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Income Tax Appellate Tribunal, JAIPUR BENCH VC ’B’, JAIPUR
Before: SHRI RAMESH C. SHARMA, AM & SHRI VIJAY PAL RAO, JM vk;dj vihy la-@ITA No. 589/JP/2019
PER VIJAY PAL RAO, JM :
This appeal by the revenue is directed against the order dated 5th February, 2019 of ld. CIT (A), Kota for the assessment year 2010-11. The revenue has raised the following grounds :-
“ 1. On the facts and in the circumstances of the case the ld. LD. CIT (A) has erred in deleting the disallowance made by the AO on account of Principal NPA of Rs. 32,42,000/-.
2. On the facts and in the circumstances of the case the ld. LD. CIT (A) has erred in deleting the disallowance made by the AO on account of Time Barred Interest RES of Rs. 3,58,96,329/-.
The appellant craves liberty to raise additional ground/s and to modify/amend the ground of appeal at the time of hearing.”
The hearing of the appeal is concluded through Video Conference due to prevailing condition of COVID 19 pandemic.
The assessee is a Cooperative Land Development Bank filed its return of income for the year under consideration on 13.10.2010 declaring loss of Rs. 16,89,180/- which was processed under section 143(1) on 18.08.2011. Thereafter the AO reopened the assessment by issuing notice under section 148 which was served on the assessee on 31st March, 2017. In response to the notice under section 148, the assessee stated that the return of income filed on 13.10.2010 may be treated as return filed in response to the notice under section 148. The AO noted that the assessee has made provision of Rs. 3,91,38,329/- on account of Principal NPA of Rs. 32,42,000/- and Time Barred Interest of Rs. 3,58,96,329/- on over-due NPA loan account. The AO was of the view that the assessee bank falls under the category of Primary Cooperative Agricultural and Rural Development Bank and, therefore, is not covered under section 36(1)(viia) of the IT Act and hence the AO has made the addition of the said amount of Rs.3,91,38,329/-.
On appeal, the ld. CIT (A) has deleted the addition made by the AO by holding that the assessee falls in the provision of section 36(1)(viia) of the Act so far as the provision was made by the assessee in respect of NPA of Rs. 32,42,000/-. As regards the time barred interest of Rs. 3,58,96,329/-, the ld. CIT (A) has held that though the assessee has shown this claim under Provision for Time Barred Interest, however, it is in fact written off in the books of account of the assessee. Aggrieved by the order of LD. CIT (A), the revenue has filed the present appeal.
Ground No. 1 is regarding disallowance made on account of Principal NPA of Rs. 32,42,000/-.
3. The ld. D/R has contended that since provisions of section 36(1)(viia) are not applicable in assessee’s case being a primary Cooperative Agricultural and Rural Development Bank, then the order of the LD. CIT (A) is contrary to section 36(1)(viia) of the Act. He has referred to the assessment order and submitted that the AO has given a clear finding that the assessee is not covered under section 36(1)(viia) of the Act. Thus the ld. D/R has contended that the addition deleted by the LD. CIT (A) based on misunderstanding of the provision is not sustainable in law. He has relied upon the judgment of the Hon'ble Kerala High Court in case of Art Leasing Ltd. vs. CIT, 187 Taxman 29 (Ker.). He has relied upon the order of the AO.
On the other hand, the ld. A/R of the assessee has submitted that the account of NPA is recognized as per guidelines of RBI as well as chief bank Rajasthan Rajya Sahkari Bhumi Vikas Bank Ltd. from which the assessee takes loan. He has referred to the Circular dated 31st March, 2010 of Rajasthan Rajya Sahkari Bhumi Vikas Bank Ltd. and submitted that as per the directions of the National Bank all the land development banks has to follow the prudential standard for recognizing the time barred interest as well as NPAs. Therefore, the assessee has made this provision in compliance of the directions of the Rajasthan Rajya Sahkari Bhumi Vikas Bank Ltd. as well as the directions of the RBI for following the prudent accounting standard for recognizing the NPAs and over-due interest. He has supported the order of LD. CIT (A).
We have considered the rival submissions as well as the relevant material on record. The AO has made this addition on the ground that the provisions of 36(1)(viia) are not applicable to the assessee as the assessee is a primary Cooperative Agricultural and Rural Development Bank which is excluded from the Cooperative Bank. For ready reference, we reproduce clause (viia) of section 36(1) of the Act as under :-
“ Section 36(1) xxxx xxxx
[(viia)17 18[19 in respect of any provision for bad and doubtful debts made by— (a) a scheduled bank [not being 20[***] a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank 21[or a co- operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount 22[not exceeding 23[eight 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 24[ten] per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner : 25[Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year:]”
The assessee has not disputed that it is a primary Cooperative Agricultural and Rural Development Bank. The deduction under section 36(1)(viia) is available to 3 categories of bank, namely, -
(i) Scheduled bank subject to exception therein
(ii) A non scheduled bank, and (iii) A cooperative bank.
The Cooperative Bank which is eligible for deduction under section 36(1)(vii) does not include a primary agricultural credit society or a primary cooperative agricultural and rural development bank. Therefore, there are two exclusions from the broad category of cooperative banks which are (i) a primary agricultural credit society and (ii) a primary cooperative agricultural and rural development bank. Assessee being a primary cooperative agricultural and rural development bank falls in the exception provided in clause (viia) of section 36(1) of the Act. Therefore, the assessee is not entitled for deduction under section 36(1)(viia) of the Act. The LD. CIT (A) given a finding on this issue as under :-
“ As regards Ground no. 2, the addition made by the AO of amounts debited in the P & L account namely,
1) Principal NPA of Rs. 32,42,000/- and 2) Time barred interest RES Rs. 3,58,96,329/- is under contention.
As per the AO, since these amounts could not be deducted unless such amounts had been written off in the books & deduction claimed u/s 36(1)(vii), it was a case of provisions for bad & doubtful debts which were not allowable.
Accordingly she has made an addition of total amount of Rs. 3,91,38,329/- in the case.
From a perusal of the details available and filed in the course of the appellate proceedings, it is observed that the appellant is a primary cooperative agricultural & Rural Development Bank which is covered under provisions of section 36(1)(viia) of the I.T. Act, 1961.
The bank follows a double entry system where while on the one hand the provision for NPA accounts & time barred loans on NPA account is debited, at the same time on the credit side, interest done on NPA loan account is also appearing. These amounts are much higher than the expenditure for provisions during the year. The same is found to be done year wise & for this year the accounts have been tallied in reference to the balance sheet as well when seen from the certificate issued by the accountant of the bank.
The total outstanding loan interest & current year’s interest total upto 13,79,80,511/- out of which Rs. 3,58,96,329/- is debited in the current year.
Further, since as per section 36(1)(viia) a provision for bad & doubtful debts @ 10% of the aggregate average advances can be made in the appellant’s case such limit is not found to be exceeded where provision of only Rs. 32,42,000/- is made advance to members which stands at Rs. 33,58,76,356/-.
After amendment of section 36(1)(viia), from the Assessment Year 2007- 08, the assessee bank is now entitled to deduction of provision for bad debt and doubtful debt as under :-
(i) 7.5% of the total income computed before making a deduction under this clause and chapter VI-A of the Income Tax Act and (ii) 10% of aggregate monthly average advances made by the rural branches of such bank computed in the prescribed manner.
The plain reading of the provision of section 36(1)(viia)(a) made it clear that the aggregate average balance of advances made by the rural branches has to be calculated considering the loans and advances made during the year only by the rural branches of the bank in the prescribed manner as envisaged under Clause (viia)(a) of section 36(1), not on the cumulative balance of loans and advance of the bank over the years. Bad debt, if any, arises out of advances made in the earlier years would be covered under clause (viia) of section 36(1) of the I.T. Act.”
Thus the LD. CIT (A) has held that the assessee a primary Cooperative Agricultural & Rural Development Bank is covered under the provisions of section 36(1)(viia) of the Act. After giving a finding, the LD. CIT (A) held that the assessee is entitled for deduction. The LD. CIT (A) has discussed the quantum of deduction. Thus the finding of the LD. CIT (A) is based on misunderstanding of the provisions which is in fact not applicable in the facts of the assessee’s case. Accordingly, the order of the LD. CIT qua this issue is set aside.
Ground No. 2 is regarding addition made on account of Time Barred Interest on over-due NPA loan accounts.
The AO has disallowed this amount and made the addition on the ground that this is a provision and, therefore, when the assessee is not covered under the provisions of section 36(1)(viia), it is not an allowable deduction.
We have heard the ld. D/R as well as the ld. A/R and considered the relevant material on record. At the outset, we note that the assessee has not specified under which provision this deduction is claimed, whether under section 36(1)(vii) or under section 36(1)(viia) of the Act. The LD. CIT (A) has deleted the addition on the ground that the assessee has already written off this amount by taking it to the debit side as well as on the credit side of the P & L account. We find that this finding of the LD. CIT (A) is based on the details filed by the assessee. However, those details are not part of the audited books of account. The assessee has shown the Interest Income in the Profit & Loss account at Rs. 7,99,36,791/- and also debited an amount of Rs. 3,58,96,329/- under the head Time Barred Interest. The LD. CIT (A) has deleted the addition made by the AO on the assumption of fact that the amount of Rs. 3,58,96,329/- is part of the Interest income shown in the Profit & Loss account and hence the said amount was treated as actually written off in the books of account. We note that even from the details filed by the assessee, it is not clear whether this whole amount was part of the Interest income shown in the Profit & Loss account. Further, the details filed by the assessee are not part of the audited books of account being Schedule to the Balance Sheet but it is prepared subsequently without certified by the Auditors. Even otherwise, the possibility of over-lapping between the deduction under section 36(1)(vii) and 36(1)(viia) is not ruled out when it comes to the cases of bank. It is settled proposition of law that deduction under section 36(1)(vii) is allowable in respect of any bad debts written off as irrecoverable in the books of account for the relevant accounting year but only to the extent such bad debt exceeds the credit balance in the provisions for bad and doubtful debt account made under clause 36(1)(viia). Therefore, to avoid the double deduction, the proviso to section 36(1)(vii ) was inserted and the assessee has choice to choose between 36(1)(vii) and 36(1)(viia) whichever is beneficial. The finding of the LD. CIT (A) are not based on the complete details as to whether this amount on account of Time Barred Interest on NPA loans is fully satisfied the condition of section 36(2) of the Act. Accordingly in the facts and circumstances of the case and in the interest of justice, we set aside this issue to the record of AO to re-examine the same on the point whether the assessee has actually written off this amount in the light of various decisions of the Hon'ble Supreme Court on this point. Needless to say, the assessee may be given an appropriate opportunity of hearing.
In the result, appeal of the assessee is partly allowed for statistical purposes.
Order is pronounced in the open court on 31/07/2020.