A.P. GRAMEENA VIKAS BANK,WARANGAL vs. DCIT CIRCLE 3(1), HYDERABAD

Brief facts of the case as could be culled out from the record are that assessee is a Regional Rural Bank, engaged in the activity of banking. For the assessment year 2010-11, assessee filed its return of on

Assessee preferred appeal against all the additions/disallowances made before the learned CIT(A) and the learned CIT(A) vide order dated 16/09/2014, deleted additions/disallowances of Rs. 9,93,40,015/- thereby making the total income at Rs. 125,79,27,870/- by confirming the issue of disallowance of claim of deduction under section 36(1)(viia) of the Act to Rs. 3,27,34,353/-. Thereafter, the department went in a second appeal before the ITAT and the Co-ordinate Bench of the Tribunal vide order dated 10/04/2015 in ITA No.51/Hyd/2015, remitted the issue back to the file of the learned Assessing Officer for deciding the issue afresh after giving due opportunity of being heard to the assessee.

Pursuant to the remand by the Co-ordinate Bench of the Tribunal, assessment was completed under section 143(3) read with section 254 of the Act on 28/12/2016, assessing the total income at Rs. 148,66,41,870/- thereby making addition of Rs. 22,87,14,000/- on account of disallowance under section 36(1)(vii) of the Act. In the assessment order, learned Assessing Officer noted that the assessee debited total provisions of Rs. 22,87,14,000/- to the P&L A/c and out of the same, provision of Rs.

Challenging the addition of Rs.22,87,14,000/-, assessee preferred appeal before the learned CIT(A) and contended that while computing the total income, the assessee only claimed deduction under section 36(1)(viia) of the Act of Rs.9,93,40,015/- towards first limb of section 36(1)(viia) i.e. 7.50% of gross total income and no deduction has been claimed towards second limb of section 36(1)(viia) of the Act i.e. 10% of average aggregate rural advances. Assessee further contended that it made average aggregate rural advances of Rs.3171.15 Crs. and hence, it was entitled to claim deduction of Rs.317.11 Crs. @ 10% of such rural advances while computing the total income for assessment year 2010-11. Assessee also contended that although the above claim was not made in the ITR, or by way of filing a revised ITR, the Revenue authorities are empowered to consider and admit such fresh legal claims.

Learned CIT(A) admitted the claim of the assessee regarding deduction under section 36(1)(viia) of the Act towards 10% of average aggregate rural advances. On merits, learned CIT(A) considered the claim of the assessee that it made average aggregate rural advances of Rs.3171.15 Crs. and hence, it was entitled to claim deduction of Rs.317.11

Learned CIT(A), in the impugned order noted that the assessee actually made the provision of Rs. 17,02,00,000/- towards bad and doubtful debts (rural advances), actually debited to the P&L A/c in this year, but did not provide precise details of purpose for which the balance provisions of Rs.5,85,14,000/- out of the total provisions of Rs.22,87,14,000/- debited to P&L A/c in this year were made and since the quantum of deduction under section 36(1)(viia) of the Act cannot exceed the actual quantum of provision towards bad and doubtful debts/rural advances debited in the books, considering the deduction allowed by the learned Assessing Officer under section 36(1)(viia) of the Act to the tune of Rs. 9,93,40,015/-, allowed further deduction of Rs.7,08,59,985/- limiting the entire deduction to Rs.17,02,00,000/-.

Assessee is, therefore, before us in this appeal contending that section 36(1)(via) of the Act allows deduction in respect of provision for bad and doubtful debts without making any distinction between provision made for rural or urban advances and, therefore, learned CIT(A) should have allowed the total provision of Rs. 22,87,14,000/- debited to P&L A/c in this year. Learned AR submitted that the observations of the learned CIT(A) that the assessee actually made the provision of Rs.17,02,00,000/- towards bad and doubtful debts (rural advances), actually debited to the P&L A/c in this year is factually incorrect.

It is the submission of the learned AR that debit of the higher amount of 10% of the total income or 7.5% of aggregate average advances by rural branches of the assessee towards provision for bad and doubtful debts to the P&L Account is suffice to claim the deduction and law does not require such a computation of 10% of the total income shall be in relation to rural advances. He placed reliance on the decision of DCIT vs. ING Vysya Bank Ltd., in ITA Nos. 53 & 54/Bang/2013, dated 25/10/2013.

Per contra, learned DR heavily relied upon the impugned order and submitted that as observed by the learned Assessing Officer in the assessment order, in the original scrutiny assessment proceedings the assessee debited a provision of Rs.17,02,00,000/- representing aggregate rural advances to its P&L Account out of the total provisions debited to P&L account standing at Rs. 22,87,14,000/- and therefore, the learned CIT(A) are justified in restricting the deduction to Rs. 17,02,00,000/- attributable to the aggregate rural advances.

We have gone through the record in the light of the submissions made on either side. It could be seen from the impugned order that the assessee submitted before the learned CIT(A) that, -

It is, therefore, clear that whether the assessee created the provision for bad and doubtful debts and debited a sum of Rs. 22.87 crores to the P&L Account or not, is not in dispute. As a matter of fact, the learned Assessing Officer in the assessment order itself noted that there was a provision for bad and doubtful debts to the tune of Rs. 22,87,14,000/-, and he disallowed the same.

March of law on this aspect is exhaustively considered by the Co-ordinate Bench of the Tribunal in the case of ING Vysya Bank Ltd., (supra) and the Bench observed that when initially the provisions under section 36(1)(viia) of the Act was inserted by Finance Act, 1978, deduction thereunder was allowed for provision for bad and doubtful debts in relation to rural branches, but subsequently, after the amendment by Finance Act, 1985, such a deduction was allowed not exceeding 10% of total income or 2% of aggregate average advances by rural branches, whichever is higher and the provision for bad and doubtful debts had to be credited and debited to the P&L Account, but the computation need not be in relation to the advances by the rural branches alone and it could be in relation to any debt. The deduction was confined to only banks that have rural branches. However, after the IT (Amendment) Act, 1986, the upper limit of deduction was not exceeding 2% (which is now enhanced to 10%) of the aggregate average advances made by the rural branches of the banks concerned and apart from this, a further deduction upto 5% of

In the case of ING Vysya Bank Ltd., (supra), it was further held that the quantification of the maximum deduction permissible under section 36(1)(viia) of the Act has to be computed firstly by ascertaining the 10% of the aggregate average advances made by the rural branches and nextly, 7.5% of the total income, and then provision for bad and doubtful debts be created and subject to the permissible upper limits of 10% and 7.5% as the case may be, the deduction has to be allowed to the assessee. The question of bifurcating the provision for bad and doubtful debts as one relating to rural advances and other advances (non-rural advances) does not arise for consideration.

This being the law on this aspect, now coming the case on hand, we find no justification in allowing the deduction only to the extent of Rs.17,02,00,000/- towards bad and doubtful debts (rural advances) by ignoring the total debit of provision for bad and doubtful debts to the tune of Rs. 22.40 crores. Either in the assessment order or in the impugned order, the authorities did not cause any verification as to the quantum of aggregate average advances made by the rural branches of the assessee so as to verify the correctness of quantification of provision for bad and doubtful debts.

According to the assessee, such aggregate average advances was to the tune of Rs. 3,171.15 crores and, therefore, irrespective of provision for bad and doubtful debts attributable to rural advances or not, the

Since it is a verifiable fact and the allowing the deduction depends upon the computation of provision for bad and doubtful debts at 10% of the aggregate average advances made by the rural branches of the assessee, we deem it just and necessary to direct the learned Assessing Officer to cause verification of the aggregate average advances made by the rural branches of the assessee and if the provision for bad and doubtful debts created and debited by the assessee to the P&L Account does not exceed 10% of such aggregate average advances made by the rural branches of the assessee, then allow the deduction under section 36(1)(viia) of the Act by keeping in mind that the question of bifurcating the provision for bad and doubtful debts as one relating to rural advances and other advances does not arise. Grounds are answered accordingly.

In the result, appeal of the assessee is allowed in above terms.