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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, V.P. & MS. PADMAVATHY S., AM
Per Saktijit Dey, VP: The captioned appeal by the assessee arises out of order dated 30.01.2025 passed by National Faceless Appeal Centre (NFAC), Delhi pertaining to Assessment Year (AY) 2019-20. 2. In Ground No.1, assessee has challenged disallowance of deduction claimed of Rs.591,79,00,000/- u/s. 36(1)(viia) of the Income Tax Act, 1961 (in short the ‘Act’).
Briefly the facts are, assessee is a Nationalized Bank engaged in the business of banking. For the assessment year under dispute, assessee had filed its return of assessee also filed a revised return of income claiming brought forward loss. In course of assessment proceeding, the Assessing Officer (AO) noticed that the assessee had claimed deduction of Rs.4620,87,19,739/- on account of bad debts written off in terms of Section 36(1)(viia) of the Act. On verification of details of the claim, the AO observed that against the provision made for doubtful debts u/s. 36(1)(viia) of the Act, the assessee had adjusted debts relating to rural branches.
1. Whereas, the debts relating to non-rural branches have not been adjusted against the provision so made. According to the AO, against the provision made u/s. 36(1)(viia) of the Act, the debts relating to, both, rural and non-rural branches have to be adjusted. Accordingly, he concluded that the assessee has claimed excess deduction of Rs.591.79 crores on account of write off of bad debts. Hence, he disallowed the deduction claimed to that extent. Though, the assessee contested the disallowance before learned First Appellate Authority, however, it was not successful.
Before us, learned counsel appearing for the assessee submitted that the issue is squarely covered by the decision of the Coordinate Bench not only in assessee’s own case but in case of various other Banks. In support of such contention, he relied upon the following decisions:
Bank of Baroda (erstwhile Vijaya Bank) 2022 (3) TMI 669-ITAT Bangalore 2. Karnataka Bank 2022 (5) TMI 1537 – ITAT Bangalore 3. Union Bank of India (erstwhile Corporation Bank) 2025 (2) TMI 530 – ITAT Mumbai (AY 2019-20) M/s. Bank of Baroda 4. Bank of Baroda (erstwhile Vijaya Bank)
1033 & 1040 / Bang/2024 for Asstt. Years 2014-15, 2016-17 & 2017-18 order dated 28.11.2024.
Though, learned Departmental Representative (DR) relied upon the observations of the AO and learned First Appellate Authority, however, he could not controvert assessee’s submission that the issue is squarely covered by the decision of coordinate Bench in assessee’s own case and in case of other banks.
Having considered rival submissions, we find, identical issue came up for consideration in assessee’s own case before the Bangalore Bench of the Tribunal.
While deciding the issue, the Tribunal in order dated 27.03.2018 in & 1839/Bng/2018 has held as under:
“16. We have heard the rival submissions and perused the materials on record. We noticed that the coordinate bench of this Tribunal in assessee's own case (Supra) has held that "9.3 We heard the parties and perused the record. We notice that the co-ordinate bench has considered an identical issue in the assessee's own case for AY 2010-11 in dated 05-01-2018 and it has been decided in favour of the assessee with the following observations:- "5. Ground No.2 - Bad Debts written off u/s.36(1)(vii) 5.1 In this ground (supra), the assessee challenges the disallowance of bad debts written off by it u/s.36(1)(vii) of the Act. In the order of assessment, the Assessing Officer disallowed the assessee's claim as he was of the view that it was only a prudential write off since the individual accounts were not squared off. The Assessing Officer also observed that the write off was not debited to the assessee's profit and loss account. On 1839/Bang/2018 appeal, the learned CIT (Appeals) rejected the assessee's contentions that the said bad debts are written off by debit in the profit and loss account under the head 'Bad Debts Written Off Account' under the code 163301, as he was of the view that unless the individual debts are squared off, the entries in the books of (AY 2019-20) M/s. Bank of Baroda account cannot be accepted as reliable. In coming to this finding the learned CIT (Appeals) relied on the decision of the Hon'ble Apex Court in the case of Southern Technologies Limited (2010) 320 ITR 577 (SC). 5.2.1 Before us, the learned Authorised Representative of the assessee submitted that the assessee bank has written off the debts by debiting the same to the 'Bad Debts Written Off Account' under the GL Code 163301 which is part of the profit and loss account and recoveries made in written off accounts are credited to the profit and loss account and offered to tax. According to the learned Authorised Representative, it is only in respect of accounts written off that the assessee bank can credit the recoveries to the profit and loss account and in the case of live accounts any recovery is credited to the debtors account. Therefore, the very fact that the recoveries are credited to the profit and loss account shows that the corresponding debts have been written off. It was submitted that the detailed accounting entries passed by the assessee bank with regard to the write off has been extracted at pages 31 and 32 of the order of assessment. The learned Authorised Representative drew the attention of the Bench to page 32 of the paper book in which the reconciliation of Gross Advances as per Branch Books and net advances as per Balance Sheet as on 31.3.2010 of the Bank has been carried out (placed at page 135 of the Annual Report for the year under consideration). It is submitted that the net advances as shown in the Balance Sheet tallies with the statement appearing at page 32 of the paper book, thereby establishing the fact that bad debts written off are reduced from the advances at the time of preparation of the Balance Sheet. The learned Authorised Representative also drew our attention 1839/Bang/2018 to page 25 of the paper book, which is a part of Form 3CD wherein at clause 20, it is clearly mentioned that recoveries of Rs.91,89,44,840 made against bad debts written off have been credited to the profit and loss account and reduced form the advances in the Balance Sheet. In support of the assessee's claim for write off of bad debts, the learned Authorised Representative placed reliance on the decision of the Hon'ble Apex Court in the assessee's own case i.e. Vijaya Bank Vs. CIT (2010) 323 ITR 166 (SC). 5.2.2 The learned Authorised Representative contended that the reliance placed by the authorities below on the decision of the Hon'ble Apex Court in the case of Southern Technologies Limited (supra) is not applicable as the facts in this cited case are totally different. It is submitted that the cited decision has been noted by the Hon'ble Apex Court in the assessee's own case (supra) and after noticing the said decision, the Hon'ble Court held that the provision debited to profit and loss account and reduced from advances would amount to write off.
(AY 2019-20) M/s. Bank of Baroda 5.3 Per contra, the ld. CIT, DR placed reliance on the findings rendered by the authorities below on this issue. It was contended that since the assessee's bank had not closed the individual debtors accounts at the Branch Level, there cannot be any write off. 5.4 In rejoinder, the learned Authorised Representative for the assessee bank submitted that there is no requirement to close the individual debtors account at the branch books, as has been held by the Hon'ble Apex Court in the assessee's own case. In this regard, the learned Authorised Representative also placed reliance on the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2009- 1839/Bang/2018 5.5.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. The facts on record indicate that the assessee bank has debited the bad debts written off to the account 'Bad Debts Written Off Account' (GL Code 163301) which is part of the profit and loss account and has reduced the write off from Gross Advances in the Balance Sheet. The authorities below disallowed the write off on the ground that the individual accounts are not squared off at the branch level. We find that this issue of write off has been settled by the Hon'ble Apex Court in the assessee's own case reported in 2010 (323 ITR 160) (SC), wherein at paras 8 & 9 thereof it was held as under : "
Coming to the second question, we may reiterate that it is not in dispute that s. 36(1)(vii) of 1961 Act applies both to banking and non- banking businesses. The manner in which the write off is to be carried out has been explained hereinabove. It is important to note that the assessee-bank has not only been debiting the P&L a/c to the extent of the impugned bad debt, it is simultaneously reducing the amount of loans and advances or the debtors at the year-end, as stated hereinabove. In other words, the amount of loans and advances or the debtors at the year-end in the balance sheet is shown as net of the provisions for impugned debt. However, what is being insisted upon by the AO is that mere reduction of the amount of loans and advances or the debtors at the year-end would not suffice and, in the interest of transparency, it would be desirable for the assessee- bank to close each and every individual account of loans and advances or debtors as a precondition for claiming deduction under s. 36(1)(vii) of 1961 Act. This view has been taken by the AO because the AO apprehended that the assessee-bank might be taking the benefit of deduction 1839/Bang/2018 under s. 36(1)(vii) of 1961 Act, twice over. [See order of CIT(A) at pp. 66, 67 and 72 of the paper book, which (AY 2019-20) M/s. Bank of Baroda refers to the apprehensions of the AO]. In this context, it may be noted that there is no finding of the AO that the assessee had unauthorisedly claimed the benefit of deduction under s. 36(1)(vii), twice over. The order of the AO is based on an apprehension that, if the assessee fails to close each and every individual account of its debtor, it may result in assessee claiming deduction twice over. In this case, we are concerned with the interpretation of s. 36(1)(vii) of 1961 Act. We cannot decide the matter on the basis of apprehensions/desirability. It is always open to the AO to call for details of individual debtor's account if the AO has reasonable grounds to believe that assessee has claimed deduction, twice over. In fact, that exercise has been undertaken in subsequent years. There is also a flipside to the argument of the Department. Assessee has instituted recovery suits in Courts against its debtors. If individual accounts are to be closed, then the debtor/defendant in each of those suits would rely upon the bank statement and contend that no amount is due and payable in which event the suit would be dismissed.
9. Before concluding, we may refer to an argument advanced on behalf of the Department. According to the Department, it is necessary to square off each individual account failing which there is likelihood of escapement of income from assessment. According to the Department, in cases where a borrower's account is written off by debiting P&L a/c and by crediting loans and advances or debtors accounts on the asset side of the balance sheet, then, as and when in the subsequent years if the borrower repays the loan, the assessee will credit the repaid amount to the loans 1839/Bang/2018 and advances account and not to the P&L a/c which would result in escapement of income from assessment. On the other hand, if bad debt is written off by closing the borrower's account individually, then the repaid amount in subsequent years will be credited to the P&L a/c on which the assessee-bank has to pay tax. Although, prima facie, this argument of the Department appears to be valid, on a deeper consideration, it is not so for three reasons. Firstly, the head office accounts clearly indicate, in the present case, that, on repayment in subsequent years, the amounts are duly offered for tax. Secondly, one has to keep in mind that, under the accounting practice, the accounts of the rural branches have to tally with the accounts of the head office. If the repaid amount in subsequent years is not credited to the P&L a/c of the head office, which is ultimately what matters, then, there would be a mismatch between the rural branch accounts and the head office accounts. Lastly, in any event, s. 41(4) of 1961 Act, inter alia, lays down that, where a deduction has been allowed in respect of a bad debt or a part thereof under s. 36(1)(vii) of 1961 Act, then, if the amount subsequently recovered on any such debt is greater than the (AY 2019-20) M/s. Bank of Baroda difference between the debt and the amount so allowed, the excess shall be deemed to be profits and gains of business and, accordingly, chargeable to income-tax as the income of the previous year in which it is recovered. In the circumstances, we are of the view that the AO is sufficiently empowered to tax such subsequent repayments under s. 41(4) of 1961 Act and, consequently, there is no merit in the contention that, if the assessee succeeds, then it would result in escapement of income from assessment." 5.5.2 Respectfully following the aforesaid decision of the Hon'ble Apex Court in the assessee's own case reported in 323 ITR 166 (supra), we hold that the assessee bank is eligible to claim and be allowed write off of the bad debts u/s.36(1)(vii) of the Act and we therefore reverse and delete the disallowance made by the Assessing Officer in this regard. Consequently, Ground No.2 of the assessee's appeal is allowed." 9.4 We notice that the Ld CIT(A) has followed the decision rendered by the coordinate bench in assessee's own case and deleted the disallowance of bad debts u/s 36(1)(vii) of the Act. Accordingly we do not find any reason to interfere with his order passed on this issue"
17. Respectfully following the decision rendered by the coordinate bench in assessee's own case, we allow the appeal in favour of the assessee. Accordingly, this ground of the assessee is allowed and the disallowance made u/s.36(1)(vii) is deleted.”
Factual position relating to the dispute being identical, respectfully following the decision of the Coordinate Bench as referred to above, we allow assessee’s claim and disallowance made is deleted.
8. In Ground No.2, the assessee has challenged disallowance of Rs.2,71,90,180/- u/s. 37(1) of the Act.
Briefly the facts are, in course of assessment proceeding, the AO noticed that under the head other office expenses claimed towards deduction, an amount of Rs.2,84,14,751/- represents penalty/fine paid by the assessee. Being of the view that Rs.2,84,14,751/-.
Contesting such disallowance, assessee preferred an appeal before learned First Appellate Authority. While deciding the issue, learned First Appellate Authority granted partial relief to the assessee by deleting the disallowance of Rs.12,24,571/-, being penalty imposed by Reserve Bank of India (RBI) on currency and non-currency chest.
Before us, learned counsel appearing for the assessee drew our attention to the nature of penalty imposed, as enumerated in Paragraph-8.2 of the assessment order, and submitted that the penalty imposed by consumer Courts are not for infraction of any law but imposed due to deficiency on service, hence, does not fall within the exception provided u/s. 37(1) of the Act. He submitted, identical is the nature of penalty imposed of Rs.25,000/- on delayed ATM Transaction. He submitted such penalty is not on account of infraction of any law but due to delay in ATM transaction. Thus, he submitted, these two amounts cannot be disallowed u/s. 37(1) of the Act. In so far as penalty paid of Rs.2,24,44,050/- is concerned, learned counsel submitted, the AO has not furnished the details of the penalty imposed so as to ascertain the nature of the penalty, whether for infraction of any law or otherwise.
Thus, he submitted the issue of allowability of Rs. 2,24,44,050/- can be restored back to the AO for factual verification.
Learned DR relied upon the observations of the Departmental Authorities. deficiency in service cannot be equated to an offence or an activity prohibited by law. Therefore, in our considered opinion, the amount cannot be disallowed by referring to Explanation-1 to Section 37(1) of the Act. Therefore, in our view, the amount of Rs.47,21,30/- has to be allowed as deduction. Similar is the case with regard to penalty on delayed ATM transaction amounting to Rs.25,000/-. In our view, the amount paid was not as a result of any offence or infraction of law. Hence, allowable as deduction.
In so far as penalty paid at 2,24,44,050/-, on perusal of the assessment order and the order of the First Appellate Authority, what is the nature of such penalty is not forthcoming. Learned counsel for the assessee has submitted before us that Departmental Authorities have also failed to disclose the exact nature of penalty imposed, whether for infraction of law or otherwise.
In view of the aforesaid, we restore the issue of disallowance of Rs.2,24,44,050/- to the AO for factual verification as to whether the amount was paid for any offence or for any activity prohibited by law and thereafter may consider allowability of such expenditure. The assessee must be provided an opportunity of being heard before deciding the issue.
In Ground No.3, assessee has contested the disallowance made of Rs.15,95,31,971/- u/s. 36(1)(va) r.w.s. 2(24)(x) of the Act. Alleging that the assessee has not deposited the employee’s contribution to provident fund within the stipulated confirmed by the learned First Appellate Authority.
Before us, learned counsel for the assessee submitted that the disallowance of Rs.15,95,31,971/- also includes the contribution made by the employees towards New Pension Scheme (NPS), which does not come in the category of PF. Hence, cannot come within the purview of Section 36(1)(va) of the Act. He submitted, even with regard to employee’s contribution to PF, it requires factual verification whether actually there was delay in depositing the contribution or not. Thus, he submitted, the issue may be restored back to the AO for factual verification and thereafter be decided.
Learned DR has no objection with regard to restoration of the issue to Assessing Officer.
Having considered rival submissions, we are of the view that employee’s contribution to NPS cannot be equated to employee’s contribution to PF, hence cannot be subjected to disallowance u/s. 36(1)(va) of the Act. Therefore, the AO is directed to factually verified the composition of the amount of Rs.15,95,31,971/- and in case it is found that it also includes employee’s contribution to NPS such amount should be excluded. From the purview of applicability of Section 36(1)(va) of the Act. Even in respect of employee’s contribution to PF, the AO is directed to verify the actual delay in depositing the employee’s contribution only after fctual verification if it is found that there is delay in depositing employee’s contribution to PF then disallowance u/s. 36(1)(va) of the Act can be made. Needless to say, the deciding the issue.
In the result, appeal is partly allowed. Order pronounced in the open court on 29.04.2025 Sd/- Sd/- (Padmavathy S.) (Saktijit Dey) Accountant Member Vice President Mumbai: Dated : 29.04.2025 Aks/- Copy of the Order forwarded to : 1. The Applicant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER,