THE ASSTT. COMMISSIONER OF INCOME TAX, HOSHIARPUR vs. THE HOSHIARPUR CENTRAL CO-OP BANK LTD.,, HOSHIARPUR

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR BEFORE SH. SANJAY ARORA, ACCOUNTANT MEMBER AND SH. N.K.CHOUDHRY, JUDICIAL MEMBER I.T.A No.453/Asr/2015 Assessment Year: 2012-13 Asst. CIT, vs. The Hoshiarpur Central Hoshiarpur Circle, Co-op. Bank Ltd., Hoshiarpur. Railway Road, Hoshiarpur.

[PAN: AAAAT 0384K] (Appellant) (Respondent) Appellant by: Sh. Pawan Kumar (CIT-D.R.) Respondent by: Sh. J. S. Bhasin, Advocate Date of hearing : 05.11.2018 Date of pronouncement: 04.12.2018 ORDER PER SANJAY ARORA, A.M. This is an Appeal filed by the Revenue directed against the order by the Commissioner of Income Tax (Appeals)-I, Jalandhar (‘CIT(A)’ for short) dated 01.06.2015, dismissing the Revenue’s appeal contesting its assessment u/s. 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for Assessment Year (A.Y.) 2012-13 vide order dated 11.03.2015.

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lacs by way of a provision, which was denied by the Assessing Officer (AO) on the ground that the provision implies a contingent, and not an ascertained, liability, inadmissible in computing business income. Two, how could a provision for bad and doubtful debts be claimed in respect of standard assets, i.e., assets which by the assessee’s own estimation are good, provision in respect of which though stands booked in the assessee’s accounts in compliance with the RBI guidelines, even as the Act is a separate code in itself and income chargeable to tax under the Act is to be computed in accordance with its’ provisions (Southern Technologies Ltd. v. Jt. CIT [2010] 320 ITR 577 (SC)).

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Loss on sale of car as well as write off of perishable goods could not be regarded as a provision for bad and doubtful debts. The assessee states that while, without doubt, write off of perishable articles cannot be claimed as a provision for bad and doubtful debts, it is not barred from claiming the same against any other provision falling under Chapter IV-D. Surely, however, the assessee has to specify the provision where-under the said claim is admissible. Why, the ld. AR, on being queried by the Bench during hearing in this regard, was unable to specify the same or even the nature of the articles, stated to have since perished, or even if the said article stood included in the assessee’s block of assets. That is, their accounting treatment. While, therefore, no case for a set aside is made out, we, yet, in the interest of justice, consider it proper to allow the assessee a final opportunity to present its case before the AO in the appeal effect giving proceedings. The AO shall, where a case duly substantiated, is made out by the assessee, consider the assessee’s contention and adjudicate per a speaking order. Without doubt, the onus to prove its claim, both on facts and in law, would be on the assessee. We decide accordingly. 14. Ground 4 is in respect of claim of Rs.1.43 lacs (refer para 13 above). The same was denied on the basis that the said provision could not be regarded as a provision for bad and doubtful debts. The assessee’s claim is that the interest, booked as income for fy. 2006-07 (AY 2007-08), being not realized even during fy. 2007-08 (AY 2008-09), was reversed. That is, constitutes reversal of interest, so that it would not, as stated by the ld. CIT(A), stand to be debited to the provision account.

The provision u/s. 36(1)(viia) at the rate of 7.5% of income working to Rs.98.31 lacs, the ld. CIT(A) restricted the deduction for the provision for bad and doubtful debts thereto, thus, in effect, directing a disallowance for Rs.1.69 lacs (Rs.100 lacs-Rs.98.31 lacs). The assessee’s case (also refer Ground 2) is that the provision u/s. 36(1)(viia) should be considered at Rs.850 lacs, i.e., by including Rs.750 lacs, which is within the prescribed limit of 10% of the aggregate average advances made by rural branches of the bank (computed in the prescribed manner). That is, there is no scope for considering the provision (u/s. 36(1)(viia)) disjunctively. And that both the components of 36(1)(viia) must be considered together in-

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as-much as it is a single provision, albeit comprising of two parts, each of which is to be computed separately. As long as therefore the total provision is within the total amount computed as prescribed u/s. 36(1)(viia), no disallowance could be made with reference to either component. In our considered view, firstly, the crystallization of the amount of provision u/s. 36(1)(viia), in-so-far as it is based on assessed income, shall have to await the finalization of and, thus, could only be after giving the effect to the assessee’s other claims (or counter claims), i.e., in appeal proceedings. On merits, the assessee has aggregated the provision into its two constituents, opening and maintaining separate (provision) accounts for each of them, as is incumbent upon it. This is as though each of the two limbs is, in effect, a provision for bad and doubtful debts, the deduction for the same is to be made with reference to the upper limit for each of the two limbs, defined separately as, ‘not exceeding’ i.e., the specified percentage of total income in one case, and of the aggregate rural branch advances for the other. Each of the two components would therefore have to be reckoned separately, and no disallowance could be made where each of the two components does not exceed the limits specified there-for. It does not mean that the provision already made in accounts is to be disturbed to accommodate other provision, i.e., adjust the provision account, where in excess (as by Rs.1.69 lacs qua the income based provision in the instant case), with that where it is short. We say so as the section does not specify the amount of deduction per se, but permits the deduction in respect thereof up to a particular sum. As such, as along as the limit, specified separately, which is the reason for our stating of the assessee being required to maintain two provision accounts, is not breached, no disallowance could be made. Per contra, to the extent it is, disallowance for the excess claim would follow. It may be argued that the assessee could, in that case, open a single account which would make the adjustment aforesaid, i.e., transfer from one provision account to another, unnecessary. The total provision made each year would stand to be reckoned with reference to the sum of the two limbs, and as long as the aggregate of the two, i.e., 7.5% of the current year’s income and 10% of the aggregate rural advances, is not breached, no disallowance could be called for. The argument needs examination. As afore-stated, each of the two limbs, nevertheless, represent a provision u/s. 36(1)(viia). This, however, would require us to consider as to if the provision component reckoned on the basis of all rural branch advances is to be reckoned on a year- wise basis or the provision already credited in accounts is to be taken into account, i.e., if a provision for Rs.10 lacs (say) stands already made and allowed for an earlier year (AY 2007-08, say), would the assessee be eligible for another deduction of Rs.10 lacs qua rural advances assuming, for the sake of simplicity, no increase in the rural advances during the previous year relevant to AY 2008-09. This could be extrapolated for each succeeding year. It does not appear to be so, i.e., that the provision already made would have to be taken into account. This is as, where not so, the aggregate provision qua rural advances would, in time, exceed hundred per cent of such advances, i.e., as outstanding at the end of the relevant year, and which cannot be. The provision, it needs to be appreciated, is against an asset, i.e., recognizes the risk associated with its realisability and, therefore, is valid only with reference to the extant assets, i.e., as obtaining at the relevant time. The provision as on 31.03.2008 (asset) would therefore have to be reckoned with reference to the advances (by rural branches of the bank, speaking in the context of section 36(1)(viia)) as on 31.03.2008. The said provision may include that made during the earlier years, i.e., where not reversed, which thus would have to be taken into account while computing the upper limit specified qua rural advances u/s. 36(1)(viia). And in which case, therefore, the provision based on income (for each year u/s. 36(1)(viia) would have to be made, accounted for and

ITA No.453/Asr/2015 (A.Y.2012-13) 5 Asst. CIT v.The Hoshiarpur Central Co-op. Bank Ltd. reckoned (for the breach of the limit specified in its respect) separately. The argument aforesaid, appealing at first blush, does not hold. At this stage, we may refer to the Revenue’s Ground No. 2 (for AY 2008-09, in ITA No. 399/Asr/2011). The AO regarding the entire provision of Rs.852 lacs by the assessee as against standard loans, effected an addition for the same, i.e., Rs.852 lacs. The ld. CIT(A), while confirming disallowance of Rs.2 lacs (agitated by the assessee per its appeal), regarding the balance Rs. 850 lacs as in excess by Rs.1.69 lacs, allowed thus, in effect, a relief of Rs.848.31 lacs, which the Revenue contests per its Ground 2. Even if against standard assets, why could not the provision be regarded as a provision for bad and doubtful debts. A provision, though normally in-admissible in computing income u/s. 28, is allowed as special measure (in computing taxable income) for banks, including cooperative banks, in view of the nature of the business. While one component of the provision is based on income, so that it would necessarily have to be a regular component, i.e., for each year, based on its income, the other part is based on the aggregate (average) advances by rural branches, limit for which stands separately already specified. The provision made during the current year shall be allowed subject to the total provision (i.e., including that already made) not exceeding the limits specified in its respect. To conclude, the issue of disallowance of Rs.1.69 lacs sustained by ld. CIT(A) and Rs.848.31 lacs deleted by him, and qua which the opposing sides are in appeal, are correlated. This also explains our considering the two together, as also apparent from the said consideration. However, while arguments were made in respect of the assessee’s appeal, the Revenue’s appeal was largely considered as consequential. In the absence of proper deliberation, we do not consider it proper to conclude the two (correlated) issues. Our foregoing observations notwithstanding, which may well be relied upon by either side in the set aside proceedings, we only consider it proper that the matter is restored to the file of the AO for adjudication afresh after allowing the assessee a reasonable opportunity of presenting its case, in accordance with law. No side, we may though add, be constrained by our observations, so that is an open set aside. Ground 2 of the assessee’s and the Revenue’s appeal is disposed of accordingly. 3.2 It may therefore not be correct to state that the issue arising in the present appeal, i.e., the maintainability of the assessee’s claim for provision for bad and doubtful debts, is covered by the tribunal’s order in the assessee’s own case for AY 2008-09. As apparent, the tribunal observing that the issue, in part, also arose in the Revenue’s appeal, on which no arguments were made, declined to adjudicate, and restored the matter to the file of the first appellate authority, albeit with its’ observations. Sh. Bhasin would, on this being pointed out by the Bench during hearing, concede thereto, modifying his prayer for a similar course being adopted for the current year. We see no reason not to address the issue at hand; the same having travelled the earlier stages, with the findings by the two Revenue on merits on record. The non-adjudication for AY 2008-09 by the tribunal, as afore-noted,

ITA No.453/Asr/2015 (A.Y.2012-13) 6 Asst. CIT v.The Hoshiarpur Central Co-op. Bank Ltd. was for the reason of it subsequently coming to its’ notice that the issue, raised in context of some specific amounts in the assessee’s appeal, duly heard, also arose, i.e., in principle, in the Revenue’s appeal, which though had not been subject to proper hearing. It, therefore, to avoid prejudice being caused to either side, refrained from adjudicating the issue in principle. No such constraint obtains in the instant case.

3.3 Even as observed by the tribunal per its order supra, the claim for provision, generally inadmissible, is allowable only in view of the specific provision for provision for bad and doubtful debts in the case of banks, including the cooperative banks, as the assessee, in view of the nature of their business (sec.36 (1)(viia)). The only question that therefore survives is with regard to its’ quantum, i.e., if the provision as made and being claimed is in terms of, and in accordance with, the said provision (s. 36(1)(viia)), which provides for two independent parameters, i.e., the average rural branch advances, and the current year’s income (prior to any provision for bad and doubtful debts), stipulated at 10 percent and 7.5 percent thereof respectively. The manner of computing the average rural branch advances stands prescribed in the Income Tax Rules, 1962 (‘the Rules’ hereinafter), being r. 6ABA. The only issue, therefore, that could arise is if the provision @ 10% qua rural advances is to be made on a year-to-year basis, or represents the maximum amount for which the provision in its’ respect could be made. In our clear view, and even as observed by the tribunal per its order supra, also citing an example, it is the former. The profile or the constitution of the rural advances recoverable admittedly changing with time, a provision in its’ respect would only be with reference to that outstanding at any given point of time. As such, this part of the provision, i.e., referable to the rural advances, could not exceed, at any given time, 10% of the advances computed in the manner provided in the Rules. In fact, this is the accepted position; the assessee’s reply dated 29/12/2014 in the assessment

ITA No.453/Asr/2015 (A.Y.2012-13) 7 Asst. CIT v.The Hoshiarpur Central Co-op. Bank Ltd. proceedings, extracted at para 5.1 of the assessment order, whereat it says that the provision qua rural advances, including that already made earlier, thus, does not exceed 10% of its’ rural branch advances. This was in fact also the unanimous view of the learned representatives before us. The other component of the provision u/s. 36(1)(viia) is with reference to a percentage of the income (prior to the provision for bad and doubtful debts). This, of course, would stand to be made, and accordingly claimed, on a year-to-year basis. The assessee, as observed by the tribunal in its’ order for AY 2008-09 (para 15/pg. 18), maintained separate provision accounts for the two components. Subject, therefore, to the quantum limitation prescribed by law, as explained by us, the assessee’s claim for deduction toward provision for bad and doubtful debts is to be allowed under section 36(1)(viiia), and the assessee succeeds in principle. The AO shall, while confirming the same – the provision component linked to income being required to be revised on each revision in the assessee’s income in appeal, also clarify the exact amount of provision made by the assessee in its books; the ld. CIT(A) pointing to some difference therein, i.e., while giving appeal effect to this order, which is in conformity with the judicial rulings. Further, the write off of debts as bad and doubtful, i.e., in future, needless to add, would be by way of debit to the provision account, which is to be replenished, each year, on the basis of the parameters provided. We decide accordingly.

Sd/- Sd/- (N. K. Choudhry) (Sanjay Arora) Judicial Member Accountant Member Date: 04.12.2018 PKK Copy of the order forwarded to:

ITA No.453/Asr/2015 (A.Y.2012-13) 8 Asst. CIT v.The Hoshiarpur Central Co-op. Bank Ltd. (1) The Appellant: Asst. CIT, Hoshiarpur Circle, Hoshiarpur. (2) The Respondent: The Hoshiarpur Central Co-op. Bank Ltd., Railway Road, Hoshiarpur. (3) The CIT(Appeals)-1, Jalandhar (4) The CIT concerned (5) The Sr. D.R., I.T.A.T. True copy By Order