ACIT (LTU)-1, MUMBAI vs. UNION BANK OF INDIA, MUMBAI

ORDER \nPER NARENDRA KUMAR BILLAIYA, AM:\nI.T.A. No. 424/Mum/2020 & are cross-appeals by the assessee and the revenue preferred against very same order of the ld. CIT(A) – 2, Mumbai [hereinafter 'the ld. CIT(A)'] dated 05/11/2019 pertaining to AY 2015-16.\n2\nI.T.A. No. 424/Mum/2020\nI.T.A. No. 882/Mum/2020\nThe cross-appeals were heard together and are disposed of by this\ncommon order for the sake of convenience and brevity.\n3. We first take up the assessee's appeal in ITA No. 424/Mum/2020.\nThe grounds of the appeal raised by the assessee read as under:-\n“Disallowance of bad debts written off\n1.1 The CIT(A) erred in directing the AO to recompute deduction for bad debt written\noff by reconstructing provision for bad and doubtful debt account in a manner different\nfrom what was already decided by ld. CIT(A) for Asst year 2014-15.\n1.2 Without prejudice to the above even as per CIT(A)'s own method of arriving\nbalance in the provision account a credit entry of Rs 1362.02 crores against a debit\nentry of Rs 909.41 crores would result in a credit balance of Rs 452.61 crore and not\na credit balance of 1362.0 crores as erroneously arrived by him.\nTaxability of recovery in respect of bad debts written off which was not\nallowed as deduction.\n2.1 The CIT(A) failed to note that when bad debts written off were not allowed, the\nquestion of charging to tax the amount recovered therefrom does not arise. Reliance is\nalso placed on the decision of Hon'ble ITAT Bangalore in case of State Bank of Mysore\n(33 SOT 7) in this regard.\n2.2 Without prejudice to the above the contention of Ld CIT(A) that any recovery\ntowards bad debt written off shall be charged to tax merely because a deduction against\nprovision made for bad and doubtful debts is allowed u/s 36(1)(viia), is contrary to the\nprovisions of the Act since the two terms are not interchangeable. Further charging to\ntax such sum amount by disallowing same amount once since by charging the\nrecovery and the other by reducing allowable bad debt by such recovery.\nDeduction u/s 36(1)(viia)\n3.1 The Ld. CIT(A) ought to have noted that provision made in books of accounts in\nline with RBI auction towards loans having arrears up to 90 days (though classified\nas standard assets) is eligible for deduction u/s 36(1)(viia) which is made by all banks\nin the manner of provisioning as per RBI norms prescribed by RBI.\nApplicability of provisions of section 115JB\n4.1 The CIT(A) erred in holding that the provisions of section 115JB are applicable to\nappellant relying only to those entities established under Companies Act and will not\napply to appellant which is established by Banking (Companies Transfer of\nUndertakings) Act, 1970 as held by Hon'ble ITAT Kolkata in case of UCO Bank."\n3\nI.T.A. No. 424/Mum/2020\nI.T.A. No. 882/Mum/2020\n4. Briefly stated the facts of the case are that the assessee filed its\nreturn of income on 27/11/2015 declaring total income of Rs.\n33,49,62,49,038/- and book profits of Rs.28,85,73,24,680/-. The return\nwas selected for scrutiny assessment and accordingly statutory notices\nwere issued and served upon the assessee. During the course of scrutiny\nassessment proceedings, the AO observed that an amount of Rs.\n471,05,05,075/- has been claimed as bad debts written off with regard to\nthe non-rural branches in the statement of computation of income and\nthis amount is claimed in addition to the provision made u/s 36(1)(viia)\nof the Act of Rs.17,21,27,00,501/-. The assessee has claimed that the\namount of rural bad debts written off is not claimed as a deduction\nconsidering the fact that the provision available exceeds the amount\nwritten off. It was contended that the provision account u/s 36(1)(viia)\nof the Act has to be constructed for the first time for both rural and non-\nrural advances together with the insertion of Explanation 2 to Section\n36(1)(vii) w.e.f 01/04/2014.\n5. Drawing support from the provisions of Section 36(1)(vii) read\nwith its proviso along with provision of Section 36(1)(viia) of the Act and\nCBDT Circular No. 464 dated 18/07/1986 along with clarificatory\namendment made to Section 36(1)(vii) vide Finance Act, 2013 by adding\nExplanation 2 thereon, the AO was of the opinion that a plain reading of\nthe aforementioned provisions leaves no doubt that the legislature\ndid not intend to differentiate between rural and non-rural bad debts for\nthe purpose of proviso to clause (vii). According to the AO deduction\navailable under clause (vii) of Section 36(1) shall be the difference\nbetween the bad debts written off by assessee in his books and the\nprovision made for bad and doubtful debts u/s 36(1)(vii) of the Act.\nAccording to the AO, since opening credit balance in provision u/s\n36(1)(viia) of the Act exceeds the actual amount of bad debts written off,\nassessee is not entitled for additional claim made for bad debts and\naccordingly disallowed Rs.471,05,05,075/-.\n5.

1. The assessee agitated the matter before ld. CIT(A) and vehemently\ncontended that the assessee had written off bad debts of Rs.923.67 Crore\nafter reducing the opening credit balance in the provision for bad and\ndoubtful debts account u/s 36(1)(viia) of Rs.452.61 Crores and claimed\nthe balance amount of Rs.471.06 Crores. It was strongly argued that the\nAO is not correct in stating that the opening credit balance in the\nprovision account was in excess of bad debt written off without\nsignifying the opening credit balance.\n6. The contention of the assessee did not find favour with the ld.\nCIT(A) who concurred with the view taken by the AO by taking the\nopening balance as on 01/04/2013 as Nil and confirmed the\ndisallowance.\n7. Before us, the ld. Counsel for the assessee reiterated what has been\nstated before the lower authorities.\n8. Per contra the ld. D/R strongly supported the findings of the AO.\nThe applicability of Explanation 2 to Section 36(1)(vii) r.w.s.\n36(1)(viia) has been elaborately considered by the Co-ordinate Bench in\nthe case of the The Karnataka Bank Ltd. vs. DCIT in order dated 26/05/2022. The relevant findings reads as under:-\n“7.7 We heard the Ld D.R and perused the record. Now the core question that arises\nis whether the bad debts relating to non-rural branches are also required to be first\n4\nI.T.A. No. 424/Mum/2020\n PBDD alone could be allowed as bad debts u/s 36(1)(vii) of the Act.\nThe provisions of Section 36(1)(vii) allows deduction as under:-\n(vii) subject to the provisions of sub-section (2), the amount of any bad\ndebt or part thereof which is written off as irrecoverable in the accounts of the\nassessee for the previous year.\nProvided that in the case of an assessee to which clause (viia) applies, the\namount of the deduction relating to any such debt or part thereof shall be\nlimited to the amount by which such debt or part thereof exceeds the credit\nbalance in the provision for bad and doubtful debts account under that clause.\nExplanation 2 - For the removal of doubts, it is hereby clarified that for the\npurposes of the proviso to clause (vii) of this sub-section and clause (v) of sub-\nsection (2), the account referred to therein shall be only one account in respect\nof provision for bad and doubtful debts under clause (viia) and such account\nshall relate to all types of advances, including advances made by rural\nbranches.\nThe provisions of sec.36(2)(v) are relevant here and it reads as under:-\n\"(v) In making any deduction for a bad debt or part thereof, the following\nprovisions shall apply---\n(v) where such debt or part of debt relates to advances made by an assessee to\nwhich clause (viia) of sub-section (1) applies, no such deduction shall be\nallowed unless the assessee has debited the amount of such debt or part of debt\nin that previous year to the 'provision for bad and doubtful debts' account\nmade under that clause.\"\nA combined reading of provision of clause (vii) of sec.36(1), the proviso thereunder\nand clause (v) of sec.36(2) would show that-\n(a) the bank should debit the actual bad debts written off by it to \"PBDD a/c\"\n(sec. 36(1)(viia))\n(b) the deduction u/s 36(1)(vii) shall be limited to the amount by which such\ndebt or part thereof exceeds the credit balance in the PBDD made under clause\n(vii) of sec.36(1).\n7.9 The contention of the revenue is that the Explanation 2 has expanded the scope\nof the proviso to sec. 36(1)(vii) and hence the bad debts relating to non-rural branches\nare also required to be first debited to PBDD a/c and the excess amount alone can\nbe allowed as deduction u/s 36(1)(vii) of the Act. According to revenue, the decision\nrendered by Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. vs. DCIT\n(343 ITR 270) . In the above said case, the Hon'ble Supreme Court has expressed the view\nthat the provisions of sec. 36(1)(vii) and 36(1)(viia) allow separate deduction and\nthey are independent provisions. The Supreme Court further held that the clause\n(viia)(a) applies only to rural advances. But the sec. bad debts relating to non-rural\nadvances need not be adjusted against the PBDD allowed under clause (a) of\nsec. 36(1)(vii) of the Act. The Hon'ble Supreme Court, inter alia, also observed as\nunder:-\n6\nI.T.A. No. 424/Mum/2020\nI.T.A. No. 882/Mum/2020\n"31 It was neither in dispute earlier nor is it disputed before us, that the\nassessee-bank is maintaining two separate accounts, one being a provision for\nbad and doubtful debts other than provision for bad debts in rural branches\nand another provision account for bad debts in rural branches for which\nseparate accounts are maintained....”.\nReferring to the above said observations, the revenue has taken the view that the\nHon'ble Supreme Court has rendered its decision on the assumption that the banks\nwould be maintaining two separate PBDD a/c, viz., one for rural branches and\nanother one for non-rural branches.\n7.10 It is possible that all banks may not be maintaining two separate accounts, as\nobserved by the Hon'ble Supreme Court. Hence there was an apprehension in the\nminds of revenue with regard to the effect of the decision rendered by Hon'ble\nSupreme Court. For instance, if a particular bank is maintaining only a single PBDD\na/c for the provision created u/s 36(1)(viia) of the Act and even if that bank is not\nhaving any rural branches, then it may try to avail the benefit of decision rendered\nby Hon'ble Supreme Court and may possibly contend that\n(i) the provision allowed u/s 36(1)(viia) shall apply only to rural branches.\n(ii) since it does not maintain two separate PBDD a/c for rural and non-rural\nadvances, the bad debts relating non-rural branches need not be reduced from\nthe PBDD a/c allowed u/s 36(1)(viia) in terms of sec. 36(2)(v) and the proviso\nto sec. 36(1)(vii) of the Act.\nHowever, the Ld A.R submitted before us that the Explanation 2 has been inserted\nin sec. 36(1)(vii) by Finance Act, 2013 (after the decision of Catholic Syrian Bank)\nto debar certain assessees to avail the interpretation given by Hon'ble Supreme Court\nin the case of Catholic Syrian Bank (supra).\n7.11 We have considered the arguments advanced by Ld A.R on this point. According\nto Ld A.R, if we closely analyse the provisions of sec. 36(1)(viia) of the Act, the\nintention of the Parliament in inserting Explanation -2 shall become clear.\nAccordingly, we analysed the provisions of sec.36(1)(viia) and notice that the said\nsection allows deduction of PBDD to various types of assessees, viz.,\n(i) Clause (a) of sec. 36(1)(viia) shall be applicable to a Scheduled bank (not\nbeing a bank incorporated by or under the laws of a country outside India) or\nnon-scheduled bank or a co-operative bank other than a primary agricultural\ncredit society or a primary co- operative agricultural and rural development\nbank. The quantum of The\ndeduction is 7.50% of Total income (computed before making any deduction\nunder this clause and Chapter VIA) and an amount not exceeding 10% of\nthe aggregate average advances made by the rural branches of such bank.\n(ii) Clause (b) of sec. 36(1)(viia) shall be applicable to a bank incorporated by\nor under the laws of a country outside India. The quantum of deduction is\n5% of the total income (computed before making any deduction under this\nclause and Chapter VIA).\n7\nI.T.A. No. 424/Mum/2020\nI.T.A. No. 882/Mum/2020\n(iii) Clause (c) is applicable to a public financial institution or a State\nfinancial corporation or a State industrial investment corporation. The\nquantum of deduction is 5% of total income (computed before making any\ndeduction under this clause and Chapter VIA).\n(iv) Clause (d) is applicable to Non-banking financial company from AY\n2017-18.\nThe Hon'ble Supreme Court in the case of Catholic Syrian Bank (supra) has held\nthat the PBDD allowed under clause (a) of Sec. 36(1)(viia) refers to 'rural advances'\nonly. In fact the expression \"rural branches\" finds place in clause (a) only. It can be\nnoticed that the reference to \"rural branches\" is not there in clause (b) to (d).\nGenerally, the foreign banks may not have rural branches. However, such kind of\nbanks, financial institutions, NBFC etc. are also eligible to claim deduction towards\nPBDD u/s 36(1)(viia) of the Act under clauses (b) to (d). In view of the decision\nrendered in the case of Catholic Syrian bank, it is possible that the assessees covered\nby clause (b) to (d) may contend that the bad debts written off by them need not be\nadjusted against PBDD allowed u/s 36(1)(viia) of the Act, since the bad debts relate\nto \"non-rural debts\". Accordingly, we are of the view that the Explanation 2 has\nbeen inserted in order to bring the assesses covered by clauses (b) to (d) within the\nambit of the proviso to sec. 36(1)(vii) and sec. 36(2)(v) of the Act. Hence, in our The\nview, advances given by rural and non-rural branches mentioned in Explanation 2\nshall apply to the assesses covered by clause (b) to (d) of sec. 36(1)(viia) of the Act.\n7.12 At this juncture, we may gainfully refer to the \"MEMORANDUM\nEXPLAINING FINANCE BILL 2013\", which brings out the intention of the\nParliament in inserting Explanation-2 in sec. 36(1)(vii) of the Act. It is extracted\nbelow:-\n\"Clarification for amount to be eligible for deduction as bad debts in\ncase of banks:-\nUnder the existing provisions of section 36(1)(viia) of the Income-tax Act, in\ncomputing the business income of certain banks and financial institutions,\ndeduction is allowable in respect of any provision for bad and doubtful debts\nmade by such entities subject to certain limits specified therein. The limit\nspecified under section 36(1)(viia)(a) of the Act restrict the claim of deduction\nfor provision for bad and doubtful debts for certain banks (not incorporated\noutside India) and certain cooperative banks to 7.5% of gross total income\n(before deduction under this clause) of such banks and 10% of the aggregate\naverage advance made by the rural branches of such banks. This limit is 5%\nof gross total income (before deduction under this clause) under sections\n36(1)(viia)(b) and 36(1)(viia)(c) for a bank incorporated outside India and\ncertain financial institutions.\nProvisions of clause (vii) of section 36(1) of the Act provides for deduction\nfor bad debt actually written off as irrecoverable in the books of account of the\nassessee. The proviso to this clause provides that for an assessee, to which\nsection 36(1)(viia) of the Act applies, deduction under said clause (vii) shall\n8\nI.T.A. No. 424/Mum/2020\nI.T.A. No. 882/Mum/2020\nbe limited to the amount by which the bad debt written off exceeds the credit\nbalance in the provision for bad and doubtful debts account made under\nsection 36(1)(viia) of the Act. The provisions of section 36(1)(vii) of the Act\nare subject to the provisions of section 36(2) of the Act. The clause (v) of\nsection 36(2) of the Act provides that the assessee, to which section 36(1)(viia)\nof the Act applies, should debit the amount of bad debt written off to the\nprovision for bad and doubtful debts account made under section 36(1)(viia)\nof the Act. Therefore, the banks or financial institutions are entitled to claim\ndeduction for bad debt actually written off under section 36(1)(vii) of the Act\nonly to the extent it is in excess of the credit balance in the provision for bad\nand doubtful debts account made under section 36(1)(viia) of the Act.\nHowever, certain judicial pronouncements have created doubts about\nthe scope and applicability of proviso to section 36(1)(vii) and held\nthat the proviso to section 36(1)(vii) applies only to provision made\nfor bad and doubtful debts relating to rural advances. Section\n36(1)(viia) of the Act contains three sub-clauses, i.e. sub-clause (a), sub-\nclause (b) and sub-clause (c) and only one of the sub-clauses i.e. sub-\nclause (a) refers to rural advances whereas other sub-clauses do not\nrefer to the rural advances. In fact, foreign banks generally do not have\nrural branches. Therefore, the provision for bad and doubtful debts account\nmade under clause (viia) of section 36(1) and referred to in proviso to clause\n(vii) of section 36(1) and section 36(2)(v) applies to all types of advances,\nwhether rural or other advances. It has also been interpreted that there are\nseparate accounts in respect of provision for bad and doubtful debt under\nclause (viia) for rural advances and urban advances and if the actual write\noff of debt relates to urban advances, then, it should not be set off against\nprovision for bad and doubtful The debts made for rural advances. There is\nno such distinction made in clause (viia) of section 36(1). In order to clarify\nthe scope and applicability of provision of clause (vii), (viia) of sub-section (1)\nand sub-section (2), it is proposed to insert an Explanation in clause (vii) of\nsection 36(1) stating that for the purposes of the proviso to section 36(1)(vii)\nand section 36(2)(v), only one account as referred to therein is made in respect\nof provision for bad and doubtful debts under section 36(1)(viia) and such\naccount relates to all types of advances, including advances made by rural\nbranches. Therefore, for an assessee to which clause (viia) of section 36(1)\napplies, the amount of deduction in respect of the bad debts actually written\noff under section 36(1)(vii) shall be limited to the amount by which such bad\ndebts exceeds the credit balance in the provision for bad and doubtful debts\naccount made under section 36(1)(viia) without any distinction between\nrural advances and other advances. This amendment will take effect from 1st\nApril, 2014 and will, accordingly, apply in relation to the assessment year\n2014-15 and subsequent assessment years.\nThe CBDT has issued an Explanatory note to the Provisions of Finance Act, 2013\non 24.01.2014 in F No.142/24/2013 - TPC, wherein also the very same explanations\nhave been given for introducing Explanation - 2 in Sec. 36(1)(vii) of the Act.\n9\nI.T.A. No. 424/Mum/2020\nI.T.A. No. 882/Mum/2020\nabove said Memorandum and the Explanatory Note issued by the\nGovernment/CBDT supports our view.\n7.13 Our view is further fortified by certain observations made by Hon'ble Supreme\nCourt in the case of Catholic Syrian Bank (supra). We may refer to paragraph 27 of\nthe decision now:-\n"27. As per this proviso to clause (vii), the deduction on account of the actual\nwrite off of bad debts would be limited to the excess of the amount written off\nover the amount of the provision which had already been allowed under clause\n(viia). The proviso by and large protects the interests of the Revenue. In case\nof rural advances which are covered by clause (viia), there would be no such\ndouble deduction. The proviso, in its terms, limits its application to the case\nof a bank to which clause (viia) applies. Indisputably, clause (viia)(a) applies\nonly to rural advances."\nIt is pertinent to note that the Hon'ble Supreme Court has categorically held that\nclause (a) of sec. 36(1)(viia) applies to rural advances only. If the Parliament wanted\nto undo the above said interpretation given by the Hon'ble Supreme Court, it should\nhave brought amendment in clause (a) to sec. 36(1)(viia) to make its intention clear\nthat the clause (a) shall apply to both rural and non-rural advances. Since there is no\nsuch amendment, the interpretation given by Hon'ble Supreme Court that \"clause\n(viia)(a) applies to rural advances only\" shall remain intact. Explanation 2 inserted\nin sec. 36(1)(vii), in our view, does not override the above said interpretation given\nby Hon'ble Supreme Court.\n7.14 In the Memorandum explaining the purpose of introducing Explanation -2 in\nSec. 36(1)(vii), it has been acknowledged that only the clause (a) refers to \"rural\nbranches\". It has also been stated that the foreign banks do not have rural branches.\nThe assesses covered by clause (b) to (d) may not be having rural branches. Hence,\nthe memorandum explains as under with regard to the decision rendered by Hon'ble\nSupreme Court in the case of Catholic Syrian Bank (supra):-\n\"However, certain judicial pronouncements have created doubts about the\nscope and applicability of proviso to section 36(1)(vii) and held that the\nproviso to section 36(1)(vii) applies only to provision made for bad and\ndoubtful debts relating to rural advances.\"\nBecause of the interpretation so given by Hon'ble Supreme Court, as discussed\nearlier, there arose a necessity for the Parliament to clarify that the PBDD allowed\nu/s 36(1)(viia) shall apply to all types of advances The Karnataka Bank Ltd.\nincluding advances made by rural branches. However, as stated earlier, the clause\n(a) to sec.36(1)(viia) has been held to be applicable to rural advances only and this\ninterpretation has not been overridden by any amendment.\n7.15 As noticed earlier, the assessees covered by clauses (b) to (d) may not be having\nrural branches, but they would be getting the benefit of deduction of PBDD u/s\n36(1)(viia) of the Act. Hence, in order to bring those assessees within the ambit of\n10\nI.T.A. No. 424/Mum/2020\nI.T.A. No. 882/Mum/2020\nthe proviso to sec. 36(1)(vii) and sec. 36(2)(v), it was imperative for the Parliament\nto clarify the legal position and accordingly Explanation-2 has been inserted in sec.\n36(1)(vii) of the Act. Accordingly, on the analysis of the provisions discussed above,\nwe are of the view that the above said Explanation-2 shall operate\n(a) in respect of clause (a) of sec. 36(1)(viia) of the Act only to rural advances\nand\n(b) in respect of clauses (b) to (d), for advances given by both rural and non-\nrural branches.\n7.16 In the instant case, the assessee has claimed deduction towards PBDD under\nclause (a) to sec. 36(1)(viia) of the Act, meaning thereby, the clause (a) is applicable\nto rural advances only as per the decision given by Hon'ble Supreme Court in the\ncase of Catholic Syrian Bank. Hence the bad debts relating to non-rural branches are\nnot required to be adjusted against PBDD allowed under clause (a) of sec. 36(1)(viia)\nof the Act in terms of the proviso to sec. 36(1)(vii) and sec. 36(2)(v) of the Act.\n7.17 In view of the foregoing discussions, we are unable to agree with the view\nexpressed by Ld CIT(A) on this issue. Accordingly, we set aside the order passed by\nLd CIT(A) on this issue and direct the AO to allow the bad debts relating to non-\nrural branches u/s 36(1)(vii) of the Act without adjusting the same against the\nPBDD a/c, since the said PBDD a/c relates to rural advances only.\nFinding parity of facts qua the relevant provisions, we direct the\nAO to allow the bad debts written off by the assessee. Accordingly,\nGround No. 1 is allowed.\n10. Ground No. 2 relates to the taxability of recovery in respect of bad\ndebts written off which were not allowed as deduction. A similar issue\nwas considered by the Co-ordinate Bench in assessee's own case in ITA\nNo. 2037/Mum/2024, vide order dated 11/06/2025. The relevant findings\nread as under:-\n“5.1 We find that an identical issue was decided by the coordinate bench in ITA No.\n1440/Mum/2023 in AY 2016-17. The relevant findings read as under:-\n\"11. We heard the parties and perused the material on record. The Id.\nAR brought to our attention that a similar issue in assessee's own\ncase for AY 2013-14 was considered by the Co-ordinate Bench where\nit has been held that \"11. Considered the rival submissions and\nmaterial placed on record, we observe from the record that the issue\nraised by the assessee is covered in its favour by the order of the\nCoordinate Bench in assessee's own case, the same is reproduced by\n11\nI.T.A. No. 424/Mum/2020\nI.T.A. No. 882/Mum/2020\nthe Ld. CIT(A) in his order at Page No. 17 of the order. Since the issue\nunder consideration is already covered in favour of assessee, however,\nLd. CIT(A) has elaborately discussed his point of view that why he is\nnot in a position to follow the decision of the Coordinate Bench, even\nthough it is not as per the legal conventions still we proceed to explain\nthe issue in the following paragraphs.\n12. In the factual matrix submitted before us, the Bank makes\nprovision for bad and doubtful debts as per RBI norms. Out of the\nsaid provisions made, deduction is allowed under section 36(1) (vita)\nto the extent of eligible amount as prescribed (an amount not\nexceeding 8.5% of the total income and an amount not exceeding 10%\nof the aggregate average advances by the rural branches). This is the\nfirst stream of deduction specified u/s 36(1) (vita) of the Act.\n13. Therefore, Let us understand this transaction with an example, if\na provision of say 2.1000 is made in the books as per RBI norms, a\ndeduction of say .500 is allowed based on formula (an amount not\nexceeding 8.5% of the total income and an amount not exceeding 10%\nof the aggregate average advances by the rural branches) under\nsection 36(1)(viia). However, if no provision is made in the books, no\ndeduction is allowed under section 36(1)(viia) as per section 36(2)(v)\nof the Act.\n14. Accordingly, for the purpose of determining taxable income, the\nprovision made of 2.1000 is added back and offered to tax, the\ndeduction of ₹.500 is claimed u/s 36(1)(viia) in the tax computation.\nTherefore, the actual bad debts written off is charged to the provision\naccount, which the assessee ultimately reverses in the tax\ncomputation and allowed only the statutory deduction u/s 36(1)(viia)\nof the Act, in the books it never crossed the amount allowed under\nsection 36(1)(viia) of the Act.\n15. If there is a reversal of provision which is credited to P&L account,\nthe same will be offered to tax and no deduction is allowed under\nsection 36(1)(viia) of the Act. Therefore, the provision made/reversed\nand deduction allowed under section 36(1)(viia) / amount offered to\ntax form a separate stream of deduction under the Income-tax Act.\nWhen a bad debt is written off, the same is written off by debit to\nprovision account for the reason that the assessee's claim of actual bad\ndebts written off never crossed the claim of deduction claimed under\nsection 36(1)(viia) of the Act by the assessee. Whereas, the deduction\nunder section 36(1) (vii) is allowed to the extent it exceeds the opening\ncredit balance in the provision account maintained under section\n36(1)(viia) of the Act. This is the 2nd stream of deduction.\n12\nI.T.A. No. 424/Mum/2020\nI.T.A. No. 882/Mum/2020\n16. No deduction of the bad debts written off is allowed under\nsection 36(1)(vii) of the Act. In this regard, if a recovery is effected out of the\nsaid write off which falls under the 2nd stream of deduction, the same\ncannot be taxed unless a deduction has been allowed under the 2nd\nstream in respect of bad debts written off.\n17. The provisions of section 41(4) of the Act which provides for\ntaxing the recovery effected out of the bad debts written off, therefore,\nclearly stipulates that the said recovery would be taxed if a deduction\nhas been allowed in respect of bad debt written off which falls under\nthe second stream of deductions, as stated above. Accordingly, the\ndeduction under section 36(1)(vii) of the Act i.e., in second stream of\ndeductions, the recovery effected out of such write off, which has been\nallowed, will be charged to tax. This is explained in the below chart\nand table.\n*************************\n18. From the above, in the situation I, the deduction u/s 36(1)(viia) as\nallowed the extent of 2.500 because there is a provision created as per\nRBI guidelines. In situation II, deduction of 500 is allowed\n36(1)(viia) until also the actual bad debts is more than the first stream\nof deduction, the additional deduction is allowed of 2.100/- u/s\n36(1)(vii) of the Act. In situation III, if the provision is not created in\nthe books of account, then no deduction is allowed under section\n36(1)(viia) of the Act and only option available to the assessee is to\nclaim u/s 36(1)(vii) of the Act.\n19. Therefore, it is clear that where a deduction has not been allowed\nin respect of bad debts written off under the 2nd stream, the\nquestion of charging the recovery effected out of such bad debts written off to\ntax will not arise. In the third situation discussed in the chart, when\nthe assessee does not make any provision as per RBI guidelines, then\nit cannot claim any deduction under Section 36(1)(viia) of the Act\nand it can only claim deduction under Section 36(1)(vii) of the Act, if\nthere is any recovery of bad debts by the Assessing Officer is not\nproper and observation of Ld.CIT(A) is also not correct, the Revenue has to appreciate the actual claim\nof deduction made by the assessee under various provisions as correctly\nenacted for the purpose of taxation by Companies Act. It has to be read along\nwith the tax computation submitted by the assessee and not express\ntheir opinion without properly verifying the impact in the tax\ncomputation. It may look double deduction while reading the\n13\nI.T.A. No. 424/Mum/2020\nI.T.A. No. 882/Mum/2020\nprovisions in isolation. Accordingly, the grounds raised by the\nassessee is allowed.\n20. In the result, appeal filed by the assessee is allowed.\"\n12. From the observations of the AO as extracted in earlier part of this order,\nit is clear that the AO has held the recovery to be taxable for the reason that\nthe adjustment made to the provision is indirectly charged to P&L A/c. This\nscenario is considered in the above decision and therefore respectfully\nfollowing the same, we hold that the recovery of bad-debts which has not been\nclaimed as a deduction u/s 36(1)(vii) in earlier years is not taxable.\nAccordingly, the AO is directed to delete the addition made in this regard.\"\n5.2 Respectfully following the findings of the coordinate bench, we direct the AO to\ndelete the impugned addition. Ground No. 2 is allowed.\"\n11. Ground No. 2 with its sub-grounds are accordingly allowed.\n12. Ground No. 3 relates to the deduction claimed u/s 36(1)(viia) of the\nAct.\n13. During the course of scrutiny assessment proceedings, the AO\nfound that the method adopted by the assessee taking the average\nadvances as Rs.32,928.41 Crores and the profit earned at Rs.1032.96\nCrores, was not acceptable for the computation of deduction claimed u/s\n36(1)(viia) of the Act at Rs.200 Crores. The AO computed yield on\nadvances by considering interest earned on advances as a percentage of\ntotal advances at 9.38% and the net profits earned have been computed\nby reducing the same by cost of funds and computed the deduction @\n20% of net profits earned for eligible advances at Rs.101.03 Crores.\n13.

raised by the revenue read as under:-\n20. The first grievance relates to the deletion of the disallowance u/s\n14A r.w.r 8D.\n21. Similar issues was decided by the Co-ordinate Bench in assessee's\nown case in (supra). The relevant findings read\nas under:-\n\"4.1 We find that an identical issue was decided by the coordinate bench in ITA No.\n1440/Mum/2023 for AY 2016-17. The relevant findings of the coordinate bench read\nas under:-\n\

4. The Id. AR submitted that the Co-ordinate Bench in assessee's own case\nfor AY 2014-15 (ITA No. 1807/Mum/2018 dated 27.11.2020) has considered\na similar issue and held that\n\

6. We have heard the submissions made by rival sides and have\nexamined the orders of authorities below. The assessee in appeal has\nraised solitary ground against the disallowance under section 14A\nr.w.r. 8D of the Act. The Revenue in ground No.1 of the appeal has\nimpugned the finding of CIT(A) in restoring the issue of disallowance\nunder section 144 r.w.r. 8D of the Act to Assessing Officer.\nUndisputedly, the assessee has earned tax free income from Bonds and\ndividend income on shares held as 'stock-in-trade'. The assessee has\nmade suo-moto disallowance of Rs.9,20,164/- under section 144 for\nearning tax free income. The assessee in appeal has contended that no\ndisallowance under section 144 of the Act is warranted as tax free\nincome has been earned on shares/stock held as 'stock-n-trade'. In so\nfar as contention of the assessee that shares/bonds on which tax free\nincome has been earned are held as 'stock-in- trade', is not disputed\nby the Revenue. The Hon'ble Apex Court in the case of Maxорр\nInvestment Pvt. Ltd. (supra) has observed that where shares are held\nas 'stock-in-trade', it becomes business activity of the assessee to deal\nin those shares as a business proposition. Whether dividend is earned\nor not is immaterial. It is quirk of fate that when the investee company\ndeclared dividend, those shares are held by the assessee, though the\n25\nI.T.A. No. 424/Mum/2020\nI.T.A. No. 882/Mum/2020\nintention of the assessee is to trade in shares to earn profits. The\nHon'ble Supreme Court approved the order of Hon'ble Punjab &\nHaryana High Court in the case of PCIT vs. State Bank of Patiala,\n391 ITR 218 albiet for a different reason that provisions of section 144\nwould not get attracted where the shares are held in 'stock-in-trade'\nFollowing the judgment rendered in the case of Maxopp Investment\nP. Ltd. (supra), the Tribunal in the case of Asstt.CIT vs. UCO Bank\n(supra), Punjab National Bank vs. ACI (supra) and IDBI Bank Ltd.\nVs. DCIT(supra) has held that disallowance under section 144 r.w.r.\n8D of the Act in case of assessee engaged in Banking business and\nholding shares as 'stock-in-trade' is not warranted.\n7. The CIT(A) has restored the issue of disallowance under section\n144 r.w.r. 8D of the Act to Assessing Officer to decide the issue in\nline with the order of Tribunal in assessee's own case for assessment\nyear 2010-11. We observe that the Co-ordinate Bench while\nadjudicating the issue of disallowance under section 144 r.w.r. 8D\nof the Act for assessment year 2010-11 in appeal by the assessee ITA\nNo.1627/Mum/2014 has in turn followed the order of Tribunal in\nassessee's own case for assessment year 2008-09, wherein the issue\nwas restored to Assessing Officer with a direction to examine the same\nafresh. The Tribunal while deciding the appeal of assessee for\n assessment year 2010-11 was not having the benefit of judgment\nrendered in the case of Maxopp Investment P. Ltd. (supra). The\nTribunal passed the order on 08/01/2016 and the judgment in the case\nof Maxopp was delivered in February 2018. Even the judgment in the\ncase of Pr.CIT vs. State Bank of Patiala (supra) and Pr.CIT vs. Punjab\nand Sind Bank (supra) are subsequent to the order of Tribunal.\n8. Thus, in the light of the decisions discussed above, we hold that no\ndisallowance under section 14A r.w.r. 8D of the Act is warranted\nwhere the assessee has earned exempt income on shares/stocks held as\n'stock-in-trade'. Consequently, the sole ground raised in appeal by the\nassessee is allowed and corresponding ground No.1 raised in the\nappeal by the Revenue is dismissed.\n9. In the result, appeal of the assessee is allowed.\"\n5. We heard the parties and perused the material on record. The facts for the\nyear under consideration is identical i.e. the exempt income earned by the\nassessee is out of the shares/stock held as stock-in-trade, therefore respectfully\nfollowing the above decision of the Co-ordinate Bench in assessee's own case,\nwe direct the AO to delete the disallowance made u/s 14A r.w.r. 8D.\nOn finding of parity of facts, respectfully following the decision of the coordinate\nbench (supra), we direct the AO to delete the disallowance made u/s 14A r.w. rule\n8D. Ground No. 1 with its sub-grounds allowed.\n26\nI.T.A. No. 424/Mum/2020\nI.T.A. No. 882/Mum/2020\n22. Respectfully following the same, Ground Nos.1 to 3 are\ndismissed.\n23. Ground Nos.4 & 5 relate to the bad debts written off u/s 36(1)(vii)\nof the Act. This issue has been also considered by us in the appeal of the\nassessee (supra) vide Ground No. 1 of that appeal. For our detailed\ndiscussion therein, this ground is dismissed.\n24. Ground Nos.6 & 7 relate to the adjustment in book profit in\nrespect of disallowance u/s 14A and addition of various provisions to\nincome while computing book profit.\n25. Since in the appeal by the assessee we have categorically held that\nprovision of Section 115JB of the Act are not applicable, therefore,\nGround No. 6 and 7 become infructuous.\n26. In the result, appeal by the assessee is allowed and appeal of the\nrevenue is dismissed.\nOrder pronounced in the Court on 11th August, 2025 at Mumbai.\nSd/-\n(SAKTIJIT DEY)\nVICE PRESIDENT\nMumbai, Dated 11/08/2025\n*SC SPS\nSd/-\n(NARENDRA KUMAR BILLAIYA)\nACCOUNTANT MEMBER\nआदेश की प्रतिलिपि अग्रेषित/