Andhra Pradesh Grameena Vikas Bank, ... vs Department Of Income Tax

ITA No.51/Hyd/15 : Assessment year 2010-11

Asst. Commissioner of Income- V/s. Andhra Pradesh Grameena Vikas tax, Circle-1, Warangal Bank, Hanamkonda, Warangal

(PAN - AAAJA 1351 N) (Appellant) (Respondent)

ITA No.88/Hyd/15 : Assessment year 2010-11

Andhra Pradesh Grameena Vikas V/s. Asst. Commissioner of Income-tax, Bank, Hanamkonda, Warangal Circle-1, Warangal

(PAN - AAAJA 1351 N)

(Appellant) (Respondent)

Assessee by : Shri T.Uma Kant

Department by : Smt G.Aparna Rao DR

Date of Hearing 25.3.2015 Date of Pronouncement 10.4.2015

ORDER

Per P.M.Jagtap, Accountant Member :

These two appeals one filed by the Revenue being ITA No.51/Hyd/2015, and the other filed by the assessee being ITA No.88/Hyd/2015, are cross appeals which are directed against the order of the learned Commissioner of Income-tax(Appeals) VI. Hyderabad dated 16.9.2014.

2 ITA Nos.51 & 88/Hyd/2015 Andhra Pradesh Grameena Vikas Bank, Warangal

Revenue's Appeal - ITA No.51/Hyd/2015

2. The solitary issue relating to the assessee's claim for deduction of Rs.9,93,40.,015 on account of provision for bad and doubtful debts under S.36(1)(viia) of the Income Tax Act,1961 is raised by the Revenue in its appeal by way of the following grounds-

1. The CIT(Appeals) erred both in law and on facts of the case.

2. The learned CIT(Appeals) has erred in interpreting the facts of the present case to the decision of Hon 'ble Supreme Court in the case of Catholic Syrion Bank Ltd., Vs CIT wherein the Hon'ble Supreme Court has held that the provisions of the sec. 36(1)(vii) and 36(1)(viia) of the Act are distinct and independent items of deduction.

3. The learned CIT(Appeals) while relying on the above decision has erroneously held that the assessee is having a closing balance of bad debts to the extent of Rs.1690 lakhs in the rural branches and the assessee has made claim of Rs.9,93,40,015/- against such provision and therefore is eligible for deduction.

4. The learned CIT(Appeals) ought to have taken into consideration the clarificatory provision brought into LT. Act as explanation 2 of clause (vii) of sec.36(1) which is subsequent to Hon'ble Supreme Court's decision in the relied upon case, viz. Catholic Syrion Bank Vs. CIT.

5. The CIT(Appeals) ought to have appreciated that the assessee has claimed provision for bad and doubtful debts to the extent of Rs.22,87,14,000/- in the P&L account though the eligibility as per the provisions of clause viia of sec.36(1) is Rs.9,93,40,015/- as worked out by the assessee itself and has not furnished any details/basis of such provisions.

6. The CIT(Appeals) ought to have appreciated that no additional deduction towards provision other than that mentioned in clause (viia~, is available to assessee since the deduction towards provision on non specified/doubted assets in accordance with First proviso to Clause (viia) of Sec.36(1) is applicable for AYs 2000- 01 to 2004-05 only.

7. The CIT(Appeals) ought not to have allowed the further deduction of Rs.9,93,40,0 15/ - towards provision for bad and doubtful debts in the computation since the assessee 3 ITA Nos.51 & 88/Hyd/2015 Andhra Pradesh Grameena Vikas Bank, Warangal

has already claimed such provision in P&L account.

8. The CIT(Appeals) ought to have appreciated that the issue regarding claim u/s 36(1) (viia) in assessee's own case for AY 2009-10 has not yet been decided by the Hon'ble ITAT, Hyderabad as claimed by the assessee and a M.A. was filed by the Department before the Hon'ble ITAT.

9. Any other ground(s) that may be urged at the time of hearing.

3. The assessee in the present case is a Regional Rural Bank which is deemed to be a cooperative society for the purposes of Income Tax Act,1961. The return of income for the year under consideration was filed by it on 7.10.2010 declaring total income of Rs.122,51,93,517. In the assessment originally completed under S.143(3), the total income of the assessee was determined by the Assessing Officer at Rs.142,04,20,490. The record of the said assessment came to be examined by the learned Commissioner and on such examination, he found that the claim of the assessee for deduction on account of salary arrears amounting to Rs.12,73,60,121 and on account of provision for bad and doubtful debts under S.36(1)(viia) amounting to Rs.9,93,40,015 was allowed by the Assessing Officer without conducting proper and sufficient enquiry and without applying his mind to the relevant facts of the assessee as well as the relevant provisions of law. He therefore, revised the assessment order passed by the Assessing Officer vide his order passed under S.263 with a direction to the Assessing Officer to decide both these issues by making proper and sufficient enquiries and by applying his mind to the relevant facts of the case as well as the relevant provisions of law.

4. As per the directions of the learned Commissioner, the Assessing Officer examined the claim of the assessee for deduction of Rs.9,93,40,015 on account of provision of bad and doubtful debts 4 ITA Nos.51 & 88/Hyd/2015 Andhra Pradesh Grameena Vikas Bank, Warangal

made under S.36(1)(viia) of the Act, being 7.5% of the total income of the assessee as computed before making any deduction under S.36(1)(viia) and Chapter VIA. On such examination, he found that the assessee has made another provision for an amount of Rs.22,87,14,000 under the head 'Provisions and Contingencies' without giving any break up or bifurcation of the relevant details like category of asset under NPA. In the absence of these details, the Assessing Officer found it difficult to ascertain as to whether deduction under S.36(1)(viia) was claimed by the assessee twice while arriving at the total income for the year under consideration. According to the Assessing Officer, the assessee also could not explain as to whether it has debited the write off under the head 'bad debts' in the account of provision for bad and doubtful debts, which has to be maintained by it as per the proviso to S.36(1)(vii). He noted that the deduction under S.36(1)(viia) was not allowable in respect of non-specified assets or in respect of advances categorized as 'standard assets', as per the decision of the Hon'ble Supreme Court reported at (320 ITR 577). He therefore, held that deduction of Rs.9,93,40,015 claimed by the assessee on account of provision for bad and doubtful debts under S.36(1)(viia) was not admissible in the facts and circumstances involved in the case of the assessee and the same was disallowed by him.

5. The disallowance made by the Assessing Officer on account of its claim for deduction under S.36(1)(viia) amounting to Rs.9,93,44,015 was challenged by the assessee in an appeal filed before the learned CIT(A) and after considering the submissions made by the assessee as well as the relevant facts and figures furnished in support, the learned CIT(A) allowed the claim of the assessee for deduction under S.36(1)(viia) for the following reasons given in paragraph 6.3 of his impugned order-

5 ITA Nos.51 & 88/Hyd/2015 Andhra Pradesh Grameena Vikas Bank, Warangal

"6.3 Perused the submissions of the appellant and the observations of the Assessing Officer. As could be seen from the 'assessment order, the Assessing Officer was of the opinion that the assessee is eligible to write-off the bad debts on actual basis and the provision for doubtful and bad debts can be made on the basis of the assessment of the health of the advances given by bank and as per the guidelines issued on this regard, and the deduction u/s 36(1)(viia) is not allowable to non-specified assets, which means deduction is not available to assets which are neither bad nor doubtful and the assessee failed to specify such assets in this case. It was also observed by the Assessing Officer that bad debts written off under the clause (vii) of Section 36(1) can only be adjusted against the opening credit balances of provisions for bad and doubtful debts. Whereas, the appellant's contention is that apart from deductions being bad debts written off under clause (vii) and the appellant is also eligible for deduction of 7.5% of the profits, independently u/s 36(1)(viia), in addition to the deduction of 10% of the Aggregate Average Advances (AAA), which was not claimed, for the year under reference. It was also submitted that the deduction claimed under (vii) of Section 36 (Rs.22.24 crores) for the year, does not exceed the credit balance of provision for bad and doubtful debts (Rs.40.29 crores). In this context, it is relevant to refer to the clause (vii) and (viia) of Section 36(1), and Section 36(2)(v) of the IT Act, which read as under:

"Section 36(1) :The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 -

(vii) subject to provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of assessee for the previous year,

(viia) 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 primary agricultural credit society or a primary co- operative agricultural and rural, development Bank, an amount not exceeding seven and half percent of total income (computed before making any deduction under this clause and chapter VIA) and an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner.

(b) A bank, being a bank incorporated by or under the laws of a country outside India, an amount 6 ITA Nos.51 & 88/Hyd/2015 Andhra Pradesh Grameena Vikas Bank, Warangal

not exceeding five percent 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 VIA)

Section 36(2): In making any deduction for a bad debt or part thereof, the following provisions shall apply-

(v) where such debt or part of the debt relates to advances made by an assessee to which clause (viia) or sub-section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause."

Thus, reading of the clause (vii) of Section 36(1) makes it clear that bad debts written off during the year are eligible to be claimed as deduction and in case where the provisions of Section 36(1)(viia) also applicable, the claim u/s 36(1)(vii) is restricted to availability of credit balances of the provision for bad and doubtful debts, relatable to Rural Branches of Banking Institutions. As it reveals there appears 00 restriction on claiming the deduction u/s 36(1)(viia), towards the provision % for bad and doubtful debts, which in turn held to be confined to 7.5 of the net profits after the claim of deductions under chapter VIA, in addition to the 10% of the Aggregate Average Advances(AAA) of Rural Advances. In this case, no specific infirmity was pointed out by the Assessing Officer towards the claim of deduction of Rs.9,93,40,01S/- u/s 36(1)(viia), where provision of Rs.22.40 crores have been made for bad and doubtful debts for the year. It is also a fact that the claims u/s 36(1)(vii) was made to the extent of Rs.22.24 crores, and did not exceed the limits placed thereon. In this context, it is relevant to refer to the decision of ITAT, Hyderabad in the case of State Bank of Hyderabad Vs DCIT, in ITA NO.1237/Hyd/2006, dated 28.11.2008, wherein the Hon'ble Tribunal had held that the deduction u/s. 36(1)(viia) of I.T. Act not exceeding 7.5% of the total income computed, is to be allowed as deduction towards provision for bad and doubtful debts. Further, it is also relevant to refer to the decision of Supreme Court in the case of Catholic Syrian Bank Ltd Vs. CIT (2012) 343 ITR 270 on the said issue, wherein the Hon'ble Supreme Court held as under:

7 ITA Nos.51 & 88/Hyd/2015 Andhra Pradesh Grameena Vikas Bank, Warangal

"To conclude, we hold that the provisions of Sections 36(l)(vii) and 36(1)(viia) of the Act are distinct and independent items of deduction and operate in their respective fields. The bad debts written off debts, other than those for which the provision is made under clause (viia), will be covered under the main part of Section 36(1)(vii), while the proviso will operate in cases under clause (viia) to limit deduction to the extent of difference between the debt or part thereof written off in the previous year and credit balance in the provision for bad and doubtful debts account made under clause (viia). The proviso to Section 36(1)(vii) will relate to cases covered u/s 36(1)(viia) and has to be read with Section 36(2)(v) of the Act. Thus, the proviso would not permit benefit of double deduction, operating with reference to rural loans while under Section 36(1)(vii), the assessee would be entitled to general deduction upon an account having become bad debt and being written off as irrecoverable "in the accounts of the assessee for the previous year. This, obviously, would be subject to satisfaction of the requirements contemplated under Section 36(2)." (Para 41 of the order)

Thus, as could be seen from the interpretation given by the Hon'ble Supreme Court (supra), on the issue, the proviso to Section 36(1)(vii), will relate to cases covered under section 36(1)(viia), and has to be read with Section 36(2)(v) of the I.T.Act, and the said proviso would not permit the benefit of double deduction, operating with reference to rural loans, while the clause vii of Section~36(1) would entitle general deduction for bad debts or debts written off, for the previous year. Applying the interpretation to the facts of the assessee for the year under reference the provisions for bad and doubtful debts for rural branches stood at Rs.4752 laksh including teh opening balance of Rs.3050 lakhs and Rs.1702 lakhs. towards provision made for the year. Thus, there is a closing balance of Rs.2936 lakhs, towards provision even after write off of bad debts to the extent of Rs.1690 lakhs in the rural branches of the banks during the year, against which the claim of Rs.9,93,40,015/- was made as deduction u/s 36(1)(viia), for the year which being 7.5% of the total profits computed.

Thus, based on the interpretation of the law that governs the deduction on provisions of bad and doubtful debts u/s 36(1)(viia) and the judicial decisions cited, I am of the considered opinion that there is no infirmity in the claim of the assessee. AS such the claim for deduction u/s 36(1)(viia), being the 7.5% of the total profits computedbeingRs.9,93,40,015/-, for the year under reference towards the provision for bad and doubtful debts is ordered to be allowed. On this issue, the ground of appeal treated as allowed."

Aggrieved by the order of the learned CIT(A) giving relief to the assessee on this issue, the Revenue has preferred this appeal before the Tribunal.

8 ITA Nos.51 & 88/Hyd/2015 Andhra Pradesh Grameena Vikas Bank, Warangal

6. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that the claim of the assessee for deduction of Rs.9,93,40,015 being 7.5% of its business income (before claiming deduction under S.36(1)(viia) and Chapter VIA)) was allowed by the learned CIT(A) after taking in to consideration the following facts and figures furnished by the assessee in respect of advances and NPAs relating to urban and rural branches and the provisions made in addition to the provision of Rs.9,93,40,015, in respect of such advances and NPAs under S.36(1)(viia).

Particulars Rupees Urban Rural Total

Total In crores 1089.23 2780.49 3869.72 Advances Opening In lakhs 963.00 3050.00 4013.00 balance provisions Add: In lakhs 538.00 1702.00 2240.00 Provision made during the year Written off In lakhs 534.00 1690.00 2224.00 during the years Closing In lakhs 1093.00 2936.00 4029.00 balance provisions

7. The relevant provisions of S.36(1)(viia) under which deduction in question is claimed by the assessee are extracted below-

"Section 36(1) :The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 -

.........

9 ITA Nos.51 & 88/Hyd/2015 Andhra Pradesh Grameena Vikas Bank, Warangal

(viia) 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 primary agricultural credit society or a primary co- operative agricultural and rural, development Bank, an amount not exceeding seven and one-half percent of the total income (computed before making any deduction under this clause and chapter VIA) and an amount not exceeding ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner.

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 percent"

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 deductions 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."

10 ITA Nos.51 & 88/Hyd/2015 Andhra Pradesh Grameena Vikas Bank, Warangal

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;

. ......."

8. It is observed that the assessee in the present case, being eligible bank, is entitled to claim deduction as per the main provision contained in clause (a) of S.36(1)(viia), in respect of any provision for bad and doubtful debts to the extent of an amount not exceeding 7.5% of the total income 'computed before making any deduction under S.36(1)(viia) and Chapter VIA' and an amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. A perusal of the impugned order of the learned CIT(A) however, shows that it was stated by the assessee before the learned CIT(A) that no provision was made towards average rural advances. If it is so, it is not clear as to what is the basis on which the provision of Rs.22.40 crores (Rs.5.38 crores in respect of urban advances and Rs.17.02 crores in respect of rural advances) was made by the assessee during the year under consideration. Moreover, all these facts and figures were furnished by the assessee before the learned CIT(A) for the first time and the Assessing Officer therefore, did not have any opportunity to verify the same. The claim of the assessee of having adjusted the amount of Rs.22.24 crores towards bad debts written off during the year under consideration against the opening balance of the provision of Rs.40.13 crores was also made by the assessee for the first time before the learned CIT(A), and the Assessing Officer did not have any opportunity to verify the same. Having regard to all these facts and circumstances of the case, we are of the view that it would be fair and proper and in the interests of justice to restore the issue relating to the assessee's claim for deduction under S.36(1)(viia) to the file of the Assessing Officer for 11 ITA Nos.51 & 88/Hyd/2015 Andhra Pradesh Grameena Vikas Bank, Warangal

deciding the same afresh, in accordance with the provision of S.36(1)(viia) after giving proper and sufficient opportunity of hearing to the assessee and after verifying all the relevant facts and figures. We order accordingly. This appeal of the Revenue is accordingly treated as allowed for statistical purposes.

Assessee's Appeal - ITA No.88/Hyd/2015

9. The appeal of the assessee involves a solitary issue relating to the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of its claim for deduction on account of salary arrears amounting to Rs.12,73,60,121.

10. As per the directions of the learned Commissioner given in the order passed under S.263, the claim of the assessee for deduction on account of salary arrears for the period from 1.11.2007 to 31.3.2009 amounting to Rs.12.73 cores was examined by the Assessing Officer. On such examination, he found that the said claim pertaining to earlier years was not allowable in the year under consideration, i.e. assessment year 2010-11 in the case of the assessee following mercantile system of accounting. He therefore, disallowed the deduction claimed by the assessee on account of provision made for salary arrears amounting to Rs.12.73 crores for the period from 1.11.2007 to 31.3.2009.

11. On appeal, the learned CIT(A) confirmed the disallowance made by the Assessing Officer on this issue on the ground that the deduction claimed by the assessee for salary arrears pertained to the earlier year, and there was nothing to show that the liability on account of the said arrears had crystallized 12 ITA Nos.51 & 88/Hyd/2015 Andhra Pradesh Grameena Vikas Bank, Warangal

during the year under consideration. Aggrieved by the order of the learned CIT(A) on this issue, assessee has preferred this appeal before the Tribunal.

12. We have heard the arguments of both the sides and also perused the relevant material on record. There is no dispute that the amount in question provided by the assessee for salary arrears for the period from 1.11.2007 to 31.3.2009 related to the earlier years and not to the year under consideration. After examining all the relevant aspects of the matter, a finding has been given by the learned CIT(A) in his impugned order that the liability on account of salary arrears in question has arisen vide the proceedings dated 24.7.2010, i.e. much later than the closure of the year under consideration. The said liability thus had neither arisen nor discharged by the assessee during the year under consideration and the learned counsel for the assessee has not been able to bring anything on record to rebut or controvert this finding of fact recorded by the learned CIT(A) in his impugned order. The liability on account of salary arrears in question thus neither related to the year under consideration nor crystallized in that year, and this being so, we find no infirmity in the impugned order of the learned CIT(A) confirming the disallowance made by the Assessing Officer on account of provision made by the assessee for the salary arrears in question. The same is, therefore, upheld on this issue dismissing the appeal filed by the assessee.

13. To sum up, appeal of the Revenue, being ITA No.51/Hyd/2015, is allowed for statistical purposes; and the appeal of the assessee, being ITA No.88/Hyd/2015, is dismissed.

13 ITA Nos.51 & 88/Hyd/2015 Andhra Pradesh Grameena Vikas Bank, Warangal

Order pronounced in the court on 10th April, 2015

Sd/- Sd/-

(Asha Vijayaraghavan) (P.M.Jagtap) Judicial Member Accountant Member

Dt/- 10th April, 2015

Copy forwarded to:

1. Andhra Pradesh Grameena Vikas Bank, H.No.2-5-8/1, Old Buys Depot Road, Ramnaar, Hanamkonda, Warangal

2. Asst. Commissioner of Income-tax Circle 1, Warangal

3. Commissioner of Income-tax(Appeals) VI Hyderabad

4. Commissioner of Income-tax V, Hyderabad

5. Departmental Representative, ITAT, Hyderabad.

B.V.S