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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI R.K. PANDA & MS. ASTHA CHANDRA
आदेश / ORDER
PER ASTHA CHANDRA, JM :
The appeal filed by the Revenue is directed against the order dated 05.04.2024 of the Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi [“CIT(A)”] pertaining to Assessment Year (“AY”) 2018-19.
The Revenue has raised the following grounds of appeal :-
1. The Id. CIT(A) NFAC, Delhi has erred in deleting the disallowance made in respect of provisions for standard assets made by the assessee at Rs.1,09,89,000/-.
2. The Ld. CIT(A) NFAC, Delhi has erred in deleting the disallowance made in respect of the bad and doubtful debts reserve u/s 36(1)(viia) of Rs.6.10,00,000/-.
3. The appellant craves leave to add, amend or alter all or any of the Grounds of Appeal.”
3. Briefly stated, the facts of the case are that the assessee is a Co- operative Bank engaged in the banking business and is regulated by the Banking Regulation Act, 1949 by the Reserve Bank of India. For AY 2018- 19, the assessee filed its return of income on 29.09.2028 declaring total income of Rs.20,08,07,180/-. The case was selected for limited scrutiny under the E-assessment Scheme, 2019 on the following issues: - (i) Claim of Any Other Amount Allowable as Deduction in Schedule BP; (ii) Default in TDS & Disallowance for such Default and (iii) Expenses Incurred for Earning Exempt Income. Statutory notice(s) u/s 143(2)/142(1) of the Income Tax Act, 1961 (the “Act”) were issued and duly served upon the assessee calling for certain details/documents/information in respect of the above issues. The Ld. Assessing Officer (“AO”) while examining the veracity of deduction of “any other amount allowable as deduction in the schedule BP” noted that the assessee has debited Rs.7,19,89,000/- to its profit and loss account as bad and doubtful debts reserve. During the assessment proceedings, the assessee submitted that Rs.7,19,89,000/- is rightly claimed as deduction allowable u/s 36(1)(viia) of the Act being in respect of any provision for bad and doubtful debts read with calculation made under Rule 6ABA of the Income Tax Rules, 1962 (“IT Rules”). From the audit report in Form 3CD under column 21(a)(2) and (3), the Ld. AO observed that the auditor has reported that the provision for standard assets amounting to Rs.1,09,89,000/- and bad and doubtful debts reserves u/s 36(1)(viia) of the Act amounting to Rs.6,10,00,000/- are capital in nature. Relying on the decision(s) of Hon’ble Supreme Court in the case of Southern Technology Vs. JCIT 320 ITR 577 (SC) and in the case of Catholic Syrian Bank Vs. CIT 343 ITR 270 (SC) and the Hon’ble Madras High Court in the case of T.N. Power Investment Corporation Ltd. Vs. JCIT 280 ITR 491 (Mad.) and observing that the NPA is not same as bad and doubtful debts and mere provision for NPA is not allowable deduction u/s 36(1)(viia) of the Act, the Ld. AO disallowed the claim of the assessee u/s 36(1)(viia) of the Act totaling to Rs.7,19,89,000/- (Rs.1,09,89,000/- + Rs.6,10,00,000/-). The Ld. AO thus completed the assessment u/s 143(3) r.w.s. 144B of the Act on 29.04.2021 by making an addition of Rs.7,19,89,000/- on account of disallowance of provision on standard assets and bad and doubtful debts reserve u/s 36(1)(viia) of the Act.
Aggrieved, the assessee challenged the disallowance of Rs.7,19,89,000/- made by the Ld. AO before the Ld. CIT(A). Before the Ld. CIT(A) the assessee, inter alia submitted that the Co-ordinate Bench of the Pune Tribunal in assessee’s own case for AYs 2013-14 and 2014-15 has allowed the deduction for provision for bad and doubtful debts u/s 36(1)(viia) of the Act. The assessee also submitted that the case laws relied upon by the Ld. AO is not applicable in the present case as they are distinguishable on facts which has been recorded by the Ld. CIT(A) in para 4.5 of his appellate order. The assessee further placed reliance on catena of decisions wherein it is held that the provision on standard assets as mandated by the RBI is allowable u/s 36(1)(viia) of the Act (para 4.6.1 of the appellate order refers). In light of the above contentions, the Ld. CIT(A) allowed the assessee’s appeal holding that the assessee is entitled for deduction u/s 36(1)(viia) of the Act in respect of provision for bad and doubtful debts reserve amounting to Rs.7,19,89,000/-. The relevant findings and observations of the Ld. CIT(A) are reproduced below : “5. I have carefully considered the assessment order the grounds of appeal and the written submissions of the appellant. The man issue in depute in the present appeal is whether the appellant is entitled for deduction under section 36(1)(viia) of The Income Tax Act respect of the provision for bad and doubtful debts for an amount of 7,19,89,000/-. For the purpose of deduction under section 36(1)(via), the assessee must satisfy twin conditions of 1) being an entity specified under section 36(1)(via) and 2) having debited or provided for bad and doubtful debts in its accounts As per section 36(1) (vi) of the Income Tax Act scheduled bank or a non- scheduled bank or a cooperative bank other than primary agricultural credit society or a primary cooperative agricultural and rural development bank is eligible for deduction in respect of any provision for bad and doubtful debts made subject to the amount of deduction computed as per the above provision read with Rule 6ABA of the Income Tax Rules, which the appellant had clearly demonstrated in its written submissions reproduced above. From the facts on record, it is noted that the appellant is a cooperative bank regulated as per the Banking Regulation Act, 1949 and by the Reserve Bank of India and is into the business of banking Accordingly, the appellant is entitled to claim deduction under section 36(1)(viia) a of the Income Tax Act, 1961 as it is one of the specified entities under the provision. It is further noted from the audited financials of the appellant cooperative bank that the appellant had debited a sum of Rs. 1,09,89,000 as provision on standard assets at the rate of 0.40% and Rs. 6,10,00,000 as bad and doubtful debts reserve under section 36(1)(viia) of the Income Tax Act to its P & L account. These sums were also found credited to the standard assets provision under "other liabilities" and Special reserve fund under section 36(1)(viia) of the IT act under the Reserve Fund and Other Reserves in the Balance Sheet, respectively. The appellant during the assessment proceedings claimed the above sums credited to the reserve funds and debited to the profit and loss account as provision for bad and doubtful debts and accordingly, claimed the deduction under section 36(1)(viia) of the act. The above facts are not in dispute. However, the assessing officer observed from the tax audit report that the above- mentioned provisions debited to the profit and loss account were qualified as expenses of capital in nature by the auditors of the appellant cooperative bank. The assessing officer also tried to make a distinction between the provision for NPA and the provision for bad and doubtful debts as an allowable as deduction under section 36(1)(viia) of the Act.
It is to be noted that the appellant is a cooperative bank and is in the business of banking regulated under the Banking Regulation Act and by the regulations of the Reserve Bank of India. For the purpose of regulating the banking business in India, the Reserve Bank of India from time-to-time issues circular and other instructions with the regard to certain statutory norms to be followed by the entities regulated by it. The appellant being an entity operating in the business of banking and come within the regulatory framework of Reserve Bank of India is under the obligation to follow the guidelines of the Reserve Bank of India as far as the recognition of the income, asset classification and provisioning norms for loans and advances etc. The provisioning norms are given in para 5 of the Reserve Bank of India Master Circular dated July 1, 2015, and clause 5.1- Norms for provisioning on loans and advances, reads as under. In conformity with the prudential norms, provision should be made on the non- performing assets on the basis of classification of assets into prescribed categories..... viz standard assets, sub-standard assets doubtful assets, and loss assets. Accordingly, the banking companies are required to make provisions to cover the risk associated with the recovery of the loans and advances made in their business as per the norms prescribed by the Reserve Bank of India in the matter. The appellant before the assessing officer, had referred to CBDT Circular No. 258 dated 14th June 1979 and Circular No 421 dated 12th June 1985 explaining the intent of the legislature in introducing section 36(1)(viia) of the Act. After introduction of section 36(1)(viia) by the Finance Act, 1979, with effect from 1st April 1980, Circular No. 258 dated 14th June 1979 was issued by the Board to clarify the application of the new provisions. The provisions were introduced in order to promote rural banking and assist the scheduled commercial banks in making adequate provision from their current profits to provide for risks in relation to their rural advances. The deductions were to be limited as specified in the section. A rural branch' for the purpose of the Act had meant a branch of a scheduled bank, situated in a place with a population not exceeding 10, 000, according to the last preceding census of which the relevant figures have been published. The circular No. 421 dated 12tnJune, 1985 attempted to explain the amendments made to section 36 and also explained the provisions of clause (viia) of section 36(1).. The applicable clause of the circular reads as under. "Deduction in respect of provisions mode by banking companies for bad and doubtful debts. Section 36(1)(viia) of the income-tax Act provides for a deduction in respect of any provision for bad and doubtful debts made by a scheduled bank or a non-scheduled bank in relation to advances made by its rural branches, aggregate average advances made by such branches. Having regard to the increasing social commitments of banks, section 36(1)(viia) has been amended to provide that in respect of any provision for bad and doubtful debts made by a scheduled bank [not being a bank approved by the central Government for the purposes of section 36(1) (viiia) or a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank, an amount not exceeding ten per cent of the total income (computed before making any deduction under the proposed new provision) shall be allowed as a deduction in computing the taxable profits. Given the provisioning norms prescribed by the Reserve Bank of India in dealing with the non-performing assets, which are akin to the bad and doubtful assets/debts it is prudent for the appellant to make provisioning based on the Regulatory guidelines of the Reserve Bank of India and that would be sufficient for the appellant to make a claim under section 36(1)(via) of the Act. Further, as the appellant is obligated to make provision in respect of the non-performing assets as per the Reserve Bank of India guidelines, it may not be mandatory or rather it would be redundant for the appellant to make provision for bad and doubtful debts, separately Given the banking norms prescribed by the RBI under the Banking Regulation Act, the guidelines for recognition of NPAs and associated provisioning would tantamount to provision for any bad and doubtful debts in the banking business. In such scenario, I do not find any infirmity in the accounting policy of the appellant in so far as the provision for the non-performing assets which in anyway is equivalent to the bad and doubtful debts of appellant's business. The assessing officer observed in the assessment order that the provisions for bad and doubtful debts are of revenue in nature as compared to the appellant's provision for NPA which is qualified as capital in nature by the auditors. Given the mandate of deduction under section 36(1)(viia) of the Act, which provides for deduction in respect of provisions for bad and doubtful debts of scheduled banks and non-scheduled banks and the same deals with their provisioning for risk associated with the loans and advances, which turned out to be NPAs or bad as per RBI norms or business norms, as the case may be, the denial of deduction in respect of such provisions as made by the appellant would defeat the very purpose of section 36(1)(viia) of the Act. For the same reason and relying on the decision cited by the appellant in the case of Sarva UP Gramin Bank (ITA No. 3223/Del/2018) I do not agree with the assessing officer that the provisioning for bad and doubtful debts as contemplated in section 36(1)(visa) ought to be revenue in nature to allow the deduction. Further I have examined, the decisions relied on by the assessing officer in coming to the above conclusion that the provisions in respect of the bad and doubtful debts as claimed by the appellant is not allowable and the appellant submissions that the decisions are not applicable to the facts of the appellant case. Having perused the facts and context of the above decisions I agree with the appellant that the decisions relied on by the AC are not applicable to the appellant case. Regarding the deduction in respect of the provision made towards the standard assets, the assessing officer by going into the definition of standard assets vis-a-vis the other assets, held that the same cannot qualify as bad and doubtful assets. It is true that as per the RBI norms the standard assets are not bad and doubtful assets but at the same time the RBI norms provide for making some general provision @ 0.40% or 0.25% meaning there could be some element of risk associated with the performing assets in future and such provisions are also covered within the scope of the deduction under section 36(1)(viia) in as much as the same amount to the provisioning for bad and doubtful debts. Further, the appellant's reliance on decisions cited in Para 4.6 above are followed to hold that the appellant is entitled to deduction of the provisions made on standard assets as well.”
Dissatisfied, the Revenue is in appeal before the Tribunal and all the grounds of appeal relate thereto.
At the outset, the Ld. AR submitted that the impugned issue is squarely covered in favour of the assessee by catena of decisions of various judicial forums including the Co-ordinate Bench of the Pune Tribunal and also by the Tribunal’s order in assessee’s own case for AYs 2013-14 and 2014-15. In support thereof, the Ld. AR relied on the following judicial pronouncements : i. Bhagini Nivedita Sahakari Bank vs DCIT, Pune in 29.05.2015; ii. Sant Sopankaka Sahakari Bank Ltd. vs DCIT, Pune in dated 20.12.2019; iii. DCIT vs Sarva UP Gramin Bank in ITA No. 3223/Del/2018, dated 17.08.2021; iv. Nawanshehar Central Co Operative Bank Ltd vs DCT in ITA No. 544/Asr/2017, dated 11.03.2019; v. Bellad Bagewadi Urban Souharda Sahakari Bank in ITA No. 100168/2015 Karnataka HC, dated 29.01.2018; vi. Shri Samartha Sahakari Bank Ltd. in ITA No. 873/PUN/2017 dated 06.01.2020; vii. The Jalgaon District Central Co-op. Bank Ltd. Vs. DCIT in ITA No. 395/PUN/2021, dated 08.03.2023 and ACIT Vs. Jila Sahakari Kendriya Bank in ITA No. 455/Ind/2018, dated 28.04.2023.
7. The Ld. DR, on the other hand, vehemently supported the order of the Ld. AO.
8. We have heard the Ld. Representatives of the parties and perused the material on record and various judicial precedents cited by the Ld. AR. The facts are not in dispute. The Ld. AO has disallowed the deduction u/s 36(1)(viia) of the Act for the reason that the assessee has created provision for NPA and not provision for bad and doubtful debts. We observe that before the Ld. AO, the assessee submitted a copy of audited financials which duly reflects that the assessee has created ‘provision for bad and doubtful debts’ and not ‘provision for NPA’. As an alternate contention, the assessee submitted before the Ld. AO that there are various judicial precedents on the impugned issue in favour of the assessee wherein it is held that even although the assessee has named the provision as ‘Provision for NPA’, but in pith and substance the provision had been created for ‘Bad and Doubtful Debts’ (page 34 of the paper book-I refers). The Ld. CIT(A) has deleted the addition of Rs.7,19,89,000/- made by the Ld. AO for the reasons reproduced above. The Ld. AR for the assessee has submitted that the impugned issue is a recurring issue and the Co-ordinate Bench of the Pune Tribunal has decide the same issue in assessee’s own case in its favour for AYs 2013-14 and 2014-15. We have perused the order of the Co-ordinate Bench of the Pune Tribunal in assessee’s own case in & 628/PUN/2019 for AYs 2013-14 and 2014-15, dated 04.10.2019. The relevant findings and observations of the Tribunal in the said case are as under : “17. If we adopt the qualifying amount of Rs.20.05 Crore, being, the second part of the deduction along with the first part of the deduction at 7.5% of the total income correctly computed, namely, after reducing the amount of depreciation, still the total qualifying amount of deduction is more than Rs.21 Crore. As against this, the assessee claimed deduction towards provision for bad and doubtful debts only at Rs.3.29 Crore. When we view both the parts of the deduction u/s.36(1)(viia) of the Act in totality, it transpires that even though the assessment order was erroneous in accepting the computation at 7.5% of the income without reducing the amount of depreciation, but on entirety, the assessment order on this issue cannot be construed as prejudicial to the interest of the Revenue because the total amount of deduction u/s 36(1)(viia) is only Rs.3.29 Crore, which is well much short of the correct qualifying amount at more than Rs.21 Crore. That being the position, the assessment order albeit erroneous and prejudicial to the interest of the Revenue at the first part of calculation of qualifying amount at 7.5% on total income, but ceases to be prejudicial to the interest of the revenue on the overall question of granting deduction u/s 36(1)(viia) of the Act because the total amount of deduction, even after correcting the first part of the qualifying amount, remains at the same level at which it was claimed and allowed at Rs.3,29,84,041/-. We, therefore, refuse to accept the validity of the exercise of revisionary power on this issue.”
9. The claim of the assessee also finds support by the decision of the Hon’ble Karnataka High Court in the case of Bellad Bagewadi Urban Souharda Sahakari Bank (supra). The Pune Bench of the Tribunal in the case of Shri Samartha Sahakari Bank Ltd. (supra) following the decision of the Hon’ble Karnataka High Court in the case of Bellad Bagewadi Urban Souharda Sahakari Bank (supra) decided the impugned issue in favour of the assessee by observing as under : “7. We have heard the rival submissions and perused the material on record. The issue in the present appeal is with respect to the provision made for bad debts for standard assets. We find that the amount was disallowed by the Assessing Officer and CIT(A) as they were view of that the provision made for standard assets is not allowable as deduction for provision of bad and doubtful debts. We find that an identical issue arose before the Hon‟ble High Court of Karnataka in the case of Bellad Bagewadi Urban Souhard Sahakari Bank Niyamit Vs. CIT & Anr. (supra), wherein substantial question of law before the Hon‟ble High Court was as under:-
Whether in the facts and circumstances of the case and in law, the authorities were justified in denying deduction for provision of bad debts made for standard assets of Rs.15,00,000/- during the assessment year 2011-12 under Section 36(1)(viia) of the Income Tax Act, 1961 on the ground that the assessee has failed to furnish the details of deduction?
Thereafter, the Hon‟ble High Court held as under:- “5. We have heard the learned counsel appearing for the parties and perused the material on record.
6. It is apparent from the material placed before us that the RBI guidelines prescribes the provision on standard assets from the year ended March 31, 2000 directing the banks to make a general provision of a minimum of 0.25% on standard assets.
In our opinion, the decision rendered by the Commissioner of Income Tax is unjustifiable for the reason that assessee is bound by the guidelines issued by the Reserve Bank of India. Any contrary view taken by the Income Tax Authorities would disentitle the assessee from claiming deduction under Section 36(1)(viia) of the Act. In view of non-furnishing of the material documents in support of the claim before the Tribunal, it was left with no other option except to confirm the order of the Commissioner of Income Tax (Appeals).”
Before us, the Revenue has not placed any contrary binding decision in its support nor has placed any material on record to demonstrate that the decision of Hon‟ble High Court of Karnataka in the case of Bellad Bagewadi Urban Souhard Sahakari Bank Niyamit Vs. CIT & Anr. (supra) has been set aside / overruled / stayed by Higher Judicial Forum. We therefore, following the decision of Hon‟ble High Court of Karnataka in the case of Bellad Bagewadi Urban Souhard Sahakari Bank Niyamit Vs. CIT & Anr. (supra) and for similar reasons hold that the assessee is eligible for deduction and we thus, direct the Assessing Officer. In view of the aforesaid, the grounds raised by the assessee are partly allowed.”
We observe that the Ld. CIT(A) has duly considered the assessment order, submissions of the assessee, CBDT and RBI Circular(s) relating to the impugned issue as well as various case laws cited by the assessee. Only after getting convenienced that the decisions relied on by the Ld. AO are not applicable in the case of the assessee, the Ld. CIT(A) allowed the appeal of the assessee holding that the assessee is entitled to deduction of provision made on standard assets as well. We, therefore, do not find any infirmity in the order of the Ld. CIT(A) who has passed a speaking order on merits of the case in light of the various judicial precedents wherein the impugned issue has been favorably decided in favour of the assessee. Before us, the Revenue has not brought any contrary binding decision in its support. We, therefore, following the decisions (supra) and for the same reasons cited therein hold that the assessee is eligible for deduction in respect of provision for standard assets and bad and doubtful debts reserves u/s 36(1)(viia) of the Act and dismiss the ground Nos. 1 and 2 raised by the Revenue. The Ld. AO is hereby directed to allow the claim of the assessee. We hold and direct accordingly.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 28th January, 2025.