THE AKKIALUR URBAN CO-OP BANK LTD,HAVERI vs. INCOME TAX OFFICER, WARD-2, HAVERI

The present appeal is filed by the assessee against the order of the CIT (A), Davangere, dt.28.09.2017, for the assessment year 2012-13.

Following grounds are raised by the assessee ;

The CIT (A) had disallowed the provision for bad and doubtful debts and in this regard the CIT (A) in para 6 and 6a of his order, had recorded as under : 6. As regards the other issue, disallowance of provision made for bad and doubtful debts u/s 36(1)(viia) is contested. The AO noticed that the assessee had debited Rs.97,00,000/- in the Profit & Loss A/c towards BDDR. Upon verification, the AO found that the reserves for such expenses was not in accordance with Sec. 36(i)(viia) of the Act and on reworking found that the assessee had claimed excess deduction of Rs.96,46,750/- and disallowed the same. The AO proposed to disallow the excess claim of expenditure of Rs.96,46,750/- and the reply filed by the assessee was not acceptable to the AO and he disallowed the excess reserve debited to the Profit & Loss a/c and brought it to tax. 6a. I have gone through the submissions made before me in this regard and find that the assessee's contentions are not tenable because what is debited in P&L account is only a provision and not a crystallised liability. Any provision is to be ITA.2885/Bang/2017 page - 3 added back to the income declared, therefore it is held that the entire BDDR of Rs.97,00,000/debited to the Profit & Loss a/c is to be disallowed. The AO is directed to verify the same and accordingly, bring the same to tax. Thus the ground fails.

The Ld. AR had submitted that the assessee had obtained licence from RBI to run the banking business. The assessee filed return of income for A. Y. 2012-13 declaring loss of Rs.89,12,597/-. The AO passed order u/s.143(3) where, in para 5.2 the AO had recorded that the assessee had not written off the debts in its books of account and the assessee is still showing the debts as balance in the assets of the balance sheet. Further it was pointed out by the AO that the assessee had debited the provision for bad and doubtful debts in the profit and loss account which clearly shows that the assessee had not written off such amounts in its books of account. On the basis of the above the AO had disallowed the provision for bad and doubtful debts. Before us the Ld. AR had relied upon the judgment of the Hon’ble Supreme Court in the matter of Vijaya Bank v. CIT [323 ITR166].

On the other hand the Ld. DR had submitted that there is no error in the order passed by the lower authorities as the assessee was not able to satisfy the conditions mentioned u/s.36(1)(viia) of the Act.

We have heard the rival contentions and perused the record. Undoubtedly the AO as brought on record that the assessee has not written off the debts in the books of account and the assessee is still showing the balance on the assets side of the balance sheet. In view ITA.2885/Bang/2017 page - 4 of the above and in view of the provisions of section 36(1)(viia), we do not find any merit in the appeal of the assessee and therefore the same is dismissed.

One point needs to be clarified. According to Shri Bishwajit Bhattacharya, the learned Additional Solicitor General appearing for the Department, the view expressed by the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [1981] 130 ITR 95 was prior to the insertion of the Explanation vide the Finance Act, 2001, with effect from April 1, 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 April 1, 1989, a mere debit of the impugned amount of bad debt 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 the Finance Act, 2001, many assessees used to take the benefit of deduction under section 36(1)(vii) of the 1961 Act by merely debiting the impugned bad debt to the profit and loss account and, therefore, 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 its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance-sheet and, consequently, at the 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 the impugned bad debt". In the judgment of the Gujarat High Court in the case of Vithaldas H. Dhanjibhai Bardanwala [1981] 130 ITR 95, a mere debit to the profit and loss account was sufficient to constitute actual write off whereas, ITA.2885/Bang/2017 page - 6

In the result, appeal of the assessee is dismissed. Order pronounced in the open court on 28th day of February, 2019.