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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SMT KAVITHA RAJAGOPAL & MS. PADMAVATHY S.
O R D E R PER : MS PADMAVATHY S. (AM)
This appeal of the Revenue is against the order of the CIT(A) National Faceless Appeal Centre (NFAC) [hereinafter ‘Ld.CIT(A)’] dated 15/02/2023 for the assessment year 2012-13. The Revenue raised the following ground of appeal:-
Whether on the facts of the case and in law and in view of provisions of section 36(l)(viia) and section 36(2): clause (i) thereof of the Act, the bad debts declared as Non Performing Assets before 01.04.2006 are allowable as deduction u/s. 36(l)(vii) of the Act being bad debt written off disregarding section 36(l)(vii) of the Act?
2 ITA 1128/Mum/2023 Abhyudaya Co-operative Bank Ltd 2. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the AO be restored 3. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary 2. The assessee is a co-operative bank and filed a return of income for A.Y. 2012-13 on 17/09/2012 declaring a total income of Rs.93,92,49,840/-. The return was selected for scrutiny under CASS and the assessment was completed under section 143(3) accepting the income returned by the assessee. Subsequently, a notice under section 148 was issued for the reason that certain expenses and deductions claimed by the assessee were not correct and that the assessee has failed to disclose truly and fully all material facts necessary for assessment. The assessee, in response to notice under section 148 filed the return of income declaring a total income of Rs.94,23,35,980/-. The Assessing Officer issued a show cause notice to the assessee with regard to the amount of Rs.4,21,14,192/- claimed as a deduction under section 36(1)(vii) by stating that – “4. From the perusal of the records, it is found that assessee has claimed Rs. 4,21,14,192/- as Bad Debts u/s 36(1)(vii) of the Act. It is also noted that assessee was having balance of Rs. 19,96,39,699- in Provision for Bad and Doubtful Debts created as per provisions of Section 36(1)(viia), for which assessee has claimed deduction in earlier years. As per the provisions of Section 36(1)(vii) of the Act, only the bad debts over and above the balance of provision is allowed for deduction. As assessee was having sufficient balance in provision account therefore the assessee was not eligible for any deduction u/s 36(1)(vii) of the Act. In this regard, the assessee was show caused as to why the deduction towards bad debts written off u/s 36(1 )(viia) should not be disallowed, which is being reproduced as under:
It is noted that you have written off Rs. 6,34,25, 145/- as Bad Debts during the year under consideration. You also mentioned that you have claimed Rs. 4,21, 14, 192/- as bad debts u/s 36(1)(vii) of the Act. It is also noted that you have opening balance of Provision for Doubtful Debts as on 3 ITA 1128/Mum/2023 Abhyudaya Co-operative Bank Ltd 01.04.2011 created u/s 36(1)(viia) of the Act is Rs. 19,96,39,699/-. Thus the bad debts should have been claimed first against this provision and, '.'. later if any, should have been claimed u/s 36(1)(vii) of the Act. There is no such provision in the Act to differentiate the different category of debts. - Further provision s created for all the debts including older debts. Thus the plea of the assessee is that the bad debts belong to the debts given prior to the creation of this provision does not hold any stand. In this regard, you are request to show cause that why the claim of Rs.4,21,14,192/- made u/s 36(1)(vii) should not be disallowed and added back to the total income.”
The assessee in response submitted before the Assessing Officer that Section 36(1 )(viia) of the Income Tax Act, 1961 became applicable to Cooperative Banks after 1.4.2006. This section allows the deduction of provision made in the Books of Accounts towards Bad and Doubtful Debts. The maximum amount allowed as deduction under this section is limited to 7.5 percent of the total income computed before making any deduction under this clause and Chapter VIA. Section 36(1)(vii) deals with the deduction of actual amount written off as Bad Debts. Since Section 36(1)(viia) allows deduction of provision made towards Bad Debts in the year in which it is made, actual Bad debts written off is first adjusted against such provision and the amount written-off over above such provision is allowed as deduction under section 36(1)(vii). Before applicability of provision of sect ion 36(1) (viia) of the Income Tax Act, 1961 to Co-op Banks i.e. prior to 01.04.2006, Bank had created provision for Bad and Doubtful Debt Reserve Accounts by debiting to profit and loss account which was disallowed by the Assessing Officer.
As per RBI guidelines Bank has to create 100 percent provision (BDDR) on loss assets (Non-Performing Assets NPA) and as per percentage prescribed on doubtful assets and substandard assets. A provision towards Bad and Doubtful Debts Reserve (BDDR) has been created year on year basis as per RBI requirements by debiting to profit and loss account. As on 31.03.2006, Bank had provision towards Bad and Doubtful Debts Reserve of Rs.1,86,48,51,000/- which was disallowed in the respective assessment years in which the provisions were made. During the Financial Year 2011-12, Bank had written off Rs.6,34,25,145/- as Bad Debts. The Bad Debts were written off by utilising the provision created
4 ITA 1128/Mum/2023 Abhyudaya Co-operative Bank Ltd for the same. Out of the total bad debts written off, Rs.4,21,14,192/- was written off against the BDDR provisions made before 1.4.2006 (as these advances were classified as NPA before 31.3.2006) i.e. before applicability of the section 36(1)(viia) to Coop Banks. This provision was disallowed totally in the respective earlier assessment years in which the provisions were made by the Assessing Officer. Hence, now the same is claimed as deduction under section 36(1)(vii). We have not claimed deduction under section 36(1)(vii) of bad debts written off of Rs. 2,13,10,953/- (Rs. 6,34,25,145/- less Rs.4,21,14,192/-) during Financial Year 2011-12 as these advances were classified as NPA after 31.3.2006 against which deduction has been claimed u/s 36(1)(viia).
In this regard, the assessee further submitted the assessment order for A.Y. 2005- 06 A.Y. 2006-07 before the Assessing Officer. The assessee further submitted that the provisions of 36(1)(viia) is applicable to cooperative banks only from AY 2007-08 and therefore any provision towards bad and doubtful debts standing in the account of a cooperative bank prior to 01.04.2006 will not come under the ambit of 36(1)(viia). The assessee relied on the decision of the coordinate bench in the case of City Co-op Bank Ltd vs ITO in dated 12/09/2017.
The Assessing Officer did not accept the submissions of the assessee and accordingly disallowed the said amount. Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) allowed the appeal in favour of the assessee by relying on the decision of co-ordinate bench assessee’s own case for A.Y. 2010-11 in ITA No.1595/Mum/2020 dated 28.06.2022. Aggrieved, the Revenue is in appeal before the Tribunal.
The Ld.AR submitted that the issue is held in favour of the assessee by the co- ordinate bench in assessee’s own case for AY 2010-11 which is relied on by the CIT(A) and also the subsequent assessment year 2011-12. Accordingly the ld AR submitted that the issue is already covered in favour of the assessee.
5 ITA 1128/Mum/2023 Abhyudaya Co-operative Bank Ltd
The Ld.DR, on the other hand, relied on the order of the Assessing Officer.
We heard the parties and perused the material available on record. We notice that the co-ordinate bench of the Tribunal in assessee’s own case for A.Y. 2011-12 has considered the similar issue and held that –
“8. Considered the rival submissions and material placed on record, we observed that this issue is already covered in detail by the Coordinate Bench in the case of City Cooperative Bank Ltd. v. ITO (supra) and heldas under: - "3. We have gone through the submissions made by both the parties. We noted from the chart available on page 15 of the paper book showing the statement of party-wise bad debts written off and the provision existed as on 31.03.2006 that the assessee has written off the bad debts in respect of 31 parties amounting to '94/45,827/-during the impugned assessment year while the provisions as on 31.03.2006 was~to the extent of 1.83,39,432.57. The assessee has made provision for assessment years 2007-08, 2008-09 and 2009-10 at ?.7,96,787/-,f. 5,029/- and 1.2,75,628/- respectively. It is a fact that up to A. Y. 2006-07 the income from banking business was fully allowed in the case of the assessee under section SOP of the Income Tax Act. Subsequently by Finance Act, 2006 by insertion of sub-section (4) in section SOP the assessee was not entitled for deduction under section SOP from A. Y. 2007-08. The deduction under section 36(l)(vii) is available in respect of bad debts written off subject to the fulfilment of the conditions specified under section 36(2), Section 36(l)(viia) provides for the treatment of provisions for bad and doubtful debts of an amount not exceeding 7.5% of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding 10% of the aggregate average advances made by the rural branches of such banks. The provisions of Section 36(1 )(vii) and section 36(l)(viia) are distinct and independent. The provisions of Section 36(l)(viia)are applicable w.e.f. A.Y. 2007-08 to cooperative bank also. Therefore any provision allowed in A. Y. 2007-08 onwards in the case of a cooperative bank under clause (viia) will be hit by this amendment but a provision standing in the account of a cooperative bank prior to 01.04.2006 will not come in the ambit of section 36(l)(viia)
6 ITA 1128/Mum/2023 Abhyudaya Co-operative Bank Ltd and in our opinion if any bad debts written off for which a provision has been created prior to 01.04.2006 will be entitled for deduction under section 36(l)(viia) if the conditions stipulated under section 36(2) are satisfied. From the chart: as appearing on page 15 it is apparent that the assessee had written off the bad debts amounting to Rs. 92,45,827/- during the year. It is not related to the provisions in respect of which the assessee has claimed deduction in the earlier assessment year. We, therefore, set aside the order of the CIT(A) on this issue and delete the said addition. Thus, this ground stands allowed.
Respectfully following the above said decision, we are inclined to allow the claim of the assessee. Moreover, the assessment was originally assessed u/s. 143(3) of the Act and subsequently reopened to examine the same issue. After verification, the Assessing Officer has accepted the contention of the assessee. Once again Ld. Pr.CIT raised the same issue and directs the Assessing Officer to verify the same once again after giving opportunity of being heard to the assessee. The Ld. Pr.CIT cannot impose his views on the issue which was verified twice and respective Assessing Officer's has taken their view. Considering the sequence of events in our view Ld, Pr.CIT has no jurisdiction to interfere with the completed proceedings otherwise, there is no end to the assessment proceedings. Therefore, the revision order passed u/s 263 is accordingly, set aside. Grounds raised by the assessee are allowed.”
In the above case the coordinate bench has relied on the decision in the case of City Cooperative Bank Ltd (supra) where the ratio laid down is that the provision standing in the account of a cooperative bank prior to 01.04.2006 will not come in the ambit of section 36(l)(viia) and if any bad debts written off for which a provision has been created prior to 01.04.2006 will be entitled for deduction under section 36(l)(viia) if the conditions stipulated under section 36(2) are satisfied. For the year under consideration we notice that the assessee out of the total amount bad debts written off for Rs.6,34,25,145 had claimed a sum of Rs.4,21,14,192 as deduction since the same pertains to advances classified as NPA prior to 01.04.2006. The assessee had not claimed the deduction towards the balance amount of Rs.2,13,10,953 since the same pertains to assets classified as NPA after 01.04.2006. Therefore respectfully following 7 ITA 1128/Mum/2023 Abhyudaya Co-operative Bank Ltd the ratio laid down by the coordinate bench we are of the considered view that the deduction claimed by the assessee under section36(1)(vii) should be allowed since the same pertains to advances classified as NPA prior to 01.04.2006 and accordingly the disallowance made by the Assessing Officer is hereby deleted.
In result the appeal of the Revenue is dismissed.
Order pronounced in the open court on 30/06/2023.