BANK OF CEYLON,CHENNAI vs. DDIT, CHENNAI

आयकर अपील�य अ�धकरण, “डी” �यायपीठ, चे�नई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI �ी चं� पूजार�, लेखा सद�य एवं �ी धु�वु� आर.एल रे�डी, �या�यक सद�य के सम� Before Shri Chandra Poojari, Accountant Member & Shri Duvvuru RL Reddy, Judicial Member आयकर अपील सं./I.T.A.No.518/Mds/2015 �नधा�रण वष�/Assessment Year:2010-11 M/s. Bank of Ceylon , The Deputy Director of 20/21, Casa Major Road, Vs. Income Tax, New No.2, Zerart Garden II Lane, International Taxation I, Egmore, Chennai 600 008. Chennai 600 034. [PAN: AAACB2218C] (अपीलाथ� /Appellant) (��यथ�/Respondent) अपीलाथ� क� ओर से / Appellant by : Shri V.S. Jayakumar, Advocate Shri S. Ganapathi Subramanian, CA ��यथ� क� ओर से/Respondent by : Dr. B. Nischal, JCIT सुनवाई क� तार�ख/ Date of hearing : 29.02.2016 घोषणा क� तार�ख /Date of Pronouncement : 06.05.2016 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER:

This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 16, Chennai, dated 20.01.2015 relevant to the assessment year 2010-11. The only effective ground raised in the appeal of the assessee is with regard to confirmation of disallowance of ₹.42,36,327/- representing the provision for bad and doubtful debts made under section 36(1)(viia)(b) of the Income Tax Act, 1961 [“Act” in short].

[Provided that 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 any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent 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 1st 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 per cent", the words "ten per cent" had been substituted:] [Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government: Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession."] [Explanation.-For the purposes of this sub-clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005;] (b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VIA);] [(C) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) :] [Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1 st day of April, 2005, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, of an amount not exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year.] 6. The Assessing Officer has observed that as per the section, the assessee company falls under the category (b), wherein, an amount not exceeding 5% of the total Income is allowed as deduction for the provision made for bad and doubtful debts. In the instant case no such provision is made. The argument of the assessee is that the provisions has been made in compliance with the Reserve Bank of India's IRAC norms and in accordance with the Banking Regulations Act was not accepted by the Assessing Officer as these provisions are applicable only for the companies incorporated in India and not to a foreign Banking company. It was further argued before the Assessing Officer that the provision for Non performing assets is a generic expression for provision for bad and doubtful debts and that it is only the head under which it is classified. Even though the nature is the same, the Assessing Officer has not accepted as “A loan on which the borrower is not making interest payments or repaying any principal. At what point the loan is classified as non-performing by the bank, and when it becomes bad debt, depends on local regulations. Banks normally set aside money to cover potential losses on loans (local loss provisions) and write off bad debt in their profit and loss account. In some countries, banks that have accumulated too many NPLs are able to sell them on - at a discount - to specially established asset management companies (AMCs), which attempt to recover at least some of the money owed. There exists a clear distinction between what is classified as NPA and Bad debt. Thus the assessee's argument that both are same is not acceptable.”

The provision of the Act is very clear and there is no ambiguity regarding the same. Since the assessee company has not created any provision for bad and doubtful debts, the deduction claimed under section 36(i)(viia)(b) of the Act was disallowed and added back to the total income of the assessee. On appeal, the ld. CIT(A) dismiss the ground raised by the assessee by observing as under: “From the above computation, it is seen that assessee is deducted actual ‘bad debt written off’ u/s 36(1)(vii) and also reduced ‘provision for bad and doubtful debts’ u/s 36(1)(viia). However, before the Assessing Officer, it was emphatically stated by the appellant in writing: "Deduction for bad debt written off claimed by the assessee is only in respect of the excess of the amount written off over the deduction already allowed to the assessee u/s 36(1) (viia) every year i.e. 5% of the total income. As already mentioned during the course of hearing, the entire balance in the provisions and contingencies has been added back and offered as income every year. Thus no deduction has been claimed for the provision made, and only the actual write off of bad debts has been claimed as deduction." (emphasis ours) Even though, it was stated that no deduction has been claimed for the provisions made and only the actual write off of bad debts has been claimed as deduction, it is noticed that the appellant claimed both. This will raise another issue for adjudication, "whether the proviso to section 36(1)(vii) limits the deduction in respect of bad debts written off when it exceeds the provision made under section 36(1)(viia)?" 7.2 There is another significant misrepresentation of facts as emanated from the details filed by the appellant during the assessment proceedings. Appellant has claimed deduction u] s. 36(1)(viia)(b) @ 5% of total income i.e. amounting to Rs. 42,36,327/-. The appellant had debited 'Items included under provision and consistencies' amounting to Rs. 4,64,65,785/-. Appellant added the same in computation and claimed deduction for 'provision for bad and doubtful debts' u/s 36(1)(viia)(b) amounting to Rs.42,36,327/-. The AO took a stand that provisions for NPA can't be equated with provision for bad and doubtful debts and since such provisions was not made, appellant is not entitled for deduction. But the appellant repeatedly claim before the Assessing Officer as well the CIT(A) that provision for Non Performing Assets amounts to Rs.4,64,65,786/- was made in accounts. But the details of 'items included under provision and consistencies’ amounting to Rs.4,64,65,785/- as furnished by the appellant [Annexure-I of this order) are as follows: Sl. Description Year Ended Year Ended No. 31.03.2009 (Rs.) 31.03.2009 (Rs.) 1. Provision for depreciation in 18,10,000 38,65,000 investments 2. Provision for Non performing Assets (2,98,48,652) 20,17,436 3. Provision for Standard Assets 9,27,000 - 4. Provision for income tax 5,44,00,000 3,91,69,866 5. Provision for FBT & floating 26,82,000 13,47,757 provision etc.

8. Provisions for NPA vs. provision for bad and doubtful debts The assessment order and the grounds of appeal centered on the issue of Provisions for NPA. The AO took a stand that provisions for NPA can't be equated with provision for bad and doubtful debts and since the bad debt provisions were not made, appellant is not entitled for deduction. He is of the view that there exists a clear distinction between what is classified as NPA and Bad debt.

At the same time appellant argued that provision for non- performing assets is a generic expression for provision for bad and doubtful debts and that it is only the head under which it is classified. Even in grounds of appeal the appellant stated: "The word "any provision" should be interpreted liberally and will include provision for non performing assets. It would also be pertinent to state here that to claim that NPA provision is not a provision for bad and doubtful debts will only be ignorance of accounting methods. The ld. DDIT also failed to appreciate that any provision made in the books by whatsoever name is added back to the appellant's total income and only the actual write off of bad debt is claimed as deduction. The words "non Performing asset” is commonly understood to mean bad debts in banking parlance." 8.2 The contention of the appellant is erroneous. NPA and bad debt are not equal in all respect. Appellant tried to ignore the distinctions between them only to make a case for deductions. Non- Performing Assets (NPAs) for the banks: the loans and advances given to the customers form the biggest part of bank's income generating assets. The incomes on these loans are generated in the form of interest or discount. When the repayment of the interest or installments on these loans remain unpaid for a specified period (6 months or 2 quarters), after they are due for payment, these loans or advances are classified as Non- Performing Assets (NPAs) to distinguish these loans from the Standard Assets (Performing Assets). Depending on the age of these loans, after being identified as NPAs, and the availability of the realisable value of securities, they are further classified as sub-standard, doubtful or loss assets. But, a bad debt on loan is termed as a bad debt, when the recovery of the loan becomes impossible. Thus it may possible that all the bad debts may be non-performing assets (NPAs), all the NPAs are not necessarily the bad debts. 8.3 In T.N. Power Finance & Infrastructure Development Corporation Ltd. vs. Jt. CIT (2006) 280 ITR 491 (Mad), assessee engaged in the business of long-term finance for infrastructure development. The company had made provision for non- performing assets as per directives of Reserve Bank of India and had debited the said provision to profit and loss account and had claimed deduction as bad debt. It was held the mere provision was not deductible under section 36(1)(vii) and as far as section 36(1)(viia) was concerned, it stipulated a deduction not exceeding five per cent of the total income only in respect of provision for bad and doubtful debts which are predominantly revenue in nature or trade related and not for provision for non-performing assets which are predominantly capital in nature. Thus the Jurisdictional High Court, clearly differentiated the provision for bad and doubtful debts with provision for non-performing assets. 8.4 Even the Supreme Court opined that there are deviations between RBI Directions 1998 and Companies Act in creating provisions. The deviations are due to differences in creating a provision for all NPAs summarily as against creating a provision only when the debt is doubtful of recovery under the norms of the Accounting Standards issued by the ICAI. These deviations prevail to protect the depositors in the context of income recognition and presentation of the assets and provisions created against them. [para 28, SOUTHERN TECHNOLOGIES LTD. vs. JCIT (2010) 320 ITR 577 ] 8.5 Thus, I held that NPA is not same as bad and doubtful debts and accordingly the requirement of provision for bad and doubtful debts is not satisfied by the appellant. The IT Act deals only with doubtful debt. It is for the assessee to establish that the provision is made as the loan is irrecoverable. Hence the appellant fails on ground no. 1 and 2. However, coming to this conclusion I again reiterated that appellant had made a provision of only Rs. 20,17,436/- under the head provisions for NPA (discussed in para 7.2).

9. RBI's directives and its relevance. The appellant also argued that the provision for NPA has been made in compliance with the Reserve Bank of India's IRAC norms and in accordance with the Banking Regulations Act. But AO viewed that these provisions are applicable only for the companies incorporated in India and not to a foreign banking company. This view of AO is erroneous as the appellant is scheduled bank and its accounts are to concur with banking regulations etc.

The appellant submitted that Banks are required to follow RBI guidelines [Reserve Bank of India's master circular #DBOD #BP. BC.17/21.4.048/2009-10 dated 01.07.2009 for the relevant year] and financial statements are drawn up only in accordance with these guidelines / circulars. It is argued that banks are required to make a provision for "Non Performing Assets", which as per appellant, is provision for bad and doubtful debts only. Such provisioning for bad debts by banks including foreign banks operating in India, is governed by income recognition and asset classification norms (IRAC norms) laid down by Reserve Bank of India. In essence RBI Directions cited by appellant [Master Circular- Prudential norms on Income Recognition, Asset Classification, and Provisioning pertaining to Advances #DBOD #BP.BC.17/21.4.048/ 2009-10 dated 01.07.2009] are prudential/ provisioning norms issued by RBI. These norms deal essentially with income recognition. They force the banks to disclose the amount of NPA in their financial accounts. They force the banks to reflect "true and correct" profits. However, these Directions have nothing to do with computation of taxable income and deductions. These Directions cannot overrule the "permissible deductions" or "their exclusion" under the IT Act. There are inconsistency between these Directions and Income tax Act in the matter of income recognition and presentation of financial statements. The accounting policies adopted by a Bank cannot determine the taxable income. The entire thrust of RBI Directions is on presentation of NPA provision in the balance sheet of Bank. Presentation/ disclosure is different from computation/taxability of the provision for Bank. The nature of expenditure under the IT Act cannot be conclusively determined by the manner in which accounts are presented in terms of Master Circular. There are cases where on facts Courts have taken the view that the so- called provision is in effect a write off. Therefore, RBI Directions, though deviate from accounting practice as provided in the Companies Act, do not override the provisions of the IT Act. It is relevant reproduce the observation of Supreme Court in SOUTHERN TECHNOLOGIES LTD. vs. JCIT (2010) 320 ITR 577:

Therefore, in our view, RBI Directions 1998, though deviate from accounting practice as provided in the Companies Act, do not override the provisions of the IT Act. Some companies, for example, treat write offs or expenses or liabilities as contingent liabilities. For example, there are companies which do not recognize mark-to- market loss on its derivative contracts either by creating reserve as suggested by ICAI or by charging the same to the P&L a/c in terms of Accounting Standards. Consequently, their profits and reserves and surplus of the year are projected on the higher side. Consequently, such losses are not accounted in the books, at the highest; they are merely disclosed as contingent liability in the Notes to Accounts. The point which we would like to make is whether such losses are contingent or actual cannot be decided only on the basis of presentation. Such presentation will not bind the authority under the IT Act. Ultimately, the nature of transaction has to be examined. In each case, the authority has to examine the nature of expense/loss. Such examination and finding thereon will not depend upon presentation of expense/loss in the financial statements of the NBFC in terms of the 1998 Directions. Therefore, in our view, the RBI Directions 1998 and the IT Act operate in different fields.

With the reasoning cited above I conclude that the accounting policies adopted by a Bank following RBI guidelines, cannot determine the taxable income. Thus, the contention of the appellant is not accepted.

(ground no. I & ii) are dismissed.”

7. By analysing the issue in detail after verifying the particulars available on record, the ld. CIT(A) has passed the well reasoned order. In view of the above, since the ld. CIT(A) has rightly held that the provisions for Non-Performing Assets cannot be equated with provision for bad and doubtful debts and since such provisions was not made, the assessee is not entitled for deduction, we find no infirmity in the order passed by the ld. CIT(A) on this issue and accordingly, the ground raised by the assessee is dismissed.

Order pronounced on the 6th May, 2016 at Chennai.