weavers co-operative societies till
31.3.2010. Therefore, the total waived amount of
Rs.17,03,22,962.00 is debited to “loss on OTS account” and
charged to P&L account for the F.Y. 2013-14. It was submitted
that the Loss on OTS pertains to the loss related to the interest
income credited to P&L account during the current year. Since the
original accounts were NPA, interests were not charged since the
date of NPA. Only to avail the scheme, the full interest is charged
to the accounts and credited to P&L account. The interest amount
which is waived is debited to P&L account in the name of “Loss on
OTS”. The above explanation of the assessee was not found
acceptable to ld PCIT. He thus set aside the assessment order
with a direction to the AO to modify his assessment order dated
9.12.2016 by making disallowance of Rs.17,03,22,962/- claimed
under the head “loss on OTS” in the light of provisions of section
36(1)(vii), its first proviso and its Explanation -2 read with section
36(1)(via) and 36(2) of the Act and keeping in view the ratio of
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the decision of Catholic Syrian Bank Ltd vs CIT (2012) 343 ITR 270
(SC).
Hence, the assessee is in appeal before the Tribunal.
Ld A.R. of the assessee submitted that the Assessing Officer show
caused the assessee by way of note sheet dated 16.11.2016 on six points
asking the assessee to furnish the details under section 142(1) of the Act
including allowability of claim of loss on One time settlement (OTS), which
was replied by the assessee vide written submission dated 24.11.2016,
wherein, it was explained that the assessee has claimed loss on OTS as the
assessee is a co-operating bank and the principal business to take deposit
and lending i.e. extending loans. Ld A.R further submitted that as per
direction of Reserve Bank of India (RBI), the bank has taken up one time
settlement scheme for recovery of bad loans, which are not recoverable for
couple of years & the bank has shown the same as Non-performing assets
(NPA). Therefore, against the said loans, the bank able to recover some
money and the balance amount is written off & charged to profit and loss
account as loss on OTS. Ld A.R further explained that loss on OTS is
nothing but the bad debt & written off during the year & claimed as
deduction u/s.36(1)(vii) of the Act. Ld A.R. further submitted that during
assessment proceedings, the AO raised query, which was properly replied
by the assessee which was not found unacceptable by the AO and accepted
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without making any addition in this regard and allowing the claim of the
assessee regarding loss on OTS.
Ld A.R. submitted that the Pr. CIT issued notice u/s.263 of the Act on
two issues viz; loss on OTS and provision for bad and doubtful debts but
while passing the order u/s.263 of the Act, Ld PCIT as per deliberation in
paras 10 & 11 dropped the proceedings on the issue of provisions for bad
and doubtful debts accounts but Pr. CIT by appreciating wrong facts held
that the assessment order is erroneous and prejudicial to the interest of the
revenue and directed the AO to modify his assessment order dated
9.12.2016 by making disallowance claimed under the head loss on OTS in
the light of provisions of section 36(1)(vii), its first proviso and its
Explanation -2 read with section 36(1)(viia) and 36(2) of the Act.
Ld A.R. placed vehement reliance on the judgment of Hon’ble
Supreme Court in the case of Catholic Syrian Bank Ltd vs CIT, 343
ITR 270(SC) and the decision of ITAT Delhi Bench in the case of
Kangra Co-operative Bank vs JCIT (ITA No.840/Del/2003) order
dated 16.10.2015. Ld A.R. submitted that in the concluding
paragraph 40, Ld. PCIT has placed reliance on the judgment of
Hon’ble Supreme Court in the case of Catholic Syrian Bank Ltd
(supra) but the proposition laid down by Hon’ble Apex Court in this
case favours the stand of the assessee and reliance placed by Ld
PCIT on this judgment is mis-placed and mis-directed.
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Ld A.R. submitted that some claim was made by the
assessee and accepted by the department, therefore, same cannot
be readjudicated or doubted in any manner in subsequent
assessment year. Explaining the mode of accounting of claim of
the assessee, ld A.R. submitted that in the earlier years also, when
the interest was charged, same was accounted as income by
passing following entry:
Interest receivable A/c. ….. Dr To interest a/c. And when the main branch write off some amount, then the entry is passed as follows: Loss on OTS …….. Dr To interest receivable A/c.” Therefore, the loss on OTS is nothing but the bad debt & written
off during the year and claimed as deduction u/s.36(1)(vii).
Ld A.R. further submitted that when the assessee is crediting interest
receivable to the profit and loss account and the interest amount is not
being received by the assessee, as the debt become bad and amount of
interest was waived off during OTS then the claim of loss on OTS is nothing
but reversal of interest credited by the assessee on the same loan account
during earlier period. Therefore, the claim of the assessee is very much
available u/s.36(1)(vii) of the Act. Ld A.R. strenuously contended that Ld
PCIT has not appreciated and considered the claim of the assessee in right
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perspective by considering the relevant facts and circumstances on the
issue but the only point that the balance sheet for previous year 2013-14
relevant to assessment year 2014-15 revealed that the assessee bank had
credited the amount on 31.3.2013 as well as on 31.3.2014 as “provision of
bad and doubtful debts account” Ld A.R. further submitted that the Pr. CIT
wrongly observed that the claim of the assessee bank towards “loss on
OTS” or “claim of deduction of bad debt” neither exceeded the credit
balance in the “provision for bad and doubtful debts account” nor the said
amount was debited to the “provisions for bad and doubtful debts account”,
hence the claim was required to be disallowed and added back to the total
income of the assessee. Ld A.R. submitted that the provisions of section
36(1)(vii) and Section 36(1)(viia) are separate, distinct and independent
from each other and cannot be pressed into service in the identical facts
and circumstances and this proposition has been rendered by Hon’ble
Supreme Court in the case of Catholic Syrian Bank Ltd (supra).
Further, drawing out attention towards para 6 of the order of ITAT
Delhi in the case of Kangra Co-operative Bank(supra), ld A.R.
submitted that the Tribunal after considering the principles laid
down by Hon’ble Supreme Court in the case of Catholic Syrian
Bank Ltd (supra) held that the provisions of section 36(1(vii) and
36(1)(viia) are separate, distinct and independent from each other.
Ld A.R. further submitted that provisions of section 36(1)(vii)
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governing the allowance of bad debts are not controlled or limited
by the provisions of section 36(1)(viia) but once the bad debt is
actually written off as irrecoverable and the requirements of the
provisions of section 36(2) of the Act are satisfied then it will not
be permissible to deny such deduction on the apprehension of the
double deduction under the provisions of section 36(1)(viia) and
the proviso to section 36(1)(vii) of the Act. Ld A.R. submitted that
in view of above facts and circumstances of the case, Ld PCIT was
not correct and justified in holding the assessment order as
erroneous and prejudicial to the interest of the revenue.
Therefore, the notice u/s.263 of the Act, revisionary order under
section 263 of the Act and all consequent proceedings and orders
may kindly be quashed.
Replying to above, ld CIT DR drew our attention towards
page 2 para 5 of the revisionary order u/s.263 of the Act and
submitted that the balance sheet of the assessee bank as on
31.3.2013 and 31.3.2014 revealed that the assessee has made
provisions for bad and doubtful debts account. He further
submitted that the claim of the assessee bank towards loss on OTS
neither exceeded the credit balance in the “provision for bad and doubtful
debts account” nor the said amount was debited to the “provisions for bad
and doubtful debts account”, hence the claim was required to be disallowed
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and added back to the total income of the assessee in the light of
provisions of section 36(1)(vii) and its first proviso together with
its Explanation-2 read with sections 36(1)(via) and 36(2) of the
Income tax Act.
Ld CIT DR further submitted that this is a case of inadequate
and insufficient enquiry as the AO simply show caused the
assessee on six points including the issue of loss on OTS and
simply taken on record the reply of the assessee without any
deliberation or adjudication in the assessment order. Therefore,
Ld PCIT was right in holding the assessment order as erroneous
and prejudicial to the interest of the revenue. Ld CIT DR placed
reliance on various decisions including the decision of Hon’ble
Supreme Court in the case of Malbar Industrial Co. Ltd vs CIT, 243
ITR 83 (SC) and the decision of Hon’ble High Court of Calcutta in
the case of Dawajee Dadabhoy & Co vs S.P.Jain, 31 ITR 872 (Cal)
and the decision of Hon’ble Allahabad High Court in the case of
CIT vs Bhawagan Das, 272 ITR367 (All). Ld CIT DR also submitted
that as per para 15 at page 9 of the impugned order, the loss on
OTS actually not a loss for the assessee bank because after write
off in its books for assessment year 2013-14 and submitted the
utilization certificate before NABARD through OSCB, the bank has
been compensated by Government of India through NABARD by
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the same amount in the very next year and these facts have not
been submitted before the AO during assessment proceedings and
only during revisionary proceedings before Ld PCIT, therefore, it is
clear that the AO had not made any efforts to collect full facts
during assessment proceedings regarding claim of the assessee of
loss on OTS and the AO has failed to take cognizance of
Explanation 2 to Section 36(1)(vii), which was introduced w.e.f.
1.4.2014 by Finance Act, 2013, therefore, the assessment order
has to be held as erroneous and prejudicial to the interest of the
revenue.
Placing rejoinder to above submission of ld CIT DR, ld A.R.
submitted that as per said scheme implemented during the
financial year2013-14 by the assessee co-operative bank as per
the direction of NABARD, bank will allow share 75% of overdue
interest and remaining 25% was compensated by the Government
of India. He strenuously contended that the assessee bank has
not received any amount partly or fully during next financial year,
or any other subsequent financial period. Therefore, keeping in
view the enquiry conducted by the AO during the original
assessment proceedings on the issue of “loss on OTS account”, the
assessment order cannot be alleged as erroneous and prejudicial
to the interest of the revenue. Ld A.R. lastly submitted that the
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reliance placed by ld CIT DR on various decisions including the
decision of Hon’ble Supreme Court in the case of Malabar
Industrial Company Ltd vs CIT, 243 ITR 83 (SC) and Smt. Taradevi
Agarwal vs CIT, 88 ITR 323 (SC) and Hon’ble Gauhati High Court in
the case of CIT vs Jawahar Bhattacharjee, 20 taxmann.com 652 is
misplaced as the facts and circumstances of the present case are
clearly dissimilar and distinguishable and hence, not applicable in
favour of the revenue.
On careful consideration of the rival submissions, we note
that the Ld PCIT in paras 12 to 17 after considering the factual
matrix of the case held as under:
“12. Thus, we are left with only one issue i.e. the issue of claim of "loss on OTS" amounting to Rs. 17,03,22,962/-, which the assessee had claimed as a "bad debt" and the AO had implicitly allowed it u/s 36(1)(vii) of the Act, based on the written submissions filed by the assessee on 24.11.2016 and 07.12.2016 during assessment proceedings. Now let me refer to the contents of these two written submissions.
In its written submission filed before the AO on 07.11.2016, the assessee had made the following submission on the issue of "loss on OTS" :
"7. Loss on OTS: . We have claimed Rs. 17.03.22.962/- as loss on OTS. This is a Co-Operative Bank; The principal business is deposit & lending. As per the direction of the RBI, the bank has taken up a One Time Settlement Scheme (OTS) for recovery of BAD Loans, which are not recoverable for couple of years & the bank has shown the same as Non Performing Assets(NPA). Therefore against the said loan the bank was able to recover some money & the balance amount is written off & charged to P/L account as "Loss on OTS". Therefore "Loss on OTS" is nothing but the Bad Debt written off during the year & claimed as deduction u/s 36(1)(vii)."
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Thus before the AO, the assessee had claimed deduction for "Loss on OTS" under Section 36(1)(vii) of the Act, terming it as "bad debt" which were non recoverable However, in the present proceedings, the assessee's A.R., while agreeing that "loss on OTS" is nothing but bad debt written off during the year and allowable as a deduction u/s 36(1) (vii), has submitted further evidence on the nature of the claim. According to it, Hon'ble Union Finance Minister had announced a financial package for the Handloom Sector in the budget speech of 2011-12 with the aim of putting the handloom sector on an even keel which continues to be the second largest employment generator in rural areas after agriculture. Thereafter, the Ministry of Textiles, Government of India finalized the package, according to which, NABARD was appointed as the implementing agency for this "Modified Revival, Reform and Restructuring Packages for Handloom Sector and institutional credit component of integrated Handlooms Development Scheme (IHDS)". This scheme had a financial package of Rs.3000 crore for loan waiver of the handloom sector. The idea was that the banks, which had given loans to the weavers, would give a One Time Settlement (OTS) to these weavers and after giving such waiver, NABARD would release equal amount to these banks as a compensation. A copy of the letter No. 6/2/99/DCH/2013-14/DHDS dated 27th September, 2013 issued by the Government of India, Ministry of Textile, is enclosed herewith as Annexure-1.
l5. Thereafter, the implementing agency NABARD started implementing the scheme in all cooperative banks through the state level Apex cooperative banks. Accordingly, the present assessee, Cuttack Central Co-operative Bank Ltd. had written off Rs. 17,03,38,795/- as "loss on OTS" on 31.03.2014, by passing necessary entries in its books. However, it is clarified that this is actually not a loss for the assessee bank because after writing off this amount in its books for the F.Y. 2013-14 and submitting the Utilisation Certificate before NABARD through the Odisha State Cooperative Bank Ltd, the bank has been compensated y-the Government of India through NABARD by the same amount in the very next year. Thus, in reality there was no loss. These additional facts relating to its claim of "Loss on GTS" had not been submitted before the AO during the assessment proceedings, but have been submitted only during the present revisionary proceedings. In any case, facts remains that the AO had not made efforts to collect full facts during assessment proceedings. In other words, the AO had failed to examine the issue from all angles.
In the present proceedings, it has been submitted on behalf of the assessee that since the claim was allowed by the AO based on written submissions made before him on the issue, it has to be presumed that the AO had applied his mind to the issue in hand and had therefore allowed the claim being satisfied with its correctness as per law. But in para no 15, I have brought out the factual background leading to this claim of "Loss on OTS". The full facts had not been placed before the AO by the assessee. The AO also did not make any effort to get to the bottom of this claim,
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which was expected of him, before he allowed such a huge claim of loss of Rs. 17.03 Crores. This failure to conduct complete inquiry/verification of the claim made by the assessee, had made the assessment order erroneous and prejudicial to the interest of revenue.
There is another ground on which the assessment order need to be held erroneous and prejudicial to the interest of revenue. No doubt, the AO had asked for assessee's reply on allowability of claim of "loss on OTS" and the assessee had furnished some reply on the issue before him, although full facts were never presented. The real question is not whether the AO applied his mind to the issue, but the real issue is whether the decision of the AO to allow the claim u/s 36(1 )(vii) of the Act, is sustainable in law in the light of the facts of the case and other related provisions such as 1st proviso to S. 36(1)(vii), Section 36(1)(via) and Section 36(2) of the IT Act. On careful considerations of the entire factual matrix of the case, it has been found that the view taken by the AO in this regard is absolutely unsustainable in law. The reason for holding so is given hereunder.”
Thus, Pr. CIT in this case, firstly noted that the AO failed to conduct
complete enquiry/verification of the claim made by the assessee on “loss on
OTS account” and, therefore, this omission had made the assessment order
erroneous and prejudicial to the interest of the revenue. Secondly, Pr. CIT
has held that in the light of the facts of the case and other related
provisions i.e. first proviso to section 36(1)(vii), 36(1)(via) and section 36(2)
of the Act, the view taken by the AO absolutely unsustainable in law.
Thereafter, the Pr. CIT recorded the reasons for holding the assessment
order as absolutely unsustainable in paras 18 to 34 which read as follows:
“18. First of all, the AO had failed to take note that in the case of the present assessee, which is a bank, deduction claimed under the provisions of section 36(1)(vii) is further subject to the provisions of 36(1)(viia) and Section 36(2) of the IT Act. The AO failed to take note of this interplay between Section 36(1)(vii), Section 36(1)(viia) and Section 36(2) of the IT. Act, while completing assessment. Moreover, he also failed to take note of the amendment made by Finance Act, 2013, which was to take effect for the first time from A.Y. 2014-15 onwards, which is the year under consideration. The AO by oversight probably failed to take cognizance of
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Explanation -2 to Section 36(1)(vii) which was introduced w.e.f. 01.04.2014 by Finance Act, 2013. He also failed to take into consideration the CBDT's Circular No.3/2014 dated 24-1-2014 containing the "Explanatory Notes to the Provisions of Finance Act, 2013". The failure of the AO to consider the first proviso to s.36(1)(vii) and provisions of Section 36 (D(viia) and the newly inserted Explanation -2 to Section 36(1 )(vii), has made his order erroneous and prejudicial to the interest of Revenue. Now, I proceed to explain the issue in detail.
According to section 36(1)(vii), if the bad debt or and part thereof is written off as irrecoverable in the accounts of the assessee, the same is allowable as a deduction, subject to the provisions of S.36(2) of the Act. However, the first proviso to s.36(1)(vii) imposes one more restriction in the case of "banks" to whom provisions of S.36(1)(viia) applies. For better appreciation, Section 36(1)(vii) and its first proviso are reproduced hereunder: Other deduction Section 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 – (vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year:
Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.
On a conjoint reading of 1st proviso to S.36(1)(vii) and S.36(1)(viia) together, it would be clear that the only restriction in the case of assessees, falling in the category of scheduled banks/non-scheduled banks & co- operative banks, is that the amount of bad debts relating to rural debts should be first set-off against the "Provision for bad and doubtful debts" created u/s. 36(1)(viia), and if the bad debts so remaining thereafter are more than the provision created therefor, the excess portion can only be claimed u/s.36(1)(vii) as "bad debt".
This is the position of law, which emerges from a combined reading of Section 36(1)(vii) and its first proviso, Section 36(1)(viia) and Section 36(2)(v) of the Act. I propose to briefly discuss the above provisions for better clarity. Section 36(1)(vii), which allows deduction towards bad debts, is subject to the provisions of Section 36(2). The first proviso to Section 36(1)(vii), which was introduced w.e.f. 01.04.1985, further provides that in the case of scheduled banks/co-operative banks to which clause (viia) of Section 36(1) applies, the amount of deduction relating to such debt or part
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thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the "provision for bad and doubtful debts account" made under that clause. Section 36(1)(vii) and its proviso, and section 36(1)(viia)read as under.
Section 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 – (vii) subject to the provisions of sub-section (2), the amount of [any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year]:
[Provided that in the case of [an assessee] to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause:]
Explanation 1.—For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee;
Explanation 2—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii)of this subsection and clause (v)of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;
(viia) in respect of any provision for bad and doubtful debts made by— (a)a scheduled bank [not being a bank incorporated by or under the laws of a country outside India or a non-scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount not exceeding [seven and one-half per cent] of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner :
Thus proviso to S.36(1)(vii) says that in the case of banks, who are eligible for deduction u/s 36(1)(viia), deduction on account of "bad debts" relating to rural advances shall be first set off against credit balance in the "provisions for bad & doubtful debt account" and deduction would be allowed to the extent "bad debt" relating to "rural debt" exceeds the credit balance available in the "provision for bad & doubtful debt" created u/s 36(1)(viia) maintained by the assessee. In the present case, the assessee
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already had credit balance of Rs.38,43,38,064/- in its "provision for bad and doubtful account", as appearing in its balance sheet as on 31.03.2014. Therefore, the " Loss on OTS", which is in the nature of "rural bad debt" (Rs. 17,03,22,962/-) having been extended to weavers in rural areas, should have been first set off against the credit balance of Rs.38,43,38,064/- available under the "provision for bad and doubtful account". Since credit balance of Rs.38,43,38,064/- available under the "provision for bad and doubtful account", was more than the actual "rural bad debt" of Rs. 17,03,22,962/-, the AO should not have allowed any deduction u/s 36(1 )(vii) of the IT Act.
This position of law has been endorsed in the case of Southern Technologies Limited v JCIT (2010) 320 ITR 577(SC). At para 43 of that order, it has been held as under.
"Even section 36(1)(vii) has been amended to provide that in the case of a bank to which section 36(1)(viia) applies, the amount of bad and doubtful debt shall be debited to the provision for bad and doubtful debt account and that the deduction shall be limited to the amount by which such debt exceeds the credit balance in the provision forbad and doubtful debt account."
Similarly, the Hon'ble Supreme Court, in the case of Catholic Syrian Bank Ltd. v CIT(2012) 343 ITR 270(SC), in a three-Judge bench decision, had a similar issue to decide. In that case, The assessee bank was having Rs. 15,01,29,990/- towards "provision for bad and doubtful debts" under section 36(1)(viia). It claimed an amount of Rs.12,65,95,770 as deduction on account of "bad debts". The Assessing Officer held that, since the bad debts did not exceed the credit balance in the provision for bad and doubtful debts account and also, the requirements of clause (v) of sub-section (2) of section 36 were not satisfied, the assessee's claim for deduction of bad debts written off from the account books was to be disallowed. However, before the Supreme Court, it was pleaded that while provision of Rs. 15,01,29,990 for bad and doubtful debts under section 36(1)(viia), related to "rural debts", the bad debts claimed at Rs.12,65,95,770, pertain to 'urban branches' only. The Supreme Court, adjudicating the claim of the assessee, held that while "bad debts" referred to in section 36(1 )(vii) refers to both "rural debts" and "urban debts", "provision for bad and doubtful debts" referred to in section 36(1)(viia) refers to only "rural debts". Thereafter, it went on to hold that under the proviso to Section 36(1)(vii) read with Section 36(2) and 36 (1)(viia), while "rural debts" are eligible for deduction both under section 36(1 )(vii) and 36 (1)(viia), subject to the proviso to section 36(1 )(vli), "urban debts" are eligible for deduction only u/s 36(1 )(vii) of the Act. This would be evident from the observations made by the Hon'ble Supreme Court in para 27, 28 and 30 of its order. The same is extracted hereunder:
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"As per this proviso to clause (vii), the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed under clause (viia ). The proviso, by and large, protects the interests of the revenue. In case of rural advances which are covered by clause (viia), there would be no such double deduction. The proviso, in its terms, limits its application to the case of a bank to which clause (viia ) applies. Indisputably, clause (viia) applies only to rural advances. [Para 27]
As far as foreign banks are concerned, under section 36(1) (viia )(b) and as far as public financial institutions or State financial corporations or State industrial investment corporations are concerned, under section 36(1)(viia)(c), they do not have rural branches. Thus, it can safely be inferred that the proviso is self indicative that its application is to bad debts arising out of rural advances. [Para 28]
The scope of the proviso to clause (vii) of section 36(1) 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) and only shows that a double benefit in respect of the same debt is not given to a scheduled bank. A scheduled bank may have both urban and rural branches. It may give advances from both branches with separate provision accounts for each. [Para 30]
In the instant case, the assessee-bank is maintaining two separate accounts, one being a provision for bad and doubtful debts other than provisions for bad debts in rural branches and another provision account for bad debts in rural branches for which separate accounts are maintained."
Finally, at para 41 of Catholic Syrian Bank Ltd. v CIT(2012) 343 ITP^ 270(SC), the Supreme Court has held as under:
"....The bad debts written off, 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 the 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....." (Emphasis mine)
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In para 45 of the same judgement, Justice S.H. Kapadia, in his concurring judgement, has also clarified the scope and ambit of Section 36(1)(vii), its proviso, Section 36(2)(v) and Section 36(1)(viia), in the following words.
".....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 the 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)...." 27. In fact, in its written submission dated 12.02.2019, the A.R. of the assessee has also relied on the same decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. v CIT(2012) 343 ITR 270(SC) in favour of its claim that "bad debt" of Rs. 17,03,22,962/- (OTS Loss) should be allowed. However, on applying the facts of this case to the ratio of the decision of Catholic Syrian Bank Ltd. v CIT(2012) 343 ITR 270(SC), I find that the Supreme Court's decision actually does not help the cause of the assessee. Rather on the peculiar facts of this case, it goes in favour of revenue.
How it is so, I proceed to discuss hereafter: It is no doubt true that in the above case, the Supreme Court has held that in addition to deduction for provision for bad and doubtful debts u/s 36(1 )(viia), banks are also entitled to benefit of write-off of irrecoverable debts u/s 36(1 )(vii) of the Act. However, there is a caveat. In this decision, the Supreme Court also held that this double benefit was restricted only to "urban debts", but not to other debts, including "rural debts". The Hon'ble Supreme Court, while reversing the decision of Kerala High Court, held that "bad debt" referred to in section 36(1)(vii) refers to both "rural debts" and "urban debts", while "provision for bad and doubtful debts" referred to in section 36(1)(viia), refers to only "rural debts". According to the Supreme Court, 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 the 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, according to the Supreme Court, 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).
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In the present assessee's case, the "bad debts" of Rs.17,03,22,962/- which have been written off during the year, were in the nature of “rural debts” as it had been extended to weavers in rural areas. Admittedly, in this case, the assessee had a credit balance of Rs.38,43,38,064/- in its "provision for bad and doubtful account" and therefore "bad debts" of Rs. 17,03,22,962/-, pertained to "rural debts" could not have been allowed by the AO either under the provisions of law or even according to the ratio of the decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. v CIT(2012) 343 ITR 270(SC). Hence the assessment order passed in this case has to be held erroneous and prejudicial to the interest of revenue within the meaning of section 263 of the I.T. Act.
Moreover, we have to keep another issue in mind. Since the above decision of the Supreme Court in the case of Catholic Syrian Bank Ltd. v CIT(2012) 343 ITR 270(SC) rendered in the year 2012, literally allowed double deduction to the banks - both u/s 36(1 )(vii) and 36(1)(viia) in respect of "urban debts" - the law has been amended by the Finance Act, 2013 w.e.f. 01.04.2014 (from A.Y.2014-15 onwards) to overcome the above decision. An Explanation -2 has been inserted below section 36(1)(vii) by the Finance Act, 2013 w.e.f. 01.04.2014, which reads as under: Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii)of this sub-section and clause (v)of subsection (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;
In Catholic Syrian Bank's case cited supra, the assessee-bank had claimed that it was maintaining two separate accounts, (i) one being a provision for bad and doubtful debts in urban branches and (ii) another provision account for bad debts in rural branches. After the above amendment by insertion of Explanation -2 u/s 36(1)(vii) w.e.f. A.Y.2014-15 onwards, the banks are allowed only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches. Since the assessment year under consideration in the present revision proceedings relate to A.Y.2014-15, the above Explanation-2 would also apply to this case.
The true import of this amendment by way of insertion of Explanation-2 below section 36(1)(vii) has been explained in paragraph No. 11 of CBDT's Circular No. 03/2014 dated 24.01.2014. The same is reproduced hereunder:
FINANCE ACT, 2013 - EXPLANATORY NOTES TO THE PROVISIONS OF FINANCE ACT, 2013
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CIRCULAR NO.3/2014[F.NO.142/24/2013-TPL], DATED 24-1-2014
Clarification for amount to be eligible for deduction as bad debts in case of banks
11.1 Under the provisions of section 36(1)(viia) of the Income-tax Act, before amendment by the Act, in computing the business income of certain banks and financial institutions, deduction is allowable in respect of any provision for bad and doubtful debts made by such entities subject to certain limits specified therein. The limit specified under section 36(1)(viia)(a) of the Income-tax Act restricts the claim of deduction for provision for bad and doubtful debts for certain banks (not incorporated outside India) and certain cooperative banks to 7.5 percent of gross total income (before deduction under this clause) of such banks and 10 percent of the aggregate average advance made by the rural branches of such banks. This limit is 5 percent of gross total income (before deduction under this clause) under sections 36(1)(viia)(b) and 36(1)(viia)(c) for a bank incorporated outside India and certain financial institutions.
11.2 Provisions of clause (vii) of sub-section (1) of section 36 of the Income-tax Act provides for deduction for bad debt actually written off as irrecoverable in the books of account of the assessee. The proviso to this clause provides that for an assessee, to which section 36(1) (viia) of the Income-tax Act applies, deduction under said clause (vii) shall be limited to the amount by which the bad debt written off exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1) (viia) of the said Act.
11.3 The provisions of section 36(1)(vii) of the Income-tax Act are subject to the provisions of section 36(2) of the said Act. The clause (v) of sub-section (2) of section 36 of the Income-tax Act provides that the assessee, to which section 36(1)(viia) of the said Act applies, should debit the amount of bad debt written off to the provision for bad and doubtful debts account made under section 36(1) (viia) of the Income-tax Act.
11.4 Therefore, the banks or financial institutions are entitled to claim deduction for bad debt actually written off under section 36(1)(vii) of the Income-tax Act only to the extent it is in excess of the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia) of the said Act. However, certain judicial pronouncements have created doubts about the scope and applicability of proviso to clause (vii) of sub- section (1) of section 36 of the Income-tax Act and held that the proviso to clause (vii) of sub-section (1) of section
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36 of the Income-tax Act applies only to provision made for bad and doubtful debts relating to rural advances.
11.5 Section 36(1)(viia) of the Income-tax Act contains three sub- clauses, i.e. sub-clause (a), sub-clause (b) and sub-clause (c) and only one of the sub-clauses i.e. sub-clause (a) refers to rural advances whereas other subclauses do not refer to the rural advances. In fact, foreign banks generally do not have rural branches. Therefore, the provision for bad and doubtful debts account made under clause (viia) of sub-section (1) of section 36 and referred to in proviso to clause (vii) of sub-section (1) of section 36 and clause (v) of sub-section (2) of section 36 of the Income-tax Act applies to all types of advances, whether rural or other advances.
11.6 It has also been interpreted that there are separate accounts in respect of provision for bad and doubtful debt under clause (viia) for rural advances and urban advances and if the actual write off of debt relates to urban advances, then, it should not be set off against provision for bad and doubtful debts made for rural advances. There is no such distinction made in clause (viia) of sub-section (1) of section 36 of the Income-tax Act.
11.7 In order to clarify the scope and applicability of provision of clause (vii), (viia) of sub-section (1) and sub- section (2), an Explanation in clause (vii) of sub-section (1) of section 36 has been inserted stating that for the purposes of the proviso to clause (vii) of sub-section(l) of section 36 and clause (v) of sub-section (2) of section 36, only one account as referred to therein is made in respect of provision for bad and doubtful debts under clause (viia) of sub-section (1) of section 36 and such account relates to all types of advances, including advances made by rural branches. Therefore, for an assessee to which clause (viia) of sub-section (1) of section 36 applies, the amount of deduction in respect of the bad debts actually written off under clause (vii) of subsection (1) of section 36 shall be limited to the amount by which such bad debts exceeds the credit balance in the provision for bad and doubtful debts account made under clause (viia) of sub-section (1) of section 36 without any distinction between rural advances and other advances.
11.8 Applicability: - This amendment takes effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years. (Emphasis mine)
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A combined reading of the newly inserted Explanation-2 and Paragraph 11 of the above Circular NO.3/2014 , dated 24-1-2014 of the CBDT makes it very clear that w.e.f. A.Y.2014-15 onwards, whether it is "rural debt" or "urban debt", only one account as referred to in section 36(1)(viia) would be maintained towards provision for bad and doubtful debts and such account would relate to all types of advances, whether such advances are made by rural branches or urban branches. Thus, even if we assume for a moment that the present assessee's "bad debts" of Rs.17,03,22,962/- (Loss on OTS) relate to "urban debt", the same cannot be allowed after A.Y. 2014-15. 34. In the light of the above discussion, it is held that assessee's "bad debts" of Rs. 17,03,22,962/- (Loss on OTS) claimed u/s 36(1)(vii) could not have been allowed in view of outstanding credit balance of Rs.38,43,38,064/-in its "provision for bad and doubtful account" as on 31.03.2014. The case of the assessee is hit by the decision of the Supreme Court in the case of Catholic Syrian Bank Ltd. v CIT(2012) 343 ITR 270(SC), where it has been held that in the case of bad debts relating to "rural debts", the same can be allowed u/s 36(1)(viia) only to the extent it exceeds the credit available under the "provision for bad and doubtful debts" created under section 36(1 )(vii) of the Act. Admittedly, in this case, the assessee had a credit balance of Rs.38,43,38,064/- in its "provision for bad and doubtful account" and therefore "bad debts" of Rs. 17,03,22,962/-, which pertained to "rural debts", being loans extended to weavers, could not have been allowed by the AO after the decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. v CIT(2012) 343 ITR 270(SC). Moreover, in any case, after insertion of Explanation-2 below section 36(1 )(vii) from A.Y.2014-15 onwards, whatever little ambiguity was there in law, has been set right. Therefore, the AO's action in not following the decision of the Supreme Court in the case of Catholic Syrian Bank Ltd. v CIT(2012) 343 ITR 270(SC) and not invoking the first proviso to section 36(1)(vii) and its Explanation-2 has rendered the assessment order erroneous and prejudicial to the interest of the revenue within the meaning of section 263 of the Act.”
Thereafter, Ld Pr. CIT recorded a finding that for an assessee to
which clause (viia) of Section 36(1) applies, the amount of deduction in
respect of bad debts actually written off u/s.36(1)(vii) shall be limited to the
amount by which such bad debts exceeds the credit balance in the provision
for bad and doubtful debts account made under section 36(1)(viia) of the
Act.
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The provisions of section 36(1)(vii) of the Act provides that in case of
the banks, who are eligible deduction u/s.36(1)(viia), deduction on account
of bad debts relating to rural advance/loans shall be first set off against
credit balance in the provision for bad and doubtful debts account and
deduction will be allowed to the extent of debts relating to rural debts which
exceeds credit balance available in the said provision created under section
36(1)(vii) of the Act. The facts and circumstances of the present case are
that the assessee had a credit balance of Rs.38,43,38,064/- in its balance
sheet as on 31.3.2014 as “provision for bad and doubtful account”. Thus,
as per proviso to section 36(1)(vii) of the Act, the amount of loss on TOS,
which was in the nature of rural debts of Rs.17,03,22,962/-, which was
extended as benefit to the weaver in the rural areas, which should have
been first set off against credit balance of Rs.38,43,38,064/- available in the
balance sheet, which was more than the actual rural bad debts of
Rs.17,03,22,962/- was not available u/s.36(1)(vii) of the Act. The rider
created by the legislature by way of insertion of proviso to section 36(1)(vii)
of the Act raises a clear-cut bar on the allowability of claim of the assessee
made before the AO during the original assessment proceedings under the
head “loss on OTS account” in a situation, when the amount standing in the
balance sheet as “provision for bad & doubtful debts” is higher than the
amount of bad debts shown as “loss on OTS a/c.”.
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In view of above, we are inclined to hold that since the AO has
ignored the relevant provisions of the Act before allowing the claim of the
assessee of loss on OTS account and without making proper and adequate
enquiry and the view taken thereafter was also not sustainable, therefore,
the impugned order passed by ld Pr. CIT revising the order u/s.263 of the
Act is fully justified and correct alleging the impugned assessment order as
erroneous and prejudicial to the interest of the revenue and there is no
valid reason to interfere with the same.
In the result, appeal of the assessee is dismissed.
Order pronounced on 22 /01/2021. Sd/- sd/- (Laxmi Prasad Sahu) (Chandra Mohan Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER Cuttack; Dated 22 /01/2021 B.K.Parida, SPS (OS) Copy of the Order forwarded to : 1. The Appellant : Cuttack Central Co-operative Bank Ltd., Nimchouri, Chandini Chowk, Cuttack
The Respondent. Pr. CIT, Cuttack 3. The CIT(A)-, Cuttack 4. DR, ITAT, Cuttack 5. Guard file. //True Copy//
By order
Sr.Pvt.secretary ITAT, Cuttack
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