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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 18TH DAY OF JUNE, 2021
PRESENT
THE HON'BLE MR. JUSTICE SATISH CHANDRA SHARMA
AND
THE HON'BLE MR. JUSTICE NATARAJ RANGASWAMY
I.T.A. NO.783 OF 2018
BETWEEN:
SYNDICATE BANK HEAD OFFICE MANIPAL-576104 REPRESENTED BY ITS GENERAL MANAGER MR. G.MOHAN RAO PAH: AACCS4699E ...APPELLANT
(BY SRI. SURYANARAYANA T., ADVOCATE)
AND:
THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1, UDUPI.
THE COMMISSIONER OF INCOME TAX, CENTRAL REVENUES BUILDING, ATTAVARA, MANGALORE. …RESPONDENTS
(BY SRI. SRIDHAR, ADVOCATE FOR SRI. JEEVAN J. NEERALGI, ADVOCATE)
THIS APPEAL IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961, ARISING OUT OF THE ORDER DATED: 21.06.2018 PASSED IN ITA NO.476 AND 477/BANG/2017, FOR THE ASSESSMENT YEAR 2011-2012 PRAYING THIS HON`BLE COURT TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AS STATED ABOVE AND ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, ‘C’ BENCH, BANGALORE, PRONOUNCED ON 21.06.2018 IN ITA NOs.476 AND 477/BANG/2017 (ANNEXURE ‘E’) TO THE EXTENT QUESTIONED HEREIN.
THIS APPEAL HAVING BEEN HEARD AND RESERVED ON 14.06.2021, COMING ON FOR ‘PRONOUNCEMENT OF JUDGMENT’ THIS DAY, NATARAJ RANGASWAMY J., DELIVERED THE FOLLOWING:
J U D G M E N T
This appeal under Section 260A of Income Tax Act, 1961 is filed by the assessee challenging the common order dated 21.06.2018 passed by the Income Tax Appellate Tribunal, Bengaluru Bench ‘C’, Bengaluru (henceforth referred to as ‘the Tribunal’) dismissing the appeals filed by the assessee for the assessment year 2011-12 and 2012-13.
The assessee filed its return of income for the assessment year 2011-12 and claimed deduction of a sum of Rs.9,18,82,49,133/- under Section 36 (1)(viia) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’
for short). The deduction claimed comprised of a sum of Rs.8,10,96,43,882/- being provision made towards rural advances and Rs.1,07,86,05,251/- being 7.5% of the total income. The assessee was selected for scrutiny and the Assessing Officer passed an order of assessment dated 22.02.2013 and recomputed the total income of the appellant by restricting the deduction claimed under Section 36(1)(viia) of the Act to the provision made in the books of accounts and set off the loss brought forward for computing the deduction as a percentage of the total income.
Similarly, for the assessment year 2012-13, the assessee filed its return of income and claimed deduction under Section 36(1)(viia) of the Act amounting to Rs.11,25,35,06,311/- comprised of Rs.10,21,38,42,187/- towards the provision for rural advances and Rs.1,03,96,64,124/- being 7.5% of the total income. The return filed by the assessee was taken up for scrutiny and the assessing officer passed an order dated
26.12.2013 restricting the deduction in the same manner as done for the assessment year 2011-12.
Being aggrieved by the aforesaid orders of assessment, the assesse filed appeals before the Commissioner of Income Tax (Appeals), who, confirmed the orders of assessment passed by the Assessing Officer in terms of the order dated 30.12.2016.
Being aggrieved by the aforesaid, the assessee filed appeals before the Tribunal. The following grounds were urged before the Tribunal:
i) The learned CIT (A) erred in upholding the disallowance to the extent of Rs.92,14,87,404/- under Section 36 (1)(viia) of the Income Tax Act, 1961;
ii) The learned CIT (A) erred in holding that the deduction should be restricted to the provision made in the books of accounts;
iii) Without prejudice to the above, the learned CIT (A) erred in holding that the provision made in the subsequent years cannot be considered for allowing deduction under Section 36 (1)(viia) during the relevant assessment year under Appeal;
iv) The learned CIT(A) erred in holding that the brought forward loss should be adjusted to arrive at Total income before computing the deduction under Section 36 (1)(viia)
v) The learned CIT(A) erred in not adjudicating the grounds relating to various additions made while computing the book profit which are not covered by the explanation I to Section 115JB(2).
The Tribunal followed a decision passed by a Co-ordinate Bench of the Tribunal in ITA 681 and 955/Bang/2012 dated 13-06-2014, in the case of the assessee for the assessment year 2009-10 and 2010-11 and confirmed the order of the Assessment Officer in restricting the deduction claimed under Section 36(1)(viia) of the Act to the amount of provision made in the books of accounts.
As regards the appellant’s contention that a percentage of the total income should be deducted while computing before setting off the loss brought forward, the Tribunal rejected it in view of a decision of a Co-ordinate Bench of the Tribunal in the case of CANARA BANK VS.
J.C.I.T. ([2016] 68 TAXMANN.COM 128 (BANGALORE-TRIB)).
The order of assessment in respect of the assessee for the assessment year 2009-10 and 2010-11 was challenged by the assessee before this Court in I.T.A.No.481/2014 which was dismissed in terms of the order dated 31.01.2020 by following an earlier decision of this Court dated 24.01.2020 in I.T.A.No.258/2011.
The learned counsel for the assessee submitted that the Tribunal committed an error in holding that the amount deductible under Section 36(1)(viia) of the Act is to be limited to the amount provided for in the books. He contended that the purpose of the said section would be rendered otiose and the consequence would be that the benefit conferred there under would be largely ineffectual and illusory. He also contended that Section 36(1)(viia) is a beneficent provision intended to promote rural banking and therefore should be allowed full play. He also contended that Tribunal while holding that, the deduction
as a percentage of the total income must be computed after setting off the brought forward loss, would be doing harm to the provision itself.
This appeal was admitted to consider the following substantial questions of law:
“Whether, on the facts and circumstances of the case and on the grounds raised:
i) the Tribunal was right in holding that the amount deductible under Section 36(1)(viia) of the Act would have to be limited to the amount actually provided for in the books;
ii) the Tribunal was right in holding that the deduction computed at the rate of 7.5% of the total income ought to be computed after setting off of brought forwards losses; and
iii) the Tribunal was right in not adjudicating on the Appellant’s alternate contention that the shortfall in the present years between the upper limit allowable under Section 36(1)(viia) of the Act and the actual amount created as a provision in its books in the present years ought to nevertheless be allowed as a deduction in the present years on account of the provision created in the subsequent years that was in excess of such alleged shortfall and as such deemed to have been made good?”
In so far as question Nos.1 and 3 are concerned, it is relevant to note Section 36(1) (viia) of the Act, 1961, which is extracted below:
“(viia) in respect of any provision for bad and doubtful debts made by—
(a) 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], an amount not exceeding 42[eight and one-half per cent] of the total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner:
Provided that a scheduled bank or a non- scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the
amount of such assets shown in the books of account of the bank on the last day of the previous year:
Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words "five per cent", the words "ten per cent" had been substituted:
Provided also that a scheduled bank or a non- scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government:
Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession."
Explanation.—For the purposes of this sub- clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005”.
Explanatory notes on provisions contained in circular No.346 dated 30.01.1982 deals with object of deductions made in respect of payments to associations and doubtful debts under Section 36(1)(viia) of the Act. The relevant extract reads as under:-
17.3 As non-scheduled commercial banks are also engaged in providing rural credit and promoting rural banking, the Finance Act has amended clause (viia) of sub-Section 36 of the IT Act to extend the provision relating to deduction in respect of provisions made by scheduled commercial banks for bad and doubtful debts relating to advances by rural branches to non-scheduled commercial banks as well. For this purpose, the expression “non-scheduled Bank” means a banking company as defined incl. (c) of S.5 of the Banking Regulation Act, 1949 but which is not a scheduled bank.
Thus, a conjoint reading of provision contained in Section 36(1)(viia) and explanatory note dated 30.06.1982, it is evident that deduction provided in Section 36(1)(viia) shall be allowed in respect of the matters dealt therein, in computing the income. The condition precedent for claiming deduction under Section
36(1)(viia) of the Act is that a provision for bad and doubtful debt should be made in the accounts of the assessee. The aforesaid Section mentions the maximum amount for which such a provision should be made. If a provision is made in excess of the limits prescribed under the Section, the assessee would not be entitled to deduction of the excess amount. Once a provision is made and the amount of deduction is within the limit prescribed under the Act, the assessee would be entitled to deduction of the amount for which provision is made in the books of accounts.
The assessee is therefore entitled to deduction subject to the limit mentioned in Section 36(1)(viia) of the Act. The substantial Questions of law Nos.1 and 3 framed by this Court, are substantially answered by this Court in I.T.A.Nos.256/2011 and 258/2011 and therefore, the said questions are answered in favour of the revenue and against the assessee. The Tribunal was right in holding that the deduction computed at the rate of 7.5% of the
total income ought to be computed after setting off of brought forwards losses.
In so far as the second question of law is concerned, a plain reading of section 36(1)(viia) of the Act, it is clear that the amount of deduction at the rate of 7.5% is to be calculated with reference to total income computed under the head ‘profits and gains of business or profession’. The provisions governing the brought forward and set of business loss are not part of the provisions governing the computation of profits under the heads ‘profits and gains of business’ under Section 28. Hence, we hold that the deduction at the rate of 7.5% of the total income should be computed before setting off the loss brought forward. Hence the reasoning adopted in this regard by the assessing officer and the Commissioner of Income Tax (Appeals) is not in accordance with the provisions of the Act. Hence, the substantial question No.2 is answered against the revenue and in favour of the assessee.
In view of the above, the appeal is allowed in part. The substantial question of law Nos.1 and 3 are answered in favour of the revenue and against the appellant -assessee and substantial question of law No.2 is answered against the revenue and in favour of the appellant-assessee..
Sd/- JUDGE
Sd/- JUDGE
NR/-