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Income Tax Appellate Tribunal, KOLKATA BENCH “C” KOLKATA
Before: Shri N.V.Vasusdevan & Shri Waseem Ahmed
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
Both appeals by same assessee are arising out of orders of Commissioner of Income Tax (Appeals)-VI, Kolkata dated 25.08.2009 & 26.08.2009. Assessments were framed by ACIT, Circle-6 Kolkata u/s 143(3)/263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his orders dated 17.12.2007 & 27.12.2006 for assessment years 2003-04 & 2004-05 respectively.
ITA No.1803-1804 A.Ys. 2003-04 & 2004-05 Allahabad Bank Kol. v. ACIT Cir-6 Kol. Page 2 2. Both the appeals are filed by the same assessee, and we decided to take up both the appeals together and pass a consolidated order for the sake of convenience. First we take up ITA No.1803/Kol/2009 for A.Y.04-05 3. Assessee has raised following grounds:- “1. That the learned CIT(A) has erred in disallowing Rs.311,17,10,637/- being the amount of claim for bad debts relating to non-rural branches claimed under section 36(1)(vii). 2. That the learned CIT(A) has erred in holding that the debts written off by the non-rural branches of the bank are also to be adjusted against the provision allowed u/s. 36(1)(viia). 3. That the Learned CIT(A) has erred in confirming the disallowances of Rs.96,65,00,000 being 10% of the doubtful and loss assets claimed under 3rd proviso to section 36(1)(viia). 4. That the learned CIT(A) has erred in holding that claim of the bank is without proper basis and evidence. 5. That the Learned CIT(A) has erred in confirming the disallowances of Rs.30,00,00,000 claimed under section 36(1)(viii) for creation of special reserve under the said provision. 6. That the Learned CIT failed to appreciate the fact that bank is financial corporation and a public Company. 7. That the Learned CIT(A) has erred in confirming the addition of Rs.9,68,139 being provision for intangible asset in computing “Book Profit” under section 115JB.”
First of all, Ld. AR of assessee has not pressed for adjudcitation ground No. 7, hence, same is dismissed as not pressed.
The first and second ground relate to the common issue raised by assessee in this appeal is that Ld. CIT(A) erred in confirming the order of the Assessing Officer by disallowing a sum of ₹311.77 crores u/s 36(1)(vii) on account of bad debts written off relating to non-rural branches.
5.1 Facts of the case are that assessee is a Nationalised Bank and as such it is a Central Government undertaking. During the year, assessee has
ITA No.1803-1804 A.Ys. 2003-04 & 2004-05 Allahabad Bank Kol. v. ACIT Cir-6 Kol. Page 3 claimed deduction for an amount of Rs.331,90,04,003/- u/s 36(1)(vii) of the Act. During the course of assessment for the year under consideration the AO found that for the preceding assessment year i.e. 2003-04 the allowance towards the bad debts under section 36(1)(vii) was allowed by his predecessor only of that amount exceeding the reserve created under section 36(1)(viia) of the income tax act. The AO observed that for the assessment year under consideration the provisions of section 36(1)(viia) were applicable. Therefore the AO following the order of his predecessor for the AY 2003-04 has disallowed the deduction of Rs. 311.77 crores claimed under section 36(1)(vii) in the light of the provisions of section 36(1)(viia) for the year under consideration and added the same to the total income of the assessee.
Aggrieved, assessee preferred an appeal before ld. CIT(A) and demonstrated that the proviso to section 36(1)(vii) of the Act is applicable in respect of bad debts written off relatable to the non-rural branches of assessee-bank. However the ld. CIT(A) disregarded the claim of the assessee and upheld the action of the AO by observing as under : “I have gone through the submissions of the appellant and also perused the order of AO. The issue is recurring for the last few Asst. years. In my opinion the argument of the Ld.AR that intention of the legislature as explained in the CBDT circulars is, the debts written off by the Rural branches of the bank are only to be adjusted against the credit balance in the provision account is not the correct legal position as per law. The argument of Ld. AR that the debts written off by the non rural branches of the bank are not controlled by the proviso to section 36(1)(vii) and as such allowable in full does not deserve any merit. 36(1)(vii) nor the proviso talk about rural advances and urban advances. Section 36(1)(viia) provides for deduction of provision made on account of percentage of total profits and also percentage of aggregate average rural advances. The intention of the legislature is clear when the section was allowing the provision made on total income. It includes all types of advances made by the Bank. If the intention of the legislature was only to allow provision made for rural advances, then this concession could not have been given. Under section 36(1)(vii) of the Act, deduction on account of bad debts which are written off as irrecoverable in the accounts of the assessee is admissible. However, this should be allowed only if the assessee had debited the amount of such debts to the provision for bad and doubtful debt account under section 36(1)(viia) of the act as required by section 36(2) (v) of the Act. This was clarified by CBDT in Instruction no. 17/2008, Dated: November 26, 2008. As seen from record the appellant complied with the provisions of
ITA No.1803-1804 A.Ys. 2003-04 & 2004-05 Allahabad Bank Kol. v. ACIT Cir-6 Kol. Page 4 section 36(1)(vii) by adjusting the bad debts written off by rural branches against the provision allowed u/s 36(1)(viia). But as per IT Act, section 36(2)(v), the bad debts written off should be adjusted against the provision allowed u/s 36(1)(viia). In my opinion, the assessee bank is entitled to deduction under clause (vii) only of the difference between the provision made under clause (viia) and the bad debts written off in the accounts, without making any distinction in respect of debts relating to urban advances or rural advances. In view of this the disallowance made by AO is according to the provisions of the act and is upheld. The grounds of appeal are dismissed. Regarding the claim of the appellant that additional deduction of Rs.100.55 crores be allowed on account of bad debts under section 36(1)(vii), the facts are as follows. According to the appellant an amount of Rs.33.55 lakhs for A.y 2001-2002 and amount of Rs.67.00 lakhs for A.Y 2003-2004 have not been claimed as deduction u/s. 36(1)(vii) during the current assessment year, although the above debts were written off during A.Y 2004-2005. The same were adjusted against the claim made under section 36(1)(viia) in the AYs 2001-2002 and 2003-2004. The optional deduction has not been allowed for AYs 2001-2002 and 2003-2004. Since no deduction was allowed u/s. 36(1)(viia), the appellant submits that the same be allowed u/s 36(1)(vii). I have gone through the submissions of the app, and find no merit in the claim of the appellant. If the same were adjusted against the claim made 36(1)(viia) in the AY 2001-2002 and 2003-2004 then claim u/s 36(1)(vii) cannot be made by the ape now for this A.Y The appellant has not furnished any information and details on this .Further if the claim was adjusted against the claim made us/s 36(1)(viia), the remaining amount if any would have been allowed by the AO. The optional deduction cannot be an additional deduction along with deduction u/s 36(1)(viia). According to the 1st proviso to section 36(1)(viia)(a)of the IT Act a scheduled bank or a non scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of my provision made by it for any assets classified by the RBI as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five percent of the amount of such assets shown in the books of account of the bank on the last day of the previous year. Provided further that for the relevant assessment years commencing on or after the first day of April 2003 and ending before the 1st day of April 2005, the provisions of the first proviso shall have effect as if for the words ‘five percent’, the words ‘ten percent’ had been substituted. In the third proviso the language says at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions which clearly means it is an additional deduction which clearly states that it is not an additional deduction, but an optional deduction. The claim of the appellant is without proper basis and evidence. Hence the clam of the appellant is rejected.”
ITA No.1803-1804 A.Ys. 2003-04 & 2004-05 Allahabad Bank Kol. v. ACIT Cir-6 Kol. Page 5 Being aggrieved by this order of Ld. CIT(A) Assessee preferred second appeal before us.
Shri B.K.Ghosh and Shri Pijush Dey, both Ld. Authorized Representatives appearing on behalf of assessee and Shri G.Mallikaujana, Ld. Departmental Representative appearing on behalf of Revenue.
We have heard rival contentions of both the parties and perused the materials available on record. Before us the ld. AR submitted that the provision for doubtful debts as allowable under section 36(1)(viia) is in respect of provision made against advances of rural branches only. The bad debts in respect of advances of non rural branches is to be allowed fully u/s 36(1)(vii) and as such it is not required to be set off against provision for bad debts claimed u/s 36(1)(viia). The assessee also submitted that the above issue is fully covered by the decision of Hon’ble Supreme Court in the case of Catholic Syrian Bank (2012) 343 ITR 270 (SC). On the other hand the ld. DR vehemently relied on the order of Authorities below.
7.1 From the aforesaid discussion we find that the AO has disallowed the bad debts written off by holding that as per the proviso to section 36(1)(vii) bad debts relating to non-rural branches of the bank shall be allowed if such bad debts exceed the credit balance in provision for doubtful debts made under section 36(1)(viia) of the Act. However the assessee’s claim is that provision for doubtful debts as allowable under section 36(1)(viia) is in respect of provision made against advances of rural branches only. Bad Debts in respect of advances of non-rural branches is to be allowed fully under section 36(1)(vii) and is not required to be set off against provision for bad debts claimed under section 36(1)(viia) of the Act. However we find that in the own case of the assessee for the assessment year in ITA No.2486/Kol/2007, the issue has been decided in favour of assessee. The relevant extract of the order is reproduced below :
ITA No.1803-1804 A.Ys. 2003-04 & 2004-05 Allahabad Bank Kol. v. ACIT Cir-6 Kol. Page 6 “We have carefully considered the submissions of the learned Representatives of the parties and the orders of the authorities below. We have also gone through the cases cited by the Ld. AR of the assessee (supra). On consideration of the provisions of Section 36(1)(viia), as also Sec. 36(2)(v) and also considering the provisions of Section 36(1)(vii) of the Act, we find substance n the submissions of the Ld. AR of the assessee. Hon’ble Kerala High Court has held that the scope of the proviso to clause (vii) of Sec. 36(1)(vii) has to be ascertained from a cumulative reading of the provisions of clauses (vii) & (viia) of Sec. 36(1) and clause (v) of Sec. 36(2) of the Act. It was held that the intention of the Legislatures in enacting the proviso to clause (vii) of Sec. 36(1) and clause (v) of Sec. 36(2) simultaneously is only to see that a double benefit in respect of the same bad debt is not given to a scheduled bank. A scheduled bank may have both urban and rural branches and advances given from other branches. It was also held that as a result of the amendment, the scheduled bank would be entitled to the deduction of the entire bad debt relating to advances made by the urban branches written off in the books and also the difference between the amount written off in the books relating to advances made by the rural branches during the previous year relevant to the assessment year and credit balance in the provisions for bad and doubtful debt account relating to advances made by the rural branches made in clause (viia). It was held that if the bad debt written off relates to debts other than for which provision is made under clause (viia), such debt will fall squarely under the main part of clause (vii) which is entitled to deduction and in respect of that part of the debt with reference to which the provision is made under clause (viia), the provisos will operate to limit the deduction to the extent of the difference between that part of debt written off in the previous year and the credit balance in the provision for the bad and doubtful debts accounts made under clause (viia). Further, the Special Bench of the ITAT in the case of Catholic Syrian bank Ltd. (supra) has held that the debts actually written off which do not arise out of the rural advances are not affected by the proviso to clause (vii) and that only those bad debt which arises out of the rural advances are to be limited in accordance with the proviso.
Considering the above decisions and also the findings given by the ITAT in assessee’s own case in AYs 1994-95, 1996-97 and 1997-98 and also considering the details placed on pages 26 to 39 of the paper book, we allow the claim of the assessee by reversing the orders of the authorities below. Hence, ground No. 2 taken by the assessee is allowed.”
Considering the above decision and finding of the ITAT in the own case of the assessee, we allow the claim of the assessee by reversing the order of authorities below. Accordingly the common ground of assessee’s appeal is allowed.
ITA No.1803-1804 A.Ys. 2003-04 & 2004-05 Allahabad Bank Kol. v. ACIT Cir-6 Kol. Page 7 8. The third and fourth grounds relate to the common issue raised by the assessee in this appeal is that ld. CIT(A) erred in confirming the disallowances of Rs. 96.65 crores being 10% of doubtful and loss assets claimed under 1st and 2nd proviso to section 36(1)(viia) of the Act.
At the time of hearing before us, both the parties fairly conceded that both issues are covered against assessee in assessee’s own case for A.Y 2003-04 in ITA No. 2486/Kol/2007 and for the A.Y. 2001-02 ITA No. 1349/Kol/2009. Therefore, we dismiss ground No. 3 & 4 respectfully following the Tribunal’s order in assessee’s own case dated 30th September, 2009 and 14th May, 2012. The extract relevant portion for the assessment year 2001-02 is reproduced below:- “7. We have carefully considered the orders of the authorities below and the submissions of the learned Representatives of the parties. We have also considered the provisions of Section 36(1)(viia) of the Act. We are of the considered view that the claim of 10% of doubtful assets and loss as provided in first proviso to Section 36(1) (viia)(a) of the Act as amended by the Finance Act, 2002 w.e.f. 1.4.2003 and applicable to the Assessment ear under consideration as an alternate claim and the additional deduction could not be allowed if the claim of the assessee under clause (a) of Section 36(1)(viia) has been allow. Since the Department has allowed the deduction to the assessee us. 36(1)(viia)(a) of the Act, we held that the learned CIT(A) has rightly confirmed the action of the Assessing Officer to disallow the additional claim of Rs.1,40,30,70,000 of the assessee. Hence, ground No.1 is rejected.”
9.1 Since the facts involved in the present case are similar to that of the one decided by the Tribunal, we find no reason to deviate from the orders of the Tribunal taken in assessee’s own case. Hence, common ground No. 3 & 4 raised by assessee are dismissed.
The fifth and sixth grounds relate to the common issue raised by the assessee in this appeal is that ld. CIT(A) erred in confirming the disallowances of Rs. 30 crores claimed u/s 36(1)(viii) of the Act for the creation of special reserve.
ITA No.1803-1804 A.Ys. 2003-04 & 2004-05 Allahabad Bank Kol. v. ACIT Cir-6 Kol. Page 8 11. During the year the assessee has claimed the deduction of Rs.30 crores in terms of the provisions provided u/s 36(1)(viii) of the Act by creating a special reserve for its long term finance business. This deduction is available to a financial corporation engaged in long term finance for industry, agricultural and infrastructure facility. The financial corporation has been described to include a public company and a government company. On query by the AO, the assessee submitted that as per section 11 of Banking Companies Act, 1970, a Nationalized Bank is an Indian company for the purpose of Income Tax Act. Besides the Government of India holds more than 51% shares of the Bank, so it can also be regarded as Government Company. However the AO has disallowed the same by holding that the nationalized banks are statutory bodies and not registered under the companies Act, therefore the assessee bank is not entitled for the deduction under section 36(1)(viii) of the Act.
Aggrieved, assessee preferred an appeal before Ld. CIT(A) who confirmed the action of AO by observing as under:- “I have gone through the submissions of the appellant and also the assessment order of A.O. The AO in his assessment order at para 5.4 stated that in the explanation below sec. 36(1)(viia)(c), a public company has been defined to have the meaning assigned to it in sec. 3 of companies Act and a Govt. company shall have the meaning assigned to it in sec. 617 of the Companies Act. The primary condition of both is that it has to be registered under the companies act, 1956. The nationalized scheduled banks are statutory bodies, which may enjoy the status of a deemed company for income tax purpose, but it cannot be held to be a company registered under the companies act. The submissions of the appellant with reference to “Guide to Companies Act” by A Ramaiya are not relevant here because the context mentioned there was with reference to “public servants”, I uphold the disallowance made by the AO and the ground of Appeal is dismissed.”
Being aggrieved by this order of Ld. CIT(A) assessee preferred second appeal before us.
We have heard both the parties and perused the materials available on record. Before us the ld. AR submitted that the assessee is a Govt. Company
ITA No.1803-1804 A.Ys. 2003-04 & 2004-05 Allahabad Bank Kol. v. ACIT Cir-6 Kol. Page 9 within the meaning of Sec. 617 of the Companies Act,1956, therefore it is entitled to claim deduction u/s. 36(1)(viii) of the Act. The assessee also submitted in support of its claim the order of ITAT Mumbai Bench in the case of Union Bank of India v. ACIT in ITA No. 4704 to 4706/Mum/2010 for AYs 2002-03 to 2006-07. On the other hand, Ld DR relied on the orders of Authorities Below.
13.1 From the aforesaid discussion we find that the assessee has claimed a deduction of Rs.30 crores by virtue of Sec. 36(1)(viii) of the Act by creating a special reserve in the books of account. However, the AO found that the deduction as specified u/s 36(1)(viii) of the Act is applicable to a financial corporation which include public company or a Govt. company but not a statutory bodies therefore, the AO held that the bank is neither a govt. company or public company, consequently, the deduction was disallowed. Now let us examine whether the deduction specified under section 36(1)(viii) of the Act is available to the present assessee i.e. Allahabad bank. The relevant portion of the section 36(1)(viii) of the Act is reproduced below : Explanation.- In this clause,- (a) “specified entity” means,- (i) A financial corporation specified in section 4A21 of the Companies Act, 1956(1 of 1956) (ii) A financial corporation which is a public sector company; (iii) A banking company; (iv) A co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank; (v) A housing finance company; and (vi) Any other financial corporation including a public company; (b) … …. (c) “banking company” means a company to which the Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank or banking institution referred to in section 51 of that Act;
ITA No.1803-1804 A.Ys. 2003-04 & 2004-05 Allahabad Bank Kol. v. ACIT Cir-6 Kol. Page 10 From the aforesaid definition we find that the banking company has been duly included in the specified entity to which the provisions of section 36(1)(viii) are duly applicable. Besides the above we are of the opinion that any entity incorporated under a statute carrying on the business of financing would come under the definition of financial corporation. The definition is not an exhaustive definition and the term financial corporation has been defined in inclusive manner so as to include a govt. company and a public company. Hence financial corporation should include ‘bank’ also. The Memorandum explaining the amendment to Sec. 36(1)(viii) w.e.f.12.2008 has clearly stated as follows:- “The provision has also been restructured to provide for different categories of entities (which now also include co-operative banks) and their respective activities for eligibility of the deduction under the said clause. For claiming deduction under the said clause, (i) a financial corporation specified in Sec. 4A of the Companies Act or a financial corporation which is a public section company or a banking company or a co-operative bank (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank)…”
The amendment also provides definitions of the expressions “banking company,” “co-operative bank”, “primary agricultural credit society”. Further, the restructuring done to define the financial corporation is only clarificatory as we can see from the notes on clauses which read as follows:- “The proposed amendment further seeks to define certain terms including ‘specified entities and eligible business’ for the purposes of deduction.”
Since the definition is only clarificatory in nature, it can be presumed that the entity such as the assessee was covered in the definition from the inception of the section. Even otherwise the assessee is a govt. Company since the Central Govt. holds more than 51% of the share capital of the bank and as defined in Sec. 617 of the Companies Act the assessee is a govt. company. Hence the deduction u/s. 36(1)(viii) has to be allowed to the assessee as it is engaged in the business of providing long term finance for industrial, agriculture and infrastructure development in India and is a govt. company. The assessee is a financial corporation “within the meaning of Sec. 36(1)(viii)” since it is govt. company. However the deduction available under this section
ITA No.1803-1804 A.Ys. 2003-04 & 2004-05 Allahabad Bank Kol. v. ACIT Cir-6 Kol. Page 11 will be restricted to the amount transferred to Special reserve subject to the limit of prescribed percentage of profits derived from providing long term finance for the approved purposes mentioned in Sec. 36(1)(viii). Accordingly, the common grounds of the assessee is allowed.
Coming to ITA No.1802/Kol/2009 for A.Y. 03-04. 14. At the time of hearing Ld. AR fairly stated that he has been instructed by the assessee not to press the grounds raised in appeal. Ld. DR raised no objection. Hence, all the grounds raised by assessee are dismissed as not pressed. 15. In the result, assessee’s appeal No. ITA No. 1803/Kol/2009 is partly allowed whereas ITA No.1802/Kol/2009 is dismissed as not pressed. Order pronounced in the open court 03/02/2016 Sd/- Sd/- (N.V.Vasudevan) (Waseem Ahmed) (Judicial Member) (Accountant Member) Kolkata, *Dkp �दनांकः- 03/02/2016 कोलकाता । आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. आवेदक / Assessee- Allahabad Bank, 2, Netaji Subhas Road, Kolkata-700 001 2. राज�व / Revenue-ACIT, Circle-6, Aaykar Bhawan, P-7, Chowringhee Squre, Kol-69 3. संबं�धत आयकर आयु�त / Concerned CIT Kolkata 4. आयकर आयु�त- अपील / CIT (A) Kolkata 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file. By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता ।