DCIT 1(3)(2), MUMBAI vs. THE KUNBI SAHAKARI BANK LTD, MUMBAI

आदेश / O R D E R Per Bench: These are appeals by the Revenue and the cross objection by the assessee arising out of the order of the ld. Commissioner of Income Tax (Appeals) for assessment years 2009-10 and 2010-11 respectively. Since the issues are connected and the appeals were heard together, these have been disposed of by this common order.

DECISION 2.3 During the appellate proceedings, the appellant has submitted several details with regard to the NPAs of the bank. It is seen from the details submitted that the report submitted by the Auditors of the Bank as well as the inspection report of the Reserve Bank of India has identified that loans and advances made under autorickshaw loans' had not complied with the requisite procedures. It was observed that the said loans are likely to become Bad Debts. On that basis, the auditors of the appellant have recommended for making a provision of Rs. 66 lacs and Rs. 4,88,18,1527- under the head 'loss' assets. By referring to these reports, the Ld. A.R. of the appellant has contended that the entire debits made in the P & L account have to be allowed as a deduction u/s. 36(l)(vii) of the I.T.Act.

2.4 It is seen that although the appellant has been able to bring on record the relevant information to identify the autorickshaw loans as potential bad debts, the requisite procedure has not been followed for claiming the same as deductions in the computation of total income in the case of the appellant for A.Ys 2009-10 and 2010-11. The appellant has merely debited the P & L account by a 'provision against NPAs' and has not followed the procedure as provided u/s. 36(l)(vii) of the I.T. Act. In the first instance, since the appellant is a co-operative bank, Section 36(l)(viia) is clearly applicable with regard to the provision towards NPAs. Accordingly, the appellant is entitled to a deduction @ 7.5% of the total income as computed in terms of the provisions of section 36(l)(viia) itself. Since the A.O. has already stated in the assessment order that the appellant is entitled to the deduction as provisions u/s. 36(l)(viia) of the Act, no further finding is required on this issue. As regards the balance amount which is not allowed as a deduction by the A.O., the same is to be dealt with in accordance with the other relevant provisions of the Act as follows.

2.5 The first proviso to section 36(l)(viia) makes it clear that the appellant is entitled for further deduction of 5% of the doubtful assets or loss assets as classified and quantified in terms of the RBI guidelines. Accordingly, the 4 M/s. The Kunbi Sahakari Bank Limited appellant is entitled to a further deduction of 5% of the 'doubtful assets' or 'loss assets' in each of the assessment years. After allowing the deduction in terms of section 36(l)(viia) and the first proviso to section 36(l)(viia), the allowability of the balance amount u/s. 36(l)(vii) has been examined. In order to qualify for a deduction u/s. 36(l)(vii), the appellant has to follow the procedure of write off as provided in section 36(l)(vii) of the A The Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. in Civil Appeal No. 1143 of 2011 has held as follows:

"To conclude, -we hold that the provisions of section 36(l)(vii) and 36(l)(viia) of the Act are distinct and independent items of deduction and operate in their respective fields. The bad debts written off in debts, other than those for which the provision is made under clause (viia), will be covered under the main part of Section 36(l)(vii), while the proviso will operate in cases under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to section 36(l)(vii) will relate to cases covered under section 36(1) (viia) and has to be read with section 36(2)(v) of the Act. Thus, the proviso would not permit benefit of double with reference to rural loans while under section 36(l)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable in the accounts of the assessee for the previous year. This, obviously, would be subject to satisfaction of the requirements contemplated under section 36(2) ".

2.6 The Hon'ble Supreme Court has also clarified that section 36(l)(vii) is of general application and the same is applicable to banking companies as well as other entities. Therefore, there is no doubt about the applicability of section 36(l)(vii) of the act to a case of bad debts written off even in the case of a co- operative bank. But it is seen that the appellant has not written off the bad debts by debiting the P & L account as required u/s. 36(l)(vii) of the Act. The appellant has merely stated that a provision for NPAs were created in the accounts which is more in the nature of what is envisaged in terms of section 36(l)(viia) of the Act. Since the appellant has not complied with the accounting requirement as well as legal requirements of write off by clearly identifying the sums that are allowable u/s. 36(l)(viia), the first proviso to section 36(l)(viia) and the amounts qualifying for deduction u/s. 36(l)(vii), the claim of the appellant for allowing the deduction in full cannot be entertained at this stage.

Accordingly, the A.O. is directed to recompute the income of the appellant by allowing the deduction in terms of section 36(l)(viia) as well as the first proviso to section 36(l)(viia) of the I.T. Act. Needless to say that the appellant would be 5 M/s. The Kunbi Sahakari Bank Limited entitled to the deduction in respect of 'autorickshaw loans' in the year in which the write offs have been effected, as required u/s. 36(l)(vii) of the Act. 6. From the above, it is clear that the order of the Assessing Officer by reference to which the penalty has been levied, no longer survives as the issue of the addition has been remitted back by the ld. Commissioner of Income Tax (Appeals) to the file of the Assessing Officer.

6 M/s. The Kunbi Sahakari Bank Limited