THE PRINCIPAL COMMISSIONER OF INCOME TAX vs. DHANALAXMI BANK LTD

:3: I.T. Appeal No.59 of 2020. Section 36(1)(vii) of the Income Tax Act. The Principal commissioner found that the actual bad debts that were written off in the audited balance sheet and profit and loss account of the assessee company was only in an amount of Rs.173,69,10,000/-. Accordingly, it was found that an

amount

Rs.121,07,84,000/-

(Rs.294,76,94,000/-

- Rs.173,69,10,000/-) was the excess provision made in the accounts towards NPA that was not allowable as a deduction as per Explanation -1 to Section 36 (1)(vii). 2. Aggrieved by the order of the Principal Commissioner, the respondent assessee preferred an appeal before the Income Tax Appellate Tribunal, Cochin, which by the order impugned in this appeal allowed the assessee's appeal and quashed the order dated 18.12.2018 passed by the Principal Commissioner of Income Tax and found the assessee entitled to the deduction under Section 36(1)(vii) relying on the judgment of the Supreme Court in Vijaya Bank v. Commissioner of Income-Tax and Another [(2010) 323 ITR 166 (SC)]. 3. In the appeal before us, the revenue impugns the order of the Tribunal and raises the following substantial questions of law:- 1. Whether on the facts and in the circumstances of the

:4: I.T. Appeal No.59 of 2020. case and considering the facts presented before and considered by the Assessing Officer vis-a-vis the Principal Commissioner's conclusion on examination of the records, is not the consequential order of the Pr. Commissioner interfering with the assessment order legal and in accordance with law? 2. (a) Whether on the facts and in the circumstances of the case and in the light of the facts and figures found by the Principal Commissioner on an examination of records demonstrate the order of the Assessing Officer as an order erroneous and prejudicial to the interest of the Revenue? (b) ls not the Revisional Order of the Principal Commissioner in accordance with law and the Tribunal is justified in interfering with the Revisional Order? 3. Whether on the facts and in the circumstances of the case and since the excess provision made in accounts for non performing assets (NPA) being not allowable as per Explanation-1 to Section 36(1)(vii) of the I.T Act and will not non consideration of such an aspect by the Assessing Officer result in the order being erroneous and prejudicial to the interest of the Revenue, empowering the Principal Commissioner to subject the same to revision? 4. Inasmuch as the questions of law raised are essentially with

:5: I.T. Appeal No.59 of 2020. regard to whether or not the Appellate Tribunal was right in allowing the appeal of the assessee merely by relying on the decision of the Supreme Court in Vijaya Bank (Supra), we deem it appropriate to discuss the three questions of law raised together for the purposes of disposing this appeal. 5. The decision of the Supreme Court in the case of Vijaya Bank (Supra) considered, inter alia, the question as to whether it was imperative for a bank to close the individual account of each debtor in its books or a mere reduction in the “Loans and Advances Account” or debtors to the extent of the provision for bad and doubtful debt would suffice. Answering the said question, the court found as follows:- " 8. Coming to the second question, we may reiterate that it is not in dispute that section 36(1)(vii) of the 1961 Act applies both to banking and non-banking businesses. The manner in which the write off is to be carried out has been explained hereinabove. It is important to note that the assessee-bank has not only been debiting the profit and loss account to the extent of the impugned bad debt, it is simultaneously reducing the amount of loans and advances or the debtors at the year-end, as stated hereinabove. In other words, the amount of loans and advances or the debtors at the year-end in the balance-sheet is shown as net of the provisions for the impugned debt. However, what is being insisted upon by the Assessing Officer is that mere reduction of the amount of loans and advances or the debtors at the year-end would not suffice and, in the interest of transparency, it would be desirable for the assessee- bank to close each and

:6: I.T. Appeal No.59 of 2020. every individual account of loans and advances or debtors as a precondition for claiming deduction under section 36(1)(vii) of the 1961 Act. This view has been taken by the Assessing Officer because the Assessing Officer apprehended that the assessee-bank might be taking the benefit of deduction under section 36(1)(vii) of the 1961 Act, twice over. [See order of the Commissioner of Income-Tax (Appeals) at pages. 66, 67 and 72 of the paper book, which refers to the apprehensions of the Assessing Officer]. In this context, it may be noted that there is no finding of the Assessing Officer that the assessee had unauthorisedly claimed the benefit of deduction under section 36(1) (vii), twice over. The order of the Assessing Officer is based on an apprehension that, if the assessee fails to close each and every individual account of its debtor, it may result in the assessee claiming deduction twice over. In this case, we are concerned with the interpretation of section 36(1)(vii) of the 1961 Act. We cannot decide the matter on the basis of apprehensions/desirability. It is always open to the Assessing Officer to call for details of individual debtor's account if the Assessing Officer has reasonable grounds to believe that the assessee has claimed deduction, twice over. In fact, that exercise has been undertaken in subsequent years. There is also a flipside to the argument of the Department. The assessee has instituted recovery suits in Courts against its debtors. If individual accounts are to be closed, then the debtor/defendant in each of those suits would rely upon the bank statement and contend that no amount is due and payable in which event the suit would be dismissed.” 6. In the appeal before us, the essential contention of the revenue is that in the case of the assessee herein, the Appellate Tribunal failed to verify whether, as a matter of fact, the assessee had reduced the value of its assets in an amount equivalent to the amount claimed by

:7: I.T. Appeal No.59 of 2020. way of bad debts that were allegedly written off as irrecoverable. It is pointed out that the Supreme Court in Vijaya Bank (Supra) had clearly found that the assessee bank had not only debited the profit and loss account to the extent of the impugned bad debt but was also simultaneously reducing the amount of loans and advances of the debtors at the year-end. In other words, the Court, in the judgment above, had clearly recognised that it was open to an assessee company to not only show a write-off of the bad debts in its profit and loss account but it could also simultaneously reduce the value of its assets in a like amount in the balance sheet of the company. In either event, the assessee could claim the benefit of reduction permissible under the Income Tax Act for bad debts written off. It is the case of the revenue that such a factual verification was not resorted to in the instant case. 7. Since we found force in the submission of learned Standing counsel for the Income Tax Department that the Appellate Tribunal had not examined the factual aspect as to whether or not the respondent assessee in the instant case had actually reduced the amount representing bad debts from the value of its assets in the balance sheet and had merely adopted the ratio of Supreme Court judgment in Vijaya Bank (Supra), we requested the learned Senior counsel for the respondent assessee to make available a copy of the audited balance

:8: I.T. Appeal No.59 of 2020. sheet and profit and loss account of the company for the assessment year in question so as to verify the factual aspects therein. We have today been handed over a copy of the printed balance sheet and profit and loss account of the assessee company for the year 2014-2015. A perusal of the said balance sheet, however, does not show that the assessee had, in fact, reduced the value of its assets by a figure corresponding to the bad debts written off by it. The learned Senior counsel for the assessee, however, brings to our notice an additional document titled “Schedule of advances as on 31.03.2023”, which shows that the advances shown in the balance sheet is the net figure arrived at after reducing the provisions made for NPA (including bad debts written off and write back). It is also his submission that this document forms part of the audited balance sheet and profit and loss account, although it does not find a place in the printed annual report of the company that is produced before us. 8. Taking note of the said annual report as also the submissions of the learned Senior counsel in relation to the additional documents produced before us, we are of the view that the Tribunal was clearly in error in allowing the appeal preferred by the assessee through a mere application of a ratio in Vijaya Bank (Supra). In our view, the Tribunal ought to have ascertained whether the factual situation that was

:9: I.T. Appeal No.59 of 2020. established in Vijaya Bank (Supra) existed in the instant case. We, therefore, find that the substantial questions of law raised by the revenue in this appeal has to be answered in favour of the revenue and against the assessee. We, therefore, answer the questions as such in favour of the revenue and against the assessee by setting aside the Annexure (C) order of the Tribunal and restoring Annexure (B) order of the Principal Commissioner of Income Tax. The Assessing Officer shall now re-do the assessment based on the directions in Annexure (B) order of the Principal Commissioner and after taking note of the documents produced by the learned Senior counsel before us to substantiate his contention that for the assessment year in question the audited balance sheet of the company did contain documents which showed that the value of the assets had been reduced by the amount of bad debts/provision written off. Sd/-

A.K.JAYASANKARAN NAMBIAR JUDGE Sd/- MOHAMMED NIAS C.P. JUDGE mns

:10: I.T. Appeal No.59 of 2020. APPENDIX OF ITA 59/2020 PETITIONER ANNEXURES ANNEXURE A A TRUE COPY OF THE ASSESSMENT ORDER U/S. 143(3) DATED 07-12-2017 ANNEXURE B TRUE COPY OF THE ORDER U/S 263 PASSED BY THE PR. COMMISSIONER OF INCOME TAX, THRISSUR DATED 18-12-2018 ANNEXURE C CERTIFIED COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL DATED 07-11-2019 IN ITA NO.191/COCH/2019