STANDARD CHARTERED GRINDLAYS BANK LTD vs. ASSISTANT COMMISSIONER OF INCOME TAX INTERNATIONAL TAXATION CIRCLE-3(1) (2) & ORS.

The appellant/assessee carried the matter in appeal to the Tribunal. The Tribunal, via, the impugned order dated 01.08.2022, sustained the decision of the CIT(A).

It is in these circumstances that the appellant/assessee has preferred the present appeal under Section 260A of the Act.

Ms Shashi M. Kapila, who appears on behalf of the appellant/assessee, has submitted that the authorities below have committed factual and legal errors.

In this context, Ms Kapila has drawn our attention to paragraph 14 of the impugned order passed by the Tribunal, which alludes to the fact that in the previous AY i.e., AY 2002-03, the profit determined was Rs.215,62,49,368/-.

Ms Kapila says that the appellant/assessee had, in fact, filed a loss return. The AO via the order dated 18.03.2005 had disallowed the loss claimed and, that the said issue is presently pending adjudication in an appeal [ i.e., ITA 87/2020 ] lodged in this Court.

This apart, Ms Kapila says that the authorities below have failed to appreciate the scope and ambit of the provisions in issue, i.e., Section 36(1)(vii), read with Section 36(2) and Section 36(1)(viia) of the Act. It is Ms Kapila’s submission that these provisions are independent of each other. ITA 536/2022

Ms Kapila submits that since the appellant/assessee had not created any provision for bad debts in the AY in issue i.e., AY 2003-04, it could straightaway claim, in law, the entire irrecoverable bad debt crystallized for the AY in issue. In support of her plea, Ms Kapila has relied upon the following judgments: (i) Principal Commissioner of Income-tax vs. Khyati Realtors Pvt. Ltd. [2022] 447 ITR 167 (SC); (ii) Catholic Syrian Bank Ltd. vs. Commissioner of Income-Tax [2012] 343 ITR 270 (SC); (iii) Southern Technologies Ltd. vs. Joint Commissioner of Income-Tax [2010] 320 ITR 577 (SC).

Mr Aseem Chawla, learned senior standing counsel, who appears on behalf of the respondent/revenue, says he cannot but accept that patent errors of fact have been made by the Tribunal.

It is Mr Chawla’s contention that, therefore, the matter could be remitted to the AO for correction of errors and the consequent result would follow thereafter.

We have heard the learned counsels for the parties and perused the material on record.

The following facts are not in dispute: (i) In AY 2002-03, the appellant/assessee had filed a loss return. (ii) The AO had passed an order dated 18.03.2005, whereby the loss claimed by the appellant/assessee for AY 2002-03 was disallowed. (iii) There was clearly no provision made for bad debts available in the succeeding period i.e., AY 2003-04. ITA 536/2022

Given these facts and the state of the law, as expounded by the Supreme Court in Catholic Syrian Bank Ltd., in our opinion, the appellant/assessee is entitled to straightaway claim deduction towards irrecoverable bad debts under Section 36(1)(vii) of the Act. There is no dispute that the conditions prescribed under Section 36(2) of the Act stand fulfilled.

Section 36(1)(vii) and Section 36(1)(viia) of the Act are distinct and independent provisions. An assessee, which includes a scheduled and non- scheduled bank, is entitled to claim deduction of any bad debt or a part thereof which is written off as irrecoverable in the period in issue. The first proviso appended to Section 36(1)(vii) of the Act applies to an assessee to which clause (viia) applies. It is when clause (viia) of sub-section(1) of Section 36 becomes appliable, that the deduction relating to any bad debt or part thereof gets limited to the amount by which such debt or part thereof exceeds the credit balance in the provision made for bad and doubtful debts in the books of accounts of the assessee.

2 In this case, the first proviso appended to Section 36(1)(vii) has no applicability, as there was no provision made for bad and doubtful debts. As is well recognised, ordinarily, the Act does not allow for deduction on account of a mere provision for bad and doubtful debts in computation of taxable profits.

However, the legislature gave this leeway, inter alia, to banks and public financial institutions and Non-Banking Financial Companies(NBFCs) ITA 536/2022

Notably, Sub-section 2(v) states that where a debt or part of debt relates to advances made by an assessee to which clause (viia) of Section 36(1) applies, no such deduction would be allowed unless the assessee has debited the amount of such debt or part of the debt in the previous year in issue, to the provision made for bad and doubtful debts in the accounts of the assessee. Thus, as would be evident, the scheme of the aforementioned provisions would exclude the applicability of the first proviso appended to Section 36(1)(vii) of the Act, as there was no provision for bad debts available in the AY in issue i.e., AY 2003-04. 16. The roundabout manner which the Tribunal has followed, appears to be predicated on the fundamental errors of fact. As noticed above, the Tribunal wrongly noted that in AY 2002-03, the profit determined qua the AY amounted to Rs.215,62,49,368/-.

1 Based on this, it calculated that a provision for bad debts could be created at the rate of 5%, which was Rs.10,78,12,465/-[sic. Rs.10,78,12,469/-].

2 Having regard to this supposed credit balance, the Tribunal allowed a ITA 536/2022

In this regard, it must be emphasized that the flawed formula adopted by the AO would run into rough weather if the appellant/assessee’s appeal for AY 2002-03 were to be allowed; which would result in its loss return being accepted.

According to us, this roundabout manner of arriving at the addition was flawed, both on facts and in law.

Having regard to the aforesaid, the question of law, as framed, is answered in favour of the appellant/assessee and against the respondent/revenue.

The appeal is disposed of, in the aforesaid terms.