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Income Tax Appellate Tribunal, MUMBAI BENCH “F” MUMBAI
Before: SHRI PAVAN KUMAR GADALE, HONBLE & SHRI S. RIFAUR RAHMAN, HONBLE
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “F” MUMBAI BEFORE SHRI PAVAN KUMAR GADALE, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO.1439/MUM/2023 (ASSESSMENT YEAR: 2013-14) M/s. Union Bank of India v. Dy. CIT, Circle- (LTU)-2 Finance & Accounts 29th Floor, World Trade Centre Union Bank Bhavan Cuffe Parade, Mumbai- 400005 239, Vidhan Bhavan Marg Nariman Point, Mumbai- 400021 PAN: AAACU0564G (Appellant) (Respondent) Assessee Represented by : Shri C. Naresh Department Represented by : Shri Ankush Kapoor
Date of conclusion of Hearing : 06.02.2024 Date of Pronouncement : 13.03.2024
O R D E R PER S. RIFAUR RAHMAN (AM)
The above appeal was filed by the assessee against order of Ld.Commissioner of Income-Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld. CIT(A)”] and the said appeal was
ITA NO.1439/MUM/2023 (A.Y. 2013-14) M/s. Union Bank of India disposed off by the Coordinate Bench on 25.07.2023 which is a consolidated order for the A.Y. 2009-10 and 2013-14. Due to inadvertent mistake Ground No. 1 of ITA No. 1438/MUM/2023 was followed with the perception that Ground No. 1 of the present appeal i.e., ITA No. 1439/MUM/2023 are similar. Accordingly, it was adjudicated as allowed mutatis mutandis.
In Miscellaneous Application No. 581/MUM/2023 dated 10.01.2024, the above mistake was brought to the notice of the bench, it was suitably rectified and the Ground No. 1 of the present appeal is recalled for fresh adjudication. Accordingly, the case was posted for hearing before us and heard afresh.
The relevant facts of the ground no. 1 are, in order giving effect to the Ld.CIT(A) order the assessee was asked to submit the following details:-
“(i) Whether the assessee bank has debited the amounts so recovered out of bad debts against Reserve created by virtue of section 36(1)(viia) of the Act? (ii) Whether the amounts recovered against the bad debts have not exceeded the reserve so created? (ⅲ) Whether the amounts recovered against the bad debts have not been charged to profit & loss account of assessee bank as per provisions of section 36(1)(vii). The AO is directed to ascertain the
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ITA NO.1439/MUM/2023 (A.Y. 2013-14) M/s. Union Bank of India facts from the books of accounts and to take appropriate action in conformity with the findings on the legal issue. Therefore, the ground of the appellant is treated as partly allowed.
In response, assessee vide letter dated 04.04.2018 submitted as under: -
"Deduction Recovery in respect of bad debts written off relating to rural branches amounting to Rs21,27,37,034/- In respect of above issue Learned CIT(A)-2 has allowed in Bank's favour & directed to verify the following aspects: (i) Whether the assessee-Bank has debited the amounts so recovered out of bad debts against Reserve created by virtue of section on 36(1)(viia) of the Act? (ii) Whether the amounts recovered against the bad debts have not exceeded the reserve so created? (iii) Whether the amounts recovered against the bad debts have not been charged to Profit & loss account of assessee-Bank as per the provisions of section 36(1)(vii). With regard to above we wish to submit as under: (i) The Bank has always been debiting the amount of Bad debt written off relating to rural branches to the provision created u/s 36(1) (viia) & since the balance in provision account u/s 36()1) (viia) was higher, no deduction in respect of bad debts written off relating to rural branches was claimed. (ii) As stated above since the provision u/s 36(1)(viia) was higher than the actual BB/d w/o relating to rural branches no deduction u/s 36(1)(vii) had been claimed in any of the years. iii) As stated in Point no(1) above, the bad debts written off relating to rural branches has been debited to Provision for bad and doubtful debts u/s 36()1) (viia) & no part of the same has been debited to P/L a/c.
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ITA NO.1439/MUM/2023 (A.Y. 2013-14) M/s. Union Bank of India In view of the above, since the bad debts written off relating to rural branch was never claimed and allowed as deduction, the recovery in respect of the same cannot be charged to tax.”
After considering the above submissions, Assessing Officer observed that assessee has not furnished any documentary evidences in respect of “recovery in respect of accounts written off of rural branches” of ₹.21,27,37,034/- as per the direction of Ld. CIT(A). Therefore, this issue remains unverified and accordingly, he disallowed the same.
Aggrieved, assessee preferred an appeal before the Ld. CIT(A) and filed detailed submissions before him. In the submissions, assessee relied on the decision of ITAT in assessee’s own case for the A.Y.2008-09. After considering the detailed submissions and decision of the ITAT in assessee’s own case, Ld. CIT(A) rejected the submissions of the assessee and observed as under: -
“5.2.3 The appellant relied on the decision of Hon'ble ITAT Bangalore in the case of State Bank of Mysore vs DCIT reported in (33 SOT 7) and the appellant's own cases as mentioned above. On careful examination of the decision, it is noticed that the decision did not take into consideration the effect of section 36(2)(v) while concluding that section 41(4) cannot be invoked as the assessee has not claimed bad debts u/ 36(1)(vii) of the I.T. Act but purely adjusted the amount against the provision created u/s 36(1)(viia) of the I.T. Act. 5.2.4 The provision of write off of bad debts as per section 36(1)(vii) is subject to section 36(2) of the I.T. Act. While Section 36(1)(vii) allows deduction of amount of any bad debt or part
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ITA NO.1439/MUM/2023 (A.Y. 2013-14) M/s. Union Bank of India thereof which is written off as irrecoverable in the accounts of the assessee for the previous year, section 36(2) puts a further condition that such debt or part thereof should have been taken into account while computing the income of that previous year or in an earlier previous year or represents money lent in the ordinary course of business of baking carried on by the assessee. 5.2.5 For a banking company, certain conditions are prescribed which are in addition to the non-banking companies. 1. As per first proviso to section 36(1)(vi) - in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. 2. As per 36(2)(v) where such debt or part of debt relates to advance made by an assessee to which 36(1) (viia) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause. 5.2.6 In the case of a bank like the appellant, following steps have to be taken for a write off of bad debts in respect of rural debts 1. bank makes a provision on account of bad and doubtful debt as per 36(1)(viia), by crediting the provision account. This includes provision for rural advances, upto 10 per cent of the aggregate rural advances made by the rural branches of such bank. This provision itself is allowed as a deduction in terms of 36(1)(viia). 2. If the bank wants to write off any such rural debt or part thereof, as irrecoverable in its accounts, it has to first debit the said amount in the provision account in terms of section 36(2)(v) 3. And if the debt writ-off is more than the credit balance in the provision account, such excess is to be allowed as write-
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ITA NO.1439/MUM/2023 (A.Y. 2013-14) M/s. Union Bank of India off as per section 36(1) (viia) read with the first proviso to that section. 5.2.7 From a cogent reading of section 36(1)(vii) its first proviso, section 36(1) (viia) and section 36(2)(v) that debt write off in the case of a bank in respect of its rural debts is allowed in two situations; (a) when it debits the provision account since the credit in provision account is itself allowed as deduction u/ 36(1) (viia) , (b) when the credit in provision account is exhausted, the excess amount is then written off separately in terms of 36(1)(vii) read with its first proviso. 5.2.8 In view of this, when the appellant creates provision for bad and doubtful debts at 10 per cent of aggregate advances made by the rural branches and claims deduction as per section 36(1) (viia), there is a corresponding credit balance available to be adjusted against the actual write off of bad debts as and when it is written off in the accounts. If the amount of write off is less than the credit balance in the provision account, then the write off is completed by a mere write off in the provision account and separate write off is not required as per 36(1)(vii) as it would result in double deductions. Once as a debit against the credit in the provision account which is already allowed as deduction u / s * 0.36(1) (viia) and second time as deduction u/ 36(1)(vii) The restriction in the first proviso to section 36(1)(vii) was indeed provided to prevent such double deduction. Thus, as the decision in the case of State Bank of Mysore is distinguishable which was relied on by the Hon. ITAT, the issue needs to be read in consonance with section 36(2)(v) of the I.T. Act. 5.2.9. The appellant's plea that the recovery relating to rural branches written off cannot be taxed as it would lead to double taxation is devoid of merits since the write off of such rural advances was already claimed as deduction when it was adjusted against the credit balance in the provision account created u/s36(1)(viia) read with section 36(2)(v) of the I.T. Act 5.2.10 In view of the above, the AO's addition of Rs.21,27,37,034/- on account of recovery in respect of accounts written off of rural branches needs no interference and is upheld.”
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ITA NO.1439/MUM/2023 (A.Y. 2013-14) M/s. Union Bank of India 7. Aggrieved with the above order assessee is in appeal before us raising following ground in its appeal: -
On the facts and in the of the case, the ld. CIT(A) erred in the order of AO of taxing the recovery in respect of bad debts written off ignoring the binding of Hon'ble ITAT Mumbai in the case of State Bank of India (ITA No. 3644/MUM/2016).
At the time of hearing, Ld.AR of the assessee brought to our notice detailed submissions explaining the provisions of section 36(1)(vii) and 36(1)(viia) of the Act and the relevant transactions involved in Writing off bad debts by the Bank. Further, he also brought to our notice section 41(4) of the Act and submitted that when the assessee claims bad debts under section 36(1)(vii) of the Act then only the provisions of section 41(4) are applied considering the fact that even in section 41(4) the relevant section referred is only section 36(1)(vii) not 36(1)(viia) of the Act. He submitted that the assessee being a banking company allowed to create a provision for bad and doubtful debts as per the RBI Guidelines and the assessee was allowed to claim the deduction under section 36(1)(viia) of the Act only when the assessee created the provisions for doubtful debts as per RBI Guidelines. It was submitted that the provision of section 36(1)(viia) allows certain percentage of deduction based on the guidelines provided in section
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ITA NO.1439/MUM/2023 (A.Y. 2013-14) M/s. Union Bank of India 36(1)(viia) of the Act. The assessee can claim deduction under section 36(1)(viia) only when assessee creates the provision for doubtful debts in its books of accounts. Further, he submitted that the assessee reverses the provision for doubtful debts in its books of account while computing the computation of taxable income and claims the deduction as per the provisions of section 36(1)(viia) of the Act in its computation of taxable income.
The assessee is allowed to claim bad debts under section 36(1)(vii) of the Act only when the actual bad debts written off are more than the amounts allowed to be claimed under section 36(1)(viia) of the Act. Therefore, any recovery by the assessee out of such bad debts are declared as income under section 41(4) of the Act only when assessee claims deduction under section 36(1)(vii) of the Act. Therefore, the claim made by the assessee is as per the provisions of the Act. Therefore, the observations made by the Ld. CIT(A) is not proper and mails away from the actual transactions. Further, he brought to our notice the decision of the Coordinate Bench in assessee’s own case in which in the similar facts on record, the claim of the assessee was allowed. He placed the order of the Coordinate Bench at the bar.
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ITA NO.1439/MUM/2023 (A.Y. 2013-14) M/s. Union Bank of India 10. On the other hand, Ld. DR relied on the detail findings and observations of Ld. CIT(A) which are discussed at Para No. 18 of the First Appellate Order and he justified the disallowance made by the lower authorities.
Considered the rival submissions and material placed on record, we observe from the record that the issue raised by the assessee is covered in its favour by the order of the Coordinate Bench in assessee’s own case, the same is reproduced by the Ld. CIT(A) in his order at Page No. 17 of the order. Since the issue under consideration is already covered in favour of assessee, however, Ld. CIT(A) has elaborately discussed his point of view that why he is not in a position to follow the decision of the Coordinate Bench, even though it is not as per the legal conventions still we proceed to explain the issue in the following paragraphs.
In the factual matrix submitted before us, the Bank makes provision for bad and doubtful debts as per RBI norms. Out of the said provisions made, deduction is allowed under section 36(1)(viia) to the extent of eligible amount as prescribed (an amount not exceeding 8.5% of the total income and an amount not exceeding 10% of the aggregate
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ITA NO.1439/MUM/2023 (A.Y. 2013-14) M/s. Union Bank of India average advances by the rural branches). This is the first stream of deduction specified u/s 36(1)(viia) of the Act.
Therefore, Let us understand this transaction with an example, if a provision of say ₹.1000 is made in the books as per RBI norms, a deduction of say ₹.500 is allowed based on formula (an amount not exceeding 8.5% of the total income and an amount not exceeding 10% of the aggregate average advances by the rural branches) under section 36(1)(viia). However, if no provision is made in the books, no deduction is allowed under section 36(1)(viia) as per section 36(2)(v) of the Act.
Accordingly, for the purpose of determining taxable income, the provision made of ₹.1000 is added back and offered to tax, the deduction of ₹.500 is claimed u/s 36(1)(viia) in the tax computation. Therefore, the actual bad debts written off is charged to the provision account, which the assessee ultimately reverses in the tax computation and allowed only the statutory deduction u/s 36(1)(viia) of the Act, in the books it never crossed the amount allowed under section 36(1)(viia) of the Act.
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ITA NO.1439/MUM/2023 (A.Y. 2013-14) M/s. Union Bank of India 15. If there is a reversal of provision which is credited to P&L account, the same will be offered to tax and no deduction is allowed under section 36(1)(viia) of the Act. Therefore, the provision made/reversed and deduction allowed under section 36(1)(viia) / amount offered to tax form a separate stream of deduction under the Income-tax Act. When a bad debt is written off, the same is written off by debit to provision account for the reason that the assessee’s claim of actual bad debts written off never crossed the claim of deduction claimed under section 36(1)(viia) of the Act by the assessee. Whereas, the deduction under section 36(1)(vii) is allowed to the extent it exceeds the opening credit balance in the provision account maintained under section 36(1)(viia) of the Act. This is the 2nd stream of deduction.
No deduction of the bad debts written off is allowed under section 36(1)(vii) of the Act, if it is lower than the deduction allowed under section 36 (1)(viia). In this regard, if a recovery is effected out of the said write off which falls under the 2nd stream of deduction, the same cannot be taxed unless a deduction has been allowed under the 2nd stream in respect of the bad debts written off.
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ITA NO.1439/MUM/2023 (A.Y. 2013-14) M/s. Union Bank of India 17. The provisions of section 41(4) of the Act which provides for taxing the recovery effected out of the bad debts written off, therefore, clearly stipulates that the said recovery will be taxed if a deduction has been allowed in respect of bad debts written off which falls under the second stream of deductions as stated above. Accordingly, the section provides that if a bad debt written off has been allowed as deduction under section 36(1)(vii) of the Act i.e., in second stream of deductions, the recovery effected out of such write off, which has been allowed, will be charged to tax. This is explained in the below chart and table:
1000 900 800 700 Actual Bad debts 600 Deduction 36(1)(viia) 500 Deduction 36(1)(vii) 400 300 RBI Guidelines 200 100 0 Situation I Situation II Situation III
Particulars Situation I Situation II Situation III Actual Bad debts 200 600 300 Deductions u/s 36(1)(viia) 500 500 0 (first stream of deduction) Deduction u/s 36(1)(vii) 0 100 300 (second stream of deduction) Provisions as per RBI Guidelines 1000 1000 0
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ITA NO.1439/MUM/2023 (A.Y. 2013-14) M/s. Union Bank of India 18. From the above, in situation I, the deduction u/s 36(1)(viia) is allowed the extent of ₹.500 because there is a provision created as per RBI guidelines. In situation II, deduction of ₹.500 is allowed under 36(1)(viia) and also the actual bad debts is more than the first stream of deduction, the additional deduction is allowed of ₹.100/- u/s 36(1)(vii) of the Act. In situation III, if the provision is not created in the books of account, then no deduction is allowed under section 36(1)(viia) of the Act and only option available to the assessee is to claim u/s 36(1)(vii) of the Act.
Therefore, it is clear that where a deduction has not been allowed in respect of bad debts written off under the 2nd stream, the question of charging the recovery effected out of such bad debts written off to tax will not arise. In the third situation discussed in the chart, when the assessee does not make any provision as per RBI Guidelines, then it cannot claim any deductions under section 36(1)(viia) of the Act and it can only claim deduction under section 36(1)(vii) of the Act, if there is any recovery, it can be charged to tax under section 41(4) of the Act. Therefore, the proposed addition of recovery of bad debts by the Assessing Officer is not proper and observation of Ld.CIT(A) is also not correct, the revenue has to appreciate the actual claim of deductions
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ITA NO.1439/MUM/2023 (A.Y. 2013-14) M/s. Union Bank of India made by the assessee under various provisions exclusively enacted for the purpose of banking companies has to be read along with the tax computation submitted by the assessee and not express their opinion without properly verifying the impact in the tax computation. It may look double deduction while reading the provisions in isolation. Accordingly, the grounds raised by the assessee is allowed.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 13th March, 2024. Sd/- Sd/- (PAVAN KUMAR GADALE) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 13.03.2024 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file.
//True Copy// BY ORDER
(Asstt. Registrar) ITAT, Mum
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