TIRUNELVELI DISTRICT CENTRAL CO OPERATIVE BANK LTD,TIRUNELVELI vs. ACIT CIRCLE 1, TIRUNELVELI
What did the Tribunal hold?
The Tribunal found that there was a dispute regarding whether the provision was actually made for bad and doubtful debts in the books of accounts. Therefore, the issue was remanded back to the AO for re-examination.
What were the facts?
The assessee, a Co-operative Bank, claimed a deduction for provision for bad and doubtful debts under Section 36(1)(viia) of the Income Tax Act. The Assessing Officer (AO) disallowed this claim, opining that the provision made was for standard assets and not for bad and doubtful debts as required by the section.
What were the issues?
Whether the provision made by the assessee qualifies for deduction under Section 36(1)(viia) as provision for bad and doubtful debts, and whether it was adequately reflected in the books of accounts.
Which sections of the Income-tax Act were involved?
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- State Bank of Patiala v. CIT62 citing272 ITR 54 · 2005 · HC
Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: HON’BLE SHRI V. DURGA RAO & HON’BLE SHRI G. MANJUNATHA
आदेश / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-1, Madurai, dated 15.11.2017 and pertains to AY 2014-15.
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.
3. The decision of Hon'ble Court of Punjab and Haryana in the case of State Bank of Patiala Vs CIT 272 ITR 54, are not applicable to the present case of the appellant bank since Provision is made in accordance with the prudential norms (Income recognition and Asset Classification) of Reserve bank of India in this regard.
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
per the provisions of Sec.36[1][viia] of the Act, deduction is available only for provision for bad and doubtful debts but not for provision made for standard assets and hence, disallowed the provision made by the assessee u/s.36[1][viia] of the Act at Rs.54,91,964/-.
4. Being aggrieved by the Assessment Order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee reiterated the arguments taken before the AO and submitted that though it has made a provision for standard assets in terms of RBI guidelines, but provision made for standard assets had been added back to the total income and further deduction was claimed only in respect of provision made for bad and doubtful debts in terms of Sec.36[1][viia] of the Act. The Ld.CIT(A) after considering the submissions of the assessee and also take a note of certain judicial precedents, including the decision of ITAT, Chennai, in the case of Salem District Central Co-operative Bank v. CIT in observed that since assessee has not made any provision for bad and doubtful debts, it cannot claim deduction u/s.36[1][viia] of the Act. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us.
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.
Therefore, as per the provisions of Sec.36[1][viia] of the Act, any provision made for bad and doubtful debts is only deductible. Since, assessee has not made any provision for bad and doubtful debts in the books of accounts, it cannot claim deduction for provision made for bad and doubtful debts as
per Sec.36[1][viia] of the Act.
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.
Order pronounced on the 12th day of January, 2022, in Chennai.
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