SHRI RAJKOT DISTRICT CO-OPERATIVE BANK LTD.,RAJKOT vs. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 1(2), RAJKOT , RAJKOT

3. Brief facts of the case that he appellant, Shri Rajkot District Co-operative Bank Limited, is a Cooperative Bank engaged in the business of banking and operates in the districts of Rajkot (Gujarat). The Appellant is assessed to income tax at ACIT, Circle-1(2), Rajkot. The Return of Income for the year relevant to A.Y. 2011-12 was filed on 13.09.2011 showing a net total income of Rs, 11,78,98,647/-. The original assessment order was passed u/s 143(3) by ACIT, Circle-1(2), Rajkot on 04.03.2014 making a disallowance of Rs. 60,00,000 for Provision for Bad & doubtful Debt ('PBDD' for short) claimed on standard assets and assessing the total income at Rs 12,38,98,647/-.

4. During the year relevant to A.Y. 2011-12, the appellant has claimed a deduction of Rs. 60,00,000 u/s 36(1)(viia) as PBDD on Standard Assets and as per regulatory requirement of RBI under IRAC norms it was shown in the books as 'Standard Assets Contingency fund'. The learned Assessing Officer has, without properly appreciating the facts and legislative intent, disallowed the lawful claim for deduction. Transferred a sum of Rs. 25,00,00,000 from accumulated PBDD to SR purely on temporary basis which were reinstated to the source account on 10.02.2015. It was simply a book entry, no real income has accrued or arisen or received by the bank and transfer under consideration is not made exigible to tax under any of the provision of the Income Tax Act. Page 2 of 33 Further the PBDD created u/s 36(1) (viia) being in the nature of Reserve, such accounting treatment as given in the books was permissible. The learned AO has, without properly appreciating the facts, submission made and legal position, added the same to the returned income stating that "the amount transferred from PBDD to reserve should be first transferred to P&L Account in order to arrive at correct taxable income. The details of claim for PBDD on standard assets as also transfer from PBDD to SR were disclosed in the return of income filed and further submission made during proceeding u/s 143(3) which were not found to be inaccurate by the AO. In light of this facts, there was no case for the AO to allege or to hold the entries under dispute as "furnishing inaccurate particulars of income" so as to invoke provision of Section 271(1)(c).

6. Subsequently, in pursuance of the order u/s 263 dated 21.03.2016 passed by the Principal CIT, Rajkot-1, a fresh order u/s 143(3) r.w.s. 263 was passed on 29.04.2016 assessing the taxable income at Rs. 37,38,98,650 after disallowing Rs. 60,00,000 claimed as PBDD on standard assets and adding Rs. 25,00,00,000 to returned income for amount transferred from PBDD to Statutory Reserve ('SR' for short). The learned AO's action is erroneous and based on wrongful assumption as well as contrary to the established principles of accounting and law.

8. That the assessee has challenge the legality and validity of impugned order of the Ld.CIT(A) by filing the appeal before us.

9. During the course of hearing, Ld. AR for the assessee submitted “Note” during the course of hearing, which are reproduced as under; The first ground of appeal

is not pressed because it was not a subiect matter of the proceedings leading to the second appeal. It was a subject matter of separate proceedings arising out of the original assessment order. The second ground of appeal arises as a result of transfer of ₹25,00,00,000 from the bad and doubtful debts rural provision account to the account of statutory reserve during the year by way of a transfer from one account to another. In the course of a challenge to the order under section 263, the Hon'ble Tribunal (paper- book page 104) has considered the said transfer entry as an income for the year. Based on it, the order giving effect to the 263 order was passed against which there was an appeal, and the first appellate authority has also upheld the addition by relying upon the order of the tribunal and hence this appeal on merits of the issue. The Appellant contends as under:

1. A mere transfer of the amount from one account to another in the same year by way of a book entry does not give rise to income which can be computed under any of the specific provisions of the Act.

2. There is no specific provision in section 36(1)(via) that the provision for bad and doubtful debts cannot be disturbed or that it should be maintained always. Contrary to this, in case of several provisions under the Act, there is such an explicit requirement, as illustrated below: (i) Sec. 36(1)(viii): for the deduction by way of a special reserve, there is a specific provision stating that the Reserve must be created and maintained; Page 4 of 33 (ii) Sec. 33AC provides that a reserve created for the purpose of deduction claim must be used for that purpose and if not used, it becomes part of profits and gains; (iii) Sec. 80HHC(4) provides that the reserve created, if utilized to distribute dividend and not for business purpose, it becomes taxable; (iv) Sec. 80HHD(5A) and Sec. 10AA(3) contain similar provisions for taxing unused reserves or wrongful use of reserve.

7. Provision amount of Rs. 25 crores is reinstated in original account: Apart from the above arguments, it is most pertinent to note that the action of transferring the same amount from provision account to a reserve account has been reversed in the year 2015 and that the provision account has been reinstated by the same amount. This would mean clearly that the original intended purpose of the amount has been restored. And in the intervening years, it has not been used for non- business purpose or for dividend because the total reserve amount continues to be much more all throughout. It goes to prove that the provision account has continued to be maintained also, and the act of reversal would show that there was no real income that accrued to the appellant and the original requirement is met with. This particular is not a subject matter in the order of the tribunal while upholding the action under section 263, and therefore this particular aspect of the matter needs to be now considered in the right perspective during the present appeal. Hence, the very basis of making the addition does not survive.

8. The order of the tribunal referred to above was mainly in context of Sec. 263 and the observations therein on other aspects of the amount of Rs. 25 crores need to be revisited now in this principal appeal on merits.

7. On the contrary, the Ld. DR for the revenue has drawn our attention that issue of taxability has already been decided by passing an order dated 15-02- 2023 while dealing with the same case in appeal u/s. 263 of the Act against the order of assessment.

(i) Ground No. 1 related to disallowance of provision Rs. 60 Lakh made for standard assets attendance fund. Since, this ground not pressed during the course of argument. Hence, we do not adjudicate Ground No. 1 the Ground No. 1 has dismissed. (ii) Ground No 2 deal with an amount of Rs. 25,00,00,000/- transferred from bad and doubtful debts provision for rural Page 6 of 33 advances to general reserve during the year, as income for the year.

Since, ground no. 2 has already decided in the case of the assessee in dated: 15/02/2023 in ground no.3 the decision taken by this bench is reproduce: 13. We have heard both the parties and have gone throughorder of the Id.Pr.CIT. We are not impressed nor convinced with the contention of the Ld.counsel for the assessee on the merits of the case that the write back of provision for bad and doubtful debts on rural advances was not taxable as income. Considered from all any and every aspect, as per law read alongwith accounting principles in this regard, the write back, we hold, is to be treated as income and subjected to tax, as rightly held by the Ld.PCIT.

To put it otherways, Section 36(1)(viia) of the Act allows claim of deduction of provisions, which otherwise are not allowable as per law, specifically made for bad and doubtful debts of rural advances made by banks. The purpose being to promote rural banking and to assist scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to rural advances. The Hon'ble apex courts takes note of the same in its order in the case of Catholic Syrian Bank (supra) at para 42 reproduced above in the earlier part of our order. Clearly the claim of deduction as per section 36(1)(viia) of the Act, in totality, is allowable only to the extent debts liable to turn bad or are doubtful for recovery are provided for by the assessee When an amount is reduced from such provisionsmade earlier, it denotes that debts to the said extent are found to be good and no longer require being provided for, for turning bad or doubtful for recovery. Thusprovision to the said extent is Page 8 of 33 written back as no longer required. There can be no case, in such circumstances, as per law therefore, for allowing claim of deduction for provision to the full extent, even that no longer required. Such write backs, representing excess claims of provision created, necessarily need to be reversed and treated as income for taxation purposes. Such write backs ipso facto have to be treated as taxable, so as to restrict the assesses claim of deduction to the extent of provision created for bad and doubtful debts, as required by section 36(1)(viia) of the Act. The Ld.PCIT has rightly dealt with the issue accordingly at para 5.1 of his order as under:

"5.1 Legislative intent for Sec. 36(1)(viia)

Section 36(1)(viia) of the IT Act is hereby reproduced: Section 36(1)(viia)(a) of the Act allows deduction in respect of any provision for bad and doubtful debts made by 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 to the following extent:

An amount not exceeding seven and one-half per cent (7.5%) of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not Page 9 of 33 exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner.

Normally no deduction is allowable in respect of a mere provision of bad and doubtful debts. However in order to promote rural banking and in order to assist banks in making adequate provision from their current profits for risks in relation to their rural advances, section 36(1)(viia) was inserted on account for provision for bad and doubtful debts for rural advances.

In this case, assessee bank has firstly debited Rs.25,15,31,572 as provision for bad and doubtful debts u/s 36(1)(viia) during relevant AY and has rightfully claimed it as deduction. Over the period this reserve has accumulated to Rs.53,14,06,776. However, during the relevant AY, bank has transferred Rs. 25 crores out of this provision to general reserve. In this case, there is no dispute regarding the eligibility of the bank for claiming deduction u/s 36(1)(viia), as it was legislative intent and at the same time in order to avoid double deduction u/s 36(1)(vii) and Sec. 36(1)(vila) of the same amount, proviso to sec. 36(1)(vii) has been inserted, which limits the allowance for actual write offs, to the excess, if any, of the write off over the amount standing to the credit of the account created under clause 36(1)(viia).

Page 10 of 33 As it is evident, Sec 36(1)(viia) is special provision for banks for encouraging them to give more rural advances and to strengthen rural economy. It is different from Sec.36(1)(vii) in the way that in normal business, bad debts will be allowed as deduction only when there are actual bad debts and no provisioning in that regard is allowed but in case of banks, vide sec. 36(1)(via), provisioning is allowed for bad and doubtful debts irrespective of the fact whether there are actual bad debts or not and when actual bad debts happen in case of banks, these provisions provide them necessary cushion, as public money is involved. Main idea behind Sec.36(1)(vii) and Sec. 36(1) (viia) is the stark realty of business that there has to be some bad debts in each business, whether it is trading, manufacturing or banking, and a business should be allowed its deduction to the extent of actual non-recoverables. Thus, it is evident that basics of Sec.36(1)(vii) and sec.36(1)(vila) are same except to the fact that, sec.36(1)(viia) is applicable only for banks and allous, above, ability of provisions irrespective of actual expenditure. In such scenario, when bad debts are recovered, they become taxable as contained in sec. 41(4) of IT Act, 1961, similarly, when bank is of view that, it does not need any provisions for bad debts, as there is going to be no bad debts, then those provisions will be added back to the income of the bank for taxation purpose, as bank had already claimed deductions in respect of these provisions u/s 36(1)(viia).

Thus as per the provisions of section 36(1) (viia) of the Act itself, we hold, this write back of provision is liable to be subjected to tax.

"Where, in an accounting period, there is any write-back of the earlier recognized provision for a liability and a provision for the same item is also being recognized in that accounting period, the write back should be adjusted in arriving at the amount of that provision, viz., only the net amount after adjustment of the write back should be charged/credited to the statement or profit and loss. However, where in an accounting period, there is only write back of the earlier recognized provision and no provision is being recognized, the write back should be recognized as income in the statement of profit and loss using the same classification as was used previously used.

Therefore, even as per accepted accounting principles, this write back needed to be treated as income and routed through the P&L account, as rightly held by the Ld.PCIT.

Thus going by law, supported by accounting principles, the write back of provisions for bad and doubtful debts of rural advances was required to be routed through the Profit and Loss account and treated as income for taxation purposes.

5.3 Taxability of real income Furthermore, Hon'ble Supreme court in case of Excel Industries Itd fcivil appeal no. 125 of 2013) lays down the key principles 1 income is said to accrue for the purposes of taxability under the Income Tae Act. The ruling reiterates that it is only real income, and not hupothetical for evaluating when income, which can be taxed in India. Further, for real income to acenie under the ITL, the income should be due; there should be a corresponding liability to pay; and practically, there is a plausible realization of such income. In the instant case, these tests are fully satisfied, an assesse bank itself reserv which clearly indicates that there is realization of income as there are no NPA. In this landmark judgement Hon'ble Supreme court held that merely by making accounting entry hypothetical income can't be brought to tax and on same analogy just by making accounting entry, real income should not go out of tax net. What to be taxed should be real income only.

It clearly shows the importance of substance over form concept for taxation purpose. Substance over form is an accounting principle used to ensure that financial statements give a complete, relevant, and accurate picture of transactions and Page 14 of 33 events". If an entity practices the 'substance over form! concept, then the financial statements will show the overall financial reality of the entity (economic substance), rather than the legal form of transactions (form). In accounting for business transactions and other events, the measurement and reporting is for the economic impact of an event, instead of its legal form. Substance overt form is critical for reliable financial reporting. It is particularly relevant in cases of revenue recognition, sale and purchase agreements, etc. The key point of the concept is that a transaction should not be recorded in such a manner as to hide the true intent of the transaction, which would mislead the readers of a company's financial statements."

4.2. In para 1 of the further submission dated 16.03.2016, the assessee has contended that the exercise of initiating the proceedings u/s. 263 of the Act in its case was unwarranted as the issue involved is a book entry which has no relevance with Page 15 of 33 the chargeability of a particular item which is otherwise taxable under the Act. The assessee's contention is not tenable because the issue involved in this case is with regard to transfer of amount of Rs.25 Crore which has been claimed and allowed in earlier years according to provisions of section 36(1)(viia) of the Act. This amount has been put in another Reserve instead of bringing it to the Pad, account.

4.5. In Para no. 2 of the submission dated 16.02.2016, with regard to book entry, the assessee has relied on the following decisions: i. CIT v. Hiralal Mittal & Sons, (1972) 86 ITR 463(AII) ii. CIT v. Chunilal V. Mehta & Sons P. Ltd. (1971) 82 ITR 54(SC) iii. CIT v. Mogul Line Ltd. (1963)46 ITR 590,600(Bom) iv. State Bank of India Vs. CIT(1996) 157 ITR 67 (SC)

The issue involved in the above decisions is summarized hereunder.

(i) CIT v. Hiralal Mittal & Sons, (1972) 86 ITR 463(АП)

Page 16 of 33 The issue in the cited case was whether the assessee was entitled to the deduction of the interest claimed even though it had not made the necessary entries in its account books.

(ii) CIT v. Chunilal V. Mehta & Sons P. Ltd. (1971) 82 ITR 54(SC) The issue in the cited case relate to the taxability under section 10(5A) of Act of a certain amount received by the assessee-firm as compensation on the termination of its managing agency.

(iii) CIT v. Mogul Line Ltd. (1963)46 ITR 590,600(Bom) The issue in the cited case was with regard to an amount debited to foreign exchange suspense account.

(iv) State Bank of India Vs. CIT(1996) 157 ITR 67 (SC)

In issue in this case is with regard to increase in amounts credited due to devaluation and it was held that the increased amount has been utilised by repatriation, it was incidental to the banking business.

The issues involved in the decisions relied upon by the assessee differ from the facts of this case and from issues mentioned in the show cause notice u/s.

263. In none of the cases cited above, the issue is with regard to an amount already debited in the profit and loss account and claimed and allowed as deduction in earlier assessment years. As already discussed, in this case, the issue is with regard to reversal of Provision for bad and Page 17 of 33 doubtful debts which was claimed earlier and allowed as deduction and also transferring the same to another reserve without routing the same through profit and loss account, in contravention to the Accounting Standards prescribed by ICAI and approved by the Income Tax Department.

10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause() of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, but before the first day of April, 2021, the following deduction shall be allowed- (i) hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter, (ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve Page 19 of 33 account (to be called the "Special Economic Zone Re- investment Reserve Account") to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub-section (2).

Explanation. For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee.

(2) The deduction under clause (ii) of sub-section (1) shall be allowed only if the following conditions are fulfilled, namely:-

(a) the amount credited to the Special Economic Zone Re- investment Reserve Account is to be utilised- (i) for the purposes of acquiring machinery or plant which is first put to use before the expiry of a period of three years following the previous year in which the reserve was created; and (ii) until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India; Page 20 of 33 (b) the particulars, as may be specified by the Central Board of Direct Taxes in this behalf, under clause (b) of sub-section (1B) of section 10A have been furnished by the assessee in respect of machinery or plant along with the return of income61 for the assessment year relevant to the previous year in which such plant or machinery was first put to use.

(3) Where any amount credited to the Special Economic Zone Re-investment Reserve Account under clause (ii) of sub-section (1),- (a) has been utilised for any purpose other than those referred to in sub section (2), the amount so utilised; or (b) has not been utilised before the expiry of the period specified in sub-clause (i) of clause (a) of sub-section (2), the amount not so utilised, shall be deemed to be the profits,- (i) in a case referred to in clause (a), in the year in which the amount was so utilised; or (i) in a case referred to in clause (b), in the year immediately following the period of three years specified in sub-clause (i) of clause (a) of sub-section (2), and shall be charged to tax accordingly:

Page 21 of 33 Provided that where in computing the total income of the Unit for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (7B) of section 10A, the undertaking, being the Unit shall be entitled to deduction referred to in this sub-section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause (ii) of sub-section (1).

The import or object of an Explanation was explained by the Hon'ble apex court in the case of Sundaram Pillai v Pattabiraman AIR 1985 SC 582,593 as:

The object of an Explanation has been explained in an earlier case as follows:-

(a) to explain the meaning and intendment of the Act itself, (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve, (c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful, (d) an Explanation cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act it can help or assist the Court in interpreting the true purport and intendment of the enactment, and (e) it cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the Page 26 of 33 working of an Act by becoming an hindrance in the interpretation of the same.

Explanations are not substantive provisions and are inserted to clear up any ambiguity in the section. They only clarify an existing law. Normally Explanations do not enlarge the scope of the section but only explain the scope.

Explanation 2 to section 263, clearly provides additional support to the dominant object of section 263, specifically pointing out situations where assessment orders will be deemed to be erroneous.

The main provision of the section and its import has not been altered by the explanation. Therefore where section 263 itself has been invoked and the reason for finding the assessment order erroneous clearly pointed out to the assessee during revisionary proceedings to the effect that adequate inquiries were not conducted by the AO on the issue in question, Explanation 2 to section 263 (a) also being to the same effect of assessment orders being deemed to be erroneous on account of lack of adequate inquiry, we see no reason why pointedly the Explanation also needs to be brought to the notice of the assessee while applying it to the case.

36 Once the ld.Pr.CIT brings to the notice of the assessee the reason why he finds the assessment order to be erroneous, which in the present case was inadequate inquiries conducted Page 27 of 33 by the AO on the nature of disclosure made by the assessee during the survey in excess stock found, he need not specifically point out that he has invoked Explanation-2 to sub-clause (a) to the section which is to the same effect of inadequate inquiries conducted qualifying as error in assessment order. The fact that he clearly brings out the reason why he found assessment order erroneous, is sufficient in itself and self-explanatory. It need not to be technically qualified by pointing out the specific clause in respect to which the reason pertained. The entire objectives of confronting anything to the assessee in the process of rendering justice is to offer an opportunity to other party to come up with his/her arguments or contentions in defense. In the present case, it is not disputed that the assessee had been specifically pointed out the error in the order of the AO of non-conducting inquiry relating to the particular issue. The assessee was required to respond to the same, which he did by pointing out that due inquiry was conducted. The fact of mentioning Explanation 2 sub-clause (a) in the notice by the ld.Pr.CIT which dealt with this specific reason or error in the order of the AO of non- conducting of inquiry, therefore, is of no consequence or relevance, since the assessee in very simple words has been confronted with the error. Mentioning of Explanation 2 to sub- clause (a) is therefore only technical addendum to the same. As we mentioned above, the Explanation did not expand the scope of section but only explained the scope of section, and therefore, once the specific section has been invoked, it is not necessary to mention any specific Explanation thereto which has been invoked. Therefore, this contention of the Id.counsel for the Page 28 of 33 assessee is rejected outrightly that the order needs to be set aside for the reason that Id.Pr.CIT did not confront the assessee before invoking Explanation 2 to sub-clause (a) to section 263 of the Act.

In the case before Hon'ble High Court in the decision relied upon by the Ld.AR, the Revenue had proposed the following questions as substantial question of law before the Hon'ble High Court:

"(a) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT is correct in holding that the PCIT was not empowered and entitled to revise assessment order u/s. 263 of the Act r/w Explanation 2 thereto by ignoring that the order passed by the AO is erroneous in so far as it is prejudicial to the interest of revenue in as much as the Assessing Officer has passed the assessment order without making inquires/verification in the light of the unsecured loans of Rs. Page 29 of 33 2.49 Crores received from M/s. Georgette Tradecom Pvt. Ltd (GTPL) and M/s. PurbaAgro Food Pvt. Ltd (PAFPL)?

(b) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT is correct in cancelling the impugned order u/s. 263 of the I.T. Act and allowing all the grounds of the Assessee?"

Para-5, as above, is just a noting by the Hon'ble High Court of the findings of the ITAT while allowing the assesses appeal. We find that it is only on the facts of the case as found by the ITAT that the issues were all duly examined by the AO and the AO had taken plausible view, that Hon'ble Court had upheld order of the Tribunal dismissing the appeal of the Revenue.

We have gone threw the order dated: 15.02.2023 carefully, we relied our own order. We find no merit in the case of the assessee since, this bench has already decided that the amount is taxable in nature.

Therefore, we find no merit in this case. In view of the above the appeal is dismissed.

Order pronounced in the open court on 04/11/2025.