Deduction towards provision for bad & Doubtful Debts available on if the provision is done in the books of accounts & not otherwise: Section 36(1)(viia)

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Deduction towards provision for bad & Doubtful Debts available on if the provision is done in the books of accounts & not otherwise: Section 36(1)(viia)

Often Assessee bank claimed deduction towards provision for bad and doubtful advances u/s 36(1)(viia) @ 7.5% of Gross total income and also further deduction @ 10% of aggregate advances made by rural branches.

 

 The question arises whether the deduction is allowable if no provision is made as required u/s 36(1)(viia)?

 

Here is one judgment by Cochin ITAT wherein it is held that condition for allowing any deduction is “creation of any provision for bad and doubtful debts”, which can only be created in books of accounts maintained by assessee. If assessee had not claimed deduction by making any provision as stated in section 36(1)(viia) tax authorities were justified in disallowing same.

 

The court made following key observation:

 

1.   Para 4 :
The issue relating to the definition of “rural branch” was dealt by this bench of Tribunal in the case of The Kannur Dist. Co-op Bank Ltd, referred supra. Since the facts prevailing in the instant case on the definition of “rural branch” are identical with the case of the Kannur Dist. Co-op Bank Ltd, referred supra, the ITAT was inclined to follow the said decision. The decision reached by the Ld CIT(A) is identical with the view taken by the Tribunal. Accordingly, his decision on this issue was upheld.

2.   Para 5 :
The next issue relates to the claim of Rs.32,72,731/-, being 7.5 percent of the total income (computed before making any deduction under clause 36(1)(viia) and Chapter VIA) made as per the provisions of sec. 36(1)(viia) of the Act. The AO has pointed out that the assessee has not created any Provision for bad and doubtful debts as mandated by sec. 36(1)(viia) of the Act. Hence, he disallowed the above said claim and the same was upheld by the Ld CIT(A).

3.   Para 6:
The deduction u/s 36(1)(viia) is allowed in respect of “any provision for bad and doubtful debts made by the assessee”. Hence, the condition for allowing any deduction is the “creation of any provision for bad and doubtful debts”, which can only be created in the books of accounts maintained by the assessee. Since the assessee has claimed the sum of Rs.32,72,731/- without making any provision as stated in sec. 36(1)(viia) of the Act, the tax authorities are justified in disallowing the same.

In totality of the case, the tribunal concluded that the deduction u/s 36(1)(viia) in respect of “any provision for bad and doubtful debts made by the assessee” cannot be allowed to the assessee if no provision for such debts is made in the books of accounts

 

 KOTTAKKAL CO-OP URBAN BANK LTD. vs. INCOME TAX OFFICER

ITAT, COCHIN BENCH

N. R. S. GANESAN, JM & B. R. BASKARAN, AM.

I.T.A. No.369/Coch/2011

16th November, 2012

(2012) 34 CCH 0411

(2013) 142 ITD 0123

Legislation Referred to

Section 36(1)(viia)

Case pertains to

Asst. Year 2007-08

Decision in favour of:

Revenue

ORDER

B. R. BASKARAN, AM. :

1. The appeal of the assessee is directed against the order dated 24-02-2011 passed by Ld CIT(A)-II, Kozhikode and it relates to the assessment year 2007-08. The assessee is aggrieved by the decision of Ld CIT(A) in confirming the disallowance of claim of provision for bad and doubtful debts made u/s 36(1)(viia) of the Act.

2. The facts relating to the above said issue are stated in brief. The assessee claimed deduction towards provision for bad and doubtful advances u/s 36(1)(viia) of the Act at 7.5 percent of the Gross total income amounting to Rs.32,72,731/- and further deduction of Rs.7,30,66,667/- being 10 percent of the aggregate advances made by the rural branches. The AO disallowed the claim of Rs.32.72,731/- as no provision was made, as required u/s 36(1)(viia) of the Act. The AO also disallowed the claim of Rs.7,30,66,667/- also on the ground that the assessee bank does not have any rural branch, i.e., the location of the branches of the bank are not “rural”. The assessee filed appeal before Ld CIT(A) on both the issues, but could not succeed. Hence, the assessee is in appeal before us.

3. None appeared on behalf of the assessee at the time of hearing. However, the Ld Counsel for the assessee had filed a letter seeking adjournment. However, the Ld D.R submitted that the impugned issue relating to the definition of “rural branch” has since been decided by this Tribunal in the case of The Kannur Dist. Co-operative bank in ITA No.323/Coch/2010. Accordingly, the Ld D.R submitted that the identical issue urged in the present appeal may be decided on similar lines. In view of the above, we reject the request for adjournment and proceed to hear the appeal ex-parte, qua the assessee.

4. We have heard the Ld. D.R and carefully perused the record. As submitted by Ld D.R, the issue relating to the definition of “rural branch” was dealt by this bench of Tribunal in the case of The Kannur Dist. Co-op Bank Ltd, referred supra. For the sake of convenience, we extract below the relevant observations made in the above said case:-

“6. With regard to the interpretation of the word “Place” for the purpose of ascertaining rural branches, it was submitted by Ld D.R that the orders passed by the ITAT, which were relied upon by the Ld CIT(A), have since been reversed by the Hon’ble Kerala High Court. The Ld D.R also placed before us the order dated 07-10-2010 passed by Hon’ble Kerala High Court in ITA No.234 of 2009 in the case of CIT Vs. The Lord Krishna Bank Ltd, which is reported in 195 Taxman 57. The relevant observations made by the Hon’ble Jurisdictional Kerala High Court are extracted below, for the sake of convenience:-

“In our view, the definition clause does not exclude the literal meaning of rural branch which necessarily excludes urban areas. If the assessee’s case accepted by the Tribunal that population in a Ward has to be reckoned for deciding as to whether the location of a Panchayat is in a rural area or not is accepted, then probably even in Municipal areas there may be Wards with less than 10000 population thereby answering the branch located in such Municipal area also as a rural Branch. Going by the ordinary meaning of Rural Branch, we feel only Branches of the Bank located in rural areas are covered. When the Legislature adopts population as the basis for classification of rural Branches, that too, with reference to the last Census report, we feel the basic unit as available for identification of rural area in the Census Report can be legitimately adopted. So much so, we feel the above meaning of rural area contained in the Census Report wherein revenue village is treated as a unit of rural area, can be rightly adopted. So much so, “place” referred to in the above definition clause for the purpose of identifying the branch of a Bank as a rural Branch with reference to its location is the revenue village. Therefore, in our view, the finding of the Tribunal that “place” referred to in the definition is the Ward of a local authority like Panchayat or Municipality is incorrect and in our view, a rural Branch has to be always in rural areas and the place referred can easily be taken as a Village. Several Wards may come within a village, whether it be in Corporation, Municipality or Panchayats. There can be no Village in a Municipal or Corporation area where the population is less than 10000. So much so, rural Branches are such of the Branches located in a Village where the population in the Village as a unit is less than 10000. We, therefore, allow the appeal on this issue by reversing the order of the Tribunal and by restoring the assessment.”

By respectfully following the decision of Jurisdictional High Court, we set aside the order of Ld CIT(A) on this issue and restore that of the assessing officer.

7. Before us, the Ld A.R took an alternative plea with regard to the issue of determination of “rural branch” by submitting that the definition of “rural branch” given in sec. 36(1)(viia) shall not apply to the Co-operative banks and hence the order of Hon’ble Jurisdictional High Court shall not apply to the assessee herein.

7.1 In order to understand this alternative plea, it is necessary to explain the relevant provisions. The section 36(1)(viia) opens with the words “in respect of any provision for bad and doubtful debts made by —

(a) a scheduled bank not being a bank incorporated by or under the laws of a country outside India or a non-scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank..

Under the Explanation, “rural branch” is defined as under:-

“rural branch” means a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of previous year”.

The definition of “rural branch” given in the Explanation does not include a “Co- operative Bank”, though the Co-operative bank is included in section 36(1)(viia) of the Act. Accordingly, the Ld A.R contended that the definition of “Rural branch” does not cover a Co-operative Bank and hence the ordinary meaning given to the “rural branch” by the regulatory authorities should be taken into account. Accordingly the Ld A.R contended that the decision of Hon’ble Kerala High Court in the case of The Lord Krishna Bank Ltd, supra also does not apply to the assessee herein, since it is a co-operative Bank. Accordingly it is prayed that the matter requires re-examination at the end of AO.

7.2 We notice that the Ld A.R has taken this alternative plea, which is entirely a new one that too raised for the first time, without filing an additional ground along with a petition praying for its admission. This plea has not also been raised before the lower authorities. Hence, the alternative ground should not have been accepted normally. However, since the alternative plea of the assessee involves interpretation of the various provisions/clauses of the Act/other Central Act only, in the interest of natural justice, we proceed to address the alternative plea of the assessee in the coming paragraphs.

8. The Explanation below section 36(1)(viia) defines various terms. Some of the definitions, which are relevant to the issue under consideration, are extracted below:-

“non-scheduled bank” means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank.

“scheduled bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of undertakings) Act, 1970 (5 of 1970), or under section 3 of Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934).

(vi) “Co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P.

In the Explanation to sub-section (4) of section 80P, the Co-operative bank is defined as under:-

“Co-operative bank” and “primary agricultural credit society” shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949)”.

8.1 Since the definition of “non-scheduled bank” and “Co-operative Bank” refer to the Banking Regulation Act, 1949, we have to refer the said Central Act in order to understand their respective meaning. We have also gone through the said Act. For understanding the meaning of “non-scheduled bank” we have to refer to clause (c) of section 5 of the Banking Regulation Act, 1949, which reads as under:-

Sec. 5(c): “banking company” means any company which transacts the business of banking in India.

For understanding the meaning of “Co-operative Bank” we have to refer to Part V of the Banking Regulations Act, 1949. The said Part V starts with section 56, which reads as under:-

56:- Act to apply to Co-operative societies subject to modifications:-

The provisions of this Act, as in force for the time being, shall apply to, or in relation to cooperative societies as they apply to, or in relation to banking companies subject to the following modifications namely:-

Throughout this Act, unless the context otherwise requires:-

References to a “banking company” or “the company” or “such company” shall be construed as reference to a Co-operative Bank”..

In section (5), after clause (cc), the following clauses shall be inserted, namely—

(cci) “co-operative bank” means a state Co-operative bank, a Central Co- operative bank and a Primary co-operative bank.

On a careful perusal of relevant provisions of Part V of Banking Regulations Act, 1949, we notice that the term “banking Company” also includes a “Co- operative Bank“. Thus a co-operative bank falls under the definition of “banking company”. Further as per the definition given in Explanation under sec. 36(1)(viia) of the Income tax Act, a “banking company” as defined in sec. 5(c) of the Banking Regulation Act, which is not a scheduled bank, is classified as a “non- scheduled bank”. Consequently, a Co-operative bank, in our view, would be classified as a “non-scheduled bank” for the purpose of sec. 36(1)(viia) of the Act.

8.2 In view of the foregoing discussions, we are of the view that the decision rendered by Hon’ble Jurisdictional Kerala High Court in the case of The Lord Krishna Bank Ltd., supra, shall apply to the assessee herein. Accordingly, we reject the alternative plea raised by the assessee. Thus, the appeal of the revenue stands allowed”.

Since the facts prevailing in the instant case on the definition of “rural branch” are identical with the case of the Kannur Dist. Co-op Bank Ltd, referred supra, we are inclined to follow the said decision. We notice that the decision reached by the Ld CIT(A) is identical with the view taken by the Tribunal. Accordingly, we uphold his decision on this issue.

5. The next issue relates to the claim of Rs.32,72,731/-, being 7.5 percent of the total income (computed before making any deduction under clause 36(1)(viia) and Chapter VIA) made as per the provisions of sec. 36(1)(viia) of the Act. The AO has pointed out that the assessee has not created any Provision for bad and doubtful debts as mandated by sec. 36(1)(viia) of the Act. Hence, he disallowed the above said claim and the same was upheld by the Ld CIT(A).

6. We have carefully gone through sec. 36(1)(viia) of the Act. The deduction under that section is allowed in respect of “any provision for bad and doubtful debts made by the assessee”. Hence, the condition for allowing any deduction is the “creation of any provision for bad and doubtful debts”, which can only be created in the books of accounts maintained by the assessee. Since the assessee has claimed the sum of Rs.32,72,731/- without making any provision as stated in sec. 36(1)(viia) of the Act, we are of the view that the tax authorities are justified in disallowing the same.

7. In the result, the appeal of the assessee is dismissed.

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