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& 877/Bang/2023 & 963 & 964/Bang/2023 Page 2 of 38 O R D E R Per Bench These appeals are filed by the assessee & revenue against the separate orders 27.09.2023 of the CIT(Appeals), National Faceless Appeal Centre, Delhi [NFAC], for the assessment years 2016-17 & 2017-18.
The assessee is a private sector bank carrying on the business of banking. The assessee filed return of income on 14.10.2016 for AY 2016-17 of Rs.280.37 crores and on 31.10.2017 for Rs.721.28 crores under the normal provisions of the Act. The AO made several disallowances/additions under regular provisions as well as u/s. 115JB of the Act and completed the assessments u/s. 143(3) of the Act. The CIT(Appeals), NFAC partly allowed the appeals of the assessee. Hence the assessee and revenue are in appeal for both the years. Certain common grounds are raised in all the appeals.
We are taking first the assessee’s appeals
Ground No.1 is general in both the appeals.
5. Common ground No.2 in both the appeals is regarding disallowance u/s. 14A of the Act. The assessee bank in AY 2016-17 had earned a tax free income of Rs. 1,83,91,995/-. It had a total investment portfolio of Rs. 16,256.65 Crores. The Tax exempt investments amounted to Rs. 120.21 Crores. The assessee bank had non-interest bearing funds of Rs. 3,690.59 Crores (page 4 of the Asst & 877/Bang/2023 & 963 & 964/Bang/2023 Page 3 of 38 order). The non-interest bearing funds, thus, far exceeded the tax exempt investments.
6. The Assessing Officer after considering the reply of the assessee was not satisfied with the amount of disallowance made by the assessee bank. According to him, the disallowance u/s 14A had to be worked out as per Rule 8D. He therefore, invoked the provisions of Rule 8D and made the following disallowances:
Rule Particulars Amount (Rs.) 8D(2)(i) Salary of Treasury Department 1,03,34,547 8D(2)(i) Brokerage 22,39,214 8D(2)(ii) Proportionate Interest expenditure 10,23,99,134 8D(2)(iii) ½ % of Average Investments 75,17,344 Total Disallowance 12,24,90,239
On appeal, the CIT(Appeals) following the Hon’ble Supreme Court decision in the case of South Indian Bank Ltd. (2021) 438 ITR 1 (SC) deleted the disallowance made u/r 8D(2)(ii) of Rs.10,23,99,134. However, he noted that the Hon’ble Supreme Court decision dealt only with interest expenditure and not direct administrative expenses. He also observed that the ITAT decisions relied on by the Bank deal only with recording of dissatisfaction by the AO and as such are not applicable. He therefore, upheld the disallowance made u/r 8D(2)(i) and (iii) to the extent of exempt income of Rs.1,83,91,995 (against disallowance of Rs.2,00,91,105 made by the AO). Hence the appeal by the assessee. & 877/Bang/2023 & 963 & 964/Bang/2023 Page 4 of 38 8. The ld. AR submitted that the issue is covered by the following decisions:-
(i) South India Bank Ltd., [2021] 438 ITR 1 (SC) (ii) Canara Bank (erstwhile Syndicate bank) & 390/Bang/2023 dt. 25-10-2023 (Bang. Trib.) 9. He further submitted that the Hon’ble Apex Court judgment in the case of South India Bank Ltd. (supra) has held that no disallowance u/s. 14A can be made in the case of banks in para 25 of its order. This judgment was followed by the Hon’ble High Court of Karnataka in the case of Canara Bank (ITA No.258/2020 dated 8.2.2021. Following this High Court judgment, the Tribunal in the case of Canara Bank (erstwhile Syndicate Bank) has held that no disallowance u/s. 14A can be made if the investments are stock-in-trade. The ld. AR also relied on the Hon’ble Supreme Court judgment in the case of PCIT v. PNB Housing Finance Ltd. [2023] 157 taxmann.com 465 (SC). He therefore submitted that the disallowance u/s. 14A sustained by the CIT(Appeals) has to be deleted.
10. The ld. DR relied on the orders of lower authorities and submitted that the CIT (A) has rightly considered the submissions of the assessee.
After considering the rival submissions and perusing the material on record, we note that this issue was considered by this Tribunal in the case of Canara Bank (erstwhile Syndicate Bank) in & 390/Bang/2023for assessment years 2016-17 & 2017-18 dated 25.10.2023 and it was held as under:-
ITA Nos.876 & 877/Bang/2023 & 963 & 964/Bang/2023 Page 5 of 38 “6. Considering rival submissions, we note that this issue has been settled by the Hon’ble jurisdictional High Court in assessee’s own case for AY 2011-12 & 2012-13 in dated 8.2.2021 observing as under:- “ 4. Even though four substantial questions of law are raised in the appeal Memorandum cited supra, among them, substantial question of law Nos.2 & 4 are covered by the judgment and are answered by the co-ordinate bench of this court vide judgment dated 31..01.2020 in ITA No.481/2014. Paras 8 to 10 of the said judgment dated 31.01.2020 passed in the aforesaid case, reads as under: "8. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note of Section 14A of the Act: Section 14A (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assesee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-Section (2) shall also apply in relation to a case where an assesee claims that no expenditure has been incurred by him in rei-3tion to income which does not form part of the total income under this Act. Provided that nothing contained in this Section shall empower the Assessing Officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154, for any assessment year beginning on or before the 1st day of April 2001.
ITA Nos.876 & 877/Bang/2023 & 963 & 964/Bang/2023 Page 6 of 38 9. From perusal of Section 14A of the Act, it is evident that for the purposes of computing the total income under this chapter, no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation of the income which does not form part of his total income under the Act. The expenditure, the return of investment and cost of requisition are distinct concepts. Therefore the word 'incurred' in Section 14A of the Act have to be read in the context of the scheme of the Act and if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other incomes which is includable in the total income for the purposes of chargeability to the Lax. It i4 equally well settled that expenditure is a pay out. In order to attract applicability of section 14,4 of the Act, there has to be a pay out and return of investment or a pay back is not such a debit item. [See: WALFORT SHARE AND STOCK BROKERS (P) LTD SUPRA as well as M.4XOP INVESTMENTS LTD SUPRA]. In the instant case, the assessee has admittedly not incurred any expenditure. This case pertains to income on dividend, which by no stretch of imagination can be treated to be an expenditure to attract the provisions of Section 14A of the Act. In view of aforesaid enunciation of law by the Supreme Court, the first substantial question of law framed by this court is answered in favour of the assessee and against the revenue.
Learned counsel for parties, have fairly admitted that in case this court frames a substantial question of law that whether provisions of Section 115JA apply to the Banking Companies are not the remaining substantial questions of lay,/ would be reduced otiose. This court has already framed a substantial question of law in this regard today. This court by an order passed on 16.01.2020 passed in has already held that the provisions of Section 115JB do not apply to the banking companies. Therefore, the substantial questions of law Nos_3, 4 and 5 and substantial question of law framed in ITA 99/2010 are rendered academic and need not be answered. So far as substantial; question of law No.2 in ITA No.97/2010 is concerned, the same is squarely covered by the decision of the Supreme Court in 'CIT VS. ESSAR TELEHOLOINGS LTD.',(2018) 401 ITR 445, wherein it has been held that provisions of Section 114A read with rule 8D of the Income Tax & 877/Bang/2023 & 963 & 964/Bang/2023 Page 7 of 38 Rules are prospective in nature and can not be applied to any assessment year prior to Assessment Year 2008-09. Accordingly, the aforesaid substantial question of law is answered against the revenue and in favour of the assessee."
In this regard, a memo is also filed by the learned counsel for the appellant, which reads as under: "MEMO ON BEHALF OF THE APPELLANT The appellant respectfully submits that in view of the substantial questions of law 2 and 4 having been covered in favour of the assessee in the earlier orders in assessee's own case, it is submitted that substantial questions of law 1 and 3 become academic and need not be answered by this Hon'ble Court. Therefore, it is most humbly prayed that this Hon'ble Court may be pleased to take the memo on record and pass appropriate orders in the interests of justice and equity."
As per the Memo, question Nos.1 & 3 would only be treated as academic and hence, not answered. in view of the same, in terms of the order dated 31.01.2020, the substantial questions of law Nos.2 & 4 are answered in favour of the assessee and in terms of the aforesaid judgment.” 6.1 Respectfully following the above judgment, we decide the issue in the above terms of the judgment. The ld. DR has submitted that the Hon’ble Apex court has admitted the SLP filed by the revenue but the status of the same could not be furnished by the ld. DR, accordingly, we are bound by the order of the Jurisdictional High Court.”
Following the above decision of this Tribunal, we delete the disallowance sustained by the CIT(Appeals) u/s 14 r.w. Rule 8D. For AY 2017-18 also, on similar facts, we delete the disallowance u/s. 14A r.w. Rule 8D. & 877/Bang/2023 & 963 & 964/Bang/2023 Page 8 of 38 13. Ground No.3 regarding deduction 36(1)(vii) is also common for both the years. The brief facts for AY 2016-17 are that while computing the taxable income, the Appellant bank had claimed a deduction of Rs. 303,86,90,303/- u/s 36(1)(vii), in respect of non-rural debts written off in the computation of income without debiting into Profit & Loss Account , out of which Rs. 110.10 Cr. related to prudential write-off. It had also written off a sum of Rs. 1.25 Cr being the bad debts written off by the rural branches, to the provision a/c made u/s 36(1)(viia). There was a debit of Rs. 439.23 Crores (including Provision for NPAs of Rs. 267.17 Cr. made during the year under the head Provision and Contingencies and the closing balance of Provision available for bad and doubtful debts amounting to Rs. 582.51 Crores. as on 31.03.2016. The assessee had claimed deduction u/s 36(1)(viia) towards Provision for bad and doubtful debts (PBDD) to the extent of Rs. 191.95 Crores as against the actual provision of Rs. 267.17 Crores made during the year. In this regard the AO asked to explain the procedure for write-off and sought for clarification and raised queries. The assessee furnished details explaining the procedures for claiming the deduction. Some parts of the submission are as under:-
“2. Details in respect of bad debts claimed U/s 36(1)(vii): a. Board of Directors has the authority for sanctioning of writing off of advances which are delegated to the hierarchy. Branches to not have power to write off. They have to send proposal for write off only in cases where all other avenues for recovering the amount has exhausted and it is not worthwhile to pursue the court proceedings to recover the amount due to the & 877/Bang/2023 & 963 & 964/Bang/2023 Page 9 of 38 cost and time involved and the chances of recovery. Apart from this, Bank also some times take decision to write off at Head Office level with the balance continue to appear in branch books which is also permitted by the regulator. Recoveries made in both the cases is offered to tax on cash basis. During the A.Y. 2016-17, Bank has offered recoveries made from written off accounts amounting to Rs.35,78,26,833. …. d. The bad debts were written off by debit to the Provision for Bad and Doubtful Advances Account, copy of statement of which is enclosed as Annexure III. In Branch Books, Borrower’s account is credited for the amount written off by raising a Debit Advice for debiting the Head Office A/c which is responded at Head Office debiting the Provision for Bad and Doubtful Advances. During the year, Bank had written off Rs.305.12 core as bad debt by debit to Provision for Loan Losses Account to the extent of Rs.211.69 Cr., by debit to Profit & Loss account – Rs.34.71 Cr. And by debit to SA – Deferred Revenue Expenditure Account to the extent of Rs.58.72 Crore. e. Statement of Non Performing Advance Account submitted by the Bank to the RBI is enclosed as Annexure IV. Interest accrued in respect of the NPA Account for the Financial Year 2005-16 was Rs.236.02 Crore. As per Para 3.1.1 in Page No.2 of Master Circular dated July, 2015 (copy enclosed as Annexure V) on Income Recognition and Asset Classification Norms issued by the Reserve Bank of India, Banks should not charge and take to income account interest on any NPA. Also, as per Section 43D of Income Tax Act, interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the RBI in relation such debts, shall be chargeable to tax in the previous year in which it is credited to the Profit and Loss Account.”
13.1 After analyzing the submissions the AO noted that the entire amount of Rs. 267.17 crores being provision made during the year, was added back in the computation of income as it was merely a provision and assessee has claimed bad debts written off u/s 36(1)(vii) in the computation of income amounting to Rs. 303.86 Crores, apart from separately claiming the provision for bad and doubtful debts u/s 36(1)(viia) amounting to Rs. 191.95 Crores. Further he noted that bad debts are not actually written off and only a provision was made in the books of account. The urban debts of Rs. 303.86 crores were not reduced from the provisions allowed u/s 36(1)(viia) and claimed as bad debts written off. Considering the entire submissions, the AO disallowed the entire deduction claimed of bad debts of non-rural branches amounting to Rs. 303,86,90,303/- on two grounds:-
(i) The amount was not actually written off in the loan account of the debtors. (ii) The entire write off (both rural and non rural debts) should be adjusted against the credit balance in the provision a/c u/s 36(1)(viia) and only the excess can be claimed. Since there is no excess amount, the write off is not allowable. He relied on Explanation 2 to section 36(1)(vii).
Before the CIT(Appeals), the assessee submitted that the provision for bad and doubtful dets u/s. 36(1)(viia) is applicable only for rural debt and accordingly the non-rural bad debts are eligible for deduction u/s. 36(1)(vii) of the act. Deduction u/s. 36(1)(viia) is not a write off of debts but it is only an allowance allowed in computing the ITA Nos.876 & 877/Bang/2023 & 963 & 964/Bang/2023 Page 11 of 38 taxable income as a percentage of average rural advances and total profit. Further, the write off against the rural loan/advances is set off against the NPA reserve and not claimed as deduction u/s. 36(1)(vii). Thus, there is no double deduction in respect of urban or rural debt written off. The assessee relied on the decision of the ITAT in its own case for AYs 2013-14 in order dated 27.12.2021 & 2014-15 in ITA No. 1907/Bang/2018 order dated 26.5.2022.
The CIT(Appeals) observed that the ITAT in assessee’s own case for AYs 2013-14 relied on the finding of the Supreme Court in the case of Catholic Syrian Bank Ltd. that section 36(1)(viia) of the Act relates to rural branch advances only but failed to the consider the later amendments and clarification issued by the Finance Act, 2013 after the decision of the Hon’ble Supreme Court. He held that provision for bad and doubtful debts account made under clause (viia) of section 36(1) and referred to in proviso to clause (vii) of section 36(1) and section 36(2)(v) applies to all types of advances, whether rural or other advances. Hence the CIT(A) rejected the submissions of the assessee and confirmed the order of AO. Hence the assessee is in appeal on this issue.
The ld. AR reiterated the submissions made before the lower authorities and submitted that bank has claimed the amount of Rs.303,86,90,303 as deduction in respect of non-rural branches u/s. & 877/Bang/2023 & 963 & 964/Bang/2023 Page 12 of 38 36(1)(vii). The system followed by the assessee bank in writing off the debts and claim of deduction u/s. 36(1)(vii) is as under:-
Procedure followed for technical write off and branch level write off The appellant bank identifies individual bad debts that are to be written off. The bad debts are written off both by the branches and also at the HO level after obtaining the requisite permission from the respective authorities. The write off carried out at the branch level is called actual write off in which case, the customer account is written off and closed for ever. However, the write off undertaken at HO level is called Technical / Prudential write off in which case, the customer account still appears in the branch books, though the same is written off at HO level. In both the cases (write off at branch level as well as at HO level), the actual amount written off is reduced from the loans and advances of the bank. Further the recovery made in written-off account is credited to Profit & Loss Account as recovery from Written- off accounts and disclosed as Miscellaneous income in the audited Profit & Loss Account under the “Other Income
The ld. AR further submitted that this issue covered in favour of the Appellant Bank by the decisions of the Hon’ble Supreme Court and the Hon’ble Bangalore bench of ITAT in the Appellant Bank’s own case for AYs 2013-14 & 2014-15 and in the case of Canara Bank (erstwhile Syndicate Bank) in & 390 Bang/2023 dated 25.10.2023. Therefore, this issue is settled in favour of the assessee.
The ld. DR strongly supported the orders of lower authorities. He further submitted that the Revenue has filed appeal against the order of the Hon’ble Tribunal to the jurisdictional Hon’ble High Court.
After hearing both the sides, we note that similar issue has been decided by the coordinate Bench of this Tribunal in assessee’s own
ITA Nos.876 & 877/Bang/2023 & 963 & 964/Bang/2023 Page 13 of 38 case for AY 2014-15 in & 230/PAN/2018 dated 26.5.2022 in favour of the assessee after considering Explanation 2 inserted in section 36(1)(vii) by Finance Act, 2013 (after the decision of the Supreme Court in the case of Catholic Syrian Bank) held as under:-
“7.7 We heard the Ld D.R and perused the record. Now the core question that arises is whether the bad debts relating to non-rural branches are also required to be first debited to PBDD a/c and then the excess amount over and above the balance available in PBDD alone could be allowed as bad debts u/s 36(1)(vii) of the Act. 7.8 The provisions of sec. 36(1)(vii) allows deduction as under:- “36(1)(vii) Subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year. Provided that 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 under that clause. ……….. Explanation 2 – For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub- section and clause (v) of sub section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (via) and such account shall relate to all types of advances, including advances made by rural branches;” The provisions of sec.36(2)(v) are relevant here and it reads as under:- “(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply---- & 877/Bang/2023 & 963 & 964/Bang/2023 Page 14 of 38 ……. (v) where such debt or part of debt relates to advances made by an assessee to which clause (viia) of sub-section (1) 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.” A combined reading of provisions of clause (vii) of sec.36(1), the proviso thereunder and clause (v) of sec.36(2) would show that (a) the bank should debit the actual bad debts written off by it to “PBDD a/c” (sec. 36(2)(v)) (b) the deduction u/s 36(2)(vii) shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the PBDD made under clause (viia) of sec.36(1). 7.9 The contention of the revenue is that the Explanation 2 has expanded the scope of the proviso to sec. 36(1)(vii) and hence the bad debts relating to non-rural branches are also required to be first debited to PBDD a/c and the excess amount alone can be allowed as deduction u/s 36(1)(vii) of the Act. According to revenue, the decision rendered by Hon’ble Supreme Court in the case of Catholic Syrian Bank (2012)( 343 ITR 270). In the above said case, the Hon’ble Supreme Court has expressed the view that the provisions of sec. 36(1)(vii) and 36(1)(viia) allow separate deduction and they are independent provisions. The Supreme Court further held that the clause (viia)(a) applies only to rural advances. So the bad debts relating to non-rural advances need not be deducted against the PBDD allowed under clause (a) of sec.36(1)(viia) of the Act. The Hon’ble Supreme Court, inter alia, also observed as under:- “31 It was neither in dispute earlier nor is it disputed before us, that the assessee-bank is maintaining two separate accounts, one being a provision for bad and doubtful debts other than provision for bad debts in rural branches and another provision account for bad debts in rural branches for which separate accounts are maintained….” Referring to the above said observations, the revenue has taken the view that the Hon’ble Supreme Court has rendered its & 877/Bang/2023 & 963 & 964/Bang/2023 Page 15 of 38 decision on the assumption that the banks would be maintaining two separate PBDD a/c, viz., one for rural branches and another one for non-rural branches. 7.10 It is possible that all banks may not be maintaining two separate accounts, as observed by the Hon’ble Supreme Court. Hence there was an apprehension in the minds of revenue with regard to the effect of the decision rendered by Hon’ble Supreme Court. For instance, if a particular bank is maintaining only a single PBDD a/c for the provision created u/s 36(1)(viia) of the Act and even if that bank is not having any rural branches, then it may try to avail the benefit of decision rendered by Hon’ble Supreme Court and may possibly contend that (i) the provision allowed u/s 36(1)(viia) shall apply only to rural branches. (ii) since it does not maintain two separate PBDD a/c for rural and non-rural advances, the bad debts relating non-rural branches need not be reduced from the PBDD a/c allowed u/s 36(1)(viia) in terms of sec. 36(2)(v) and the proviso to sec. 36(1)(vii) of the Act. However, the Ld A.R submitted before us that the Explanation 2 has been inserted in sec. 36(1)(vii) by Finance Act, 2013 (after the decision of Catholic Syrian Bank) to debar certain assessees to avail the interpretation given by Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra). 7.11 We have considered the arguments advanced by Ld A.R on this point. According to Ld A.R, if we closely analyse the provisions of sec. 36(1)(viia) of the Act, the intention of the Parliament in inserting Explanation -2 shall become clear. Accordingly, we analysed the provisions of sec.36(1)(viia) and notice that the said section allows deduction of PBDD to various types of assessees, viz., (i) Clause (a) of sec. 36(1)(viia) shall be applicable to a Scheduled bank (not being a bank incorporated by or under the laws of a country outside India) or non-scheduled bank or a co- operative bank other than a primary agricultural credit society or a primary cooperative agricultural and rural development bank. & 877/Bang/2023 & 963 & 964/Bang/2023 Page 16 of 38 The quantum of deduction is 7.50% of Total income (computed before making any deduction under this clause and Chapter VIA) and an amount not exceeding 10% of aggregate average advances made by the rural branches of such bank. (ii) Clause (b) of sec. 36(1)(viia) shall be applicable to a bank incorporated by or under the laws of a country outside India. The quantum of deduction is 5% of the total income (computed before making any deduction under this clause and Chapter VIA). (iii) Clause (c) is applicable to a public financial institution or a State financial corporation or a State industrial investment corporation. The quantum of deduction is 5% of total income (computed before making any deduction under this clause and Chapter VIA). (iv) Clause (d) is applicable to Non-banking financial company from AY 2017-18. The Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra) has held that the PBDD allowed under clause (a) of Sec. 36(1)(viia) refers to ‘rural advances’ only. In fact the expression “rural branches” finds place in clause (a) only. It can be noticed that the reference to “rural branches” is not there in clause (b) to (d). Generally, the foreign banks may not have rural branches. However, such kind of banks, financial institutions, NBFC etc. are also eligible to claim deduction towards PBDD u/s 36(1)(viia) of the Act under clauses (b) to (d). In view of the decision rendered in the case of Catholic Syrian bank, it is possible that the assessees covered by clause (b) to (d) may contend that the bad debts written off by them need not be adjusted against PBDD allowed u/s 36(1)(viia) of the Act, since the bad debts relate to “non-rural debts”. Accordingly, we are of the view that the Explanation 2 has been inserted in order to bring the assesses covered by clauses (b) to (d) within the ambit of the proviso to sec. 36(1)(vii) and sec. 36(2)(v) of the Act. Hence, in our view, advances given by rural and non-rural branches mentioned in Explanation 2 shall apply to the assesses covered by clause (b) to (d) of sec. 36(1)(viia) of the Act. 7.12 At this juncture, we may gainfully refer to the “MEMORANDUM EXPLAINING FINANCE BILL 2013”, & 877/Bang/2023 & 963 & 964/Bang/2023 Page 17 of 38 which brings out the intention of the Parliament in inserting Explanation-2 in sec. 36(1)(vii) of the Act. It is extracted below:- “Clarification for amount to be eligible for deduction as bad debts in case of banks:- Under the existing provisions of section 36(1)(viia) of the Income-tax Act, in computing the business income of certain banks and financial institutions, deduction is allowable in respect of any provision for bad and doubtful debts made by such entities subject to certain limits specified therein. The limit specified under section 36(1)(viia)(a) of the Act restrict the claim of deduction for provision for bad and doubtful debts for certain banks (not incorporated outside India) and certain cooperative banks to 7.5% of gross total income (before deduction under this clause) of such banks and 10% of the aggregate average advance made by the rural branches of such banks. This limit is 5% of gross total income (before deduction under this clause) under sections 36(1)(viia)(b) and 36(1)(viia)(c) for a bank incorporated outside India and certain financial institutions. Provisions of clause (vii) of section 36(1) of the Act provides for deduction for bad debt actually written off as irrecoverable in the books of account of the assessee. The proviso to this clause provides that for an assessee, to which section 36(1)(viia) of the Act applies, deduction under said clause (vii) shall be limited to the amount by which the bad debt written off exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1) (viia) of the Act. The provisions of section 36(1)(vii) of the Act are subject to the provisions of section 36(2) of the Act. The clause (v) of section 36(2) of the Act provides that the assessee, to which section 36(1)(viia) of the Act applies, should debit the amount of bad debt written off to the provision for bad and doubtful debts account made under section 36(1) (viia) of the Act. Therefore, the banks or financial institutions are entitled to claim deduction for bad debt actually written off under section 36(1)(vii) of the Act only to the extent it is in excess of the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia) of the Act. However, certain judicial pronouncements have created doubts about the scope and applicability of proviso to section 36(1)(vii) & 877/Bang/2023 & 963 & 964/Bang/2023 Page 18 of 38 and held that the proviso to section 36(1)(vii) applies only to provision made for bad and doubtful debts relating to rural advances. Section 36(1)(viia) of the Act contains three sub- clauses, i.e. sub-clause (a), sub-clause (b) and sub-clause (c) and only one of the sub-clauses i.e. sub-clause (a) refers to rural advances whereas other sub-clauses do not refer to the rural advances. In fact, foreign banks generally do not have rural branches. Therefore, the provision for bad and doubtful debts account made under clause (viia) of section 36(1) and referred to in proviso to clause (vii) of section 36(1) and section 36(2)(v) applies to all types of advances, whether rural or other advances. It has also been interpreted that there are separate accounts in respect of provision for bad and doubtful debt under clause (viia) for rural advances and urban advances and if the actual write off of debt relates to urban advances, then, it should not be set off against provision for bad and doubtful debts made for rural advances. There is no such distinction made in clause (viia) of section 36(1). In order to clarify the scope and applicability of provision of clause (vii), (viia) of sub-section (1) and sub-section (2), it is proposed to insert an Explanation in clause (vii) of section 36(1) stating that for the purposes of the proviso to section 36(1)(vii) and section 36(2)(v), only one account as referred to therein is made in respect of provision for bad and doubtful debts under section 36(1)(viia) and such account relates to all types of advances, including advances made by rural branches. Therefore, for an assessee to which clause (viia) of section 36(1) applies, the amount of deduction in respect of the bad debts actually written off under section 36(1)(vii) shall be limited to the amount by which such bad debts exceeds the credit balance in the provision for bad and doubtful debts account made under section 36(1)(viia) without any distinction between rural advances and other advances. This amendment will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years.” The CBDT has issued an Explanatory note to the Provisions of Finance Act, 2013 on 24.01.2014 in F No.142/24/2013 – TPC, wherein also the very same explanations have been given for introducing Explanation – 2 in Sec. 36(1)(vii) of the Act. The above said Memorandum and the Explanatory Note issued by the Government/CBDT supports our view. & 877/Bang/2023 & 963 & 964/Bang/2023 Page 19 of 38 7.13 Our view is further fortified by certain observations made by Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra). We may refer to paragraph 27 of the decision now:- “27. As per this proviso to clause (vii), the deduction on account of the actual write off of bad debts would be limited to the excess of the amount written off over the amount of the provision which had already been allowed under clause (viia). The proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by clause (viia), there would be no such double deduction. The proviso, in its terms, limits its application to the case of a bank to which clause (viia) applies. Indisputably, clause (viia)(a) applies only to rural advances.” It is pertinent to note that the Hon’ble Supreme Court has categorically held that clause (a) of sec. 36(1)(viia) applies to rural advances only. If the Parliament wanted to undo the above said interpretation given by the Hon’ble Supreme Court, it should have brought amendment in clause (a) to sec. 36(1)(viia) to make its intention clear that the clause (a) shall apply to both rural and non-rural advances. Since there is no such amendment, the interpretation given by Hon’ble Supreme Court that “clause (viia)(a) applies to rural advances only” shall remain intact. Explanation 2 inserted in sec. 36(1)(vii), in our view, does not override the above said interpretation given by Hon’ble Supreme Court. 7.14 In the Memorandum explaining the purpose of introducing Explanation -2 in Sec. 36(1)(vii), it has been acknowledged that only the clause (a) refers to “rural branches”. It has also been stated that the foreign banks do not have rural branches. The assesses covered by clause (b) to (d) may not be having rural branches. Hence, the memorandum explains as under with regard to the decision rendered by Hon’ble Supreme Court in the case of Catholic Syrian Bank (supra):- “However, certain judicial pronouncements have created doubts about the scope and applicability of proviso to section 36(1)(vii) and held that the proviso to section 36(1)(vii) applies only to provision made for bad and doubtful debts relating to rural advances.” & 877/Bang/2023 & 963 & 964/Bang/2023 Page 20 of 38 Because of the interpretation so given by Hon’ble Supreme Court, as discussed earlier, there arose a necessity for the Parliament to clarify that the PBDD allowed u/s 36(1)(viia) shall apply to all types of advances including advances made by rural branches. However, as stated earlier, the clause (a) to sec.36(1)(viia) has been held to be applicable to rural advances only and this interpretation has not been overridden by any amendment. 7.15 As noticed earlier, the assessees covered by clauses (b) to (d) may not be having rural branches, but they would be getting the benefit of deduction of PBDD u/s 36(1)(viia) of the Act. Hence, in order to bring those assessees within the ambit of the proviso to sec. 36(1)(vii) and sec. 36(2)(v), it was imperative for the Parliament to clarify the legal position and accordingly Explanation-2 has been inserted in sec. 36(1)(vii) of the Act. Accordingly, on the analysis of the provisions discussed above, we are of the view that the above said Explanation-2 shall operate (a) in respect of clause (a) of sec. 36(1)(viia) of the Act only to rural advances and (b) in respect of clauses (b) to (d), for advances given by both rural and non-rural branches. 7.16 In the instant case, the assessee has claimed deduction towards PBDD under clause (a) to sec. 36(1)(viia) of the Act, meaning thereby, the clause (a) is applicable to rural advances only as per the decision given by Hon’ble Supreme Court in the case of Catholic Syrian Bank. Hence the bad debts relating to non-rural branches are not required to be adjusted against PBDD allowed under clause (a) of sec. 36(1)(viia) of the Act in terms of the proviso to sec. 36(1)(vii) and sec. 36(2)(v) of the Act. 7.17 In view of the foregoing discussions, we are unable to agree with the view expressed by Ld CIT(A) on this issue. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the bad debts relating to non- rural branches u/s 36(1)(vii) of the Act without adjusting the same against the PBDD a/c, since the said PBDD a/c relates to rural advances only.” & 877/Bang/2023 & 963 & 964/Bang/2023 Page 21 of 38 20. Respectfully following the above decision, we delete the addition u/s. 36(1)(vii) of the Act for both the AYs 2016-17. This issue for AY 2017-18 is on the same facts and there is only difference in quantum and hence applying the decision for AY 2016-17 we delete the addition on this issue for this AY 2017-18 also.
Common ground No.4 is alternate ground to ground No.3 and since ground No.3 is allowed, ground No.4 is infructuous for both the years.
Next common Ground No.5 is regarding disallowance of amount being penalty paid to RBI and ground No.5 is with regard to disallowance of club expenses. The ld. AR submitted that considering the smallness of the amounts in both the years, these grounds are not pressed, though the assessee does not accept it on merits. Accordingly the issues raised in ground Nos.5 & 6 for both the years are left open.
Ground No.7 in AY 2016-17 relates to additions made by the AO to the book profits u/s. 115JB of the Act as contingent liability which were sustained by the CIT(Appeals) as under:-
Sr. Amount No. Particulars (Rs.) 1. Provision for HD Commission 1,75,00,000 2. Provision for exgratia and bonus 18,00,00,000 3. Provision for gratuity to HD Canvassers 14,31,000 4. Provision for gratuity 6,09,00,000 & 877/Bang/2023 & 963 & 964/Bang/2023 Page 22 of 38 24. The ld. AR made detailed submissions in respect of each of the additions as below:-
“7.1.2. Provision for HD Commission – Rs. 1,75,00,000/- 7.1.2.1. The Appellant Bank estimated the commission payable to Honey Deposit collectors and provided for the same. Since this amount was paid in the next year, in the regular computation, this was added back. However, in the regular computation, the amount actually disbursed of Rs. 1,02,78,643/- was claimed as deduction. In other words, the appellant Bank claims this deduction, in the regular computation, in the year of payment and adds back the provision made in the books. However, for the purpose of Book Profit, it is claimed on payment basis. 7.1.2.2. The learned Assessing Officer disallowed the same as contingent liability. The learned CIT(A) also sustained that disallowance by wrongly appreciating the facts. Our Submissions: 7.1.2.3. The amount provided by the Appellant Bank is an ascertained liability and not a contingent liability. Since the deduction of commission is claimed by the Appellant Bank only on payment basis, the Appellant Bank claimed in the normal computation an amount of Rs. 1,02,78,643/- which was actually paid before filing the return. The learned Assessing Officer however, added entire amount of Rs. 1,75,00,000/- as contingent liability without any finding in this regard. The addition made by the learned Assessing Officer is based on surmises & conjunctures, hence, liable to be set aside. 7.1.2.4. Without prejudice to the above, since an amount of Rs. 1,02,78,643/- has been allowed in the normal computation, only the excess amount of Rs. 72,21,357/- can be added to the Book Profit. 7.1.3. Provision for exgratia and bonus – Rs. 18,00,00,000/- & 877/Bang/2023 & 963 & 964/Bang/2023 Page 23 of 38 7.1.3.1. The Appellant Bank had provided an amount of Rs. 18 Cr towards exgratia and bonus. However, it had claimed an amount of Rs. 22,01,47,905/- based on the actual payment in the regular computation, after adding the provision amount of Rs. 18 Cr. 7.1.3.2. The learned Assessing Officer added this provision amount of Rs. 18 Cr by observing that the same is contingent liability. The learned CIT(A) also upheld the disallowance. Our Submissions: 7.1.3.3. The amount provided by the Appellant Bank is an ascertained liability and not a contingent liability. Infact, the Appellant Bank in the regular computation claimed a sum of Rs. 22,01,47,905/- based on the actual payment, which is more than the amount provided in the books. This itself establishes the fact that this an ascertained liability. The addition made by the learned Assessing Officer is based on surmises & conjunctures, hence, liable to be deleted. 7.1.4. Provision for gratuity to HD Canvassers – Rs. 14,31,000/- 7.1.4.1. This amount was provided by the Appellant Bank based on the actuarial valuation. The learned Assessing Officer disallowed the same by observing that it is a contingent liability. 7.1.4.2. The learned CIT(A) also upheld the disallowance. Our Submissions: 7.1.4.3. The amount provided is based on the actuarial valuation and is not contingent liability. The addition made by learned Assessing Officer is based on surmises & conjunctures and hence, liable to be deleted. 7.1.5. Provision for gratuity – Rs. 6,09,00,000/- 7.1.5.1. This amount was provided by the Appellant Bank based on the actuarial valuation. The learned Assessing Officer disallowed the same by observing that it is a contingent liability. & 877/Bang/2023 & 963 & 964/Bang/2023 Page 24 of 38 7.1.5.2. The learned CIT(A) also upheld the disallowance even though the audited accounts of the Gratuity Fund which showed the amount due from the Bank as current assets was produced before the learned CIT(A) at the time of the hearing (Refer page 140 of the Appeal Memorandum). The actuarial valuation reports are given in page 128 to 135 of the Appeal Memorandum. Our Submissions: 7.1.5.3. The amount provided is based on the actuarial valuation and is not contingent liability. The said amount was transferred to Gratuity Fund on 05-05-2016. It is therefore, an ascertained liability and cannot be added back while computing the Book Profit. The addition made by learned Assessing Officer is based on surmises & conjunctures and hence, liable to be deleted.”
The ld. DR relied on the order of lower authorities. The ld. DR further submitted that the provisions made by the assessee is not allowable as per section 115JB. In respect of provision for HD commission, it is a contingent liability as confirmed by both the authorities below and the assessee has paid actually Rs.1,02,78,643 in the impugned assessment year which relates to last financial year. Therefore both the authorities below are justified. For other issues, the ld. DR relied on the order of the lower authorities.
After considering the rival submissions, we note that while calculating book profit u/s. 115JB, the AO disallowed Rs.62,18,02,027 under different head out of which the ld. CIT(A) has accepted the plea of the assessee in regard to expenditure related to exempt income, provision for accrued interest on subordinated debt and provision for privilege leave. The CIT(A) upheld the addition for provision for HD & 877/Bang/2023 & 963 & 964/Bang/2023 Page 25 of 38 commission, provision for ex gratia and bonus, provision for gratuity to HD canvassers and provision for gratuity.
We note that in respect of provision for HD commission there is provision of Rs.1,75,00,000 and in the current year, the assessee paid Rs.1,02,78,643 which relates to previous assessment year. We remit this issue to the AO for verification and if the provision is allowed in the previous assessment year, then principle of consistency should be followed. However, if the AO finds that this is the first year for the provision of HD commission, then the actual payment made by the assessee should be allowed.
27.1 Further in respect of provision for ex gratia and bonus, gratuity to HD canvassers and provision for gratuity, the assessee has made provision on the basis of actuarial valuation. However both the authorities below have disallowed by holding that it is a contingent liability which is not correct. Since the assessee has made provision on the basis of certificate from the actuarial valuer therefore the provisions made are to be treated as ascertained liability. This view is fortified by the decision dated 22.02.2022 of the coordinate Bench of the Tribunal in the case of Jeans Knit (P) Ltd. [2022] 138 taxmann.com 480 [Bang. Trib.]. The relevant part is as under:-
“The AO during the course of asst. proceedings has added back the provisions created towards gratuity, leave encashment and bonus while computing the book profits of the assessee holding that the same to be an unascertained and contingent liabilities. The order of the AO was upheld by the CIT who relied on sec. 43B of the Act. & 877/Bang/2023 & 963 & 964/Bang/2023 Page 26 of 38 32. Before us, the Ld.AR submitted that the gratuity and leave encashment provision is made based on the actuarial valuation which is undisputed fact. The Ld.AR submitted that there are judicial pronouncements where it has been held that the provisions credited based on actuarial valuation would be an ascertained liability and cannot be added back for determination of book profits u/s 115JB of the Act. With respect to provision for payment of bonus, the Ld.AR submitted that the provisions is made as per the Payment of Bonus Act 1965 and it is statutory liability and therefore, it is an ascertained liability. For this the Ld.AR placed reliance on the judgment of Hon'ble Bombay High Court in the case of CIT v. Echjay Forgings (P.) Ltd. [2001] 116 Taxman 322/251 ITR 15. The Ld.AR further submitted that sec. 115JB of the Act being a separate code in itself, the AO does not have the jurisdiction to go beyond the net profit shown in the profit and loss account except to the extent provided in the explanation to sec. 115JB and for this contention the Ld.AR placed reliance on the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT [2002] 122 Taxman 562/255 ITR 273.
33. The Ld. DR placed reliance on the order of the lower authorities. We heard both the parties and perused the materials on record. Section 115JB of the Act pertains to special provision for payment of tax by certain companies. Sub-section (1) of section 115JB of the Act provides that a minimum alternative tax to be paid by the companies as computed under the said provision. Sub-section (2) of section 115 JB requires every company for the purposes of the said section to prepare its profit and loss account in accordance with the provisions of paras 2 and 3 of Schedule 6 of the Companies Act. Explanation 1 to said section provides that for the purposes of the said section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by various items specified in Clauses (a) to (i) provided therein. Clause (c) thereof reads as thus: "(c) The amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities;" Therefore as per the provisions, if an amount is specified for provision which is for meeting with the liabilities not ascertained such provision so made shall have to be added back to the book profit of the company. In other words if such provision is made for ascertained liability, no such addition back shall be made. In assessee's case the provision for gratuity and leave encashment is done based on the actuarial valuation which fact is available on record from the Actuarial Report submitted (page 188 - 255 of the paper book). The law is fairly settled in this regard and the courts have taken a consistent view that when the provision for gratuity/leave encashment is done based on actuarial valuation the same cannot be held as an unascertained liability and cannot be added for the purpose of computing the book profits u/s.115JB. The Hon'ble Jurisdictional High Curt in the case of CIT v. Kirloskar Systems Ltd. [2013] 40 taxmann.com 124/[2014] 220 Taxman 1 (Kar.) held that— & 877/Bang/2023 & 963 & 964/Bang/2023 Page 27 of 38 "The Apex Court in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 has held that an assessee who is maintaining the account on mercantile System, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of business, regard being had to the accepted principle of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. The liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. Therefore for that reason it was held that the gratuity payable and encashment of EL is not a contingent liability and the provisions thereof is to be deducted. In the light of the settled principles laid down by the Apex Court no substantial question of law arise for the year under consideration in this appeal. Accordingly, the appeal is dismissed"
With regard to provision made for bonus which the AO has treated as unascertained liability, the Hon'ble Bombay High Court in the case of Echjay Forgings (P.) Ltd., (supra) has held that "The assessee has shown that it was liable to pay bonus under the Payment of Bonus Act. Accordingly, it provided for payment of bonus to the employee. Therefore, it cannot be said that the provision for bonus amounting to Rs. 3,46,360/- is not an ascertained liability till it is actually paid to the employees."
35. Based on the various judicial pronouncements and the binding decision of jurisdictional High Court discussed above, we are of the considered view that the AO is not right in adding back the provisions made by the assessee towards gratuity, leave encashment and bonus for computation of book profits u/s. 115JB on the ground that they are unascertained liability. Hence, we allow the appeal in favour of the assessee and direct the AO to give effect to the same in the computation of book profits u/s 115JB of the Act.”
27.2 Respectfully following the above decision, we allow these issues of the assessee.
The issue of provision for ex gratia and bonus for AY 2017-18 is pari materia with AY 2016-17 therefore following the decision therein, this issue is allowed. & 877/Bang/2023 & 963 & 964/Bang/2023 Page 28 of 38 29. Ground No. 8 is common for both the AYs 2016-17 and 2017-18 regarding Non consideration of revised Book Profit under section 115JB. During the course of the Assessment proceedings, vide letter dated 05-11-2018, the Appellant Bank submitted a revised calculation of Book Profit. In the said calculation, the Appellant Bank had not added the provision for NPA of Rs. 267,17,51,684/- and provision for investment depreciation of Rs. 13,16,10,956/-.
The Assessing Officer though considered the other submissions in the letter, did not consider this claim. The learned CIT(A), in para 4.9 of his order, held that the appellant failed to furnish the copy of the revised Audit Report in form 29B and hence the revised computation of Book Profit could not be accepted.
The ld. AR submitted that the appellant Bank had submitted the Form 29B at the time of filing the return of income. There is no provision in the Act to file a revised Form 29B. Therefore, the order of the learned CIT(A) in not admitting the revised computation is not tenable. It is prayed that the issue may be remitted to the learned CIT(A) to adjudicate the revised computation on merits.
After considering the rival submissions, we noted that during the course of assessment proceeding vide assessee’s letter dated 5.11.2018 the assessee submitted revised calculation of book profit. In the said calculation the appellant bank had not added the provision for NPA of Rs.267,17,51,684 and provision for investment depreciation of Rs.13,16,10,956. The AO did not accept the same. The CIT(A) & 877/Bang/2023 & 963 & 964/Bang/2023 Page 29 of 38 observed that the appellant failed to furnish any copy of audit report in Form 29B to comply the provision of section 115JB(4) of the Act. Considering the argument of the ld. AR of the assessee, we remit this issue to the AO fresh consideration.
In the result, the appeals of the assessee are partly allowed for statistical purposes.
REVENUE APPEAL (ITA Nos. 963 & 964/Bang/2023)
34. The issue involved in both the appeals are deduction claimed by the assessee u/s. 36(1)(viia) has been allowed by the CIT(A) and the CIT(A) has not appreciated the ration of the decision of Hon’ble High Court of Kerala in the case of Lord Krishna Bank which considered the urban agglomeration and defined revenue village for the purpose of a rural branch. Since the issue raised by the revenue are similar for both the AYs 2016-17 & 2017-18, therefore we are taking first AY 2016-17 and decision of the same shall apply mutatis mutandis in AY 2017-18.
The brief facts of the issue are that the appellant bank claimed the deduction of Rs.191,95,54,195 u/s. 36(1)(viia) of the Act as per section if a bank creates any provision towards bad and doubtful debts, the bank is eligible to get a deduction worked out as per the formula provided in the section. During the year, the bank had created a provision of Rs.267,17,51,684 towards bad and doubtful debts and it claimed deduction u/s. 36(1)(viia) of Rs.191,95,54,195 as under:-
Particulars Amount (Rs.) Amount (Rs.) Average Rural Advances 10% of AAA 156,5070,000 7.5% of Total Income 35,44,84,195 Total eligible claim 191,95,54,195 Actual provision made 267,17,51,684 Deduction claimed u/s. 36(1)(viia) 191,95,54,195
The AO noted that 5 branches listed are not rural branches and are to be excluded for computing the Aggregate Average Rural Advances (AAA). He further noted that only the incremental advances has to be considered for the purpose of calculating AAA and only the advances made by the bank in each month has to be considered and not the balance outstanding at the end of each month. Accordingly, he arrived at AAA at Rs.421,49,24,680 and granted relief of Rs.42,14,92,648 being 10% of AAA and 7.5% of the revised total income and disallowed the balance amount of Rs.88,24,01,309 as under:-
Particulars Amount 01 10% of average aggregate advances made during the year Rs.42,14,92,468 by rural branches being Rs.421.49 crores (Rs.607.89 crores - Rs.186.40 crores; excluding advances pertaining to branches situated in Semi-Urban branches and Urban agglomeration and after considering the amount of advances sanctioned by rural branch during the year – incremental averages as provided by the assessee) 02 Rs.61,56,60,417 7.5% of the total income before deduction u/s 36(1)(viia) and Chapter VIA deductions 03 Deduction allowable u/s 36(1)(viia) Rs.103,71,52,885 04 Deduction claimed u/s 36(1)(viia) Rs-.191,95,54,195 05 Disallowance made being excess claim of deduction u/s Rs. 88,24,01,309 36(1)(viia)
& 877/Bang/2023 & 963 & 964/Bang/2023 Page 31 of 38 37. The CIT(A) after considering the detailed submissions and following the judgment of the Hon’ble jurisdictional High Court in the case of CIT, LTU v. Canara Bank [2023] 147 taxmann.com 171 (Karnataka) dated 5.12.2022 and the decision of ITAT Bangalore in appellant’s own case for the AY 2014-15 allowed the deduction claimed by the assessee u/s. 36(1)(viia). For the determination of rural branches of a bank he remitted the issue to the AO to consider the bank branch being a rural branch on the basis of RBI guidelines. Aggrieved from the above order of CIT(A), the revenue filed appeals before the ITAT.
The ld. DR relied on the order of AO and submitted that the CIT(A) while deciding the category of rural branches has accepted the findings recorded by the AO, however, ignored the decision of Hon’ble High Court of Kerala in the case of Lord Krishna Bank and directed to AO to follow the RBI guideline.
The ld. AR submitted that the issue is squarely covered in favour of the assessee by the order of the jurisdictional High Court and in assessee’s own case and further submitted that the ld. CIT(A) has rightly allowed the appeal of the assessee. He also relied on the coordinate Bench decision in the case of Canara Bank (erstwhile Syndicate bank) & 390/Bang/2023 dt. 25-10-2023 (Bang. Trib.). He further submitted that the assessee bank has classified the rural branches as per the RBI guidelines. & 877/Bang/2023 & 963 & 964/Bang/2023 Page 32 of 38 40. Considering the rival submissions, the assessee has computed deduction u/s 36(1)(viia) of Rs. 191.95 crores being a scheduled bank to the extent of 7.5% of the total income and 10% of the AAA of rural branches. The AO noted that the assessee has claimed excessive deduction on two counts. Firstly the assessee has not updated its information about categorization of rural branches which has either converted to semi urban branches or where the population has exceeded 10,000. Secondly the assessee has claimed 10% of the entire advances of rural branches including the opening balances. The AO discussing the provision and relying on the decision of Hon’ble High Court of Kerala in the case of Lord Krishna Bank on the basis of information furnished by the assessee restricted the deduction to the tune of Rs. 103.72 crores. This issue has been decided by the Hon’ble Jurisdiction high Court in the case of CIT, LTU v. Canara Bank [2023] 147 taxmann.com 171 (Karnataka) dated 5.12.2022. the relevant part of the order is as under:- “6. Insofar as question No. 4 is concerned, adverting to section 36(1)(viia) of the Income-tax Act, 1961, Shri Aravind submitted that the word used in the statute is aggregate average advances "made" by the rural branches. To quote an example, he submitted that for A.Y. is 2013-14 (F.Y. 2012-13) if the bad debt as on 31-3-2012 is considered to be as Rs. 1 Crore by virtue of making provisions subsequently, the assessee will be entitled for double benefit because provisions in respect of 10% of the bad debt of provisions of Rs. 1 Crore towards bad debt was already made as on 31-3-2012. Therefore, if the same amount is carried forward for the next F.Y., the assessee will be entitled for the double benefit because it would be making a provision for Rs. 1 Crore in addition to the 10% to the bad debt made in the relevant F.Y. 7. Shri Suryanarayana, adverting to the Para 7 of the impugned order, submitted that in identical circumstances, in assessee's own case, the assessee had made provision in similar manner as made in A.Y. 2013-14. A & 877/Bang/2023 & 963 & 964/Bang/2023 Page 33 of 38 co-ordinate bench of the Tribunal had accepted the provision made by the assessee benefit in Canara Bank v. Jt. CIT [2018] 99 taxmann.com 357/[2017] 60 ITR (Trib.) 1 (Bengaluru - Trib.). He further submitted that the said order has been followed by the Tribunal in Vijaya Bank v. Jt. CIT [IT Appeal Nos. 915 & 845 (Bang.) of 2017, dated 5-1-2018] and the said method of making provision has been approved by the Calcutta High Court in Uttarbanga Kshetriya Gramin Bank case. 8. We have carefully considered the rival contentions and perused the records. 9. In Para 7.2 of the impugned order, the Tribunal has recorded thus, "7.2 Before us, the learned Authorised Representative for the assessee reiterated the submission that the language of Rule 6ABA is very clear and does not mandate that only incremental advances has to be considered and nothing can be read into it as has been done by the authorities below. It was submitted that this issue has been considered and decided in favour of the assessee by the co-ordinate bench of this Tribunal in the case of Canara Bank v. JCIT (2017) 60 ITR (Trib) 1 [ITAT (Bang)]" 10. It is further held that the said decision has been followed in Vijaya Bank case. The manner in which the computation has been made has been given in the case of Vijaya Bank Case. Order passed by the Tribunal in Canara Bank's case followed in Vijaya Bank case has attained finality and the Revenue has not challenged the said order. Further, the High Court of Calcutta, while considering an identical situation as recorded thus, "Mr. Khaitan, learned senior Advocate appeared on behalf of the assessee and submitted that the computation to be made as prescribed by rule 6ABA is for the purpose of fixing the limit of the deduction available under section 36(1)(viia). Clauses (a) and (b) in rule 6ABA cannot be given the restricted interpretation. The amounts of advances as outstanding at the last day of each month would be a fluctuating figure depending on the outstanding as increased or reduced respectively by advances made and repayments received. The assessee might provided for bad and doubtful debts but the deduction would only be allowed at the percentage of aggregate average advance, computation of which is prescribed by rule 6ABA. We find from the amended direction made by the Tribunal that such direction is in terms of rule 6ABA. The ITO has made the computation of aggregate monthly advances taking loans and advances made during only the previous year relevant to assessment year 2009-10 as confirmed by & 877/Bang/2023 & 963 & 964/Bang/2023 Page 34 of 38 CIT(A). The Tribunal amended such direction, in our view, correctly applying the rule." 11. In view of the above, these appeals with regard to question No. 4 must fail and it is also answered in favour of the assessee and against the Revenue.”
Respectfully following the above judgment of the Jurisdictional High Court we hold that while calculating AAA of rural branches under section 36(1)(viia), not only fresh advances made during year, but also amount of advance outstanding are to be considered. Accordingly, the ground taken by the revenue on this issue is dismissed.
In ground No. 2 the revenue has raised that the ld. CIT (A) has not followed the decision of Hon’ble High Court of Kerala in the case Lord Krishna for computation of deduction u/s. 36(1)(viia) in respect of classification of rural branches. This issue has been decided by the jurisdictional High Court in the case of State Bank of Mysore v. ACIT [2015] 57 taxmann.com 253 (Karnataka) in which it has been held as under:-
“The instant case is concerned with the assessment for the assessment years 2003-04 and 2004-05. The first day of the previous year for these assessment years would be 1-4-2002 and 1- 4-2003. For the purpose of computing the deduction under section 36(viia) the population figures available prior to 1-4-2002 is to be considered. [Para 6] If the provisional population totals as published on 27-3-2001 and 1-9-2010 is taken into consideration, then it is the Census figures of 2001, which has to be taken into consideration. If the final & 877/Bang/2023 & 963 & 964/Bang/2023 Page 35 of 38 population published on December 2003 is taken into consideration, then it would be the final population figure of 1991 Census that has to be taken into consideration. The question is which is the final population total which has to be taken into consideration because as it is clear from the letter written by the Registry of Home Affairs, the provisional population total cannot be relied upon. [Para 7] In respect of any provision for bad and doubtful debts made by the scheduled bank, an amount not exceeding 7 1/2 percentage of the total income computed before making any deduction under this clause and chapter VIA and an amount not exceeding 10 per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner are allowed as deduction. It is clear from the said provision that the distinction has been made between the branches situated in the rural areas and the branches situated outside the rural areas. In respect of rural area, branches have to cater to the requirements of the poor and underprivileged section of the society. The chances of recovery by the national bank being weaker by 10 per cent to the aggregate average, advances made in those rural branches is given deduction towards bad and doubtful debts. The Legislature has defined what is 'rural branch', as it is clear from the explanation. They have fixed the population of not more than 10,000 as determining the rural branch and that population of 10,000 should be according to the last preceding census of which the relevant figures have been published before the first day of previous year. Therefore, this benefit of 10 per cent of the aggregate average advances made by the rural branches of the bank is extended to the small population, living in the villages which is less than 10,000. If the population of such village is more than 10,000, then the said benefit of 10 per cent deduction is not available. Hence, one should keep this object of the Legislature in mind and then interpret the word 'rural branch'. The word used is 'published' before the first day of previous year. If in the Census it is found that the population of a particular village has crossed 10,000, then the scheduled bank pertained to that village would not be entitled to the deduction of 10 per cent of the aggregate average advances towards bad and doubtful debts. The Census figure would be available with the Census Department. It is not possible & 877/Bang/2023 & 963 & 964/Bang/2023 Page 36 of 38 for the common man or the bank to know what is the Census figure. Therefore, the said provision stipulates that Census figure has to be published. Therefore, it is only after publication of the Census figures that one may be able to decide whether it is a rural branch as defined under the Act or not. The last stipulated population necessarily would be with reference to particular date. That day is also prescribed as that date before first day of the previous year. Once the publication of census is made before the first day of the previous year, then the said information is in public domain. Therefore, on that basis one could find whether a branch is a rural branch or not. It is no doubt true that the Census Department initially publishes a provisional population total, probably calling objections from the public and after considering those objections, publishes final population total. The legislature has used the words 'bad and doubtful debts' and the words 'provisional' and 'final' conspicuously missing in the said words. The word 'published' has to be understood as final population as contended by the assessee. If other words are added, it would amount to re-writing which is impermissible in law. Keeping in mind the object, before the bank is entitled to the said benefit, all that is to be seen is whether in that village where the rural branch is situated, population is less than 10,000 or exceeding 10,000. Census is conducted once in ten years. After conclusion of the Census, provisional figure will be published and then final publication is made. If from the date of provisional population totals being published, it has crossed the 10,000 limit as prescribed under the law, then it does not satisfy the requirements of the rural branch and, consequently, would not be entitled to the benefit granted to the rural branches. The publication of the final population total is only a formality. If provisional population total shows more than 10,000 and in the final population total figure shown is less than 10,000, then it will make difference. But in both the provisional population total and the final population total if figure is mentioned above 10,000, it makes no difference in the instant case. It is not the case of the assessee that though the provisional figure mentioned is above 10,000 in the final population total it has gone below 10,000 and, therefore, provisional population total cannot be acted. In that view of the matter, the Tribunal was justified in upholding the order passed by the assessing authority where they have acted on the Census & 877/Bang/2023 & 963 & 964/Bang/2023 Page 37 of 38 figures of 2001 as reflected in the provisional population totals and denied the benefit to the assessee. [Para 8]”
Respectfully following the above judgment, we hold that for claiming deduction u/s. 36(1)(viia) in respect of rural branches, the latest/provisional census available should be considered. Accordingly this issue is remitted back to the AO. The assessee is directed to provide the latest/provisional census which was available for the respective assessment year. This ground is allowed for statistical purposes.
In the result, the appeal of the revenue for AYs 2016-17 and 2017-18 are partly allowed for statistical purposes.
To sum up, the appeals of the assessee are partly allowed for statistical purposes and appeals of the revenue are partly allowed for statistical purposes. A common order passed should be kept in the respective files.
Pronounced in the open court on this 19th day of February, 2024.