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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI G.S. PANNU & SHRI PAWAN SINGH
The captioned appeal by the Revenue is directed against the order of CIT(A)-7, Mumbai dated 24.02.2012, pertaining to the Assessment Year 2003-04, which in turn has arisen from the order passed by the DCIT-3(3), Mumbai dated 19.02.2010 under section 143(3) r.w.s. 254 of the Act.
2 In its appeal, the Revenue has raised the following Grounds of appeal :-
“1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in restricting the deduction claimed u/s 36(1)(vii) of `19,18,79,822/- by an amount of credit balance as on 01.04.2002 of `21,42,00,000/- without appreciating that the bad debts claimed pertained to years prior to A.Y 2002-03 in which the income of the assessee was not taxable as per the provisions of sec. 50 of SIDBI Act, 1989.
The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.”
In brief, the relevant facts are that originally in an assessment finalised u/s 143(3) of the Act dated 28.1.2005, the Assessing Officer made various disallowances which, inter-alia, included the denial of assessee’s claim for bad debts written-off – Rs.178,23,55,838/-. When the matter reached the Tribunal, vide order dated 15.7.2009 the claim of the assessee for bad debts was allowed in terms of Sec. 36(1)(vii) r.w.s. 36(2) of the Act. So however, the Tribunal noted that assessee had also claimed deduction u/s 36(1)(viia) of the Act, which was allowed by the Assessing Officer and, therefore, the requirements of the proviso to Sec. 36(1)(vii) of the Act were required to be examined. Therefore, the Tribunal directed the Assessing Officer to recompute the deduction/claim of bad debts written-off by considering the proviso to Sec. 36(1)(vii) of the Act alongwith Sec. 36(1)(viia) of the Act. As a consequence, the Assessing Officer has passed the impugned order giving effect to the directions of the Tribunal. The assessee was not satisfied with the quantification of claim and accordingly appealed to the CIT(A).
Notably, the deduction u/s 36(1)(viia) of the Act is applicable to banks and financial institutions; and, the proviso to Sec. 36(1)(vii) of the Act prescribes that in case of an assessee to which clause (viia) applies, the amount of deduction u/s 36(1)(vii) of the Act shall be limited to the amount by which bad debt or part thereof exceeds the credit balance in the Provision for Bad and Doubtful Debt account made under that clause. In this context, the Assessing Officer called for the details of the bad debts written-off and the claim u/s 36(1)(viia) of the Act over the years. In para 5 of the impugned order, the Assessing Officer has tabulated such details starting from Assessment Year 1996-97 onwards. On the basis of such details, the Assessing Officer concluded that out of the total bad debts claimed at Rs.180,46,76,016/-, the allowable claim was to be restricted by an amount of Rs.21.42 crores on application of the proviso to Sec. 36(1)(vii) r.w.s. 36(1)(viia) of the Act, and he allowed the claim of Rs.159,04,76,016/-.
Before the CIT(A), assessee contested that upto Assessment Year 2002-03 assessee was not liable for any income-tax and, therefore, it did not create any Provision for Bad and Doubtful Debts for the purposes of Sec. 36(1)(viia) of the Act. According to the assessee, the claim has been unjustly restricted by the Assessing Officer considering a notional Provision for Bad and Doubtful Debt account, whereas in effect during the period of exemption upto Assessment Year 2002-03, there was no Provision for Bad and Doubtful Debt for the purposes of Sec. 36(1)(viia) of the Act. Therefore, it was canvassed that the Assessing Officer ought to have allowed deduction for bad debts written-off u/s 36(1)(vii) of the Act as claimed by the assessee in terms of the decision of the Tribunal. The CIT(A) has considered the submissions and has accepted the plea of the assessee and the following discussion is relevant :-
“4.3 I have considered the A.O’s order as well appellant AR’s submission. As per the provisions of section 50 of the SIDBI Act, the appellant was not liable to income-tax on its income, profits and gains. Accordingly, provisions of Income Tax for computing ‘Profits and Gains from business and profession’ contained in section 28 to 43D of the Act were not applicable to the appellant and the said is undisputed fact upto A.Yr 2002-03. It is the fact that the appellant has not filed its Return of Income upto A.Yrs 2001-02 and there has been no assessment upto A.Yr 2001-02. Thus, SIDBI has never claimed any deduction u/s 36(1)(viia) of the Act till A.Yr 2001-02 and since no such deduction was claimed and allowed there being no assessment upto A.Yr 2001-02, the question of any credit balance accumulated till A.Yr 2002-03 does not arise. There are no two views that proviso to Section 36(1)(vii) limits the deduction to the extent of credit balance in the provision for bad and doubtful debts GIC made under Clause (viia) of Section 36(1). As the appellant has not filed any return of income upto A.Yr 2001-02 no such account could have been prepared by it under that Clause as no such claim was made and allowed under that Clause. This contention of the appellant is further supported by the proposition laid down by Allahabad High Court in 55 ITR 338 (supra) wherein it was held that no income tax was payable by the appellant during the earlier years and hence no depreciation was to be allowed for earlier years. Accordingly, in that case the appellant was allowed depreciation on original assessment and without any reduction of depreciation deemed to be allowed in earlier years. In view of the above, the contention of the assessing officer to compute notional income from profits and gains and then allow and accumulate provisions of bad debts as per section 36(1)(viia) of the Act for earlier years when the appellant was not taxable for its income, profits or gains are not tenable in law.”
As per the CIT(A), the Assessing Officer was in error in restricting the deduction u/s 36(1)(vii) of the Act by the amount of notional credit balance standing in the Provision for Bad and Doubtful Debts. Against such a decision of the CIT(A), Revenue is in further appeal before us.
Before us, the ld. CIT-DR has reiterated the stand manifested in the Ground of appeal to the effect that the claim u/s 36(1)(vii) of the Act was to be restricted by the balance standing to the account of Provision for Bad and Doubtful Debt as on the beginning of the year under consideration.
The learned representative for the assessee pointed out that the Hon'ble Bombay High Court in the case of the assessee vide of 2012 dated 12.9.2012 held that the income of the assessee was exempt upto Assessment Year 2002-03 and, therefore, in this view of the matter, the Assessing Officer erred in considering a notional Provision for Bad and Doubtful Debt for the purposes of Sec. 36(1)(viia) of the Act, which is impermissible.
Having considered the rival stands, in our view, the decision of the CIT(A) is based on a reasonable understanding of the provisions of Sec. 36(1)(vii) of the Act r.w.s 36(1)(viia) of the Act in the context of position prevailing in the instant case. It is quite clear that upto the preceding Assessment Year of 2002-03 the assessee-company was enjoying a period of exemption and, therefore, there was no claim of any deduction being allowed u/s 36(1)(viia) of the Act till Assessment Year 2002-03. The proviso to Sec. 36(1)(vii) of the Act restricts the deduction to the amount which exceeds the credit balance in the Provision for Bad and Doubtful Debts made under Sec. 36(1)(viia) of the Act. In the instant, upto Assessment Year 2002-03 no claim can be said to have been made u/s 36(1)(viia) of the Act since assessee has been found to be exempt in view of the judgment of the Hon'ble Bombay High Court dated 12.9.2012 (supra) in the case of the assessee. So however, the claim of the assessee u/s 36(1)(viia) of the Act made for the instant assessment year will have to be considered for the purposes of proviso to Sec.36(1)(vii) of the Act. To the said effect, we do not find any discussion in the impugned order of the Assessing Officer and, therefore, for this limited purpose we direct the Assessing Officer to re- work the claim of bad debts allowable u/s 36(1)(vii) of the Act accordingly. Therefore, on this limited aspect, the matter is remanded to the file of the Assessing Officer who shall carry out the aforesaid exercise of recomputing the deduction u/s 36(1)(vii) of the Act, after considering the submissions put forth by the assessee, and as per law. Resultantly, the appeal of the Revenue is dismissed in principle, subject to the aforesaid directions.
In the result, appeal of the Revenue is dismissed as indicated above.
Order pronounced in the open court on 15th September, 2017.