M/S JILA SAHAKARI KENDRIYA BANK MARYADIT,MANDSAUR vs. THE DCIT, RATLAM

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ITA 386/IND/2017Status: DisposedITAT Indore17 August 2018AY 2012-1317 pages
AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that Section 36(1)(viia) and Section 36(1)(viii) deal with distinct items (provision for bad debts vs. special reserve for specific purposes) and cannot be equated. The assessee's attempt to re-characterize the reserve from one section to another after initial disallowance was not accepted.

What were the facts?

The assessee, a cooperative bank, created a special reserve fund of Rs. 1,42,00,000/-. Initially, it claimed this as a deduction under Section 36(1)(viii) of the Income Tax Act, which was disallowed as the bank did not provide long-term finance for agricultural development. Subsequently, the assessee argued it should be allowed as a deduction under Section 36(1)(viia) for bad and doubtful debts.

What were the issues?

Whether a special reserve created for long-term finance can be claimed as a deduction for provision for bad and doubtful debts under a different section of the Income Tax Act.

Which sections of the Income-tax Act were involved?

Section 36(1)(viii),Section 36(1)(viia)

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Income Tax Appellate Tribunal, INDORE BENCH, INDORE

Before: SHRI KUL BHARAT & SHRI MANISH BORAD

For Appellant: Shri S.S. Deshpande,CA
For Respondent: Shri Lalchand, CIT, Shri S.S. Deshpande,CA
Hearing: 25.7.2018

आयकर अपील�य अ�धकरण, इंदौर �यायपीठ, इंदौर IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER

ITA No.386/Ind/2017 Assessment Year: 2012-13 Jila Sahakari Kendriya DCIT, Ratlam Bank Maryadit, Vs. Mhow-Neemuch Road, Mandsaur (M.P) (Appellant) (Respondent ) PAN No.AAATJ2383F Revenue by Shri Lalchand, CIT Assessee by Shri S.S. Deshpande,CA Date of Hearing 25.7.2018 Date of 17.8.2018 Pronouncement

O R D E R PER MANISH BORAD, AM.

This appeal filed by the assessee pertaining to the A.Y. 2012-

13 is directed against the order of ld. Commissioner of Income-tax

(Appeals), Ujjain dated 06.02.2017 which is arising out of the order

u/s 143(3) of the Income Tax Act dated 11.03.2015 passed by DCIT,

Ratlam.

2.

Assessee filed has raised following grounds of appeal;

1. That Ld. CIT(A) has erred in maintaining the addition of Rs.1,42,00,000/- being the special reserve created by the Bank.

2.

It was submitted before the Ld. CIT(A) that the reserve is to be considered u/s 36(1)(viia) and the assessee is entitled to deduction of Rs. 21.70 crores against which this reserve may be considered. The reserve be considered having been made u/s 36(1)(viia) and hence the deduction may please be allowed.

3.

Briefly stated facts relating to the grounds raised in this

appeal, as culled out from the records are that the assesee is a

cooperative society doing the business of banking in the district of

Mandsaur. The return of income was filed declaring the income of

Rs.5,72,83,218/-. The accounts are audited. While preparing the

P&L a/c, the bank has made the provision for Bad and Doubtful

Debts of Rs.3,00,00,000/- and Special Reserve Fund of

Rs,1,42,00,000/-. During the course of assessment it was

submitted before the Ld.AO that the Special Reserve Fund is made

for the claim u/s 36(1)(viii) of the Income Tax Act (In short referred

as the Act). The same was @20% of the profit (5,76,38,168/- +

1,42,00,000/- = 7,18,38,168/-). While framing the assessment the

Ld. AO observed that the assessee is not entitled to a deduction u/s

36(1)(viii) since the bank has not given the long term finance for

development of agriculture. On this ground he made the addition of

Rs.1,42,00,000/- while computing the total income. In appeal it

was submitted before the Ld.CIT(A) that Rs.1,42,00,000/- has been

disallowed treating it to be a claim u/s 36(1)(viii) but the same

should be considered u/s 36(1)(viia). It was submitted before the

Ld.CIT(A) that the assessee is entitled to claim the deduction u/s

36(1)(viia) of Rs.9.2 crores and as such the special reserve created

be considered as a reserve for bad and doubtful debts and the claim

should be allowed u/s 36(1)(viia) of the Act. The Ld. CIT(A)

dismissed the appeal on the ground that the deduction would be

limited only to the extent of the reserve created for bad and

doubtful debts and it is mandatory to prepare the account as

provision for bad and doubtful debt and as the assessee has not

made the provision under this head in the P&L account, as such

the assessee is not entitled to a claim u/s 36(1)(viia).

4.

Ld. Counsel for the assessee submitted that the section

36(1)(viia) of the Act provides for the deduction in respect of the

provision for bad and doubtful debt to the extent of 7.5% of the

profit and the amount not exceeding 10% of the aggregate average

advances made by the rural branches. As per this limit the total

deduction allowable to the assessee is Rs.21.7 crores out of which

there is a reserve of Rs.12.5 crores which is already allowed. Thus

the assessee is entitled to a further deduction of Rs.9.2 Crores.

Section 36(1)(viii) of the Act prescribes the deduction for special

reserve created for long term finance to agricultural development.

The assessee is not entitled to this deduction since there is no long

term finance for agricultural development. It was through mistake

the reserve is created under the head special reserve and it was

claimed during the course of the assessment proceedings that the

same is made u/s 36(1)(viii) of the Act. However, the same should

have been claimed u/s 36(1)(viia) of the Act and should have been

considered and allowed under that section. The Ld.A.O disallowed

the same without confronting the assessee about the said

disallowance. However, before the Ld. CIT(A) the claim was

specifically made u/s 36(1)(viia) of the Act. The special provision

made by the assessee is also for bad and doubtful debt. The claim

made mentioning the wrong section should not deprive the assessee

for allowing the same while computing the income if the same is

allowable. It is submitted that the law is very clear that it is the 4

duty of the AO to allow deduction even though not claimed by the

assessee if from the facts investigated at the time of assessment, it

is found that the assessee is entitled to a particular relief in law. It

is obligatory on the part of the AO to draw attention of the assessee

to the lawful relief or deduction. The attention is drawn to the

following decision:

1.

CIT vs Archana Dhanwate 136 ITR 355 (BOM)

2.

CIT vs KN Oil Industries 142 ITR 13 (MP)

3.

Nathmal Bankatlal Parikh vs CIT 122 ITR 168

5.

Per contra The Ld. Departmental representative submitted that

the assessee has not claimed the deduction under the correct

section not is a nature of expenditure similar because the assessee

has claimed the expenditure towards special reserve fund created

for long term finance and now assesssee is pleading that it may be

allowed deduction for provision for bad and doubtful debts u/s

36(1)(viia). The Ld. Departmental Representative objecting to the

contentions of Ld. Counsel for the assessee referring and relying

following judgments;

1. IPCA Laboratory Ltd V/s DCIT (2004) 135 Taxman 594 (SC)

2.

CIT V/s N.C. Budhraja & Co. (1993) 70 Taxman 312(SC)

3.

Pandian Chemicals Ltd V/s Commissioner of Income Tax

(2003) 129 Taxman 539 (SC)

6.

We have heard the rival contentions, perused the records placed

before us and also gone through the judgments referred and relied

by both the parties carefully. Assessee’s sole grievance relates to

the addition of Rs.1,42,00,000/- maintained by Ld. CIT(A)

confirming the view taken by the Ld.A.O. The issue in narrow

compass is that the assessee claimed deduction u/s 36(1)(viii) of the

Act of the Act towards specific reserve created for the purpose of

providing long term finance for agriculture development in India.

The amount of specific reserve was calculated at Rs.1,42,00,000/-

which was within the permissible limit of 20% of net profit before

making deduction for special reserve fund at Rs.7,18,38,168/-. It

has been duly reflected in audited balance sheet under the specific

head “Special Reserve Fund” placed at page-15 of the paper book.

Subsequently during the assessment proceedings as well as before

Ld.CIT(A) assessee conceded to the fact that it is not eligible to 6

claim the deduction u/s 36(1)(viii) of the Act allowing it to create

special reserve fund as it has not given any long term finance for

development of agriculture and the deduction was wrongly claimed

u/s 36(1)(viii) of the Act.

7.

Thereafter during the appellate proceedings assessee took the

plea that it is eligible for the deduction u/s 36(1)(viia) which

provides for deduction in respect of provisions for bad and doubtful

debts to the extent of 7.5% of the profit and the amount not

exceeding 10% of the aggregate average advances made by the rural

branches. Amount of such provision which the assessee could have

claimed is computed at Rs.21.70 crores out of which assessee had

already made provision of Rs.12.5 crores (including Rs.3 crores

made during the year under appeal in the profit and loss account)

leaving behind the remaining amount of Rs.9.2 crores which could

be provided. The assessee’s plea is that the deduction of Rs.1.42

crores pertaining to specific reserve may be allowed u/s 36(1)(vii) of

the Act as there still remains an amount of Rs.9.2 crores which the

assessee could have legally claimed. Assessee has referred to various judgments which in our view do not apply to the facts of the

case as the same are distinguishable.

8.

To adjudicate this issue relating to special reserve u/s

36(1)(viiia) vis-à-vis provision for bad and doubtful debts as

provided in section 36(1)(vii) of the Act, we would first like to

reproduce relevant provision.

Section 36(1)(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 co- operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount not exceeding 3[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 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 com- mencing 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; (b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A); (c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) : Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, 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, of an amount not exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year; 4[(d) a non-banking financial company, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A).] Explanation.—For the purposes of this clause,— (i) "non-scheduled bank" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank; (ia) "rural branch" means a branch of a scheduled bank or a non- scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; (ii) "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934); (iii) "public financial institution" shall have the meaning assigned to it in section 4A5 of the Companies Act, 1956 (1 of 1956); (iv) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (v) "State industrial investment corporation" means a Government company within the meaning of section 6176 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of this sub-section; (vi) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P; 7[(vii) "non-banking financial company" shall have the meaning assigned to it in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934);] Section 36(1)(viii) in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head "Profits and gains of business or profession" (before making any deduction under this clause) carried to such reserve account: Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid up share capital and of the general reserves of the specified entity, no allowance under this clause shall be made in respect of such excess. Explanation.—In this clause,— (a) "specified entity" means,— (i) a financial corporation specified in section 4A8 of the Companies Act, 1956 (1 of 1956); (ii) a financial corporation which is a public sector company; (iii) a banking company;

(iv) a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank; (v) a housing finance company; and (vi) any other financial corporation including a public company; (b) "eligible business" means,— (i) in respect of the specified entity referred to in sub-clause (i) or sub-clause (ii) or sub-clause (iii) or sub-clause (iv) of clause (a), the business of providing long-term finance for— (A) industrial or agricultural development; (B) development of infrastructure facility in India; or (C) development of housing in India; (ii) in respect of the specified entity referred to in sub-clause (v) of clause (a), the business of providing long-term finance for the construction or purchase of houses in India for residential purposes; and (iii) in respect of the specified entity referred to in sub-clause (vi) of clause (a), the business of providing long-term finance for development of infrastructure facility in India; (c) "banking company" means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act; (d) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P; (e) "housing finance company" means a public company formed or registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes; (f) "public company" shall have the meaning assigned to it in section 39 of the Companies Act, 1956 (1 of 1956); (g) "infrastructure facility" means— (i) an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed10; (ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) or clause (vi) of sub-section (4) of section 80-IA; and

(iii) an undertaking referred to in sub-section (10) of section 80-IB; (h) "long-term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years;

9.

Provision of section 36(1)(viia) relates to provision for bad and

doubtful debts which, certain category of assessee’s have been

referred in the section are allowed to claim the expenditure as in the

nature of business as they engaged in to, regular bad debts occur.

10.

Now from the perusal of section 36(1)(viii) of the Act, we find

that it is in respect of specific reserve which is created by the

financial institutions for providing long term finance. Specific

reserve is not an expenditure but it is an apportionment of the

income and statue in order to promote long term finance in various

sectors for the benefit of general public of the country gives the

benefit of deduction to claim 20% of the available profits to be

accumulated under the head special reserve and the claimant is

duty bound to use such specific reserves only for the aforesaid

purpose for which it has been made and in case of any default the

same needs to be brought to tax. From above discussions we are of

the view that both the section 36(1)(viia) and 36(1)(viii) of the Act

deals with two distinct items namely an expenditure in the name of 12

provision for bad and doubtful debts u/s 36(1)(viia) of the Act and

in the nature of income u/s 36(1)(viii) of the Act which is set apart

for a specific purpose. In our view both the items expressed in

these two sections i.e. 36(1)(viia) and 36(1)(viii) of the Act are

different and cannot be equated to each other.

11.

Now coming to the issue raised in the instant appeal we find

that the Ld.CIT(A) has sustained the disallowance observing as

follows;

“4.2 Ground No.2: Through this ground of appeal the appellant has

challenged the addition of Rs.1,42,00,000/- on account of

disallowance of deduction u/s 36(1)(viii) of the I.T. Act. The

appellant had claimed deduction of Rs.1,42,00,000/- on account of

special reserve u/s 36(1)(viii) of the I.T. Act. The provision is in

expenditure relating to a particular account period but not falling due

on the date of filing financial statements. Since the expenditure

relates to particular financial year, a provision was made against

revenue generated in said accounting period failing which financial

statement could not be shown free and fair view. The provision of

expenditure could be allowed as deduction only if liability accrued as

on date of making provision and it is not a contingent liability. The deduction under the section would be entitled only in case of

provision for bad and doubtful debts made by the bank. The

deduction under the section is to be allowed by way of provision for

bad and doubtful debts which need to be created and reflected in

balance sheet. The deduction would be limited only to extend of the

reserve created by way of such provision. It is therefore mandatory

to prepared the account “provision for bad and doubtful debts

accounts” which automatically would need to the reserve on account

of such provision in the balance sheet. The appellant has not made

any provision for bad and doubtful debts and P&L account. The

appellant has made the provision as special reserve fund which is

meant for long term finance. The appellant is engaged in the short

term finance. Therefore, the appellant is not entitled for deduction

u/s 36(1)(viii) of the I.T. Act. Therefore, the appellant is not entitled

for deduction u/s 36(1)(viii) of the I.T Act. Therefore, the addition

made by the AO amounting to Rs.1,42,00,000/- is confirmed. The

appeal on this ground is dismissed”.

12.

In view of above discussion about the nature of items dealt in

both the sections i.e. 36(1)(viia) and 36(1)(viii) and examining them

in the light of the facts as well as the findings of Ld.CIT(A) we find

merits in the finding of Ld.CIT(A) for the reason that the assessee

made an intentional and well thought after claim u/s 36(1)(viii) of

the Act and made necessary accounting entries in the books of

accounts and also depicting it under the “Special Reserve Fund”

head in the audited balance sheet. The assessee after becaming

aware of the fact that it is not eligible for such deduction u/s

36(1)(viii) of the Act, it changed its stand and now is pleading that

the set off may be given u/s 36(1)(viia) of the Act relating to

provision for bad and doubtful debts giving the reason that it still

has unutilized limit of Rs.9.2 crores. We fail to understand how an

item of income can be equated to an item of expenditure. By no

canon can be given such set off more so section 36(1)(viia) of the Act

only provides a cap but nowhere gives the blanket permission to

claim the expenditure for provision to the extent mentioned therein.

The assessee or any other person being eligible for such deduction

under the provision of section 36(1)(viia) may make provision for

bad doubtful limits within the limit prescribed in this section. The

assessee in the instant case has made a certain amount of

provision after making necessary calculations which have been duly

certified by the auditors based on the debts given by the assessee 15

and the probability of the debts becoming paid. At this juncture the

assessee cannot be allowed to add some more amount to the

amount calculated at the time of finalizing the financial statement

just for taking the benefit of the provision. Benefits and

deductions/exemptions provided in the statute i.e. Income Tax Act

are not in the nature of “charity” that anyone can come forth and

claim. A person needs to prove with evidences, facts and

corroborative action to prove that it is entitled to a

benefit/deduction/ exemption provided in the Act. In the instant

case the assessee has tried to equate the apportionment of profit

against an expenditure for provision for bad and doubtful debts

which in our view is not possible.

13.

We therefore in the facts and given circumstances of the case

are unable to accept the contentions of Ld. Counsel for the assesse

and therefore are not inclined to make any interference in the

findings of Ld.CIT(A). In the result Ground No.1 & 2 raised by the

assesse are dismissed.

14.

Ground No.3 is general in nature which needs any adjudication.

15.

In the result appeal of the assesse is dismissed. 16

The order pronounced in the open Court on 17.8.2018.

Sd/- Sd/-

( KUL BHARAT) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER �दनांक /Dated : 17 August, 2018 /Dev

Copy to: The Appellant/Respondent/CIT concerned/CIT(A) concerned/ DR, ITAT, Indore/Guard file. By order Private Secretary/DDO, Indore

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