THE COMMISSIONER OF INCOME TAX vs. KARNATAKA VIKAS GRAMEEN BANK

THE ASST. COMMISSIONER OF INCOME TAX,

KARNATAKA VIKAS GRAMEEN BANK,

The respondent-assessee is a regional rural bank engaged in the business of banking and also making investment in Government and other securities. For the assessment year 2008-09, the assessee filed its return of income declaring a total income of Rs.93,22,72,000/-. The assessment proceedings were taken up by the assessing authority by issuing notice under Section 143(2) read with Section 129 of the Act on 27.08.2010, which came to be concluded by making various additions to the returned income and demand was made accordingly. Among the various additions made by the assessing

On the additions made by the assessing authority, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) (for short, ‘CIT(A)’), which came to be allowed deleting the additions made by the assessing authority. On further appeal before the ITAT, the order of the CIT(A) was confirmed. Being aggrieved, the Revenue is in appeal raising the following substantial questions of law: 1. Whether on the facts and circumstances of the case and in law the Tribunal was justified in allowing the claim of deduction made by the assessee at Rs.19,62,04,357/- under Section 31(1) (vii a) of the Income Tax Act, 1961? 2. Whether on the facts and circumstances of the case the Tribunal was justified in allowing the excess claim of deduction made by the assessee under Section 31(1) (viii) of the Income Tax Act 1961 at Rs.6,74,91,000/- without properly appreciating explanation “h” to Section 36(1)(viii) of the Income Tax Act, 1961?

Sri. Y.V. Raviraj, learned counsel appearing for the Revenue would submit that during the assessment

Sri. A. Shankar and Shashank Hegde, learned counsel appearing for the assessee inviting the attention of this Court to the orders of the CIT(A) as well as ITAT submits that both the facts finding authorities have carefully examined these issues. The finding was given by the CIT(A) that the appellant has not debited bad debt written off under Section 36(1)(vii) in the books nor claimed deduction in the return of income but reduced from opening provision for bad and doubtful debts. This was appreciated and confirmed by the ITAT. As regards the eligible advances, it was further contended that the assessing authority has wrongly considered the advances

Heard the learned counsel for the parties and perused the material on record.

As regards the question relating to the bad and doubtful debts, it is clear that the assessee has not claimed any deduction in the return of income, writing off bad debts under Section 36(1)(viii) of the Act. It is the

Section 36(1)(viii) provides in respect of special reserve created and maintained by a specified entity, an amount not exceeding twenty percent of the profits derived from eligible advances computed under the head “Profits and gains of business or profession” (before making any deduction under this clause) carried to such reserved account.

As regards eligible advances, it is worth to refer to Section 36(1)(viii), Explanation (b) which defines, “eligible advances” means, [i) in respect of the specified entity referred to in sub-clause(i) or sub-clause(ii) or sub-clause(iii) or sub-clause(iv) of clause (a), the business of providing long term finance for A) industrial or agricultural

‘Long term finance’ is defined under clause-(h) of explanation to Section 36 (1) (viii) of the Act , which reads thus: “long term finance” means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with the interest thereof during a period of not less than five years”

A reading of these provisions makes it clear that any loans or advances where the terms under which moneys are loaned or advanced during a period not less than five years shall be considered as ‘eligible advances’.

The assessing officer appears to have misunderstood this total eligible advances based on the aging analysis not considering the actual advances given for a period of more than five years. The appellate fact finding authorities have set-aside the findings of the assessing authority after analyzing the material on record and held that it is not an amount loaned or advanced reflected in the aging analysis

Accordingly, the substantial questions of law are answered in favour of the assessee and against the Revenue.