DY.COMMISSIONER OF INCOME TAX, THRISSUR vs. THE CSB BANK LTD, THRISSUR

2 The assessment was completed by an addition on the Book Profit.

That the amount set aside to provisions made for meeting liabilities, other than ascertained liabilities are to be added to the profit shown in the profit and loss account. Therefore, there is a shortfall in computation of book profit to the tune of Rs: 57.57 crore.

The learned CIT(A) NFAC, New Delhi held that appellant has 2 Assessment Year 2014-2015 rightly debited the provisions of bad and doubtful debts in profit and loss account, simultaneously also reduce loans and advances or the debtors from the asset side of the balance sheet to the extent of the corresponding amount. Consequently, at the end of the year, the amount of loans and advances/debtors is shown as net of provisions for bad debt. Therefore, question of disallowance u/s. 115JB of the Income tax Act does not arise. Therefore, disallowance of provisions of bad and doubtful debts to the extent of Rs. 57.57 crores is deleted.

3. The CIT(A) has erred on the following points while deleting the Book profit enhancement consequent to bad and doubtful debt the extent of Rs. 57.57 crores.

3.1. Vijaya Bank decision is applicable only for normal Income and not MAT Income [Minimum Alternate Tax, u/s.115JB of the Income tax Act] 3.2. For Minimum Alternate Tax [u/s.115JB of the Income tax Act] calculation, Rs.57.57 Crore is not applicable as it is a provision and not bad debts written off and all provisions charged to profit and loss have to be added back.

3.3. As per Financials of assessee the charge to profit and loss account was provision created and computation of book profit u/s 115 JB of the Act does not permit this as deduction.

3.4. Further this is actually provision claimed as bad debt by Vijaya Bank decision not accepted by Hon'ble Kerala high Court itself as the same issue was set aside to the Hon'ble ITAT to examine whether provision can be treated ad bad debts wrote off in the case of South Indian Bank, AY 2012-13. Kerala HC decision was on 8th, July, 2024 in OF 2019 against the order/judgment dated 22.03.2019 in ITA NO.215 OF 2018 OF I.T.A.TRIBUNAL, COCHIN BENCH [i] The decision in the SIB was as below; "17. In the light of the discussions in the previous paragraphs of this judgment, we answer the substantial questions of law raised in these appeals as follows:

[ii] The question No.5 as per the Order is as below; "5. Whether in the light of the decision of the Hon'ble Supreme Court in Vijaya Bank v. CIT reported in (2010) 323 ITR 166 the Appellant is in any event entitled to deduction of the provision for doubtful debts made even under Section 36(1)(vii)?"

Addition of INR.38.24 Crores (under normal provisions): The (a) Assessing Officer observed that the as per the details of movement of NPA provisions furnished by the Assessee, amount of NPA written off was only INR.21.38 Crores whereas the Assessee had claimed deduction of INR.59.62 Crores as bad debts written under Section 36(1)(vii) of the Act. Therefore, the differential amount of INR.38.24 Crores 4 Assessment Year 2014-2015 [INR.59.62 Crores Less INR.21.38 Crores] was added by the Assessing Officer.

(b) Addition of INR.15.29 Crores (under normal provisions): The Assessing Officer noted that INR.74.91 Crores has been shown as the provision created for bad debts. However, as per the computation of income the provision was INR.59.62 Crores. Therefore, the Assessing Officer was of the view that excess deduction has been claimed for INR.15.29 Crores [INR.74.91 Crores Less INR.59.62 Crores]

(c) Enhancement of Book Profits by INR.57.57 Crores (under MAT provisions) by invoking the provisions contained in Section 115JB(2) of the Act read with Explanation 1 thereto.

4. Being aggrieved, the Assessee instituted appeal before the CIT(A) on 26/08/2023, inter alia, challenging the enhancement of Book Profits by INR.57.57 Crores. The CIT(A) granted relief to the Assessee vide impugned Order, dated 25/03/2025 and overturned the decision of the Assessing Officer to enhance Book Profits by INR.57.57 Crores holding that question of applicability of the provisions of Section 115JB of the Act did not arise in the facts and circumstances of the present case. The Assessee had rightly debited the Provisions for Bad & Doubtful Debts in the Profit & Loss Account, and had simultaneously reduced Loans & Advances/Debtors from the asset side of the balance sheet to the extent of such corresponding amount. As a result, the Loans & Advances/Debtors of the Assessee as at the end of the relevant previous year were shown as net of ‘provisions for doubtful debt’ in the balance sheet of the relevant previous year, and simultaneously the Loans & Advances/Debtors on the asset side in the balance sheet as at the end of the relevant previous year stood reduced by the corresponding amount.

5 Assessment Year 2014-2015

6.1. During the course of hearing the Learned Authorised Representative for the Assessee had placed reliance upon the decision of the Co- ordinate Bench of the Tribunal in the case of Deputy Commissioner of Income Tax Circle – 3, Kolkata Vs. Peerless General Finance and Investment Co. Ltd. [2021] 126 taxmann.com 79, dated 03/12/2020. On perusal of the same we find that the Tribunal had, after making reference of the judgment of the Hon’ble High Courts and the Hon’ble Supreme Court on the issue under consideration, concluded that if an assessee debits an amount of doubtful debt to the Profit & Loss Account and simultaneously obliterate such provision from its account by reducing the corresponding amount from the Loans & Advances/Debtors on the asset side of the balance sheet and consequently, at the end of the year shows the Loans & Advances/Debtors on the asset side of the balance sheet are shown as net of the provision for bad debt, it would amount to an actual write-off and such actual write-off would not attract Clause (i) of the Explanation to Section 115JB(2) of the Act. Further, It was also observed that Clauses (i) to the Explanations in Section 115JB of the Act, was introduced with retrospective effect to overcome the judgment of the Hon’ble Supreme Court in case of CIT v. HCL Comnet Systems & Services Ltd. 305 ITR 409 (SC) which it was held that Clause (c) of Explanation would apply if the amount is set aside as a provision and such provision is made for meeting a liability (other than ascertained liability), and the same does not cover a provision made for a debt which is receivable by the 6 Assessment Year 2014-2015 assessee. The provision for bad and doubtful debts which is made to cover up probable diminution in the value of the asset, cannot be said to be a provision for liability because even if the debt is not recoverable, no liability could be fastened on the assessee. The relevant extract of the aforesaid decision of the Tribunal in the case of Peerless General Finance and Investment Co. Ltd. (supra) reads as under: “7. We note that the Ld. CIT(A) has correctly held that while computing book profit, provision for diminution in value of investments and provision for non-performing asset, since were not liabilities, clause "(c)" in Explanation (1) to sub- section (2) of section 115JB of the Act was not attracted. And hence, he rightly directed the AO not to add back these amounts to the book profit. However, the question now before us is whether clause (i) of Explanation (1) to sub-section (2) of section 115JB of the Act could be attracted in the facts of this case. We note that sub-clause (i) of Explanation (1) to section 115JB of the Act has been inserted by the Finance Act, 2009, with retrospective effect from 1-4-2001 and it is noted pertains to the amounts set aside as provision for diminution in value of any assets. In this case, we note that the admitted fact is that assessee has shown provision for diminution in value of investment to the tune of Rs. 29,81,59,433/- and provision for NPA amounting to Rs. 19,57,60,485/- which was debited to the P&L Account. And since both the amounts are in respect of investments and asset (non-performing assets) pertained to the asset item in the Balance Sheet, so, per-se clause (i) of Explanation (1) of section 115JB of the Act is attracted. However, the assessee's case is that though these two items have been shown as provision "it is not a provision but it is actual write off", therefore, clause (i) of Explanation (1) to sub-section (2) of section 115JB of the Act is not applicable and for urging so, the assessee has relied on the decision of the Hon'ble Gujarat High Court in the case of Vodafone Essar Gujarat Ltd. (supra) wherein the Hon'ble High Court while deciding a similar issue had held as under: "13. Thus, the Supreme Court in case of HCL Comnet Systems & Services Ltd. (supra) held that clause (c) of the explanation would apply to the debt payable by the assessee. In such a case, if the amount is set aside as a provision and provision is made for meeting a liability other than ascertained liability, clause (c) would come into force and such provision would be added in computation of book profit for the purpose of 115JA of the 7 Assessment Year 2014-2015 Act. This clause, however, would not cover a provision made for a debt which is receivable by the assessee. It was observed that the provision for bad and doubtful debts which is made to cover up probable diminution in the value of the asset, cannot be said to be a provision for liability because even if the debt is not recoverable, no liability could be fastened on the assessee.

8 Assessment Year 2014-2015 After 1.41989 however, a mere provision for bad debt would not be entitled to deduction under section 36(1)(vii) of the Act. In context of such statutory change, the Supreme Court referred to the decision in case of Southern Technologies Ltd. v. Jt. CIT [2010] 320 ITR 577/187 Taxman 346, in which the following observations were made: "Prior to April, 1, 1989, the law, as it then stood, took the view that even in cases in which the assessee(s) makes only a provision in its accounts for bad debts and interest thereon and even though the amount is not actually written off by debiting the profit and loss account of the assessee and crediting the amount to the account of the debtor, the assessee was still entitled to deduction under section 36(1)(vii). (See CIT v. Jawala Prasad Tiwari [1953] 24 ITR 537 (Born.) and Vithaldas H Dhanjibjai Bardanwala v. CIT [1981] 130 ITR 95 (Guj.) Such state of law prevailed up to and including the assessment year 1988-89. However, by insertion (with effect from April 1, 1989) of a new Explanation in section 36(1)(vii), it has been clarified that any bad debt written off as irrecoverable in the account of the assessee will not include any provision for bad and doubtful debt made in the accounts of the assessee. The said amendment indicates that before April 1, 1989, even a provision could be treated as a write off. However, after April 1, 1989, a distinct dichotomy is brought in by way of the said Explanation to section 36(1)(vii). Consequently, after April 1, 1989, a mere provision for bad debt would not be entitled to deduction under section 36(1)(vii). To understand the above dichotomy, one must understand 'how to write off. If an assessee debits an amount of doubtful debt to the profit and loss account and credits the asset account like sundry debtor's account, it would constitute a write off of an actual debt. However, if an assessee debits 'provision for doubtful debt' to the profit and loss account and makes a corresponding credit to the 'current liabilities and provisions' on the liabilities side of the balance-sheet, then it would constitute a provision for doubtful debt. In the latter case, the assessee would not be entitled to deduction after April 1, 1989."

17. The Supreme Court (in Vijaya Bank) further observed as under: "7. One point needs to be clarified. According to Shri Bishwajit Bhattacharya, learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [supra] was prior to the insertion of the Explanation vide Finance Act, 2001, with effect from 1st April, 1989, hence, that law is no more a good law. According to the learned counsel, in view of the insertion of the said Explanation in Section 36(1)(vii) with effect from 1st April, 1989, a mere debit of the impugned amount of bad debt 9 Assessment Year 2014-2015 to the Profit and Loss Account would not amount to actual write off. According to him, the Explanation makes it very clear that there is a dichotomy between actual write off on the one hand and a provision for bad and doubtful debt on the other. He submitted that a mere debit to the Profit and Loss Account would constitute a provision for bad and doubtful debt, it would not constitute actual write off and that was the very reason why the Explanation stood inserted. According to him, prior to Finance Act, 2001, many assessees used to take the benefit of deduction under section 36(1)(vii) of 1961 Act by merely debiting the impugned bad debt to the Profit and Loss Account and, therefore, the Parliament stepped in by way of Explanation to say that mere reduction of profits by debiting the amount to the Profit and Loss Account per se would not constitute actual write off. To this extent, we agree with the contentions of Shri Bhattacharya. However, as stated by the Tribunal, in the present case, besides debiting the Profit and Loss Account and creating a provision for bad and doubtful debt, - the assessee-Bank. had correspondingly/simultaneously obliterated the said provision from it's accounts by reducing the corresponding amount from Loans and Advances/debtors on the asset side of the Balance Sheet and. end of the year, the figure in the loans and advances or the debtors on the asset side of the Balance Sheet was shown as net of the provision "for impugned bad debt". In the judgment of the Gujarat High Court in the case of Vithaldas H Dhanjibhai Bardanwala [supra]. A mere debit to the Profit and Loss Account was sufficient to constitute actual write off whereas, after the explanation, the assessee(s) is now required not only to debit the Profit and Loss Account but simultaneously also reduce loans and advances or the debtors from the asset side of the Balance Sheet to the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of provisions for impugned bad debt. This aspect is lost sight of by the High Court in it's impugned judgement. In the circumstances, we hold, on the first question, that the assessee was entitled to the benefit of deduction under section 36(1)(vii) of 1961 Act as there was an actual write off by the assessee in it's Books, as indicated above."

10 Assessment Year 2014-2015

(c) of the explanation to section 115JA/115JB, would not apply. In context of applicability of clause (i) to the explanation, relying on the decision of Supreme Court in case of Vijaya Bank (supra), the Court observed that there is a dichotomy between actual write off and provision for bad and doubtful debt. A mere debit to the Profit and Loss account would constitute a bad and doubtful debt but it would not constitute actual write-off. However, if simultaneously such amount is obliterated from the accounts by reducing corresponding loans and advances on the asset side, the same would amount to a write off. It was concluded as under: " .... Therefore, after the Explanation the assessee is now required not only to debit the P &L A/c but simultaneously also reduce the loans and advances or the debtors from the assets side of the balance sheet to the extent of the corresponding amount so that, at the end of the year, the amount of loans and advances/debtors is shown as net of the provisions for the impugned bad debt. Therefore, in the first place if the bad debt or doubtful debt is reduced from the loans and advances or the debtors from the assets side of the balance sheet the Explanation to s.115JA or JB is not at all attracted."

11 Assessment Year 2014-2015

10 to 14. xx xx

15. Thus, we note from page 34 of paper book that the provision for NPA of Rs.19,57,60,485/- was debited from the profit and loss account and this was simultaneously reduced from corresponding asset side as follows:

Opening accumulated provision in 2564.11 (page 36) respect of bad debt Add: provision created in AY 2001-02 195.76 (Page 2 & 36) 2759.87 Less: Write back of provision 139.34 (Page 36, 2 & 26) Closing accumulated provision 2620.53

16. The Ld. AR explained that this write back of the provision of Rs. 139.34 million was credited to the P&L Account under the head 'Miscellaneous Income' and drew our attention to page 2 and 26 of the paper book to show that total provision for diminution in investment and loans and advances being no longer required is Rs. 451.41 million which break up (Diminution in investment is Rs. 312.07 million and provision for non-performing assets is Rs. 139.34 million and total is Rs. 451.41 million) (supra). We note that the closing balance of Rs. 2620.53 million was reduced from Schedule 7- Loans and Advances of the audited accounts in this regard, refer page 36 of paper book. The Provision of Rs. 195.76 13 Assessment Year 2014-2015 million created during the year was debited in the Profit and Loss A/c for the year and Provision written back during the year amounting to Rs. 139.34 million was credited in the Profit and Loss A/c. This clearly suggests that not only a mere 'Provision for Non-Performing Assets was created by the assessee by debiting the Profit and Loss account but simultaneously the corresponding amount from Loans and Advances' shown on the Asset side of the Balance Sheet was also reduced/adjusted. In other words, the 'Loans and Advances' were recorded in the books as net of provision. Thus, in view of the above facts, the said Provision for diminution in non-performing assets would amount to an actual write off of Provision from the Assets side and therefore would not get attracted by clause (1) of the Explanation to sub-section (2) of section 115JB of the Act as held by the Hon'ble Gujarat High Court in the case of Vodafone Essar Gujarat Ltd. (supra) since the Assets side of the Balance Sheet has also been accordingly reduced in the present case of the assessee. Thus, we note that the accumulated closing provision of Rs. 2620.53 million was reduced from the current assets, loans and advances which are evident from page 36 of the paper book, which we find to be correct. Thus, the said provision of Rs. 195.76 million was an actual write off and, therefore, it does not attract clause (i) of Explanation (1) of section 115JB of the Act. And, therefore, the assessee succeeds and the question of law forwarded by the Hon'ble High Court is answered in favour of assessee and consequently the action of Ld. CIT(A) on this issue is confirmed on the ground discussed supra.

8. In result the appeal preferred by the Revenue is dismissed.