TIRUNELVELI DISTRICT CENTRAL CO OPERATIVE BANK LTD,TIRUNELVELI vs. ACIT CIRCLE 1, TIRUNELVELI

The assessee has raised the following grounds of appeal:

The learned CIT(A) has failed to appreciate that the provision of Rs.54,91,964/- made by the appellant on Sub-standard, Doubtful and Loss Assets is a provision for bad and doubtful debts' which qualifies for deduction u/s.36 [1] [viia] of the I.T. Act 1961. In the circumstances the learned CIT(A) ought to have allowed the deduction of the said provision u/s.36[1] [viia] of the I.T. Act 1961. The said deduction may please be allowed to the appellant.

2. The learned AO had erred in his order u/s 143(3)(ii) in disallowing the amount of "Deduction relating to Provision for bad and doubtful debts relating to rural branches of Commercial Bank u/s.36(l)(viia) on the basis of amount of provision made in the books of accounts and shown in the Income computation statement and additions are made on ignoring the provisions made in the books of accounts of the appellant.

While disposing the Appeal, the learned CIT(A), Madurai, had failed to appreciate the fact of provision made in the books of accounts and Computation of Income statements; 5. For these grounds of appeal and additional grounds of appeal that may be adduced at the time of hearing, the order of the learned AC, Circle 1, Tirunelveli, for addition of "Provision for bad debts Rs.54,91,964/-" with income for the AY 2014-15 lacks proper application/computation which prima facie on the grounds of facts available, has to be set aside/negated fully.

The brief facts of the case are that the assessee is a Co-operative Bank engaged in banking business filed its return of income for the AY 2014-15 on 05.11.2014 admitting total income of Rs.5,47,12,450/- and said return of income was revised on 29.03.2015 declaring total loss of Rs.7,08,74,249/-. The assessee being a Co-operative Bank made provisions for non-performing assets as per the guidelines issued by the RBI for classification of loans and advances on Prudential Norms. Further, the assessee had also made provision for contingent reserve for standard assets @ 0.25% on total standard assets. The assessee had also made provision for reserve for risk fund at Rs.62,37,580/-. However, while computing income from business provision created for contingent reserve for standard assets and reserve risk fund has been added back to the total income but claimed deduction for provisions for bad and doubtful debts u/s.36[1][viia] of Income Tax Act, 1961 (in short “the Act") for Rs.54,91,964/-. During the course of assessment proceedings, the AO was of the opinion that the assessee has made provision for standard assets in the books of accounts in terms of RBI guidelines and claimed deduction for the same in terms of Sec.36[1][viia] of the Act and thus, opined that as

The Ld.AR for the assessee submitted that the Ld.CIT(A) failed to appreciate that the provision for bad and doubtful debts made by the assessee for Rs.54,91,964/- is on bad and doubtful debts being sub- standard and doubtful loss assets in terms of Prudential Norms but not for standard assets and thus, same is eligible for deduction u/s.36[1][viia] of the Act.

The Ld.DR, on the other hand, strongly supporting the order of the Ld.CIT(A) submitted that as per the books of accounts, the assessee has made provision only for standard assets but not for bad and doubtful debts.

We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The provisions of Sec.36[1][viia] of the Act, deals with provision for bad and doubtful debts made by any Scheduled Bank or Co-operative Bank and said provision is allowed to a maximum amount not exceeding @ 7.5% of total income computed before making any deduction under this Clause and Chapter-VIA and amount net exceeding @ 10% of the aggregate average advances made by the rural branches of such Bank computed in the prescribed manner. The above said provisions makes it clear that in order to claim deduction for any provision made u/s.36[1][viia] of the Act, the assessee shall need to create provision in the books of accounts. In this case, the claim of the assessee was that it has made provision for bad and doubtful debts in terms of Sec36[1][viia] of the Act in the books of accounts and the same has been suitably adjusted in the statement of total income, whereas, it was the findings of the AO that the assessee has made provision in books of accounts for only standard assets in terms of RBI guidelines but not for bad and doubtful debts and thus, provision made in the statement of total income in terms of Sec.36[1][viia] of the Act, is not deductible. As we have already noted in the earlier part of this paragraph, as per the provisions of Sec.36[1][viia] of the Act, a Scheduled Bank or a Co-operative Bank can claim deduction for provision for bad and doubtful debts in terms of certain percentage of total income, but such deduction can be allowed only when deduction claimed by the assessee is over and above credit in the provision for bad and doubtful debts accounts in the books of accounts of the assessee. Since, there is a dispute between provision created in books of accounts for bad and doubtful debts, we are of the considered view that the issue needs to go back to the file of the AO to verify the claim of the assessee with regard to the provision made for bad and doubtful debts in books of accounts of the assessee. Hence, we set aside the appeal to the file of the AO and directing the AO to re-examine the claim of the assessee in terms of the provisions of Sec.36[1][viia] of the Act and provision created by the assessee in the books of accounts for bad and doubtful debts and further, decide the issue in accordance with law.

In the result, the appeal filed by the assessee is treated as allowed for statistical purposes.