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PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by revenue is directed against the order of ld.
Commissioner of Income Tax (Appeals)-2 [the ld. CIT(A)], Mumbai dated 20th October 2014 for Assessment Year 2011-12 raising the following grounds of appeal: i. "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in deleting disallowance of Rs.6,66,52,645/ - being bad debt written off ignoring the fact that proviso to section 36(1)(vii) was attracted to the facts of the case, assessee being eligible to deduction under section 36(1)(viia) of the Act?" ii. "Whether on facts and in the circumstances of the case and in Law, the Ld.CIT(A) ought to have confirmed the addition of Rs.6,66,52,645/- being bad debt written off because credit balance in. provision for bad and Mum 2015-M/s The Kapol Co-op. Bank Ltd. doubtful debt account was higher at Rs.11,40,24,442/ - warranting disallowance of bad debt under proviso to section 36(1)(vii)." iii.·' "Whether on facts and in the circumstances of the case and in Law, the Ld. CIT(A) was justified in allowing deduction of Rs.3,26,86,648/- on account of gratuity payment made after close of the previous year when the said gratuity amount was not debited to P&L AI c of the previous year and therefore could have only been allowed deduction on payment basis in the subsequent Assessment Year."
Brief facts of the case are that the assessee is a Multi-state Scheduled Co-op. Bank, filed its return of income for Assessment Year 2011-12 on 29.09.2011 declaring loss at Rs. 4,18,452/-. The return of income was revised on 07.10.2011, declaring Nil income. The Assessing Officer while passed the assessment order besides the other disallowances disallowed bad-debts written off Rs. 7,79,92,836/- and gratuity payment of Rs. 3,26,86,648/- On appeal before the ld. CIT(A), both the disallowances//additions were deleted. Therefore, aggrieved by the order of ld. CIT(A), the revenue has filed the present appeal before us.
We have heard the submission of ld. Departmental Representative (DR) for the revenue and ld. Authorized Representative (AR) of the assessee and gone through the orders of lower authorities with the assistance of representative of the parties. Ground No.1 relates to disallowance of bad-debt written off. The ld. DR for the revenue supported the order of Assessing Officer. The ld. DR for the revenue Mum 2015-M/s The Kapol Co-op. Bank Ltd. relied upon the order of Assessing Officer. The ld. DR further submits that assessee has directly claimed Rs. 7,79,92,836/- as bad-debt in the computation of income. The assessee has not written off the said amount in the Profit & Loss Account. The assessee not clarified under which provision, the bad-debt was claimed. As bad-debt was not written off in the Profit & Loss Account, the same was not allowable.
On the other hand, the ld. AR of the assessee supported the order of ld. CIT(A). The ld. AR of the assessee submits that assessee has no rural branch and the logic adopted by Assessing Officer is not applicable.
The bad-debt written off consists of Rs. 6.66 crore advanced to Madhavpura Mercantile Cooperative Bank Ltd. and other/ second component pertains to written of 47 individual debtors aggregating to Rs. 1.13 crore. The assessee adequately explained before the Assessing Officer as well as before the ld. CIT(A) along with documentary and supporting evidence showing the statement of computation of income in all earlier years particularly from Assessment Year 2007-08 onwards. The Assessing Officer has not examined the accounts of 47 debtors despite furnishing the complete details. All the written off has been debited to Reserve for bad and doubtful debts. The ld. AR for the assessee further submits that the assessee has no rural branch. In support of his submission, the ld. AR of the assessee relied upon the Mum 2015-M/s The Kapol Co-op. Bank Ltd. decision of Hon’ble Supreme Court in Catholic Syrian Bank Ltd. vs. CIT [2012] 343 ITR 270(SC).
We have considered the submission of ld. DR for the revenue and ld. AR of the assessee and gone through the orders of authorities below.The relevant parts of the sections 36(1)(vii) and 36(1)(viia) have been reproduced. The said sections provide as under:
Section 36(1)(vii) :- subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year: [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]
Section 36(1)(vii) of the Act allows deduction in respect of any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee during the previous year. The deduction is only subject to the provision of Section 36(2). Section 36(1)(viia)(a) of the Act allows deduction in respect of provision made for bad and doubtful debts in relation to rural advances up to the specified limit.
The Assessing Officer disallowed the claim of bad-debt by taking view that entire liability worked out by the assessee. The assessee has not clarified the issue but merely claimed that entire amount has been paid in April 2011. The submission of assessee was not repudiated by Mum 2015-M/s The Kapol Co-op. Bank Ltd. assessing officer in express manner. Before the ld. CIT(A), the assessee furnished written submission dated 16.10.2014 explaining the bad-debt written off of Rs. 1.13 crore in respect of 47 borrowed accounts as well as in respect of amount of Rs. 6.66 Crore advanced to
The ld. CIT(A) after considering the contention and the submission of assessee passed the following order:
“3.5 The facts of the case, the stand taken by the A.O. in the assessment order and the contentions raised by the learned authorized representative of the appellant company during the appellate proceedings as well as the written submissions made are considered. The claim for deduction made by the appellant u/s. 36(1)(vii) of the Act, on account of Bad Debts written off, has two components. The first one is with regard to the Rs. 6,66,52,645/- in respect of amount advanced to Madhavpura Mercantile Co-op. Bank Ltd. The Second component pertains to the write off of individual accounts of 47 debtors, aggregating to Rs. 1,13,40,191/-. Both the issues are dealt with as follows: Madhavpura Mercantile Co-op. Bank Ltd. 3.6. It is evident from the facts of the case that the principal amount and the outstanding interest was found to be irrecoverable from, Madhavpura Mercantile Co-op. Bank Ltd. It is not in dispute that the RBI had also advised, the' Bank to make a full provision towards the irrecoverable principal and interest .amounts from Madhavpura Mercantile Co-op. Bank Ltd. Consequently, the appellant had taken a decision to write off the entire principal amount 'and the outstanding interest amount which aggregated to Rs. 6,66,52,645/-.It is evident from the audited accounts that the write off has been reflected in the P&L account. It is also seen that the appellant has provided an explanatory note to the accounts wherein such an exceptional item of write off is highlighted. The contention of the AO Mum 2015-M/s The Kapol Co-op. Bank Ltd. that the appellant ought to have debited the said Bad Debts written off to the Reserve for Bad & Doubtful Debts account is considered. The appellant bas 'adequately explained with the supporting documents such as annual audited accounts and statements of computations of income that in all the earlier years, specifically from the AY 2007-08 onwards, any provisions 'towards Bad Debts debited in the P&L a/c. have been added back in the statement of computation of income. The appellant has further explained that the Reserve for Bad & Doubtful Debts alc. reflects the credit balance, only on account of the provision for NPAs required to be made in accordance with the guidelines of the RBI. It. is further clarified that such a reserve has not been created by way of any deduction claimed under the Income-tax Act. Since the Reserve for Bad & Doubtful Debts. A/c does not include any amounts, which were claimed 'as deductions under the Income-tax Act, any write off of the Bad Debts have to be allowed as a deduction u/s. 36(1)(vii) of the Act, independent of the credit balance in the Reserve for Bad & Doubtful Debts A/c. I find that the explanation offered by the appellant adequately support the allowability of the claim u/s. 36(1)(vii) of the Act. and accordingly the addition is hereby deleted.”
Write off of individual accounts of 47 debtors, aggregating to Rs. 1,13,40,191/- 3.7. The AO has not examined and discussed this issue at all in the assessment order. He has merely included this amount as a part of the 'total disallowance of Bad Debts. DECISION: 3.8. It is evident from the written submissions and paper book-filed during the appellate proceedings that the appellant had filed a detailed reply with enclosures before the AO on 30.08.2013 so as to explain the admissibility of the claim of Bad Debts written off. It is seen from the paper book that the appellant had submitted copy of the list of 47 accounts that were written off; which contained further details such as the outstanding Mum 2015-M/s The Kapol Co-op. Bank Ltd. amounts, before the AO on 30.08.2013. The paper book also states that the statutory auditor's certificate and a copy of the Board resolution were also filed before the AO in support of the claim of write off of Bad Debts aggregating to Rs. 1,13,40,191/-. However, the AO has not examined this issue and passed a speaking order, justifying the disallowance, on this issue. 3.9. In this case, the write off is not reflected in the P&L account. As explained by the appellant, the write off has been debited to Reserve for Bad & Doubtful Debts A/c. The entries passed by the appellant are explained as under: (i) Bad Debts written off Ac. Dr. 1,13,4,0,191/- To Individual Borrowers' Accounts Cr. 1,13,40,191/- (Bad Debts written off during the year) (ii). P & L Account Dr. 1,13,40,191/- To Bad Debts written off Alc. Cr. 1,13,40,191/- (iii) Reserve of Bad & Doubtful Debts Ale. Dr. 1,13,40,191/- To P & L Account Cr. 1,13,40,191/- (Amount, equal to Bad Debts written off during the year by debit to P & L Account, now transferred from RBDD to P & L A/c.)
3.10. As observed, the appellant had not created Reserve of Bad & Doubtful Debts A/c, by claiming deductions u/s. 36(1)(viia) of the Act and therefore, any debits to Reserve for Bad & Doubtful Debts A/e., on account of the Bad Debts written off would not result in any deduction u/s. 36(1)(vii) of the Act. Since the appellant has not created any provision u/s. 36(1)(viia) of the Act, the same has to be treated as Nil. Accordingly, the appellant is entitled to full deduction u/s. 36(1)(vii) of the Act to the extent of actual write off in the books of accounts. It is evident from the facts of the case that the appellant has actually written off the Bad Debts in 47 debtors accounts." The other issue is of procedural in nature, implying that whether or not the methodology followed by the appellant is in conformity with the provisions of the Act. In this context, the appellant has relied Mum 2015-M/s The Kapol Co-op. Bank Ltd. upon the decision of the Hon'ble Supreme Court in the case of Vijaya Bank v/s CIT (2010) 323 ITR 166 SC. I find that the" methodology followed by the appellant is one of the acceptable methods of write off, seen in the context of actual write off of the 47 debtors accounts. It is seen from the Item no. 5 of the Notes on Accounts that the appellant had explained the methodology of write off. On the facts and in the circumstances of the case, I hereby hold that the write off of Bad Debts, as per the methodology followed by the appellant, also qualifies for a deduction u/s. 36(l)(vii) of the Act, Accordingly the disallowance is hereby deleted.”
The Hon’ble Supreme Court in Catholic Syrian Bank Ltd. vs. CIT (supra) held that the language of Section 36(1)(vii) of the Act is unambiguous and does not admit of two interpretations. It applies to all banks, commercial or rural, scheduled or unscheduled. It gives a benefit to the assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year. This benefit is subject only to Section 36(2) of the Act. It is obligatory upon the assessee to prove to the assessing officer that the case satisfies the ingredients of Section 36(1)(vii) on the one hand and that it satisfies the requirements stated in Section 36(2) of the Act on the other. The proviso to Section 36(1)(vii) does not, in absolute terms, control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely under Section 36(1)(viia) of the Act. We may also notice that the explanation to Section 36(1)(vii), introduced Mum 2015-M/s The Kapol Co-op. Bank Ltd. by the Finance Act, 2001, has to be examined in conjunction with the principal section. The explanation specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of 'any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee'. Thus, the concept of making a provision for bad and doubtful debts will fall outside the scope of Section 36(1)(vii) simplicitor. The proviso, as already noticed, will have to be read with the provisions of Section 36(1)(viia) of the Act. Once the bad debt is actually written off as irrecoverable and the requirements of Section 36(2) satisfied, then, it will not be permissible to deny such deduction on the apprehension of double deduction under the provisions of Section 36(1)(viia) and proviso to Section 36(1)(vii).
This does not appear to be the intention of the framers of law. The scheduled and non-scheduled commercial banks would continue to get the full benefit of write off of the irrecoverable debts under Section 36(1)(vii) in addition to the benefit of deduction of bad and doubtful debts under Section 36(1)(viia).
Considering the decision of Apex Court, there is no double deduction claimed by assessee in the computation of total income. Proviso to section 36(1)(vii) ensure that double deduction will not be allowed, the said proviso provides that in cases where clause (viia) applies, the Mum 2015-M/s The Kapol Co-op. Bank Ltd. amount of deduction relating to bad-debt under section 36(1)vii) shall be limited to the amount by which debt or part thereof exceed the credit balance in the provision of bad and doubtful debts. In our view, the ld. CIT(A) has correctly allowed the deduction under section 36(1)(vii), which we affirmed. Hence, this ground of appeal
is dismissed.
11. Ground No.2 relates to deleting the disallowance of gratuity payment after close of previous year. The ld. DR for the revenue supported the order of Assessing Officer. The ld. DR further submits that the assessee claimed Rs. 81,71,662/- being one fifth of Rs. 4.08 crore and Rs. 3.26 crore has been treated as deferred revenue expenses. The assessee claimed the remaining amount of Rs. 3.26 crore in the computation of income. In the notes to the audit report, the assessee mentioned that due to enhancement of gratuity limit from Rs. 3.50 lakhs to Rs. 10 lakhs following the amendment to the Payment of Gratuity Act, 1972, the gratuity liability as per actuarial valuation of book is Rs. 447.42 lakhs. However, as per RBI Circular dated 24.05.2011, bank has been allowed to bank gratuity liability over a period of five years in five equal installments starting from year ending 31.03.2011. Accordingly, the bank has provided Rs. 81,71,662/- towards gratuity liability being first installment of amortization and ITA No. 487 Mum 2015-M/s The Kapol Co-op. Bank Ltd. balance of Rs. 3.26 crore is shown under the head “Bank Revenue Expenditure” under the head “Other Assets”. The Assessing Officer correctly treated the as Bank Expenses.
12. On the other hand, the ld. AR of the assessee supported the order of ld. CIT(A). The ld. AR of the assessee further submits that the Assessing Officer without appreciating the fact disallowed the claim of gratuity.
The entire payment is allowable as deduction in the relevant previous year in which it was paid. In support of his submission, the ld. AR of the assessee relied upon the decision of Hon’ble Supreme Court in Taparia Tools Ltd. vs. JCIT [2015] 372 ITR 605 (SC).
We have considered the submission of both the parties and have gone through the orders of authorities below and the decision cited by ld. AR of the assessee. During the assessment, the Assessing Officer disallowed the deduction of Rs. 3.26 crore by taking his view that the amount paid pertains to the various earlier years and one fifth of such expenses were allowed and rest for treating as deferred expenses and added to the income of assessee. Before the ld. CIT(A), the assessee filed detailed written submission dated 29.05.2014 explaining that the assessee provided its staff gratuity liability of Rs. 4,08,58,310/- in Financial Year 2010-11 based on actuarial valuation as on 31.03.2011.
The gratuity was provided as per the provisions of Payment of Gratuity Mum 2015-M/s The Kapol Co-op. Bank Ltd. Act 1972, wherein the upper age limit of gratuity payment to an employee was raised from Rs. 3.50 lakhs to Rs. 10 lakhs. The entire liability provided was paid to LIC on May 2011 i.e. before due date of filing return of income and the entire expenditure was rightly allowable to the assessee in Assessment Year 2011-12. It was further explained that with the approval of RBI, one fifth of this expenditure is a charge to P&L Account of each year from Assessment Year 2011-12 to 2015-
The Assessing Officer disallowed Rs. 3.26 crore and only allowed one fifth i.e. Rs. 81,71,662/- (1/5 of 4.08 Crore) treating it for the current year and remaining amount of Rs. 3.26 crore to earlier years.
The ld. CIT(A) after considering the submission of the assessee concluded that the quantum gratuity liability was Rs. 4.08 crore. The liability was payable on 31.03.2011 and actual payment was made during May 2011, prior to due date of filing of return of income. The assessee treated the expenditure as deferred revenue expenditure and only one fifth of it’s is debited in the books of account. While the assessee treated the expenditure as deferred revenue expenditure as deferred revenue expenditure for the purpose of books of account, the assessee claimed entire expenditure as deduction on the basis of actual payment. The ld. CIT(A) concluded that payment is allowable deduction being revenue expenditure crystallized during the relevant Mum 2015-M/s The Kapol Co-op. Bank Ltd. previous year. Section 43B also makes it clear that such gratuity payment are allowable as deduction on the basis of actual payment made prior to date of filing of return of income. The Hon’ble Supreme Court in Taparia Tools Ltd. vs. JCIT (supra) held that as a general rule, revenue expenditure to be allowed in the year in which incurred. We have noted that the Assessing Officer instead of examining the liability and the actual payment of gratuity disallowed it holding that it pertains to earlier years. As we have noted that revenue expenditure to be allowed in the year in which incurred. The ld CIT(A) allowed it by following the same principle.We have noted that the ld. CIT(A) has given categorical finding that actual payment was made during May 2011 i.e. prior to date of filing of return. Therefore, we do not find any infirmity or illegality in the order passed by ld. CIT(A). No contrary facts or law is brought to our notice. Therefore, we do not find any merit in the grounds of appeal raised by revenue.
In the result, appeal of the revenue is dismissed.
Order pronounced in the open court on 10/07/2019.