ACIT, MEERUT vs. M/S. SARVA UP GRAMIN BANK, MEERUT

Per Dr. B. R. R. Kumar, Accountant Member:

The present appeal has been filed by the Revenue

against the order of the ld. CIT(Appeals), Meerut dated

06.01.2016 pertaining to assessment year 2012-13.

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claim made by the assessee, in respect of provision of bad and doubtful debts u/s 36(1)(viia) of the I.T. Act, 1961, ignoring the fact that the said amount was not reflected in schedule 9 of the balance sheet of the relevant period and was thus not part of the provision for bad and doubtful debt for the relevant period. 2. Whether in the facts and circumstances of the case, the Ld. CIT(A) has erred in law and fact in deleting the addition of Rs. 3,70,00,000/- made by the Assessing Officer, ignoring the fact that the said amount has been shown as provision made for bad and doubtful debts, during the relevant previous year, over and above the prudential norms suggested by the RBI. 3. Whether in the facts and circumstances of the case, the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer be restored. 4. That the appellant craves leave to add, modify and or delete any ground(s) of appeal.”

the Income Tax Act, 1961 of Rs. 16,06,72,355/-. The

Assessing Officer disallowed this amount on the grounds that

no provision made under the head “Provision for bad and

doubtful debts for the year under consideration”. It is held

by the Assessing Officer that the net balance of other

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provisions have actually decreased in respect of last year

balance and since it shows overall decrease in provisions,

the same needs to be disallowed.

as under:

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have been made under the head provisions and contingencies. For this reason, the amount of provision for bad and doubtful debts of Rs. 16,06,72,355/- was duly filed up in column no. 39 – other provisions as per aforesaid prescribed form no. B for Profit and Loss account applicable to banking industry. In any case, it is a settled law that whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. Further it is also a settled law that accounting practices cannot override the provisions of the Income Tax Act. This has been so held by various courts. Instances are as under: a. Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC) b. Sutlej Cotton Mills Ltd. vs. CIT (1979) 116 ITR 1 (SC) c. State bank of India vs. CIT (1986) 157 ITR 67 (SC) d. Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 227 ITR 172 (SC)

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e. CIT vs. Valikundam Rubber Co. Ltd. (2000) 241 ITR 50 (Ker.) 2. In column no. 6 of part OI of ITR, we have disallowed the amount of provision of bad and doubtful debts of Rs. 16,06,72,355/- as the provision for bad and doubtful debts is not allowable in general as per provisions of Income Tax Act. However, the banking industry has been given a specific deduction u/s 36(1) (viia) of the IT Act, 1961 in this regard and accordingly, the same has been claimed in column no. 30 of Schedule BP of ITR. Detailed submission for deduction u/s 36(1)(viia) has already been filed with you on 23.12.2014. 3. &5. As stated above that the bank made the total Provisions for bad and doubtful debts of Rs. 16,06,72,355/- during the year. Out of this, Rs. 1102.81 lakhs w>as reduced from the Advances and balance oj nRs. 503.91 lakhs was shown in schedule 5 -other provisions in the Audited accounts as per Banking Regulation Act. In other words, the outstanding amount of advances as on 31.03.2012 shown in schedule 9 of Balance sheet is net of provision for bad and doubtful debts as on 31.03.2012 and remaining accumulated amount of provision for bad & doubtful debts as on 31.03.2012 has been shown in schedule 5 -other provisions. Besides the above, there can be reduction in the amount of accumulated provisions for bad & doubtful

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debts as compared to last year due to recovery in accounts, write off and up gradation of accounts etc. As such, the incremental provision for bad and doubtful debts during the year cannot be worked out on comparison of schedule 5-other provisions with the last year in isolation. Instead schedule 5- other provisions as well as provision for bad & doubtful debts reduced from the advances have to be compared with last year. The same are depicted below for the sake of convenience: Rs. In lakhs Particulars Accumulated Written Provision Accumulated Provision provisions off/write outstanding provisions for bad for doubtful back of after write for doubtful & debts as on provision off/write debts as on doubtful 31/03/2011 during back 31/03/2012 debts the year during on write the year off 1 2 3=(1-2) 4 5=(4-3) Provision 1481.11 106.28 1374.83 2477.64 1102.81 for bad & doubtful netted with Gross advances and net advances shown in schedule-9 of audited accounts Provision 3451.91 210.36 3241.55 3745.47 503.91 for bad & doubtful debts shown under schedule 5 of audited accounts

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Total 4933.02 316.64 6223.11 1606.72

Copy of ledger account of Exp. Provision for NPA for the year ended on 31/03/2012 and Sundry Provision NPA (accumulated) as on 31/03/2012 is enclosed.

In view of the above, the amount of provision for bad and doubtful debts made during the year cannot be find out by simply comparing the accumulated amount of schedule 5- other provisions with the last year. However, the one has to look the Profit and loss account of the bank to find out the incremental amount of provision for bad and doubtful debts made during the year as it will always reflect in the profit and loss account. The said provisions for bad and doubtful debts of Rs. 16,06,72,355/- made during the year has been shown under the head provisions and contingencies in the Profit & loss account. The reasons for creation of provision for bad and doubtful debts of Rs. 16,06,72,355/- under the head provision and contingencies have already been spelt out in Para 1 above.

In addition to above, the head ‘‘other provision” of schedule -5 in the balance sheet deals with the other outstanding provisions including the provision for bad and doubtful debts. The Details of “other provision ” of schedule 5 for the financial year 2010-11 and 2011-12 is enclosed. The note refereed from schedule 17, spelt out the details of further provision made by the bank in

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addition to minimum provision required to be made in terms of RBI guidelines. It is to be noted that it is a settled position that RBI guidelines are irrelevant for the purpose of income tax computation under income tax. The bank has made the total provision of bad and doubtful debts of Rs. 16,06,72,355/- during the year which includes the provision of Rs. 3,70,00,000/- as given in the said note. Further, the provision for bad and doubtful debts has also been reduced by the amount of write off or rural advances by Rs. 210.36 lacs as this write off has been made out of the provision for bad and doubtful debts claimed earlier and accordingly, no separate claim of write off bad debts of Rs. 210.36 lacs has been made in the computation of income.

In view of the above and considering the merit of the case and provision of the law, deduction claimed u/s 36(1)(viia) cannot be disallowed and the same has been correctly claimed by the bank. It is also relevant to state that this issue was also examined in detail during the course of assessment proceedings of earlier years and there has been no disallowance on this issue in any of the earlier assessment years….”

for Bad & Doubtful Debts) on the grounds that the assessee

has failed to fill the correct and true figures of PBDD which

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was not done by the assessee. The matter was taken up to

appeal by the assessee before the Ld. CIT(A).

submissions taken up before the Assessing Officer. The

submissions of the assessee are as under:

“Section 36 (1) (viia) inter-alia provides as under: The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28: (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 seven 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. Based on the above, deduction under section 36(1)(viia) is allowable lower of the following: a. Amount of any provision for Bad & Doubtful Debts. b. Sum of 7.5% of total income (before making any deduction

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under this Section and under Chapter VIA) and 10% of aggregate average advances made by the rural branches of the bank. During the year, Bank debited the amount of Rs. 16.07 Crores towards provision for bad & doubtful debts in its books which is evident from the Schedule-16 of Operating Expenses attached to audited profit & loss account for the FY 2011-12. where it has been categorically mentioned as loan loss provision which is a provision for bad & doubtful debts.

For assessment year 2012-13, the aggregate average advances qualified for the deduction under Sec.36 (1) (viia) were computed in the manner prescribed by Rule 6ABA as under:

� The amount of advances, made by each rural branch, as outstanding at the end of the last day of the month of the Assessment Year 2012-13, is aggregated separately. � The sum so arrived at in the case of each such branch is divided by the number of months, for which the outstanding advances have been taken into account. The aggregate of the sums so arrived at in respect of each of the rural branches is the aggregate average advances made by the rural branches of the bank which work out to Rs. 1116.57 crores and 10% of the same works out to Rs. 111.66 crores. 7.5% of taxable income before deduction u/s 36(1) (viia) comes to Rs. 3.10 crores. Since the provision for bad & doubtful debts is of Rs. 16.07 crores which is much less than the aforesaid aggregate amount of Rs. 114.76 crores (Rs. 111.66 crores + Rs. 3.10 crores), the bank has claimed the deduction under section 36(1 )(viia) of Rs. 16.07 crores.

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It is to be noted that Ld AO has duly accepted the calculation of 10% of aggregate average advances made by rural branches of Rs. 111.66 crores as well as 7.5 of total income of Rs. 3.10 aggregating to Rs. 114.76 crores which is the eligible amount for deduction u/s 36(1) (viia). As such only limited dispute has been raised by the LD AO with respect to provision of Rs. 16.07 crores made by the bank for bad & doubtful debts and duly debited to its audited Profit & loss account for the AY 2012-13.

The Ld AO without considering the audited profit & Loss account which is a direct document for establishing the creation of provision for doubtful debts during the year, has gone with comparison of provision for bad & doubtful debts account as on 31/03/2011 and 31/03/2012 in isolation and without fully appreciating the fact that for comparing such accumulated account, one has to also look into reversal in this account during the year on account of write off bad debts which has been of Rs. 316.64 lacs during the year. Further, Ld AO also overlooked the fact on record that at the time of preparation of balance sheet, the advances are shown/presented net of certain provision for bad doubtful debts (NPAs) as per RBI guidelines in audited accounts though the separate account of provision for bad & doubtful debts (Sundry Provision-NPA) is being maintained in the books. Detail of computation of advances shown in audited accounts as on 31/03/2012 are as under:

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Amount Amount Particulars (in (000) (in (000) Gross Advances as per Consolidated weekly 17537654 Less:

(i) Provision for NPA 247764

(ii) Derecognized Interest on NPA 61251 .... ", .. (iii) Festival Advances 13710 322725

Advances as per Schedule 9 of Balance Sheet 17214929

A complete journey of accumulated account of provision for bad & Doubtful debts as on 31/03/2012 along with ledger account of Exp. Provision for NPA for the year ended on 31/03/2012 and Sundry Provision NPA- accumulated as on 31/03/2012 were filed with Ld AO vide its submission dated 11/02/2015. A relevant extract from such submission dated 11/02/2015 is reproduced below: Rsinlakh

Particulars Accumulated written Provision Accumulate Provision provisions off/ write outstandin Provision for bad & doubtful back of after write doubtful doubtful as on provision off/write ason debts 31/03/2011 during the back 31/03/2012 during year on year

write off

1 2 3=(1-2) 4 5=(4-3)

Provision for bad & netted with Gross

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net advances shown in 9 of audited Balance 1481.11 106.28 1374.83 2477.64 1102.81 sheet. Provision for bad & debts shown under of audited accounts 3451.91 210.36 3241.55 3745.47 503.91

Total 4933.02 316.64 6223.11 1606.72

However, the LD AO has totally overlooked the facts and figures available on record including the ledger account of Exp. Provision for NPA for the year ended on 31/03/2012 and Sundry Provision NPA (accumulated) as on 31/03/2012 filed with him and gone with his own calculations of simply doing the comparison of details filed with him of "other provisions" disclosed in Schedule-5 (Other liabilities & provisions) to audited accounts as on 31/03/2011 and 31/03/2012 in isolation which is totally incorrect as detailed above. Further, it has been one item of complete journey of accumulated account of provision for bad & Doubtful debts as on 31/03/2012 filed with him vide its submission dated 11/02/2015 & shown above and other item vision for bad & doubtful debts netted with gross advances) of same submission (i.e. provision for bad & doubtful debts netted with gross advances) of same submission dated 11/02/2015 was totally ignored by him.

Moreover, when the LD AO, in preference to accept the amount of provision for bad & doubtful debts made during the year and duly reflected in audited P& L Account, decided to go with the comparison of accumulated account of provision for bad & doubtful as on 31/03/2011 and 31/03/2012 to work out the incremental provision for bad & doubtful debts during the year, should have considered complete journey of such accumulated account as well as its presentation in audited Balance sheet which Ld AO failed to do so.

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Under these circumstances, the Ld AO has made his own pick and choose workings suited to him with preconceived mind to make the disallowance u/s 36(1) (viia) irrespective of facts and figures available on record. Thus, the action of Ld. AO in making disallowance is devoid of the merit of the case and is against the provisions of the law. It was also submitted before the Ld AO that the deduction u/s 36(1) (viia) did not affect in any manner with the fact that certain provisions for bad & doubtful debts have been netted with the advances shown under Assets and the remaining provision has been shown under the head provision for bad & doubtful debts under liability side as long as the bank has debited the total provision for bad & doubtful debts of Rs. 16,06,72,355 made during the year in profit & loss account which is the only condition to be satisfied as per section 36(1)(viia) as well as in terms of judgment of Hon'ble High Court of Punjab & Haryana in the case of State bank of Patiala as cited by the Ld. AO in his order.

It has also been stated by the Ld AO that the bank has first added the amount of provision from NPAs in its computation and then claimed the deduction under section 36(1)(viia) separately in computation whereas the same treatment has not been followed in the case of deduction u/s 36(1)(viii) claimed by the bank. In this connection, it is submitted NPAs provisions are not allowable in general under Income Tax Act. However, a specific deduction as detailed above has been given to banking industry under section 36(1)(viia) in respect of rural advances and 7.5 of taxable income. It is not out of place to mention that in case NPA provisions are more as compared to eligible amount under section 36(1)(viia), in that case. the deduction under section 36(1)(viia) is limited to eligible amount under section 36(1)(viia) and excess amount of NPA provision is not allowed at all. For this, reason, the

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bank consistently follows the treatment of first adding the NPA Provisions in computation of Income then claiming the deduction u/s 36(1)(viia) after satisfying the conditions under section 36(1)(viia).This treatment has been consistently accepted by the income tax department in scrutiny assessment of earlier years as well. In the case of deduction u/s 36(1 )(viii), the question of first adding the amount in computation of income then claiming separately does not arise at all as for deduction u/s 36(1)(viii), the legislature talks about creation of reserve which is a below line item and is appropriation of profits. Therefore, the same cannot be equated with deduction u/s 36(1)(viia) where provision has to be created which is a charge on profits. In any case, it is a settled law that whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. Further, it is also a settled law that accounting practices cannot override the provisions of the Income Tax Act. This has been so held by various courts. Instances are as under: i) Kedarnath Jute Mfg. Co Ltd vs. CIT.(1971) 82 ITR 363(SC) ii) State Bank of India vs. CIT(1986) 1571TR 67 (SC)- Para 11 However, the Ld AO did not deal with the aforesaid case laws in his assessment order which implies that he has been in agreement with our aforesaid contention and cited case laws. Under these circumstances, he is not justified in making the disallowance on this ground alone. LD AO has also not fully understood the scheme of the Act with respect to introduction of the provision of section 36(1) (viia) which is a specific incentive given to baking industry by legislature in his own wisdom to promote rural banking and assist the banks in making .adequate

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provisions from their current profits to provide for risks in relation to their rural advances. It is a settled law that a provision in a taxing statute granting incentives for promoting growth and development should be construed liberally.

Further a purposive interpretation should be given to the provisions of the Act while considering a claim for exemption from tax. Reliance is placed on the following case laws in this regard: i) Broach District Co-operative Cotton Sales, Ginning & Pressing Society Ltd. vs. CIT (1989) 177 ITR 418 (SC)- Para 3. ii) Sanjeev Lal .v. CIT (2014) 105 DTR 305/365 ITR 389/225 Taxman 239(SC)-Para 22. The aforesaid section was introduced to promote rural banking and assist the banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances. This clearly shows that legislature in his own wisdom has also realized that there is a much risk involved in granting the rural advances as compared to non rural advances and for this reason the legislature has given specific incentive for rural advances u/s 36(1)(viia). Considering the fact that there is much risk involved in granting rural advances, the bank has made additional provision of Rs. 3,70,00,000/- during the year towards rural advances which is within the very purpose of object sought to be achieved by the legislature by inserting the section 36(1) (viia) in the statute. As such, bank is eligible for deduction uls 36(1) (viia) for said provision of Rs. 3,70,OO,OOOI-also as the total provision of Rs. 16,06,72,355 (including the provision of Rs. 3,70,00,0001-) made by the bank and debited to its profit & loss account is much lower as compared to the total eligible amount of deduction u/s 36(1)(viia) of Rs. 114.76 crores as detailed above. To appreciate the provisions of section 36(1)(viia),one needs to look into the history of Sec.36(1 )(viia) as it exists in the present form.

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Stage-I:

Sec. 36(1)(viia) was inserted by the Finance Act, 1979 w.e.f. 1st April,1980 and at the time of its insertion, this clause read as under:

"(viia) in respect of any provision for bad and doubtful debts made by a scheduled bank in relation to the advances made by its rural branches, an amount not exceeding one and a half per cent of the aggregate average advances made by such branches, computed in the prescribed manner.

Explanation: For the purposes of this clause,-

("rural branch" means a branch of a scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year;

(ii) "scheduled bank" has the same meaning as in the Explanation at the end of cl. (b) of sub-section (2) of section 11, but does not include a co-operative bank."

This clause, as explained in para 13 of the CBDT Circular No. 258, dt. 14th June, 1979, was inserted to promote rural banking and to assist the scheduled commercial banks in making adequate provisions in relation to their rural advances. The Circular reads thus:-

"Deduction in respect of provisions made for bad and doubtful debts relating to rural branches of scheduled commercial banks - Sec. 36(1 )(viia)

Under s. 36(1 )(viia) of the IT Act, a taxpayer carrying on business or profession is entitled to a deduction, in the computation of the taxable profits, of the amount of any debt which is established to have become bad during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debts is not allowed as a deduction in thecomputation of the taxable profits.

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In order to promote rural banking and assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act has inserted a new cl. (viia) in sub-so (1) of s. 36 of the IT Act to provide for a deduction, the computation of the taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debts relating to advances made by the rural branches. The deduction will be limited to 1-1/2 per cent of the aggregate average advances made by the rural branches computed in the manner to be prescribed by rules in the IT Rules, 1962. For this purpose, a "rural branch" means 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 before the first day of the previous year. The expression "scheduled bank" has the same meaning as in the Explanation below s. 11 (2)(b) of the IT Act but does not include a cooperative bank. The expression "scheduled bank" would, therefore, cover the State Bank of India constituted under the State Bank of India Act, 1955, any subsidiary bank of the State Bank of India as defined in the State Bank of India (Subsidiary Banks) Act, 1959, a nationalized bank as specified in s. 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or any other bank included in the Second Schedule to the Reserve Bank of India Act,1934. It may be mentioned that all co-operative banks have been excluded from the purview of this provision in view of the position that under s. 80P(2)(a)(i) of the IT Act, the profits and gains of a co-operative society engaged in the business of banking or providing credit facilities to its members are completely exempt from income-tax.

It may be relevant to mention that the provisions of new cl. (viia) of s. 36(1) relating to the deduction on account of provisions for bad and doubtful debts is distinct and independent of the provisions of s. 36(1 )(vii) relating to allowance of the bad debts. In other words, the scheduled commercial banks would continue to get the full benefit of the write off of the irrecoverable debts under s. 36(1 )(vii) in addition to the benefit of deduction of the provision for bad and doubtful debts under s. 36(1)(viia).

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This provision will take effect from 1 st April, 1980 and will accordingly apply in relation to the asst. yr. 1980-81 and subsequent years." •

By section 1 O(a) of the Finance Act, 1982 in the opening portion of the word (scheduled bank" was substituted with the words "scheduled bank or a non-scheduled bank." Further in the Explanation to this clause, the existing cl. (i) was renumbered as cl. (ia) and the following clause was inserted as cl(i):

"Non-scheduled bank" means a banking company as defined in cl. (c) of section 5 of the Banking Regulation Act, 1945 (10 of 1949) which is not a scheduled bank".

As explained in para 17 of the CBDT Circular No. 346, dt. 30th June, 1982, the object of the amendment was to extend the benefit of the deduction to advances by rural branches of non- scheduled commercial banks as well.

Stage-II

Deduction enhanced - Amendment by the Finance Act, 1985

For the portion beginning with the words "in respect of any provision" and ending with the words "in the prescribed manner", the following was substituted w.e.f. 1 st April, 1985:

“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 cl. (viia) 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 this clause and Chapter VI-A) or an amount not exceeding two per cent of the aggregate average advances made by the rural branches of such banks, computed in the prescribed manner, whichever is higher.”

Proviso to Sec.36(1 )(vii) of the Act, was introduced by the Finance Act, 1985 and it reads thus:

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"Provided that in the case of an assessee to which cl. (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause."

Simultaneously, Sec.36(2)(v) was introduced by the Finance Act, 1985 and it reads thus:

"Sec. 36(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply-

(i) to (iv)……

(v) where such debt or part of debt relates to advances made by an assessee to which cl. (viia) of sub-so (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause."

As explained in para 17 of the CBDT Circular No. 421, dt. 12th June, 1985, the benefit of deduction under this clause was enhanced having regard to the increasing social commitments of banks.

"Deduction in respect of provisions made by banking companies for bad and doubtful debts

Sec. 36(1 )(vii) of the IT Act provides for a deduction in the computation of taxable profits of the amount of any debt or part thereof which is established to have become a bad debt in the previous year. This allowance is subject to the fulfilment of the conditions specified in sub-so (2) of s. 36.

Sec. 36(1 )(viia) of the IT 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, of any amount not exceeding 11/2 per cent of the aggregate average advances made by such branches.

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Having regard to the increasing social commitments of banks, s. 36(1)(viia) has been amended to provide that in respect of any provision for bad and doubtful debts made by a C./ r scheduled bank [not being a bank approved by the Central Government for the purposes of s. 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) or two per cent of the aggregate average advances made by rural branches of such banks, whichever is higher, shall be allowed as a deduction in computing the taxable profits. Sec. 36(1)(vii) of the Act has also been amended to provide that in the case of a bank to which s. 36(1 )(viia) applies, the amount of bad and doubtful debts shall be debited to the provision for bad and doubtful debts account and that the deduction admissible under s.36(1 )(vii) shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account.

Sec. 36(2) has been Sec. 36(2) has been amended by insertion of a new cl. (v) to provide that where a debt or a part of a debt considered bad or doubtful relates to advances made by a bank to which s. 36(1 )(viia) applies, no such deduction shall be allowed unless the bank has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debt account made under cl. (viia) of s. 36(1)." Stage-III: The IT (Amendment) Act, 1986 substituted the present cl. (viia) for the one as substituted by the Finance Act, 1985. These provisions came into effect from 1.4.1987.

SECTION 36 - OTHER DEDUCTIONS The section reads as under: Other deductions.- (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28

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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 co- operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank, an amount not exceeding seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) 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. Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1 st day of April, 2005, the provisions of the first proviso shall have effect as if for the words "five per cent.", the words "ten per cent." had been substituted. Provided also that a scheduled bank or a nonscheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government: Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of

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business or profession". Explanation: For the purposes of this sub-clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1 st day of April, 2005. (b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A); Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, 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, of an amount not exceeding ten per cent. of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year. (c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A). Explanation: For the purposes of this clause- (i) "non-scheduled bank" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949) which is not a scheduled bank;] (ia) “rural branch” means a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according t the last preceding census of which the relevant figures have been published before the first day of the previous year;

(ii) "scheduled bank" means the State Bank of India

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constituted under the State Bank of India Act, 1955, a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959, a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934;

iii) "public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);

iv) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951) ; v) "State industrial investment corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956) engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of this sub- section; vi) "co-operative bank", "primary agricultural credit society" and "primary co-operative agricultural and rural development bank" shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P" The object of the substitution, as explained in para 5 of the CBDT Circular No. 464, dt. 18th July, 1986, was to give the separate deduction, viz., one in respect of rural advances and the other for provision for bad and doubtful debts in general and also to extend the benefit of deduction to all banks including foreign banks. “Modification in respect of deduction on provision for bad and doubtful debts made by the banks. Under the existing provisions of cl. (viia) of sub-s. (1) of s. 36 of the I T Act inserted by the Finance Act, 1979, provisions for bad and

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doubtful debts made by a scheduled or a non scheduled Indian bank is allowed as deduction within prescribed limits. The limit prescribed is 10% of the total income or 2% of the aggregate average advances made by the rural branches of such banks, whichever is higher. It had been represented to the Government that the foreign banks were not entitled to any deduction under this provision and to that extent they were being discriminated against. Further, it was felt that the existing ceiling in this regard i.e. 10% of the total income or 2% of the aggregate average advances made by the rural branches of India banks, whichever is higher, should be modified. Accordingly, by the Amending Act, the deduction presently available under cl. (viia) of sub-s. (1) of s. 36 of the IT Act has been split into two separate provisions. One of these limits the deduction of the banks concerned. It may be clarified that foreign banks do not have rural branches and the bank concerned. It may be clarified that foreign banks do not have rural branches and hence this amendment will not be relevant in the case of the foreign banks. The other provision secures that a further deduction shall be allowed in respect of the provision for bad and doubtful debts made by all banks not just the banks incorporated in India, limited to 5% of the total income (computed before making any deduction under this clause and Chapter VI-A). This will imply that all scheduled or non-scheduled banks having rural branches would be allowed the deduction upto 2% of the aggregate average advances made by such branches and a further deduction upto 5% of their total income in respect of provision for bad and doubtful debts."

To complete the sequence of amendments, we may also make a reference to the Amendment to sec.36(1 )(viia) of the Act by the Finance Act, 2013. By the Finance Act, 2013, in section 36 of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2014, in clause (vii), the Explanation was numbered as Explanation 1 thereof and after Explanation1 as so numbered, the following Explanation was inserted, namely:-

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"Explanation 2.-For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;" It can be seen from the history of Sec.36(1 )(viia) of the Act that at stage-I the deduction was allowed in respect of any provision for bad and doubtful debts (PBOO) made by a scheduled bank in relation to the advances made by its rural branches. At this stage the PBOO had to be linked to the advances made by Bank's rural branches. At stage-II of Sec.36(1)(viia), the deduction while computing the taxable profits was allowed of an amount not exceeding ten per cent of the total income (computed before making any deduction under the proposed new provision) or two per cent of the aggregate average advances made by rural branches of such banks, whichever is higher. At this stage also, the PBOO had to be created and debited to the profit and loss account but it was not required to be done in relation to advances made by Bank's rural branches and can be in relation to any debt. PBOO need not be in relation to rural advances but can be in relation to any advances both rural and non- rural advances. The two percent of aggregate average advances (AAA) made by rural branches of such banks had to be computed and the PBOO made in books has to be in relation to rural advances. The other eligible sum which can be considered for deduction u/s.36(1)(viia) of the Act viz., ten per cent of the total income (computed before making any deduction under the proposed new provision) does not require computation in relation to rural advances. Nevertheless the debit of PBOO to Profit and Loss account is necessary of the higher of the two sums to claim deduction u/s.36(1 )(viia) of the Act. If the concerned bank does not have rural branches then they could not claim the deduction. Therefore, the deduction was confined only to banks that had rural branches.

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At Stage-III of the provisions of Sec.36(1 )(viia) of the Act, the deduction allowed earlier was enhanced. The enhancement of the deduction was consequent to representation to the Government that the existing ceiling in this regard i.e. 10% of the total income or 2% of the aggregate average advances made by the rural branches of Indian banks, whichever is higher, should be modified. Accordingly, by the Amending Act, the deduction presently available under cl. (viia) of sub-so (1) of s.36 of the IT Act has been split into two separate provisions. One of these limits the deduction to an amount not exceeding 2% (as it existed originally, now it is 10%) of the aggregate average advances made by rural branches of the banks concerned. This will imply that all scheduled or non-scheduled banks having rural branches would be allowed the deduction (a) upto 2% (now 10%) of the aggregate average advances made by such branches and (b) a further deduction upto 7.5% of their total income in respect of provision for bad and doubtful debts. The further deduction of 7.5% of total income was available to banks which did not have rural branches. Therefore after 1.4.1987, scheduled or non-scheduled banks having rural branches were allowed deduction., (a) upto 2% (now 10%) of the aggregate average advances made by such branches and (b) Schedule or non- scheduled banks whether it had rural branches or not a deduction upto 5% of their total income in respect of provision for bad and doubtful debts. Even under the new provisions creating a PBDD in the books of accounts is necessary. This limit of 5% was increased to 7.5% in 2002. Though under Stage-II and Stage-III of the provisions of Sec.36(1 )(viia) of the Act. PBOO has to be created by debiting the profit and loss account of the sum claimed as deduction. the condition that the provision should be in respect of rural advances is not necessary. At stage-II of the provisions of Sec.36(1 )(viia) of the Act. this condition was done away with and it was only necessary to create PBOO in the books of accounts and debit to profit and loss account. The quantification of the maximum deduction

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permissible u/s.36(1)(viia) of the Act had to be done. Firstly it has to be ascertained as to what is 10% of the aggregate average advances made by rural branches. if the Bank has rural branches, otherwise that part of the deduction u/s.36(1 )(viia) of the Act will not be available to the bank. The second part of the deduction u/s.36(1 )(viia) has to be ascertained viz. 7.5% seven and one-half per cent of the total income (computed before making any deduction under this clause and Chapter VI-A). The above are the permissible upper limits of deductions u/s.36(1)(viia) of the Act. The actual provision made in the books by the Assessee on account of PBOO (irrespective of whether it is rural or non- rural) has to be seen. To the extent PBOO is so created. then subject to the permissible upper limits referred to above. the deduction has to be allowed to the Assessee. The question of bifurcating the PBOO as one relating to rural advances and other advances (Non-rural advances) does not arise for consideration. To avoid possible claim for double deduction in respect of one and the same debt first as PBDD and thereafter as Bad Debts, the legislature has already provided in Sec.36(2)(v) of the Act that where such debt or part of debt relates to advances made by an assessee to which cl. (viia) of sub-so (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause. Further the proviso also limits the claim for deduction u/s.36(1 )(vii) of the Act to an Assessee to which Sec.36(1 )(viia) of the Act applies to the amount by which such debt or part thereof (written off as Bad debts) exceeds the credit balance in the provision for bad and doubtful debts account made under clause(viia) to Sec.36(1) of the Act. Reliance is also placed on the following case laws in this regard: i. In order to allow assessee’s claim under section 36(1)(viia), what has to be seen by AO is as to whether provision for bad and doubtful debts (PBDD) is created

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irrespective of whether it is in respect of rural or non-rural advances by debiting profit and loss account and to extent PBDD is so created, assessee is entitled to deduction subject to upper limit of deduction laid down in said section. DCIT Vs. ING Vysa Bank Ltd. (2014) 62 SOT 26 (Bangalore) – (refer page 46-63 of PB) ii. Section 36(1)(viia) of the Income Tax Act, 1961 – Bad debts – In case of banks (Provision made for bad & doubtful debts) Assessment year 2009-10 – Assessee bank had claimed provision for non-performing assets’ in accordance with s. 36(10(viia) – AO disallowed same on ground that assessee had not made any Provision for bad and doubtful debts and, thus, was not entitled to deduction u/s 36(1)(viia) – Whether although assessee had named provision as ‘Provision for NPA’ to keep it in line with RBI and BABARD Guidelines, but in pith and substance provision had been created for ‘Bad & Doubtful Debts’ and, therefore, assessee had claimed deduction in accordance with provisions of sec. 36(1)(viia) and was entitled to benefit of same – Held, yes [Para 6] [In favour of assessee] Tamilnadu State Apex Cooperative Bank Ltd. Vs. ACIT [2014] 62 SOT 113 (Chennai – Trib.) – (refer page 64-67 of PB) iii. Section 36(1)(viia) of the IT Act, 1961 – Bad debts [Cooperative bank] – AY 2008-09 – Whether, cooperative bank is a non-scheduled bank and, thus, entitled to claim benefit of provisions of sec. 36(10(viia)(a)-Held, yes – Whether where assessee, a cooperative bank, had created provision for bad and doubtful debts though under different nomenclature, viz., ‘Reserve for NPA’ in accordance with RBI directions, this would not disentitle assessee for claiming deduction u/s 36(1)(viia)(a) – Held, yes [Paras 7 & 8] [In favour of assessee] Vellore Dist. Central Cooperative Bank Ltd. Vs. CIT [2013] 36 CCH 597 (Chennai – Trib.) – (refer page 68 – 73 of PB). It is to be noted that bank is not claiming the deduction u/s 36(1) (vii) separately in respect of bad debts and adjusting the such bad debts with the provision claimed u/s 36(1) (viia) so as to avoid the claim of double

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deduction in this regard. Accordingly, bank is claiming the deduction uls 36(1) (viia) as per provisions of the law. However, the LD AO misunderstood the provisions of the law and erred in interpreting the section 36(1) (viia) in a restrictive manner. In view of the above submissions and provisions of the law, the bank has rightly claimed the deduction of Rs 16,06,72,3551- uls 36(1) (viia). It is also relevant to state that there has been no disallowance on this issue during the course of scrutiny assessment proceedings of any of the earlier assessment year in past by the income tax department. Copies of scrutiny assessment order u/s 143(3) for AY 2009-10 &2010-11 are enclosed as an instance for ready reference, the same is also allowable even on the principal of consistency. Therefore, it is prayed that the disallowance of Rs.14,72,79,355/- out of Rs. 16,06,72,355/- made by the Ld AO uls 36(1) (viia) needs to be deleted. Ground No: 4 Without prejudice to ground no 2& 3 above, even for the sake of argument it is assumed but not admitted that the provision to the extent of Rs, 14,72,79,355/- out of Rs. 16,06,72,355 was not made for bad & doubtful debts during the year, in that case also, Ld AO erred in not allowing the said provision made during the course of business and duly reflected in the audited P&L account of the bank without establishing that for what other purpose, the said provision to the extent of Rs. 14,72,79,355/- out of Rs. 16,06,72,355/- was made and why the same is not allowable under section 37, when he has not treated the said provision to the extent of Rs. 14,72,79,355/- as provision for bad and doubtful debts. It is therefore, prayed that said provision to the extent of Rs. 14,72,79,355/- be allowed under section 37 if the same is not allowed under section 36(1) (viia) of IT Act, 1961.”

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that the assessee’s accounting system is not as per the

guidelines given by the RBI. The Ld. DR argued relying on

the judgment of Hon’ble P&H High Court in the case of State Bank of Patiala order dated 24th May, 2004, 272 ITR 54 that

since the assessee has not made any provision further PBDD

that disallowance made by the Assessing Officer needs to be

upheld. It was argued that the Hon’ble Court has allowed

PBDD u/s 36(1)(viia) only to the extent of the provisions

made. It was reiterated that since no provision has been

made that assessee, no deduction u/s 36(1)(viia) is

allowable. The written submissions of the Ld. DR are as

under:

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Debt (read hereinafter PBDD) as the decision of Hon’ble High Court of Punjab and Haryana in the case of State Bank of Patiala vs. CIT(2005) 272. ITR 54 wherein it is held that “making of a provision for bad and doubtful debt equal to the amount mentioned in this section is a must for claiming such deduction.” 3. The assessee has not furnished the break-up of Rs. 16,06,72,355/- claimed as deduction towards PBDD u/s 36(1 )(viia). Out of these FIs. 5,03,93,000/- is the difference of closing and opening balances after considering written off debt and provision made over and above RBI Prudential norms. Assessee has tried to explain that the same is the PBDD for the year. 4. For the balance Rs. 11,02,79,355/- (Rs. 16,06,72,3555 – 5,03,93,00), the explanation given was that the same was netted with gross and net of advances. This is not acceptable as deduction u/s 36(1)(viia) is given for PBDD and not for advances. As submitted by the assessee that these are reflected in Schedule-9, but no such details reflected in Schedule-9. The assessee is clearly trying to divert from the main issue by distorting the facts and making feeble attempts to justify the deduction of Rs 16,0672,355/-, claimed u/s 36(1)(viia). Therefore, excess claim in respect of provision made by the assessee was amounting to Rs. 11,02,79,355/- disallowed and added back to the total income of the assessee by the AO.

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by the RBI. Therefore, assessee cannot modify the regulations at its own convenience to evade the tax on his own requirement. The PBDD during the relevant year are not allowed without any proper documentary evidence for its requirement. Therefore, the provision made by the assessee for Rs. 3,70,00,000/- was disallowed and the deduction claimed on this provision was also liable to be disallowed and, accordingly, deduction u/s 36(1)(viia) on this amount was disallowed and added back to the income of the assessee.” She also relied on the judgment of Punjab-Haryana High Court State Bank of Patiala Vs. Commissioner of Income Tax And …on 21 May, 2004, 272 ITR 54 P&H.

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assessee had made a provision for bad debts at Rs. 1,19,36,000 only. He, therefore, restricted the allowance to Rs. 1,19,36,000 only and disallowed the balance amount The disallowance was upheld by the Commissioner of Income-tax (Appeals) (for short the CIT(A)) in appeal vide order dated July 20, 1.988. The assessee further preferred an appeal before the Tribunal and the Tribunal has also upheld the disallowance vide the impugned order dated August 4, 2003.

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effect retrospectively from; April 1, 1985. 4. Learned counsel pointed out that the previous year of the assessee had ended on| December 31, 1984, and the assessee was required to get its accounts finalized and audited and audited within three months from the end of the accounting year to submit the same to the Reserve Bank of India. Accordingly, the balance-sheet of the assessed was finalised on February 14, 1985, in which provision had been made on the basis of the unamended Section 36(l)(vria) of the Act. However, in view of the amendment of Section 36( l)(viia) of the Act with effect from April 1, 1985, it filed a revised return on April 24, 1986, enhancing the claim for deduction from Rs[ 1,19,36,000 to Rs. 1,94,21,000. Learned counsel explained that since the amendment in this section had been made after the finalisation of the balance-sheet for the assessment year 1985-86. the assessec could not have possibly made the higher provision in that balance-sheet and accordingly it made up the shortfall irj the provision in the balance-sheet of the subsequent assessment year. Thus} according to him, there was substantial compliance with the requirement of law and accordingly the authorities below were not justified in restricting the claim of the assessec to Rs. 1,19,36,000 only. 5. Section 36( f)(viia) of the Act as applicable to the assessment year 1985-86} reads as under : "in respect of any provision for bad and doubtful debts made by a scheduled ban [not being a bank approved

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by the Central Government for the purposes of clause (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 this clause and Chapter Vl-A) oran an amount not exceeding two per cent, of the aggregate average advances made by the rural branches of such bank, computed in the prescribed manner, whichever is higher.” 6. A bare perusal of the above shows that the deduction allowable under the above] provisions is in respect of the provision made. Therefore, making of a provision for} bad and doubtful debt equal to the amount mentioned in this section is a must for claiming such deduction. The Tribunal has rightly pointed out that this issue stands further clarified from the proviso to clause (vii) of Section 36(1) of the Act, which) reads as under : "Provided that in the case of an assessee to which clause (viia) applies, the amount) of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in' the! provision for bad and doubtful debts account made under that clause." 7. This also clearly shows that making of provision equal to the amount claimed as, deduction in the account books is necessary for claiming deduction under Section 36(1 )(viia) of

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the Act. The Tribunal has distinguished various authorities relied) upon by the assessee wherein deductions had been allowed under various! provisions which also required creation of reserve after the assessee had created! such reserve in the account books before the completion of the assessment, it has) been correctly pointed out that in all those cases, reserves/provisions, had been) made in the books of account of the same assessment year and not of the subsequent assessment year. 8. In the present case, the assessee 'has not made any provision in the books of account for the assessment year under consideration, i.e., 1985-86, by making supplementary entries and by revising its balance-sheet. The provision has been made in the books of account of the subsequent year. 9. We are, therefore, satisfied that, the Tribunal was right in holding that since the assessee had made a provision of Rs. 1,19,36,000 for bad and doubtful debts, its claim for deduction under Section 36(l)(viia) of the Act had to be restricted to that amount only. Since the language of the statute is clear and is not capable of any other interpretation, we are satisfied that no substantial question of law arises in this appeal for consideration by this court. 10. The appeal is, accordingly, dismissed. No costs.”

Thus, the Ld. DR relied on the above judgment and pleaded that the

addition may please be confirmed.

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the material available on record. We find that the judgment dated 21st May, 2004 pertains to AY 1985-86. The board has issued

directions verifying the benefit of deduction allowable to banks vide

CBDT Circular 421 dt. 12.06.1985 which has been mentioned above.

After considering the facts and the entire submissions of both the

parties, we find that (ii) U/s 119, the CBDT is entitled to issue Circulars

to explain or tone down the rigours of law and to ensure fair

enforcement of its provisions. These circulars have the force of law and

are binding on the income tax authorities, though they cannot be

enforced adversely against the assessee. Normally, these circulars

cannot be ignored. A circular may not override or detract from the

provisions of the Act but it can seek to mitigate the rigour of a

particular provision for the benefit of the assessee in certain specified

circumstances. So long as the circular is in force, it aids the uniform

and proper administration and application of the provisions of the Act

(UCO Bank vs. CIT 237 ITR 889 (SC) followed)

Court in the case of DCIT vs. Catholic Syrian Bank 88 ITD 185. In that

case, the Hon’ble Court had to consider whether a bank was eligible to

claim a deduction for bad debts u/s 36(1)(vii) in respect of its (rural &

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urban) advances and also claim a provision for bad and doubtful debts

u/s 36(1)(viia) in respect of its rural advances in view of the Proviso to

s. 36(1)(vii) which provides that only the excess over the credit

balance in the provision for bad and doubtful debts account made u/s

36(1)(viia) can be claimed. The Special Bench of the Tribunal in DCIT

vs. Catholic Syrian Bank 88 ITD 185 held that as s. 36(1)(viia) was

confined to rural advances, a claim for bad debts of urban advances

was not subject to the limitation of the Proviso to s. 36(1)(vii).

However, the Full Bench of the Kerala High Court took a contrary view

in CIT vs. South Indian Bank 233 CTR 214 (Ker) (FB) and held that a

bank was entitled to claim deduction of bad debts u/s 36(1)(vii) only

to extent it exceeded the provision allowed as deduction under s.

36(1) (viia). On appeal to the Supreme Court, HELD reversing the Full

Bench of the High Court:

Per Court:

(i) The clear legislative intent of s. 36(1)(vii) & 36(1)(viia) together

with the circulars issued by the CBDT demonstrate that the deduction

on account of provision for bad and doubtful debts u/s 36(1)(viia) is

distinct and independent of s. 36(1)(vii) relating to allowance of bad

debts. The legislative intent was to encourage rural advances and the

making of provisions for bad debts in relation to such rural branches.

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The functioning of such banks is such that the rural branches were

practically treated as a distinct business, though ultimately these

advances would form part of the books of accounts of the head office.

An interpretation which serves the legislative object and intent is to be

preferred rather than one which subverts the same. The deduction u/s

36(1)(vii) cannot be negated by reading into it the limitations of s.

36(1)(viia) as it would frustrate the object of granting such

deductions. The Revenue’s argument that this would lead to double

deduction is not correct in view of the Proviso to s. 36(1)(vii) which

provides that in respect of rural advances, the deduction on account of

the actual write off of bad debts would be limited to excess of the

amount written off over the amount of the provision which had already

been allowed u/s 36(1) (viia) (Southern Technologies 320 ITR 577

(SC) & Vijaya Bank 323 ITR 166 (SC) referred)

Ld.CIT(A) which held that the assessee has admitted in its

submissions as well as before AO regarding the entitlement

of deduction u/s 36(1)(viia) of Rs. 114.76 crores. There is

no dispute as to the correctness of the calculation of the

entitlement of deduction u/s 36(1)(viia) of the Act. It is a

settled law that only against ascertained liability deduction

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can be allowed except for specific provisions in Act where

deduction is allowed on provisions also. The Act has

specifically provided in sec. 36(1)(viia) for deduction for

provision made for advances made by the rural branches of

the bank.

in the Act. The bank is entitled for deduction for 10% of the

aggregate average advances made by the rural branches

plus 7.5% of the total income computed before this

deduction and amount deductible under sec 80C to 80 U. It

is mandatory for all the banks to follow the income

recognition norms and assets classification norms as

prescribed by Reserve Bank of India. The assessee has also

made provision for NPA’S by following the income

recognition norms of Reserve Bank of India. The Hon.

Supreme Court in the case of Catholic Syrian Bank Ltd laid

down that the legislative intent was to encourage the Rural

advance and making of provisions for bad debts in relation

to such rural advances and for providing greater deductions.

But the deduction is allowable only on being legally entitled

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and on making actual provisions for such deduction in the

books of Account.

of Hon’ble Supreme Court in the case of Catholic Syrian Bank

Vs CIT Thrissur 206 Taxman 182(SC) there is no ambiguity

left in the interpretation of provision of sec 36 (1) (viia).

The appellant is a Regional Rural Bank sponsored by Punjab

National Bank. The assessee has made advances from its

rural branches which are not questioned. The provisions of

sec 36(l)(viia) are clearly interpreted by Supreme Court in

the case of Catholic Syrian Bank. The assessee has claimed

deduction of Rs. 16.07 Crores against it’s entitlement of Rs

114.76 Crores in the books it has made provision for Bad

Debts of rural branches for Rs 3,70,00,000/- over and above

the provision made for NPA’s as per RBI norms. This fact has

been stated in the audited balance sheet of the bank in

Schedule 17: Principle Accounting Policies & Notes on

Account, where point 1(IV)(iii) which is reproduced as

under:

“(iii) Bank has made provision of Rs.3,70,00,000/- (Previous year- Nil) against total monthly average

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advance of Rural Branches of the Bank for the Bad and doubtful debts, over and above the provision for bad & doubt debts required to be made in accordance with the Prudential norms suggested by RBI. The bank has reduced Rs. 210.36 lacs (previous year Rs 363.05 lacs) for write off of the rural advances not recoverable and are bad and doubtful debts from the provision made in earlier years and net provision for rural branches advances is Rs 2844.03 lacs (Rs 3054.39 lacs - Rs. 210.36 lags).. included in other provisions in Schedule -5 ’.

The ITAT Banglore in the case of DEPUTY COMMISSIONER OF INCOME TAX vs. ING VYSYA BANK LTD – (2014) 62 SOT 0026 (Banglore) and ITAT Chennai in the case of TAMILNADU STATE APEX CO- OPERATIVE BANK LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX – (2014) 62 SOT 0113 (Chennai) (URO) has held that the actual provision made in the books by the Assessee on account of PBDD (irrespective of whether it is rural or non- rural) has to be seen.

provision for nonperforming assets (NPA) in respect of its

urban branches. The assessee has debited Rs.2.52 Crores

(approximately) (i.e., 7.5% of the gross total income) in P&L

ITA No. 1937/Del/2016 45 M/s Sarva UP Gramin Bank

A/c creating provision for non-performing assets in

accordance with the provisions of section 36(l)(viia) of the

Act. The Revenue has disputed the deduction claimed for the

reason, that the assessee has not created provision for bad

and doubtful debts. In case of Banking Companies, the

accounts are made in accordance with the RBI guidelines and

the Banking Regulation Act, 1949. Although, the assessee

has named the provision as ‘Provision for NPA’, but in pith

and substance the provision has been created for ‘Bad and

Doubtful Debts’. The taxonomy of the provision has been

done by the assessee to keep it in line with the RBI and

NABARD guidelines.

and claimed deduction in accordance with the provisions of

section 36(l)(viia). The assessee is entitled to the benefit of

same.

VELLORE DIST. CENTRAL CO-OPERATIVE BANK LTD. VS.

COMMISSIONER OF INCOME TAX - (2013) 145 IDT 0129 (Chennai)

has held that the question which arises for determination

ITA No. 1937/Del/2016 46 M/s Sarva UP Gramin Bank

before us is whether the assessee has created any reserve/

provision for bad and doubtful debts? The AR has contended

that the assessee has created provisions for bad and

doubtful debts under the nomenclature ‘Reserve for NPA’.

The terminology ‘Reserve for NPA’ has been used by the

assessee in accordance with the RBI directions. As is evident

from the assessment order, the assessee has indeed created

‘Reserve for NPA’. For claiming benefit under the provisions

of Section 36(l)(viia)(a) the conditions to be satisfied is:

that provision for bad and doubtful debts should have been

made by the bank eligible to claim such deduction. Co-

operative Banks do not strictly follow the provisions of

Banking Regulation Act for the purpose of maintaining their

Books of Accounts. In our considered opinion, the assessee

has created provision for bad and doubtful debts may be

under different nomenclature. This will not dis-entitle the

assessee for claiming deduction under the provisions of

Section 36(l)(viia)(a). The purpose for creation of reserve

for NPA is same i.e., creating provision towards bad and

doubtful debts.

ITA No. 1937/Del/2016 47 M/s Sarva UP Gramin Bank

Thus, in view of the facts of the case and judicial

pronouncements in the above state cases the assessee will

be entitled to deduction u/s 36(l)(viia) to the extent of

provision made for bad and doubtful debts of Rs

16,06,72,355/-. The A.O is therefore directed to allow the

full deduction of Rs 16,06,72,355/- as claimed by the

assessee in the computation of income and not to restrict it

on Rs 1,33,93,000/.

Order Pronounced in the Open Court on 18/12/2019

Sd/- Sd/- (BHAVNESH SAINI) (DR. B.R.R. KUMAR) Judicial Member Accountant Member Dated: 18.12.2019 *Kavita Arora, Sr. PS