M/S DISTRICT CO-OPERATIVE CENTRAL BANK LIMITED ,BIDAR vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-1 , GULBARGA

The assessee has filed this appeal challenging the order dated 26.11.2018 passed by Ld. CIT(A) Kalaburugi, and it relates to the assessment year 2012-13. The assessee has, inter-alia, challenged the validity of reopening of assessment.

The facts relating to the above said legal issue are stated in brief. The assessee herein is a cooperative bank. The original assessment for the year under consideration was passed u/s 143(3) of the Income-tax Act,1961 ['the Act' for short] on 16.3.2015.

The assessee contested before A.O. that the reopening of assessment was not valid. However the contentions of the assessee were rejected by the AO. The Ld. CIT(A) also confirmed the validity of reopening of assessment.

The ld. A.R. submitted that the A.O. has completed the original assessment proceedings u/s 143(3) of the Act by calling for various details. The Ld. A.R. submitted that the A.O. has issued a notice on 12.2.2015 to the assessee during the course of original assessment proceedings asking the assessee to furnish information on various claims made by the assessee in the return of income. The query No.19 raised in the above said notice reads as under.

The Ld. A.R. further submitted that the A.O., in the reasons for reopening, has stated that the assessee has debited only Rs.2.00 crores to the profit & loss account towards provision for bad and doubtful debts, while it has claimed deduction of Rs.2.50 crores u/s 36(1)(viia) of the Act. The Ld. A.R. submitted that the above said observation of the A.O. is not correct and is contrary to the facts available on record. He submitted that the assessee has debited the profit & loss account with a provision of Rs.2.50 crores only. In support of the same, the ld. A.R. invited our attention to the page Nos.21 & 36 of the paper book. Page No.21 is the profit & loss account, wherein a sum of Rs.6.30 crores is debited towards “provision for NPA and others”. Page No.36 contains details of Rs.6.30 crores, which shows that the provision made for NPA is Rs.2.50 crores and it is reported as under:- Provision for NPA:- 1. Provision for doubtful debts - Rs.2,00,00,000 2. Provision for standard assets - Rs. 50,00,000 ------------------- Rs.2,50,00,000 ============= Accordingly, the ld. A.R. submitted that the assessee has debited the profit & loss account with Rs.2.50 crores only and the same amount has been claimed as deduction u/s 36(1)(viia) of the Act towards provision for bad & doubts debts. The Ld A.R submitted that the AO has taken the view that the amount of Rs.50,00,000/-, being the provision created for Standard Assets cannot be claimed as District Co-operative Central Bank Ltd., Bidar “Provision for bad and doubtful debts” u/s 36(1)(viia) of the Act. He submitted that the “Provision for bad and doubtful debts” is an estimate made on the basis of past experiences in respect of bad debts and the same is created in respect of all its outstanding debts. Further, the provisions of sec.36(1)(viia) nowhere mandate that the provision should be created only in respect of “doubtful debts”. The Ld. A.R. submitted that the AO has examined all these details during the course of original assessment proceedings and has allowed the claim of the assessee. Hence, the A.O. has reopened the assessment on account of change of opinion that the provision for standard assets is not allowable u/s 36(1)(viia) of the Act. Accordingly, he submitted that reopening is bad in law. In this regard, the Ld. A.R. placed his reliance on the decision rendered by the Hon’ble High Court of Delhi in the case of CIT Vs. Kelvinator India Ltd. (256 ITR 1), wherein it was held that reopening of assessment on mere change of opinion is unconstitutional.

The Ld. D.R. on the contrary, submitted that the deduction is allowed u/s 36(1)(viia) of the Act only in respect of provision made for bad & doubtful debts. However, the assessee has made provision of Rs.50 lakhs for standard assets, i.e., the debts which are not bad & doubtful. Hence the provision made on standard assets is not allowable u/s 36(1)(viia) of the Act. In this case, the assessee has claimed the deduction under the above said section on the provision made on standard assets and the same has resulted in escapement of income. The Ld. D.R. accordingly submitted that the reopening of assessment cannot be called to be on account of mere change of opinion. Hence reopening is valid. The Ld. D.R. relied on the following case laws in support of her submissions:

In the rejoinder, the ld. AR submitted that section 36(1)(viia) of the Act allows deduction for “provision made for bad & doubtful debts”, while sec. 36(1)(vii) allows deduction of actual bad debts. The deduction u/s 36(1)(via) allows deduction towards general provision made for expected bad debts that may arise in future on the aggregate amount of outstanding advances. Section 36(1)(via) nowhere states that the provision should be made on doubtful debts alone. Hence, it is not required to distinguish the outstanding balances of receivables into “good debts” and “bad & doubtful debts” for the purpose of section 36(1)(viia) of the Act. He submitted that the A.O. has accepted the claim of the assessee in the original assessment proceedings and hence, the reopening of assessment is on account of change of opinion only. He further submitted that the decision relied on by the Ld. D.R. does not relate to the claim made u/s 36(1)(viia) of the Act.

We heard the rival contentions and perused the record. We notice that the A.O. has called for details of provision made for standard assets during the course of original assessment proceedings. After considering the details the A.O. has accepted the claim made u/s 36(1)(viia) of the Act. There is no dispute on these facts.

From the reasons recorded by the AO for reopening of assessment, we notice that the A.O. has expressed the view that the District Co-operative Central Bank Ltd., Bidar Page 6 of 8 “Provision for Standard assets” cannot be claimed u/s 36(1)(via) of the Act. The provisions of 36(1)(viia) of the Act read as under:- (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 42[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:

The ld. D.R. placed her reliance on the decision rendered by Pune benches of Tribunal in the case of Cosmos Co-operative Bank Ltd. (supra). We notice that the Tribunal has rendered its decision in the above said case in the context of section 36(1)(vii) of the Act, which deals with the deduction of bad debts actually written off in the books of accounts. We notice that the decision rendered in the case of Cosmos Cooperative Bank Ltd. (supra) was followed in the case of The Beed District Central Co-operative Bank Ltd. (supra). In the instant case, we are concerned with the claim made u/s 36(1)(viia) of the Act and hence, the above said two decisions would not support the case of the A.O.

In view of the foregoing discussions, we are of the view that the A.O., having allowed the claim of the assessee in the original assessment proceedings, has reopened the assessment on mere change of opinion. Further, the view expressed the AO on the deduction available u/s 36(1)(via) is also, in our opinion, not a correct view The Hon’ble Delhi High Court in the case of Kelvinator of India Ltd. (supra) has held that the reopening of assessment upon mere change of opinion is not valid in law. Accordingly, we are of the view that there is merit in the contention of the assessee that reopening of assessment is not valid. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and hold that the reopening is bad in law. Accordingly, we quash the impugned orders passed by the tax authorities.

Since we have quashed the assessment order on the legal issue, the issues urged on merit would become academic in nature, hence we decline to adjudicate them.

In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 22nd June, 2021