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Facts
The assessee, a cooperative bank, claimed a deduction of Rs. 57,00,750/- under section 36(1)(viia) of the Income-tax Act, 1961, for provision for bad and doubtful debts. The Assessing Officer (AO) disallowed this claim, stating that the amount was not debited to the profit and loss account. The Commissioner of Income Tax (Appeals) upheld the AO's decision. The case was reopened under section 147.
Held
The Tribunal held that the provision for bad and doubtful debts, even if termed as a 'reserve' and made from profit and loss appropriation account, should not disentitle the assessee from claiming deduction under section 36(1)(viia), especially when it was allowed in previous years and supported by judicial precedents. The calculation of the deduction was found to be in accordance with the law.
Key Issues
Whether the provision for bad and doubtful debts, claimed under Section 36(1)(viia) and booked as a reserve, is allowable as a deduction when it was not directly debited to the profit and loss account.
Sections Cited
Section 250 of the Income-tax Act, 1961, Section 147 of the Income-tax Act, 1961, Section 144 of the Income-tax Act, 1961, Section 144B of the Income-tax Act, 1961, Section 148 of the Income-tax Act, 1961, Section 143(3) of the Income-tax Act, 1961, Section 36(1)(viia) of the Income-tax Act, 1961
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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI & SHRI DINESH MOHAN SINHA
सुनवाई क� तार�ख /Date of Hearing : 02/04/2025 घोषणा क� तार�ख /Date of Pronouncement : 01/07/2025 ORDER PER DINESH MOHAN SINHA, JM: Captioned appeal filed by the assessee, pertaining to assessment year (AY) 2014-15 is directed against separate orders passed by the Learned Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, Delhi[in short ‘Ld.CIT(A)/NFAC’], under section 250 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’), dated 31.05.2024, which arises out of an assessment order passed by the Assessing Officer u/s 147 read with section 144 and 144B of the Act dated 31.3.2022.
(AY : 2014-15) Jasumatiben Lalitchandra Shah 2. The grounds raised by the assessee in the appeal read as under: 1.The order passed u/s 147 r.w.s. 144r.w.s. 144B of the Act and the notice u/s 148 is bad in law. 2.The Learned Commissioner of Income-tax (Appeals), Income Tax Department NFAC, Delhi erred in sustaining the disallowance of claim of deduction of Rs.57,00,750/- made by the Appellant u/s 36(l)(viia) of the Act in the return of income filed for the year. The appellant craves leave to add, amend, alter and withdraw any ground of appeal anytime up to the hearing of this appeal.
3. In the light of the above grounds, we have gone through the orders of the Revenue authorities.
The facts as emerging out from the orders of the Revenue authorities are that assessee is a cooperative bank carrying one business of banking. The assessee has filed its return of income on 25-11-2014 declaring total income of Rs.3,89,08,900/- which was accepted by the AO in an assessment framed under section 143(3) of the Act on 23.12.2016. Thereafter, the AO issued a notice under section 148 of the Act on 30.3.2021, and in response to that the assessee filed the return of income on 15-12-2021 declaring the same income i.e. Rs.3,89,08,900/-. On scrutiny of the computation of income, the AO noticed that the assessee had claimed provision for Bad and Doubtful Debts (“BDD” for short) under section 36(1)(viia) of the Act of an amount of Rs.57,00,750/- being the lower of (i) Rs.39,55,57,997/- being 7.5% of total income after depreciation i.e. (a) Rs.32,22,897/- and 10% average advances of nRs.3,92,33,51,000/- i.e. (b)_ Rs.39,23,35,100/-, total (a) plus (b) Rs.39,55,57,997/- or (ii) Rs.NIL being provision debited to profit & loss account plus Rs.57,00,750/- being 15% of profit & loss appropriation amount of Rs.3,80,05,000/-. The AO was of the view that since the assessee had not debited the said amount of Rs.7,00,750/- in its profit & loss account, the same was not allowable. It was the contention of the assessee that it had made provision for “BDD” of Rs.57,00,750/- from profit & loss appropriation of preceding year profit of Rs.3,80,05,000/- and therefore 2 (AY : 2014-15) Jasumatiben Lalitchandra Shah it can claim maximum amount of Rs.57,00,750/- as provision for bad and doubtful debts appropriation. This explanation of the assessee was accepted by the AO
Upon perusal of annexure-2 Special Bad Debts Reserve Fund (“SBDRF” for short) is maintained by the assessee during this relevant financial year, and also in the proceeding financial year. The ld.AR submitted the regular assessment was already taken on 23.12.2016 when the return of income was accepted after due verification of balance sheet, audit-reports in Form No.3CD and the return was duly accepted by the Ld.AO deduction u/s 36(1)(viia) for bad & doubtful debts.
The assessee's source of income is from Financial Services sector / Banking companies. The assessee has also shown income from other sources. Subject to the above, the assessee's total income is computed as follows: Income as per statement of income filed Rs. 3,89,08,900/- Total taxable income Rs. 3,89,08,900/-
Thereafter, the case was reopened under section 147 on the ground that the assessee claimed the BDD under section 36(1)(viia) of the Act amounting to Rs.57,00,750/-. In response to the notice dated 30.03.2021, the assessee filed Return of Income on 15.12.2021. since, the Return of Income was filed after lapse of prescribed time, the return of income is the non-est. The assessee vide its letter dated 30-03-22 raised an objection stating that the facts and figures relating to the deduction of Rs 57,00,750/- towards bad and doubtful debts were furnished at the time of original assessment and therefore reopening the case on same set of facts amounts to change of opinion and not permissible. The assessee has not provided the correct and detailed working of deduction claimed towards bad and doubtful debts of Rs 57,00,750/-. The working filed by the (AY : 2014-15) Jasumatiben Lalitchandra Shah assessee during the original assessment proceedings was not correct. That the assessee submitted that correct working of claim of BDD. The allowance of provision for BDD was not taxable according to law, and not to be added in the total income of the assessee. During the course of assessment proceedings, the assessee has furnished audit report along with annexures.
Aggrieved by the order of the AO, the assessee went in appeal before the Ld. CIT(A). The Ld. CIT(A), however, dismissed the appeal of the assessee by observing that the assessee had not submitted any documentation to impress that a corresponding provision in excess of Rs.57,00,750/- was made under the Profit & loss appropriation account. While dismissing the appeal of the assessee, the ld.CIT(A) has also relied on the judgement of the Hon’ble High Court of Punjab and Haryana in the case of State Bank of Patiala (2005) 272 ITR 54.
That the assessee filed an appeal against the impugned order of the Ld. CIT(A) before the Tribunal.
During the course of argument, the Ld. Counsel for the assessee submitted that the addition made by the AO and confirmed by the Ld. CIT(A) is baseless. The assessee has made a special Bad Debts Reserved Fund (SBDDRF) of Rs. 57,00,750/-. The Ld. Counsel also submitted that assessee is in banking business and regularly claim the deduction as in previous year the same deduction has asked for and the same was granted by the Hon’ble ITAT, Rajkot vide order dated 09.01.2025. the assessee has submitted detail working deduction of aggregate average rural advances, which is placed on paper book page no. 31. The ld. Counsel drew our attention and we note that the audit report and balance sheet for AY-2014-15 and relevant page no.18 of paper book and the same is produced as under: 4
On the other hand, ld. DR for the revenue, stated that there is no provision claimed for bad and doubtful detail for the year. That no provision has been added in the memo of computation of total income, there is no proceeding to deduct any provision under this section. The Ld. DR relied on the judgement of Punjab & Haryana High court in case of state Bank of Patiala v. CIT and Anr on 21 may, 2004 reported in [2005] 272 ITR 54.
We have heard both the parties and perused the documents available on record. The issue of reopening of the assessment claim of provision for SBDD under section 36(1)(viia) of the Act of Rs.57,00,750/- being incorrect, and therefore the assessment was reopened by the notice under section 148 of the Act. The contention of the assessee that since the provision for reserve bad and doubtful doubts has been created in the books of account as per provision of u/s. 36(1)(viia) of the Act, and in the audit report and the balance sheet, this was clearly shown as a Reserve Special Bad Debts Reserve Fund (“SBDRF” for short). That the Ld. CIT(A), NFAC erred in sustaining disallowance of Rs. 57,00,750/-. The Ld. Counsel clarified that there is no difference in Provision for Bad and doubtful debt or in provision for Special Bad and Doubtful Debt Fund (SBDDF), the Ld. Counsel relied on the following judgements; i. Vellore Dist. Central Co-operative Bank Ltd. V. Commissioner of Income- tax, Chennai-VIII Section 36(1)(viia) of the Income-tax Act, 1961- Bad debts (Co-operative bank) - Assessment year 2008-09 Whether, co-operative bank is a non-scheduled bank and. thus, entitled to claim benefit of provisions of section 361 (viia) (a) - Held, yes Whether where assessee, a co-operative 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 laiming deduction under section 36(1) (via) (a) - Held, yes [Paras 7 & 8] [In favour of assessee.
ii Rural Electrification Corporation Ltd., In re. [2009] 180 Taxman 55 (AAR - New Delhi) Section 36(1) (viña) of the Income-tax Act, 1961 Bad debts Assessment year 1997-98- Applicant clamed deduction under section 36(1) (vita) (c) by creating a reserve for bad and doubtful debts in its balance sheet - Assessing Officer disallowed deduction on ground that applicant had not made a provision for bad and doubtful debts as required by section 36(1) (viia)(c) On facts, it was clear that intention of assessee was for deduction under section 36(1)(via) only, though 'provision' was nomenclatured as 'reserve'- Whether even if entry was termed as 'reserve' which according to assessee was in pursuance of ICAP's opinion, since nature and character of entry returned same as envisaged under clause (viai) of section 36(1), it was a provision though named as 'reserve-Held, yex - Whether mere debit in appropriation account would not, by self, disentitle assessee from claiming deduction under section 36(1) (viña) (c)-Held. yes iii. Power Finance Corpn. Ltd. V. Joint Commissioner of Income-tax, Special Range-22 [2006] 10 SOT 190 (DELHI) Section 36(1) (vita) of the Income-tax Act, 1961-Bad debts - Assessment year 1996-97 - Whether there is any pre-condition that amount claimed under clause (viia) of section 36(1) can be allowed under same if it is debited above line in profit and loss account Held, no Assessee claimed deduction under section 36(1)(c) Assessing Officer denied deduction mainly on reasoning that assessee had made provision in profit and loss appropriation account and not in profit and loss account itself - Whether mere debt in appropriation account by assessee would not disentitle assessee from claiming deduction when same was permissible to it under provisions of section 36(1)(via)(c) more so when same had consistently been allowed by department since 1990-91 to 1995-96 based on provision created in books of account - Held yes 12.1 We further note that during the original assessment proceedings before the AO, the assessee has claimed deduction under section 36(1)(viia) of the Act and the details thereof were submitted in Annexure-F of paper book. It is further 6 noted that the AO vide its notice dated 21.12.2021 has asked for the details of claim of BDD of Rs.57,00,750/-.
12.2 We further note that the assessee on 13.1.2022 has replied vide para-2 and the same is reproduced herewith: “2. With respect to your observation in Question No.2 that provision for Bad and Doubtful debts claimed as deduction under section 36(l)(viia) in our ITR by us is not entertain able. Hereby providing our explanation in respect of Section 36(i)(viia) and justification for claiming Deduction of the Bad and Doubtful debts provision.
> Section 36(l)(viia):- Deduction in respect of provisions made for bad and doubtful debts relating to rural branches of scheduled commercial banks: As per section 36(l)(Viia) of the Income Tax Act, 1961 only banks and financial institutions are allowed deduction in respect of the provisions made for bad and doubtful debts. A Deduction is allowed in for the debt related to the business of Bank and if the same has become irrecoverable in the previous financial year. If the Loans lent by banking or money lending concerns are not able to recover the debts in full or part thereof, a deduction may be allowed. The eligibility of the deduction is on the existence of debts which is irrecoverable is totally under the law or through courts. The limits on which the deduction is allowed to the bank is; The Maximum Deduction allowable is whichever is lower from i) Total of 7.5% of adjusted total income (i.e. 7.5 % of Rs. 4,29,71,9567-) & 10% of average aggregate advances made by rural branches (i.e. 10 % of Rs. 3,92,33,5 1,0007-) and ii) Total of Provision for Bad and Doubtful Debts as per P&L Account (i.e. Rs.O/-) & 15% of Provision debited to Current Year P&L Account (i.e. 15% of Rs. 3,80,05,0007-). Thus, The maximum Permissible Deduction is of Rs. 57,00,7507- during the year under consideration.
> The calculation of Deductions claimed in Schedule BP of the ITR along is as under: Calculation of Provision for Bad and Doubtful Debts Particulars Amount Annexure Amount Sr. No. 1 A 7,5 of Rs.4,46,09,645.00 [6,09,01,820,00- 4,46,09,645.00 33,45,723.38 A copy of Computation of Income 2,84,070.00-1,60,08,105.00] with Highlighting the Amount is enclosed herewith for your verification in Annexure C.
B 10% of Aggregate Average Advances from 3,92,33,51,000.00 3,92,33,5100.00 A copy of Average Advances Rural Branches (10% of 3923351000) from Rural Branches is enclosed herewith for your verification in Annexure D.
Total of 1 (A+B) _, 39,56,80,823.38
2 A Provision as per P&L Account [0-H3J 0.00 0.00 A copy of P&L Account for Provision as per P&L with Highlighting the Amount Account is enclosed herewith for your verification in Annexure E B 15% of Provision debited to Current Year P&L 3,80,05,000,00 57,00,750.00 A copy in respect of Provision Account (15% of Rs.38005000) debited to Current Year P&L Account with Highlighting the Amount is enclosed herewith for your verification in Annexure F.
Total of 2(A+B) 57,00,750.00 * Maximum Permissible Deduction 1 or 2 Whichever is Less. 57,00,750.00 3. A copy of the Annual Report for the Financial Year 2013-14 is enclosed herewith for your verification in Annexure G.”
12.3 Accordingly, on perusal of the computation of income for AY 2014-15, we find that the assessee claimed deduction of Rs. 57,00,750/-, u/s. 36(i)(viia) of the Act. deduction u/s. 36(1)(viia) for 1(a) bad & doubtful debts Rs. 4,29,71,956/- is Rs. 32,22,897/- res. 7.5% of total income (b) 10% of aggregate Rs. 39,23,33,51,000/- Rs. 39,23,35,100/- average advance Total Rs. 32,22,897/- Rs. 39,23,35,100/- Rs. 39,55,57,997/-
Appropriation of Rs. 57,00,750/- maximum permissible deduction which is lower that is Rs. 57,00,750/-
That total reserve fund other reserves (as per annexure 2 part of the accounts) shown that as on 31.03.2013 the amount of Rs. 1,36,26,898,00 and as on 31.03.2014 Special Bad Debts Reserve Fund amount of Rs. 1,93,27,648/- diference comes to Rs. 57,00,750/-. We further note that the assessment claiming such deduction in this same manner in the previous year also, i.e., 2013-14, wherein this Bench of ITAT has granted the similar deduction claimed by the assessee, vide order dated 09.01.2025 in ITA No. 475/Rjt/2024. We further note that the assessee has made a provision in the name of Special Bad (AY : 2014-15) Jasumatiben Lalitchandra Shah Debts Reserve Fund s. 36(1)(viia) of the Act, and claimed the deduction in the name of Special Bad Debts Reserve Fund s. 36(1)(viia). However, the law specify the provision is to be made in the name of bad and doubtful debt u/s. 36(1)(viia) of the Act. The assessee has drawn our attention to the following judgements: i. Vellore Dist. Central Co-operative Bank Ltd. V. CIT [2013] 37 taxmann.com 247 (Chennai – Trib.) “Creation of provision for bad debt under different nomenclature would not disentitle co-operative bank from claiming deduction u/s. 36(1)(viia)” ii. [2009] 180 Taxman 55 (AAR – New Delhi)/[2009] 312 ITR 122 “1. Section 36(1) (viii) of the Income-tax Act, 1961 Financial corporation, reserve created by -Assessment year 1997-98 - Whether amendment to section 36(1)(viii) by Finance Act, 1997. from 1-4-1998 for availing benefit under section 36(1)(viii), is not retrospective in operation and it shall - Held, yess Whether under pre-amended provision requirement for claiming deduction was creation of special reserve and restriction against withdrawal of special reserve cannot be read into main clause (viii) - Held, yes 2. Section 36(1)(viia) of the Income-tax Act, 1961 - Bad debts - Assessment year 1997-98 -Applicant claimed deduction under section 36(1) (viia) (c) by creating a reserve for bad and doubtful debts in its balance sheet - Assessing Officer disallowed deduction on ground that applicant had not made a provision for bad and doubtful debts as required by section 36(1) (viia)(c) - On facts, it was clear that intention of assessee was for deduction under section 36(1)(viia) only, though 'provision' was nomenclature as 'reserve' - Whether even if entry was termed as 'reserve' which according to assessee was in pursuance of ICAI's opinion, since nature and character of entry remained same as envisaged under clause (viia) (c) of section 36(1), it was a provision though named as 'reserve' - Held, yes - Whether mere debit in appropriation account would not, by itself, disentitle assessee from claiming deduction under section 36(1) (viia) (c) - Held, yes” iii. Power Finance Corpn. Ltd. v. Joint Commissioner of Income Tax, Special Range-22 [2006] 10 SOT 190 (Delhi) “1. Section 36(1) (viii) of the Income-tax Act, 1961 Financial corporation, reserve created by -Assessment year 1997-98 - Whether amendment to section 36(1)(viii) by Finance Act, 1997. from 1-4-1998 for availing benefit under section 36(1)(viii), is not retrospective in operation and it shall - Held, yess Whether under pre-amended provision requirement for claiming deduction was creation of special reserve and (AY : 2014-15) Jasumatiben Lalitchandra Shah restriction against withdrawal of special reserve cannot be read into main clause (viii) - Held, yes II. Section 36(1)(viia) of the Income-tax Act, 1961 - Bad debts - Assessment year 1997-98 -Applicant claimed deduction under section 36(1) (viia) (c) by creating a reserve for bad and doubtful debts in its balance sheet - Assessing Officer disallowed deduction on ground that applicant had not made a provision for bad and doubtful debts as required by section 36(1) (viia)(c) - On facts, it was clear that intention of assessee was for deduction under section 36(1)(viia) only, though 'provision' was nomenclature as 'reserve' - Whether even if entry was termed as 'reserve' which according to assessee was in pursuance of ICAI's opinion, since nature and character of entry remained same as envisaged under clause (viia) (c) of section 36(1), it was a provision though named as 'reserve' - Held, yes - Whether mere debit in appropriation account would not, by itself, disentitle assessee from claiming deduction under section 36(1) (viia) (c) - Held, yes”
We find that provision for bad and doubtful debts claimed by the assessee as per the scheme of the said section that is amount of 7.5% of total income and an amount, not exceeding 10% of average advance made by the rural branches has computed in the prescribed manner, therefore we find that the deduction claimed by the assessee is in accordance with law with the provision mentioned above. Hence no disallowance is attracted, therefore, we delete the remaining addition as sustained by the Ld. CIT(A) and allow the appeal of the assessee on merit. Since we had allowed the appeal of the assessee on merit, by allowing the ground no. 2 raised by the assessee, therefore, we did not adjudicate the ground no. 1 challenging the reopening of the assessment, as it becomes academic and infructuous.
In the result, the appeal of the assessee is allowed.
Order is pronounced in the open court on 01/07/2025.