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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND SHRI MANOJ KUMAR AGGARWAL
आदेश /O R D E R PER MAHAVIR SINGH, VP: The appeal by the assessee is arising out of the Revision order passed by the Principal Commissioner of Income Tax, Madurai – 1, in Order No.ITBA/REV/F/REV5/2022-23/1050105025(1) dated 24.02.2023. The assessment was framed by the ACIT, Circle-1, Nagercoil for the assessment year 2015-16 u/s.143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’), vide order of dated 12.10.2017.
The only issue in this appeal of assessee is against revision order passed by PCIT u/s.263 of the Act, assuming jurisdiction on legal as well as on facts that the assessee could explain from the financials including profit and loss account, balance sheet that the sum of Rs.3 crores has rightly been allowed by AO as deduction u/s.36(1)(viia) of the Act and after due enquiry. For this, assessee has raised various grounds which need not be reproduced.
Brief facts are that the assessee is a district Co-operative Bank, filed its return of income for the assessment year 2015-16 on 28.09.2015. The assessment was completed u/s.143(3) of the Act vide order dated 12.10.2017 after making addition of Rs.2,05,50,000/- towards disallowance of office expenses. The quantum addition and order u/s.143(3) of the Act was not challenged in appeal by assessee. Subsequently, the PCIT while examining the case records noticed that for the previous year 2014- 15 relevant to this assessment year 2015-16, the assessee bank has claimed deduction for an amount of Rs.3 crores being ‘Reserve expenses’ against standard assets u/s.36(1)(viia) of the Act. The PCIT on verification of profit & loss account and balance sheet for the financial year 2014-15 noted that the assessee has not created any such provision in the books of accounts and therefore, the assessee is not eligible for claim of deduction u/s.36(1)(viia) of the Act, but the AO during the assessment proceedings has not examined this issue and not carried out any adequate enquiry. According to PCIT this deduction of Rs.3 crores claimed by assessee being reserve expenses against standard assets u/s.36(1)(viia) of the Act is illegal and hence, the assessment order passed u/s.143(3) of the Act is erroneous insofar it is prejudicial to the interest of Revenue. The PCIT finally set aside the assessment order and directed the AO vide para 7 as under:- “7. In view of the above, I am satisfied that the order dated 12/10/2017 passed by the Assessing Officer u/s.143(3) of the Act is erroneous in so far it is prejudicial to the interest of the revenue. Therefore, in exercise of powers conferred u/s 263 of the act and in accordance with the direction of the Hon’ble ITAT, I set aside the aforesaid order for the limited purpose of verification of deduction claimed u/s 36(1)(viia) of the Act as discussed in para (5) to (5.3) above. The assessing officer shall pass fresh order in accordance with law after making necessary enquiries and verification with regard to the claim of the assessee as discussed above in accordance with law after allowing reasonable opportunity of being heard to the assessee.”
Aggrieved assessee is in appeal before Tribunal.
Before us, the ld.counsel for the assessee first of all stated that assessee vide reply dated 24.07.2017, during the course of original assessment proceedings replied the queries raised by AO and replied this particular query as under:- “2. Large any other deduction claimed in schedule BP NPA provision to the extent of Rs.3,00,00,000/- is claimed under such deduction which is allowable under the banking norms and u/s.36(1)(viia) of the Income Tax Act.”
According to ld.counsel, once the AO has raised query and assessee replied to the same, that means the AO has applied his mind and taken one of the possible view. Further, the ld.counsel for the assessee during the course of hearing drew our attention to financial statements including balance sheet and profit & loss account for the financial year 2014-15 and drew our attention to the balance sheet wherein there is an increase in the claim of bad debt by Rs.3 crores and he particularly drew our attention to reserve claimed against standard assets as under:- Balance as on Sl. Balance as on Capital and Liabilities Amount 31.03.2014 No. 31.03.2015 63302258.53 III B.D.R. OF THE BANK 683355383.57 i.NPA Reserves 298431983.62 ii. Res. Against Std Assets 55779824.60 iii. Bad Debt Reserve 3011689.75 iv. Additional Provision for 250000000.00 NPA v. Non Statutory Reserves 76131885.60 The ld.counsel then took us to the profit & loss account for the year ending 31.03.2015 wherein ‘Reserve Expenses’ are claimed and paid at Rs.5,10,91,294/- and the relevant profit & loss account reads as under:- Paid During Sl.No. Expenditure Paid During 2013-14 2014-15 657582893.00 I Interest 578030157.74 73711363.52 II Salary & Allowances 70766268.50 47099107.50 III Rent, Rate & Taxes 60187972.00 107000.00 IV Law Charges 707959.00 889681.50 V Postage & Telegram 897948.84 2104201.00 VI F.R. cost & Audit Fees 1819624.00 2853832.76 VII Depreciation 3893785.35 1800000.85 VIII Stationary & Printing 2342492.45 56373255.87 IX Reserve Expenses 51091294.57 10640462.70 X Other Expenses 40250544.18 94820403.54 XI Net Profit 59792487.00 The ld.counsel for the assessee further took us through the Schedule 8 of Reserve Expenses and this particular item of Rs.3 crores is claimed as ‘Reserve against standard assets’ in the profit & loss account and the relevant reserve receipts read as under:- 8. Reserve Expenses Sl. Balance to Details Paid Receipt No. Loss Account 1 Recoupment Reserve for 1038169.53 0.00 1038169.53 Vehicle 2 Reserve against Std Assets 30000000.00 0.00 30000000.00 3 Non-Statutory Reserves 20053125.04 0.00 20053125.04 Total 51091294.57 0.00 51091294.57 In view of the above, the ld.counsel explained that the assessee has created this provision, may be the nomenclature of standard asset given to the bad debts. But the assessee has created provision in the profit & loss account and claimed the same.
4. When these facts were confronted to ld.CIT-DR, he could not controvert the above fact situation.
We have heard rival contentions and gone through the facts and circumstances of the case. We noted that the assessee has actually created the provision but only the name given is reserve against standard assets. But actually, the provision is created by assessee. Even otherwise, it is a standard asset or bad debt claimed, the same is allowable in view of the decision of the Coordinate Bench of this Tribunal in the case of IDFC Ltd., in order dated 09.08.2023, wherein it is held as under:-
We have heard rival contentions and gone through facts and circumstances of the case. The assessee being a financial institution and NBFC engaged in the business of lending money for the purpose of financing infrastructure project as per the policy of the assessee to conduct assessment of its loans and advances based on which provision was made for loans or advances, which are doubtful and the same provision is shown under the head provision for standard assets. This provision is made in term of the prudential norms of RBI, which permits onetime restructuring of infrastructure loans and such restructured loans are classified as standard assets. An infrastructure loan is required to restructure only in case the infrastructure project is facing difficulty in meeting the obligation of interest / principal repayment on account of delay in completion of project. Accordingly, such restructured assets are classified as standard assets as per RBI regulations and accordingly onetime restructuring are permitted by RBI being stressed out assets and hence, provision is created for contingencies reflecting the estimated loss to that portfolio. In such circumstances, assessee has made claim of this amount of Rs.49.85 crores towards standard assets. It is nobody’s case neither AO nor CIT(A) that the claim is false or it is not genuine. But according to the authorities below, the claim is not allowable only on principle. We noted that the Co-ordinate Bench of Mumbai Tribunal in the case of State Bank of India, supra has considered this issue in great detail and finally allowed the claim by observing in para 73 & 74 as under:-
We noted from the provision of Section 36(1)(viia) of the Act that the same allows a deduction to banks in respect of any provision made ‘for’ bad and doubtful debts. It does not restrict the allowance to provision made ‘on’ bad and doubtful debts. Even in respect of assets that are classified as standard assets, a part of the debts are doubtful of recovery. The fact that a provision is made for standard assets by itself indicates that a part of the standard assets are doubtful of recovery. Accordingly, the entire provision made by the assessee, including in respect of standard assets, is for bad and doubtful debts as envisaged by section 36(1)(viia) of the Act. Thus, in light of above, the assessee is eligible to claim deduction under section 36(1)(viia) of the Act even in respect of the provision made for standard assets. This issue was considered by the ITAT in assessment year 2006-07 in ITA 3145/Mum/2009 dated 6.09.2016, in an appeal against the revision order of the CIT passed under section 263 of the Act, wherein it is held as under:
“So, however, we may also clarify that we are in principle in agreement that a provision for bad and doubtful debts cannot include that against standard assets i.e. which the bank (assessee) itself regards as good for receipt and, therefore with the decision by the tribunal in Bharat Overseas Bank Ltd. (supra) relied upon by the Revenue. A provision by definition a charge against profits, while that in respect of an asset, considered good, would be more in the nature of an appropriation of profit i.e. a reserve. This is precisely what the Tribunal in Bharat Overseas Bank Ltd. (supra) means when its states of the deduction being not in the nature of a standard allowance. No contrary judgement by the Tribunal or a higher court has even otherwise been brought to our notice. At the same time, the provision as per RBI guidelines – which are contended to have been followed / adopted, provide for the minimum provision, and the bank is free to make a higher provision, i.e., than that prescribed by the RBI norms. Provisioning, it may be noted, is a management function, made reflecting its risk assessment qua different assets. If therefore, the assessee-bank is able to satisfy the assessing authority that the provision as made is justified with reference to the debts considered by it as bad and doubtful, we see no reason as to why the same cannot be allowed. The matter is accordingly restored back to the file of the A.O. for fresh determination by issuing definite findings of fact. Even as the primary onus would be on the assessee, the A.O. cannot substitute his own judgement with regard to the risk assessment qua a particular asset and, correspondingly, the provision in its respect. His purview would be to examine the reasonableness of the assessee’s claim in light of the facts and circumstances qua each asset/s in respect of which provision is made. In arriving at our decision, we have taken a holistic view of the matter, placing due emphasis on the words ‘provision’ preceding the words ‘for bad and doubtful debts’ as well as the words ‘not exceeding’ occurring in the section, and which stand highlighted for the purpose. We decide accordingly.”
In view of the above discussion, arguments of both the sides, we are of the view that the assessee is eligible for claim of deduction u/s 36(1)(viia) of the Act on standard assets and this issue is covered by Tribunal’s decision in assessee’s own case for AY 2006- 07 in vide order dated 06.09.2016. Hence, we allow this issue of assessee’s appeal.
13.1 Similarly, the Indore Bench in the case of M/s. Jila Sahakari, supra has allowed the claim of standard assets by observing in para 9 & 10 as under:-
“9. We have considered the rival contentions raised by both sides and perused the material held on record in the light of section 36(1)(viia) and the judicial decisions cited above. After a careful consideration, we observe that it has been loudly held in all of the decisions cited above that the provision made by a banking company in respect of standard assets, as per RBI guidelines, is very much allowed as deduction u/s 36(1)(viia). Ld. DR is not able to point out any contrary decision on this issue. We extract below the decision of ITAT Indore Bench itself in Vikramaditya Nagarik Sahakari Bank Vs. ACIT (supra):
“6. We have heard the rival contentions and perused the material placed on record. The sole grievance of the assessee revolves around the disallowance of Rs. 2 lacs confirmed by both the lower authorities relating to provision for contingency of standard assets claimed by the assessee u/s 36(1)(viia) of the Act. Before proceeding further we would like to reproduce the provision of section 36(1)(viia) of the Act as under :-
“Other deductions. 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 xxxx xxxx xxxx (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 cooperative bank other than a primary agricultural credit society or a primary co- operative agricultural and rural development bank, an amount not exceeding 99[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 :
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:
Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words "five per cent", the words "ten per cent" had been substituted:
Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government:
Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession."
Explanation. For the purposes of this sub-clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005
On perusal of the above provision and in the given facts of the case, wherein the assessee, which is a cooperative bank carrying on banking business, we find that the assessee is eligible to claim provision for bad and doubtful debts to the extent of 7.5% of the total income before making any deduction under this clause and under Chapter VIA. Further in the profit and loss account except for the alleged provision for Rs. 2 lacs, no other provision for bad and doubtful debts has been claimed. We find force in the contention of the learned counsel for the assessee that the phrase contingency provision for standard assets is basically a provision for bad and doubtful debts only which is in general a regular feature of the banking business. It is also pertinent to mention that even though the assessee was eligible to claim much higher amount as an expenditure of provision for bad and doubtful debts, it only claimed Rs. 2 lacs. We, therefore, in the facts and circumstances of the case, are of the opinion that in the instant appeal the contingency provision for standard assets is basically in the nature of bad and doubtful debts only and the assessee has rightly claimed the expenditure u/s 36(1)(viia) of the Act. We, therefore, allow the sole ground raised by the assessee.”
Thus, the impugned issue is settled in favour of assessee by various decisions of ITAT Benches including the co-ordinate bench of ITAT, Indore. Respectfully following the same, we too hold that the provision made by assessee qua standard assets is allowable u/s 36(1)(viia) and therefore the Ld. CIT(A) has rightly deleted the disallowance made by AO. However, during hearing, we raised a specific query to Ld. AR that the assessee has claimed a total deduction of Rs. 10,00,00,000/- but the section 36(1)(viia) allows deduction upto a certain limit prescribed therein; whether the AO has verified that the deduction of Rs. 10,00,00,000/- is within permissible limit prescribed in section? Ld. AR fairly agreed that it is not reflected in the orders of lower-authorities. Ld. AR, however, raised a plea that the assessee was entitled to much higher deduction but claimed only Rs. 10,00,00,000/-. In absence of any finding on this aspect by lower-authorities, we are unable to accept such a pleading of Ld. AR. Therefore, in the circumstance, though we agree in principle that the provision made for standard assets is also eligible for deduction yet we are of the view that there is a strong necessity to verify whether the claim made by assessee is within the permissible limit prescribed in section 36(1)(viia) or not; therefore it would be appropriate to refer this issue back to the file of Ld. AO for the limit purpose of such verification. The Ld. AO will verify the permissible limit and allow deduction within such limit. We order accordingly. We also direct the assessee to provide necessary information/calculation to Ld. AO to enable him to make such verification. These grounds are, thus, allowed in terms indicated here.”
13.2 We noted that there is unanimity in the judicial precedents that as principle, the standard assets for which the provision is made as per policy and prudential norms of RBI, which permits onetime restructuring of infrastructure loans, the same is allowable u/s.36(1)(viia)(c) of the Act. Hence, we are of the view that authorities below erred in not allowing the claim of assessee and hence, we allow the claim of assessee. This issue of assessee’s appeal is allowed.
As the issue is squarely covered and assessee has actually created provision in its accounts as it is evidenced from the above reproduced financials of the assessee, we quash the revision order on merits and allow the appeal of assessee.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 30th November, 2023 at Chennai.