The Nashik Merchants Co-Operative Bank ... vs Assessee

The Nashik Merchants Co-operative Bank Ltd., A-16, Industrial Estate, Babubhai Rathi Chowk, Satpur, Nashik - 422007 .... Appellant

PAN: AAAAT3324K

Vs.

The Asst. Commissioner of Income Tax, Circle - 1, Nashik .... Respondent

Appellant by : Abhay Avchat Respondent by : Aseem Sharma Date of hearing : 31-12-2014 Date of pronouncement : 30-01-2015

ORDER

PER SUSHMA CHOWLA, JM:

This appeal filed by the assessee is against the order of CIT(A)-I,

Nashik dated 12.07.2013 relating to assessment year 2007-08 against

order passed under section 143(3) r.w.s. 263 of the Income-tax Act,

1961.

2. The assessee has raised the following grounds of appeal:-

1. The learned Assistant Commissioner of Income Tax, Circle-1 (ACIT), Nashik, has erred in making disallowances / additions amounting to Rs.15,13,575/- and the learned Commissioner of Income Tax, (Appeal)-I (CIT), Nashik has erred in confirming the same.

2. The learned ACIT, Nashik has erred in disallowing claim for bad and doubtful debts amounting to Rs.15,13,575/- under provisions of section 36(1)(viia) r.w.s. 36 (2)(v) of the Income Tax Act, 1961 (the Act) and the learned CIT, Nashik has erred in confirming the same.

2 ITA No.1737/PN/2013 The Nashik Merchants Coop Bank Ltd

3. The learned ACIT, Nashik has erred in reassessing assessee's income by wrongly applying provisions of the Income Tax Act, 1961 despite the assessment was made earlier and the learned CIT, Nashik has erred in confirming the same.

4. The order under section 143(3) r.w.s. 263 of the Act, is passed not in keeping with the provisions of law and the same needs to be cancelled.

5. The order under section 143(3) r.w.s. 263 of the Income Tax Act 1961, dated 24.08.2012 and the appellate order dated 12.07.2013, in case of the assessee is bad in law.

6. The appellant craves leave to add, amend or alter any of the grounds of appeal.

3. The issue in grounds of appeal Nos.1 and 2 raised in the present

appeal is against the disallowance of claim for bad & doubtful debts

amounting to Rs.15,13,575/- under the provisions of section

36(1)(viia) r.w.s. 36(2)(v) of the Act.

4. The learned Authorized Representative for the assessee at the

outset pointed out that the issue is covered in favour of the assessee

by the series of decisions of Pune Bench of the Tribunal.

5. The learned Departmental Representative for the Revenue has

placed reliance on the orders of authorities below.

6. We have heard the rival contentions and perused the record.

The assessee during the year under consideration had made a

provision for bad & doubtful debts at Rs.1,72,50,000/-, whereas the

deduction claimed by the assessee was Rs.1,87,73,575/- which

exceeded the limit prescribed under section 36(2)(v) of the Act.

Originally, the Assessing Officer allowed the claim of the assessee vide

assessment order passed under section 143(3) of the Act. The CIT(A)

thereafter, under section 263 of the Act held the assessment order to

be erroneous and prejudicial to the interest of Revenue as the 3 ITA No.1737/PN/2013 The Nashik Merchants Coop Bank Ltd

Assessing Officer had failed to conduct proper enquiries / verification

in respect of deduction allowed under section 36(1)(vii) and the

provisions of section 36(2)(v) have not been applied correctly.

7. The CIT(A) set aside the issue back to the file of Assessing

Officer to re-decide the same. The Assessing Officer after scrutiny,

disallowed Rs.15,13,575/- on account of bad & doubtful debts which

was upheld by the CIT(A).

8. We find that similar issue of claim of deduction on account of

bad & doubtful debts as against the provision made for bad & doubtful

debts, arose before the Pune Bench of the Tribunal in M/s. The Jalna

Dist. Central Co-op. Bank Ltd. Vs. ACIT, ITA No.2412/PN/2012

relating to assessment year 2009-10 and it was held as under:-

"6. We have heard the rival contentions and perused the record. Under the provisions of section 36(1)(viia) of the Ac, it is provided that any scheduled bank or non-scheduled bank, other than primary agricultural credit society or a primary co-operative agricultural & Rural Development Bank, can claim deduction in respect of any provision for bad & doubtful debts of an amount not exceeding 7½% of the total income computed, before making any deduction under this clause or Chapter VIA and amount not exceeding 10% of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner. Under the provisions of said section, it is clearly provided that the deduction specified therein would be is in respect of any provision for bad & doubtful debts made by the eligible assessee, meaning thereby, that the said deduction would be allowable under section 36(1)(viia) of the Act in respect of provision made. For allowing the expenditure in relevant year, provision to that extent has to be made in the books of account and in the absence of any such provision, no deduction is allowable on account of bad & doubtful debts.

7. We find that similar issue of allowability of claim of deduction under section 36(1)(viia) of the Act arose before the Pune Bench of the Tribunal in Shri Mahalaxmi Co-op. Bank Ltd. Vs. ITO in ITA No.1658/PN/2011 relating to assessment year 2008-09 and vide order dated 29.10.2013, it was held as under:

"9. We have carefully considered the rival submissions. We have also anxiously perused the authorities cited at Bar in order to determine the controversy on hand. The relevant portion of Section 36(1)(viia) of the Act, as applicable for the 4 ITA No.1737/PN/2013 The Nashik Merchants Coop Bank Ltd

assessment year under consideration i.e. A.Y. 2008-09 reads as under : -

"[(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 a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount [not exceeding seven and one-half per cent] 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 :

10. A bare perusal of aforesaid section clearly brings out that the deduction specified therein is in "respect of any provision for bad and doubtful debts made by........" an eligible assessee. The presence of the aforesaid expression in the section supports the plea of the Revenue, which is to the effect that the deduction allowable under Section 36(1)(viia) of the Act is in respect of the provision "made" by the assessee. In our considered opinion, the judgement of the Hon'ble Punjab & Haryana High Court in the case of State Bank of Patiala (supra) clearly covers the controversy in favour of the Revenue and belies the interpretation sought to be canvassed by the assessee. In the case before the Hon'ble High Court, assessee-bank had originally filed its return of income for assessment year 1985-86 claiming deduction under Section 36(1)(viia) of the Act at Rs.1,90,36,000/-. After filing of the return the provisions of Section 36(1)(viia) of the Act were amended by Finance Act, 1985 whereby deduction was enhanced to 10% of the profit or 2% of the aggregate average advances made by rural branches of the bank, whichever was higher. On account of the amended provisions, assessee filed a revised return of income on 24.04.1986 enhancing the claim for deduction from Rs.1,90,36,000/- to Rs.1,94,21,000/-. The Assessing Officer restricted the deduction under Section 36(1)(viia) of the Act to Rs.1,90,36,000/- only and disallowed the balance on the ground that in the books of account pertaining to the relevant assessment year, assessee had made a Provision for bad and doubtful debts of Rs.1,90,36,000/- only. The assessee argued that the Provision of Rs.1,90,36,000/- was made in the Balance- Sheet finalized on 14.02.1985 which was as per the unamended provisions of Section 36(1)(viia) of the Act and that in view of the amendment of Section 36(1)(viia) of the Act permitting higher claim of deduction, the assessee could not have possibly made the higher Provision in the Balance- Sheet finalized on a prior date, but it made up the shortfall by making an adequate Provision in the Balance-Sheet of the subsequent assessment year. On this basis, it was 5 ITA No.1737/PN/2013 The Nashik Merchants Coop Bank Ltd

sought to be made out that there was substantial compliance with the requirement of law of making Provision for bad and doubtful debts and therefore assessee justified the claim of deduction for the complete amount of Rs.1,94,21,000/- and not restricted to Rs.1,90,36,000/-. The CIT(A) as well as the Tribunal negated the plea of the assessee and accordingly, the matter was carried before the Hon'ble Punjab & Haryana High Court. The Hon'ble High Court referred to the provisions of Section 36(1)(viia) of the Act and observed that ".....the deduction allowable under the above provisions is in respect of the provision made" and further went on to hold that ".....making of a provision for bad and doubtful debts equal to the amount mentioned in this section is must for claiming such deduction." In view of the aforesaid judgement of the Hon'ble Punjab & Haryana High Court, in our view, the position sought to be canvassed by the assessee deserves to be repelled. We reproduce hereinafter the relevant portion of the order of the Hon'ble High Court, which reads as under :-

"5. Sec.36(1)(viia) of the Act as applicable to the asst. yr. 1985-86, reads as under :

"in respect of any provision for bad and doubtful debts made by a scheduled bank [not being a bank approved by the Central Government for the purposes of cl.(viiia) or a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank, an amount not exceeding ten per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) or an amount not exceeding two per cent of the aggregate average advances made by the rural branches of such bank, computed in the prescribed manner, whichever is higher."

6. A bare perusal of the above shows that the deduction allowable under the above provisions is in respect of the provision made. Therefore, making of a provision for bad and doubtful debts equal to the amount mentioned in this section is a must for claiming such deduction. The Tribunal has rightly pointed out that this issue stands further clarified from the proviso to cl.(vii) of s.36(1) of the Act, which reads as under :

"Provided that in the case of an assessee to which cl.(viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause."

7. This also clearly shows that making of provision equal to the amount claimed as deduction 6 ITA No.1737/PN/2013 The Nashik Merchants Coop Bank Ltd

in the account books is necessary for claiming deduction under s. 36(1)(viia) of the Act. The Tribunal has distinguished various authorities relied upon by the assessee wherein deductions had been allowed under various provisions which also required creation of reserve after the assessee had created such reserve in the account books before the completion of the assessment. It has been correctly pointed out that in all those cases, reserves/provisions had been made in the books of account of the same assessment year and not of the subsequent assessment year.

8. In the present case, the assessee has not made any provision in the books of account for the assessment year under consideration, i.e., 1985-86, by making supplementary entries and by revising its balance sheet. The provision has been made in the books of account of the subsequent year.

9. We are, therefore, satisfied that the Tribunal was right in holding that since the assessee had made a provision of Rs.1,19,36,000 for bad and doubtful debts, its claim for deduction under s. 36(1)(viia) of the Act had to be restricted to that amount only. Since the language of the statute is clear and is not capable of any other interpretation, we are satisfied that no substantial question of law arises in this appeal for consideration by this Court.

11. In view of the aforesaid interpretation of Section 36(1)(viia) of the Act by the Hon'ble Punjab & Haryana High Court, the orders of the lower authorities deserve to be upheld inasmuch as the assessee has not made a Provision for bad and doubtful debts in the books of account equal to the amount of deduction sought to be claimed under Section 36(1)(viia) of the Act, and therefore, in our view, the lower authorities were justified in restricting the deduction to Rs.50,00,000/-, being the amount of Provision actually made in the books of account.

12. The learned counsel for the assessee has cited certain decision in support of his proposition that the claim of deduction under Section 36(1)(viia) of the Act is not linked to making of a Provision in the account books. At the outset, we may observe that the decisions relied upon by the assessee are of various Benches of the Tribunal and not of any High Court. Therefore, the judgement of the Hon'ble High Court in the case of State Bank of Patiala (supra), which is contrary to the decisions of the Tribunal relied upon by the assessee; and being solitary judgement of a High Court, is required to be applied, having regard to the established norms of judicial discipline. For the said reason, we refrain from discussing each of the decisions of the Tribunal relied by the assessee before us.

7 ITA No.1737/PN/2013 The Nashik Merchants Coop Bank Ltd

13. The other plea of the assessee was that the contents of the CBDT Circular dated 26.11.2008 (supra) is contrary to the provisions of Section 36(1)(viia) of the Act and therefore the same should be disregarded. In our view, the following explanation in respect of Section 36(1)(viia) of the Act rendered by the CBDT in Circular dated 26.11.2008 (supra) by way of para 2(iii)(b) as under :-

"(b) The deduction for provision for bad and doubtful debts should be restricted to the amount of such provision actually created in the books of the assessee in the relevant year or the amount calculated as per provisions of section 36(1)(viia), whichever is less."

is in line with the interpretation of the section rendered by the Hon'ble Punjab & Haryana High Court and cannot be said to be contrary to the provisions of the Act. Therefore, the reliance placed by the lower authorities on the CBDT Circular dated 26.11.2008 (supra) cannot be faulted.

14. Before parting, we may refer to the decision of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra) relied upon by the assessee and also the decision of our co-ordinate Bench in the case of Jaysingpur Udgaon Sahakari Bank Ltd. (supra). We have carefully perused the said decision and found that the issue before the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra) was quite different; and, in any case none of the observations of the Hon'ble Supreme Court run contrary to the pronouncement of the Hon'ble Punjab & Haryana High Court in the case of State Bank of Patiala (supra) to the effect that making of a Provision for bad and doubtful debts equal to the amount mentioned in Section 36(1)(viia) of the Act is must for claiming such deduction. Therefore, the judgement of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd. (supra) does not help the assessee in the present controversy before us. Further, even in the case of Jaysingpur Udgaon Sahakari Bank Ltd. (supra), the Tribunal has merely set-aside the matter for adjudication afresh back to the file of the Assessing Officer and it does not contain any positive finding with respect to the controversy before us.

15. In the result, considering the aforesaid discussion, in our view, the orders of the authorities below on this aspect are liable to be upheld. We hold so."

9. The issue arising in the present appeal is squarely covered by

the ratio laid down by the Pune Bench of the Tribunal in M/s. The

Jalna Dist. Central Co-op. Bank Ltd. Vs. ACIT (supra). The assessee

during the year under consideration had made provision for bad &

doubtful debts at Rs.1,72,50,000/- as against which, it had claimed 8 ITA No.1737/PN/2013 The Nashik Merchants Coop Bank Ltd

deduction at Rs.1,87,73,575/-. In view of the provisions of section

36(1)(vii) r.w.s. 36(2)(v) of the Act, the assessee is not entitled to the

claim of deduction of Rs.15,13,575/-. Accordingly, we uphold the

orders of authorities below and dismiss the grounds of appeal Nos.1

and 2 raised by the assessee.

10. The assessee vide grounds of appeal Nos.3 to 5 is aggrieved by

the order of Assessing Officer in re-assessing the income in the hands

of the assessee, despite the fact that the assessment was made earlier.

We find no merit in the said grounds of appeal raised by the assessee,

where the assessment order has been passed pursuant to the

directions of CIT(A) under section 263 of the Act. In any case, the

issue is squarely covered by the provisions of the Act and the

Assessing Officer has passed the order after applying the said

provisions of the Act. The said grounds of appeal raised by the

assessee are thus, dismissed.

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

Order pronounced on this 30th day of January, 2015.

Sd/- Sd/- (G.S. PANNU) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Pune, Dated: 30 th January, 2015. GCVSR

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The CIT(A)-I, Nashik; 4) The CIT-I, Nashik; 5) The DR "A" Bench, I.T.A.T., Pune; 6) Guard File. By Order //True Copy//

Assistant Registrar I.T.A.T., Pune