DCIT, TIRUNELVELI vs. TIRUNELVELI DISTRICT CENTRAL COOP BANK LTD., TIRUNELVELI

This appeal filed by the Revenue is directed against the order of the ld. Commissioner of Income Tax (Appeals) 3, Madurai dated 14.02.2017 relevant to the assessment year 2013-14. The only effective ground raised in the appeal of the Revenue is that the ld. CIT(A) has erred in deleting the disallowance of ₹.38,67,983/- made under section 36(1)(viia) of the Income Tax Act, 1961 [“Act” in short].

Brief facts of the case are that the assessee is a cooperative society and filed its return of income on 30.05.2014 admitting total income of ₹.5,27,32,670/-. A notice under section 143(2) of the Act dated 28.08.2015 was served on the assessee on 02.09.2015. During the course of the assessment proceedings, the Assessing Officer observed that the assessee had claimed deduction under section 36(1)(viia) of the Act amounting to ₹.55,18,336/-. On verification of the Balance sheet of the assessee bank, the Assessing Officer has noticed that the reserve for bad and doubtful debts as on 31.03.2013 was ₹.2,79,24,897/- which is only an opening balance and therefore it was apparent that the assessee has not created any provision for bad and doubtful debt in the books of the assessee during the previous year. For claiming deduction under section 36(1)(viia) of the Act, provision for bad and doubtful debts had to be created by the assessee in its books of account and hence the assessment was completed by disallowing the deduction of ₹.55,18,336/-.

On appeal, the CIT(A) by accepting the claim of assessee supported by the decision of the Hon'able Karnataka High Court in the case of Shri Sidheswar Co-operative Bank Ltd [71 taxmann 126] in which the reserve for non performing assets was equated with provision for bad and doubtful debts and that the reserve for non performing assets created during the year at ₹. 38,67,983/- can be regarded as provision for bad and doubtful debts and deleted the addition of ₹. 38,67,983/- out of ₹.55,18,336/-.

Aggrieved, the Revenue is in appeal before the Tribunal and the ld. DR has contended that the assessee has not created any provision for bad and doubtful debt and the first proviso to section 36(1)(viia) of the Act makes it clear the distinction in respect of provision for bad and doubtful debts by the bank and other provisions made by the bank for any assets classified by the RBI as doubtful assets or loss assets. He also submitted that all NPAs are not bad and doubtful debts and pleaded that the order of the ld. CIT(A) should be reversed and restored that of the Assessing Officer.

On the other hand, the ld. Counsel for the assessee strongly supported the order passed by the ld. CIT(A).

We have heard both sides, perused the materials available on record and gone through the orders of the authorities below. As apparent from the balance-sheet (copy on record) and, admittedly, the assessee has not created any provision for bad and doubtful debts in its books of account during the year under consideration. In fact, the balance-sheet as at the year-end shows no such provision, so that it has never been created in the past as well, or, if so, since reversed, so that it does not outstand as at the year-end (31.03.2013) and, in fact, even as on 31.03.2012. A provision, in fact, has to be reflected in the balance-sheet by way of reduction in the value of the corresponding asset - trade debt in the instant case, as also explained by the Apex Court in Vijaya Bank v. CIT [2010] 323 ITR 166 (SC). What, on the contrary, the assessee has created (in its accounts) is a reserve for Non- Performing Assets (NPAs) at ₹.38,67,983/-. A reserve, by definition, is only an appropriation of profit, so that, again, admittedly, it does not go to reduce the profit of the assessee (reporting enterprise). There is concomitantly no reduction in the value of the debts as at the year-end, which, therefore, continue to be stated at the full (realizable) value. On what basis, then, one may ask, is the deduction being claimed? A provision, on the other hand, is a charge against profit, based on a realistic estimate (by the Management) of the risk of non-realization of the debt/s, to that extent and, thus, identifiable with reference to specific debts. As explained in Southern Technologies Ltd. v. JCIT (2010) 320 ITR 577 (SC), even a provision for NPAs (as classified under the RBI Prudential norms), will not by itself qualify for deduction under section 36(1)(vii) or section 36(1)(viia) of the Act. NPAs is a broader category of classification as per the RBI norms, and includes assets (debts) which are not doubtful for recovery, viz. sub-standard assets. In fact, apart from the ‘Reserve for NPA’, the assessee has also maintained a separate reserve for bad and doubtful debts, namely ‘Bad and Doubtful Debts Reserve’, the balance of which, both as on 31.03.2012 and 31.03.2013, is the same (₹.279.25 lakhs) (refer para 2 of this order). In other words, the assessee has not even created any fresh reserve for bad and doubtful debts during the year, i.e., the debts in respect of which the statute allows a deduction based on provision. The reserve for NPA (₹.38.68 lakhs), as other reserves, viz. contingent reserve for standard assets, reserve for risk fund, reserve for sundries, etc. stands not claimed as deduction in the computation of income under section 28 (refer computation of total income, on record). As afore-explained, there is a fundamental difference between ‘provision’ and ‘reserve’. How, and on what basis, then, could the assessee claim to be allowed deduction in respect of bad and doubtful debts? Unlike some other adjustment to the book profit in computing business income under the Act, which could be made independent of the books of account of the assessee, a provision is essentially based on an entry in the books of account representing a realistic assessment of the diminution in the value of corresponding asset in the opinion of the Management. No such provision, as afore-stated, stands made by the assessee in its accounts. The claim, we may clarify, is not in the nature of a standard deduction, as the assessee presumes it to be, claiming it de hors its accounts, much less risk assessment, in the prescribed sum calculated at 7.5% of the total income of ₹.734.44 lakhs, i.e., ₹.55,08,336/-, which, in fact, represents the upper limit for such deduction. There is, accordingly, no scope for considering the reserve for NPA of ₹.38.68 lakhs, suo motu disallowed by the assessee, as a provision for bad and doubtful debts, i.e., de hors the assessee’s accounts, and substitute its adjustment for a reserve for NPA to that extent, as opined by the ld. CIT(A). ₹.10,000/- is again release of a reserve. As a reserve is an appropriation of profit, there is no basis in the law for its claim. The assessee’s claim is, accordingly, confirmed for disallowance, reversing the part allowance by the ld. CIT(A). We decide accordingly.

In the result, the appeal filed by the Revenue is allowed. Order pronounced on the 27th September, 2017 at Chennai.