THE SALEM DISTRICT CENTRAL CO-OP. BANK LTD.,SALEM vs. DCIT, SALEM

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

This is an appeal filed by the assessee against the Order dated 17.03.2016 of Commissioner of Income Tax (Appeals), Salem, in for the AY 2008-09.

ITA No.1168/Mds/2016 :- 2 -:

2.0 Ground Nos.1 to 5 are related to the re-opening of Assessment u/s.147 of IT Act.

The assessee filed return of income declaring total income of Rs.NIL on 30.09.2008 and subsequently revised the return of income was filed and admitting the total income of Rs.7,81,94,570/- on 31.03.2010. The assessment was completed accepting the revised return of income on 28.12.2010. Subsequently, the assessment was re-opened u/s.147 the act to examine the claim of deduction u/s.36(i)(vii)(a). The AO re-opened the assessment as per the reasons recorded in Page No.2 of the Assessment Order as under:

It was observed from profit and loss account for the year ended 31.03.2008 relevant to A.Y.2008-09 that provision for bad debts was made in the profit and loss account to the extent of Rs.8,74,58,800/- as NPA provisions. However, deduction u/s.36(i)(vii)(a) was claimed and allowed as follows:

7.5% on Rs.27,31,17,971/- Rs. 2,04,83,998 10% of Rural Branch advance Rs.17,44,41,400 Total Claim allowed Rs.19,49,35,398

The above claim of Rs.19,49,25,398/- for A.Y.2008-09 should have been restricted to the extent of provisions made in the profit and loss account u/s.36(i)(vii)(a) for A.Y.2008-09. It was seen from details of Aggregate Average Advance in respect of Rural & Branches filed by assessee that a sum of Rs.1,59,15,76,966/- was shown as Aggregte Average Advance 10% of Aggregate Average u/s.36(i)(vii)(a) was worked out by assessee at Rs.I5,91,57,697/- whereas in the computation of income a sum of Rs.17,44,41,400/- was claimed and was allowed. This resulted in excess allowance of deduction in respect of Rural Branch u/s.36(i)(vii)(a) by Rs.1,52,83,703/- for A.Y.2008-09.

3.0 Aggrieved by the order of the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) upheld the issue of notice u/s.148 placing reliance on the Hon’ble Supreme Court judgment in the case of CIT v. Raman & Co., 67 ITR 11.

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4.0 Aggrieved by the order of the Ld.CIT(A), the assessee filed appeal before this Tribunal.

Appearing for the assessee, the Ld.AR argued that the assessment is re-opened to examine deduction u/s.36(1)(viia) which was already considered by the AO in original assessment. The Ld.DR further submitted that re-opening was made consequent to audit objection. The AO has considered the issue in the original assessment made u/s.143(3) dated 28.12.2010 and give a categorical finding with regard to the deduction u/s.36(1)(viia). The AO cannot re-open the assessment on the same reason which was already considered by him in the Assessment Order originally passed. The issue with regard to the provisions for bad and doubtfulness claimed u/s.36(1)(viia) was examined by the AO and the consequent audit objection would amount to interpretation of law. The audit party is barred from interpretation of law as per the settled case laws. Therefore, Ld. Counsel vehemently opposed that the issue of notice u/s.148 is mere change of opinion required to be quashed. On the other hand, the Ld.DR argued that though the AO discussed in the Assessment Order regarding the deduction u/s.36(1)(viia) he has not verified the quantum of deduction and simply accepted the revised return of income.

As per the provisions of the IT Act, the assessee is allowed 7 ½ % of the profit on 10% agricultural advances as a deduction u/s.36(1)(viia) provided the provisions is made during the previous year relevant to the AY. This aspect of making the NPA provision during the previous year was ITA No.1168/Mds/2016 :- 4 -: not examined by the AO which was brought to the notice of the AO by the audit. The issue is settled by the Hon’ble Supreme Court judgment in the case of the 237 ITR 13, wherein the Hon’ble Supreme Court held that on the basis of the factual error pointed by the Audit Party it is permissible to reopen the assessment under the law. Accordingly, the Ld.DR argued that there was no error in the issue of notice u/s.148 and the same should be upheld.

5.0 We heard the rival submissions and perused the material placed before us.

The assessee has filed return of income in the Assessment Year under consideration is 2008-09 and the re-opening was made by issue of notice u/s.148 on 18.03.2013 within the four years from the end of the relevant Assessment Year. In the assessment, the assessee claimed deduction of Rs.19,49,35,398/- as against the NPA provisions made during the previous year relevant to the Assessment Year amounting to Rs.7,72,84,858/-. This issue has not been examined by the AO in the original assessment made u/s.143(3) dated 28.12.2010. The fact regarding not making the provision u/s.36(1)(viia) was brought to the notice of the AO by Audit Party of the Income Tax Department and consequent to the audit objection, the AO re-opened the assessment by issue of notice u/s.148. The assessee has made the provision for Rs.7,72,84,858/- and claimed the deduction of Rs.19,49,25,398/- which is ITA No.1168/Mds/2016 :- 5 -: patently appears to be incorrect. This factual position has not been considered by the AO at the time of assessment. As rightly relied upon by the Ld.DR on the Hon’ble Supreme Court judgment in the case of 237 ITR 30 re-opening of the case on the basis of factual error pointed out by the Audit Party is permissible under law. What is brought to the notice of the AO by the Audit Party was the factual error and it is a fact that the assessee had claimed the deduction of Rs.19,49,25,398/- against the provisions made by under NPA for Rs.7,72,84,858/- and there was prima facie case for under assessment to the extent of Rs.11.76 Cr. Therefore, we do not find any error in the re-opening of assessment and uphold the issue of notice u/s.148 by the AO. The Ld.CIT(A) also relied on the decision of Hon’ble Supreme Court in the case of CIT v. Raman & Co 67 ITR 11 and we uphold the order of the Ld.CIT(A) and dismiss the ground of the appeal of the assessee on this issue.

6.0 Ground No.6-12 are with regard to the addition made by the AO u/s.36(1)(viia).

The AO found during the previous year relevant to the AY 2008-09, that the assessee has created NPA provisions of Rs.7,72,84,858/- and claimed the deduction of Rs.19,49,35,398/- in respect of the provisions for bad and doubtful debts. Therefore, the AO disallowed the excess claim of Rs.11,76,40,540/- and completed the re-assessment. The Ld.CIT(A)

ITA No.1168/Mds/2016 :- 6 -: confirmed the addition made by the AO and hence the assessee is on appeal before us.

7.0 Appearing for the assessee, the Ld.AR argued that the assessee has already made the provision in the earlier years which was unadjusted and brought forward in the books. The assessee need not create provision year after year. The intention of the legislature was to allow the deduction from the provisions created during the year and accumulated provisions remained unadjusted and there is no need to create the provision every year to claim the deduction u/s.36(1)(viia). The Ld.Counsel contended that since the assessee has claimed the deduction u/s.36(1)(viia) from the existing NPA provisions which was brought forward, there is no case for making any addition by the AO. On the other hand, the Ld.DR argued that in the Income Tax proceedings of each year are independent and the income has to be computed in accordance with the system of accounting followed by the assessee for every year independently. The brought forward and spill over provisions cannot be considered for computing the income of the year under consideration unless and otherwise provided in the Income Tax Act. Even in Sec.36(1)(viia), the words used is in respect of any provision for bad and doubtfulness debts made by the assessee which indicates that the provisions should be made in the year under consideration. The Ld.DR further stated that both the AO and the Ld.CIT(A) relied on the decision of Punjab and Haryana High Court in the case of State Bank of Pataiala v.

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CIT 272 ITR 54 which is correct reliance and argued that since the disallowance was made correctly, no interference is called for in the lower authorities orders. On the other hand, in the rejoinder, the Ld.Counsel argued that the placing reliance by the Ld.CIT(A) as well as AO in Punjab and Haryana High Court decision is on different facts which is distinguishable.

7.1 We heard the rival submissions and perused the material placed before us.

The assessee has debited a sum of Rs.7,72,84,858/- under the head NPA during the previous year relevant to the AY 2008-09 and claimed the deduction u/s.36(i)(vii)(a) for an amount of Rs.19,49,25,398/-. The Ld.Counsel argued that the assessee has already created the provision for NPA in the earlier years which remained unadjusted. Therefore, there is no need to create any fresh provision during the previous year relevant to the AY 2008-09.

8.0 In Income Tax, each year is an independent and the income has to be computed as per the system of accounting regularly followed by the assessee. Therefore, the deduction can be made by the assessee only on the basis of the expenditure debited to the Profit & Loss A/c from the previous year relevant to the AY under consideration. No expenditure which is not debited to the Profit & Loss A/c in the year under ITA No.1168/Mds/2016 :- 8 -: consideration is permissible for deduction. In the instant case, the assessee has not debited the expenditure relating to the provisions for bad and doubtful debts. Therefore, the deduction u/s.36(1)(viia) is permissible to the extent of the amount debited to the Profit & Loss A/c or as per the permissible limits specified u/s.36(1)(viia) whichever is less.

The contention of the assessee that the reserves already created in the earlier years is available in the books of accounts which remained unadjusted is not an acceptable proposition and not as per the Income Tax Act. This view is clarified by the CBDT in Circular No.17/2008 which was relied upon by the Ld.CIT(A) in Para No.4.2 which is re-produced hereunder:

4.2. The Assessing Officer has restricted the claim of the assessee Bank to the amount of provision made for the relevant assessment year. This restriction should be considered in light of the provisions of Section 36(1)(viia) of the IT Act read with the CBDT instruction No.17/2008 dated

26.11.2006. In this Instruction it is clearly stated as follows: QUOTE: …………… (b) The deduction for provision for bad and doubtful debts should be restricted to the amount of such provision actually, created in the books of the assessee in the relevant year or the amount calculated as per provisions of section 36(1)(viia), whichever is less. ……………… UNQUOTE.

9.0 The Circular is very clear that the deduction is permissible only to the extent of provisions actually created in the books of accounts for the relevant Assessment Year. This view is supported by the decision of the Hon’ble Punjab & Haryana High Court cited supra. Therefore, we do not ITA No.1168/Mds/2016 :- 9 -: find any infirmity in the order of the Ld.CIT(A) and the same is allowed. Ground Nos.6 – 12 of the assessee are dismissed.

10.0 In the result, the appeal of the assessee is dismissed.

Order pronounced in the Open Court on 7th June, 2017, at Chennai.