Catholic Syrian Bank
Ltd. Vs. Commissioner of Income Tax, Thrissur
[Civil Appeal No.
1143 of 2011]
[Civil Appeal No.
1147 of 2011]
[Civil Appeal No.
1151 of 2011]
[Civil Appeal No.
1155 of 2011]
[Civil Appeal Nos.
1156-1160 of 2011]
[Civil Appeal No.
1170 of 2011]
[Civil Appeal No.
1171 of 2011]
[Civil Appeal No.
1172 of 2011]
[Civil Appeal No.
1173 of 2011]
[Civil Appeal No.
1174 of 2011]
[Civil Appeal No.
1175 of 2011]
[Civil Appeal No.
1176 of 2011]
[Civil Appeal No.
1177 of 2011]
[Civil Appeal No.
1178 of 2011]
[Civil Appeal No.
1179 of 2011]
[Civil Appeal No.
1180 of 2011]
[Civil Appeal No.
1181 of 2011]
[Civil Appeal No.
1182 of 2011]
[Civil Appeal No.
1183 of 2011]
[Civil Appeal No.
1184 of 2011]
[Civil Appeal No.
1185 of 2011]
[Civil Appeal No.
1186 of 2011]
[Civil Appeal No.
1187 of 2011]
[Civil Appeal No.
1188 of 2011]
[Civil Appeal No.
1189 of 2011]
[Civil Appeal No.
1190-1193 of 2011]
[Civil Appeal No.
1194 of 2011]
[Civil Appeal No.
1396 of 2011]
[Civil Appeal No.
1397 of 2011]
J U D G M E N T
Swatanter Kumar, J.
1.
The
assessee in C.A. No. 1143 of 2011, a Scheduled Bank, filed its return of income
for the assessment year 2002-2003 on 24th October, 2002, declaring total income
of Rs. 61,15,610/-. The return was processed under Section 143(1) of the Income
Tax Act, 1961 (for short `the Act') and eligible refund was issued in favour of
the assessee. However, the assessing officer issued notice under Section 143(2)
of the Act to the assessee, after which the assessment was completed. Inter alia,
the assessing officer, while dealing, under Section 143(3) of the Act, with the
claim of the assessee for bad debts of Rs. 12,65,95,770/-, noticed that the
argument put forward on behalf of the assessee, that the deduction allowable
under Section 36(1)(vii) of the Act is independent of deduction under Section 36(1)(viia)
of the Act, could not be accepted.
Consequently, he observed
that the assessee having a provision of Rs. 15,01,29,990/- for bad and doubtful
debts under Section 36(1)(viia) of the Act could not claim the amount of Rs. 12,65,95,770/-
as deduction on account of bad debts because the bad debts did not exceed the
credit balance in the provision for bad and doubtful debts account and also, the
requirements of clause (v) of Sub-section (2) of Section 36 of the Act were not
satisfied. Therefore, the assessee's claim for deduction of bad debts written
off from the account books was disallowed. This amount was added back to the taxable
income of the assessee, for which a demand notice and challan was accordingly issued.
This order of the assessing officer dated 24th January, 2005, was challenged in
appeal by the assessee on various grounds.
2.
The
Commissioner of Income Tax (Appeals) [hereafter referred to as `the CIT(A)'],
vide its order dated 7th April, 2006, partly allowed the appeal, particularly
in relation to the claim of the appellant Bank for bad debts. Relying upon the
judgment of a Division Bench of the Kerala High Court in the case of South
Indian Bank Ltd. v. CIT [(2003) 262 ITR 579], the CIT(A) held that the claim of
the appellant was fully supported by the said decision and since the entire bad
debts written off by the bank under Section 36(1)(vii) were pertaining to urban
branches only and not to the provision made for rural branches under Section 36(1)(viia),
it was entitled to the deduction of the full claimed amount of Rs. 12,65,95,770/-.
Consequently, he directed deletion of the said amount.
3.
For
the years of assessment in question and being aggrieved from the order of the
CIT(A), the Revenue as well as the assessee filed appeals before the Income Tax
Appellate Tribunal, Cochin (for short, the `ITAT'). All the appeals were heard
together and vide its order dated 16th April, 2007, while relying upon the
judgment of the jurisdictional High Court in the case of South Indian Bank Ltd.
(supra), the ITAT dismissed the appeal of the Revenue on this issue and also granted
certain other benefits to the assessee in relation to other items.
4.
We
consider it appropriate to notice at this stage the fate of the orders passed for
the previous assessment years in relation to the appellant and other banks.
5.
M/s.
Dhanalakshmi Bank Ltd., one of the appellants before us, had also raised the
same issue before the ITAT in Income Tax Appeal Nos.602-605 (Coch.) of 1994 and
190 (Coch.) of 1995, in relation to earlier assessment years. A view had been
expressed that there was no distinction made by the Legislature in the proviso to
Section 36(1)(vii) between rural and non-rural advances and, therefore, its
application cannot be limited to rural advances. Under clause (viia) also, a
bank was held to be entitled to deduction in respect of the provisions made for
rural and non-rural advances, subject to limitations contained therein.
Thus, the contention of
the assessee in that case, for deduction of bad debts from urban branches under
Section 36(1)(vii), was rejected. The earlier view taken by the Tribunal in the
case of Federal Bank in ITA Nos. 505, 854(Coch.) of 1993, 376(Coch.) of 1995 and
284(Coch.) of 1995 held that the proviso to clause (vii) only bars the
deduction of bad debts arising out of rural advances, the actual right to set
off bad debts in respect of non-rural and urban advances cannot be controlled or
restricted by application of the proviso and the same would be allowed without
making adjustment vis-a-vis the provision for bad and doubtful debts.
This view was obviously
favourable to the assessee. Noticing these contrary views in the cases of
Dhanalakshmi Bank and Federal Bank, the matter in the case of the
appellant-Bank, for assessment years 1991-92 to 1993-1994 was referred to a
Special Bench of the ITAT for resolving the issue. The Special Bench, vide its judgment
dated 9th August, 2002, had answered the question of law in the affirmative, holding
that 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 debts which
arise out of rural advances are to be deducted under Section 36(1)(viia) in accordance
with the proviso to clause (vii).
Finally, the matter, in
respect of the appellant-Bank, was ordered to be placed before the assessing officer
and with respect to other banks, before the concerned benches of the ITAT. The order
of the Special Bench of the ITAT was implemented by the Department and was never
called in question. It may be noticed here that in relation to earlier
assessments, i.e. right from 1985-1986 to 1987-1988 in a similar case, different
banks came up for hearing in appeal before a Division Bench of the Kerala High
Court in the case of South Indian Bank Ltd. (supra) wherein, as mentioned above,
while discussing the scope of Section 36(1)(viia) and 36(2)(v) of the Act, the
High Court set aside the order of the Tribunal in that case and held that the assessee
was entitled to the deduction under clause (vii) irrespective of the difference
between the credit balance in the provision account made under clause (viia)
and the bad debts written off in the books of accounts in respect of bad debts
relating to urban or non-rural advances. It accepted the contention of the
assessee and referred the matter to the assessing officer. This judgment of the
High Court is subject matter of Civil Appeal Nos. 1190-1193 of 2011]before us.
6.
However,
the Department of Income Tax, being dissatisfied with the order of the ITAT in assessment
year 2002-2003, filed an appeal before the High Court under Section 260A of the
Act.
7.
The
Division Bench of the High Court of Kerala at Ernakulam hearing the bunch of
appeals against the order of the ITAT, expressed the view that the judgment of
that Court in the case of South Indian Bank (supra) was not a correct
exposition of law. While dissenting therefrom, the Bench directed the matter to
be placed before a Full Bench of the High Court.
8.
That
is how the matter came up for hearing before a Full Bench of the High Court of
Kerala at Ernakulam and vide its judgment dated 16th December, 2009, the Full
Bench not only answered the question of law but even decided the case on
merits. While setting aside the view taken by the Division Bench in South Indian
Bank (supra) and also the concurrent view taken by the CIT(A) and the ITAT, the
Full Bench of the High Court held as under:- "5...What is clear from the
above is that provision for bad and doubtful debts normally is not an allowable
deduction and what is allowable under main clause is bad debt actually written off.
However, so far as Banks
to which clause (viia) applies are concerned, they are entitled to claim
deduction of provision under sub-clause (viia), but at the same time when bad debt
written is also claimed deduction under clause (vii), the same will be allowed
as a deduction only to the extent it is in excess of the provision created and allowed
as a deduction under clause (viia). It is worthwhile to note that deduction under
Section 36 (1)(vii) is subject to sub-section (2) of Section 36 which in clause
(v) specifically states that any bad debt written off should be claimed as a
deduction only after debiting it to the provision created for bad and doubtful
debts.
Further, in order to
qualify for deduction of the bad debt written off, the requirement of section 36
(2) (v) is that such amount should be debited to the provision created under
clause (viia) of claim deduction of provision under sub-clause (viia), but at
the same time when bad debt is written off is also claimed deduction under clause
(vii), the same will be allowed as a deduction only to the extent it is in excess
of the provision created and allowed as a deduction under clause (viia). It is
worthwhile to note that deduction under section 36(1) (vii) is subject to sub section
(2) of section 36 which in clause (v) specifically states that any bad debt written
off should be claimed as a deduction only after debiting it to the provision created
for bad and doubtful debts.
What is clear from the
above provisions is that though Respondent-Banks are entitled to claim deduction
of provision for bad and doubtful debts in terms of clause (viia), such Banks are
entitled to deduction of bad debt actually written off only to the extent it is
in excess of the provision created and allowed as deduction under clause (viia).
Further, in order to qualify for deduction of bad debt written off, the
requirement of section 36 (2) (v) is that such amount should be debited to the
provision created under clause (viia) of Section 36(1). Therefore, we are of the
view that the distinction drawn by the Division Bench in SOUTH INDIAN BANK'S case
between the bad debts written off in respect of advances made by Rural Branches
and bad debts pertaining to advances made by other Branches does not exist and
is not visualized under proviso to Section 36(1)(vii).
We, therefore, hold
that the said decision of this Court does not lay down the correct interpretation
of the provisions of the Act. Admittedly all the Respondent-assesses have claimed
and have been allowed deduction of provision in terms of clause (viia) of the Act.
Therefore, when they claim deduction of bad debt written off in the previous year
by virtue of the proviso to section 36(1)(vii), they are entitled to claim deduction
of such bad debt only to the extent it exceeds the provision created and
allowed as deduction under clause (viia) of the Act. 6. In the normal course we
should answer the question referred to us by the Division Bench and send back the
appeals for the Division Bench to decide the appeals consistent with the Full
Bench decision.
However, since this is
the only issue that arises in the appeals, we feel it would be only an empty
formality to send back the matter to the Division Bench for disposal of appeals
consistent with our judgment. In order to Avoid unnecessary posting of appeals before
the Division Bench, we allow the appeals by setting aside the orders of the Tribunal
and by restoring the assessments confirmed in first Appeals.
9.
"9.
Dissatisfied from the judgment of the Full Bench of the Kerala High Court, the assessee
has filed the present appeal purely on question of law.
10.
The
basic question of some significance, that arises for consideration in the present
appeals, is regarding the scope and ambit of the proviso to clause (vii) of sub-section
(1) of Section 36 of the Act. According to the contention raised on behalf of
the assessee, the view taken by the Full Bench of the Kerala High Court cannot be
sustained in law as there are distinct and different items of account that are
maintained by the bank in the normal course of its business and it is not
permissible to interchange these items in accordance with the settled standards
of accountancy or even in law. As such, the claim of doubtful and bad debts could
not have been added back to taxable income as it was an additional liability of
the bank being shown as an independent item.
11.
To
put it more precisely, the contentious questions of law that have been raised
in the present appeals are as follows:- "(j) Whether the Full Bench of the
High Court has grossly erred in reversing the finding of the earlier Division Bench
that on a correct interpretation of the Proviso to clause (vii) of Section
36(1) and clause (v) to Section 36(2) is only to deny the deduction to the
extent of bad debts written off in the books with respect to which provision was
made under clause (viia) of the Income Tax Act?
(k) Whether the Full
Bench was correct in reversing the findings of the earlier Division Bench that if
the bad debt written off relate to debt other than for which the provision is made
under clause (viia), such debts will fall squarely within the main part of
clause (vii) which is entitled to be deduction and in respect of that part of the
debt with reference to which a provision is made under clause (viia), the
proviso 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 bad and doubtful debts account made under clause (viia)?"
12.
The
appellant has contended that as the similar claims had been decided in favour of
the banks for the assessment years 1991-1992 to 1993-1994, by Special Bench of
the ITAT, which had not been challenged by the Department. As such, the issue had
attained finality and could not be disturbed in the subsequent years.
13.
The
above contention of the appellant banks does not impress us at all. Merely because
the orders of the Special Bench of the ITAT were not assailed in appeal by the
Department itself, this would not take away the right of the Revenue to question
the correctness of the orders of assessment, particularly when a question of law
is involved. There is no doubt that the earlier order of the CIT(A) had merged
into the judgment of the Special Bench of the ITAT and attained finality for
that relevant year. Equally, it is true that though the Full Bench of the Kerala
High Court specifically overruled the Division Bench judgment of that very Court
in the case of South Indian Bank (supra), it did not notice any of the contentions
before and principles stated by the Special Bench of the ITAT in its impugned judgment.
As already noticed, the
question raised in the present appeal go to the very root of the matter and are
questions of law in relation to interpretation of Sections 36(1)(vii) and 36(1)(viia)
read with Section 36(2) of the Act. Thus, without any hesitation, we reject the
contention of the appellant banks that the findings recorded in the earlier assessment
years 1991-1992 to 1993-1994 would be binding on the Department for subsequent
years as well.
14.
Now,
we would proceed to examine the provisions of Sections 36(1)(vii), 36(1)(viia) and
36(2) of the Act and their scope. It would be appropriate for this Court to notice
the relevant provisions of the Sections at this stage itself. "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 - (i) to (vi)..... (vii) Subject to the provisions of sub-section
(2), the amount of any bad debt or part thereof which is written off as irrecoverable
in the accounts of the assessee for the previous year: Provided that in the
case of an assessee to which clause (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;
Explanation - For the
purposes of this clause, any bad debt or part thereof written off as
irrecoverable in the accounts of the assess shall not include any provision for
bad and doubtful debts made in the accounts of the assessee. (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, an amount not exceeding five per cent of the total income (computed
before making any deduction under this clause and Chapter VI-A) 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 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.
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. Section 36 (2) In making any
deduction for a bad debt or part thereof, the following provisions shall apply –
i.
No
such deduction shall be allowed unless such debt or part thereof has been taken
into account in computing the income of the assessee of the previous year in
which the amount of such debt or part thereof is written off or of an earlier
previous year, or represents money lent in the ordinary course of the business of
banking or money-lending which is carried on by the assessee;
ii.
If
the amount ultimately recovered on any such debt or part of debt is less than the
difference between the debt or part and the amount so deducted, the deficiency
shall be deductible in the previous year in which the ultimate recovery is
made;
iii.
Any
such debt or part of debt may be deducted if it has already been written off as
irrecoverable in the accounts of an earlier previous year (being a previous year
relevant to the assessment year commencing on the 1st day of April, 1988, or
any earlier assessment year), but the Assessing Officer had not allowed it to be
deducted on the ground that it had not been established to have become a bad
debt in that year;
iv.
Where
any such debt or part of debt is written off as irrecoverable in the accounts
of the previous year (being a previous year relevant to the assessment year commencing
on the 1st day of April, 1988, or any earlier assessment year) and the
Assessing Officer is satisfied that such debt or part became a bad debt in any earlier
previous year not falling beyond a period of four previous years immediately preceding
the previous year in which such debt or part is written off, provisions of sub-section
(6) of section 155 shall apply;
v.
Where
such debt or part of debt relates to advances made by an assessee to which clause
(viia) of 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."
15.
The
income of an assessee carrying on a business or profession has to be assessed
in accordance with the scheme contained in Part `D' of Chapter IV dealing with heads
of income. Section 28 of the Act deals with the chargeability of income to tax
under the head `profits and gains of business or profession'. All `other deductions'
available to an assessee under this head of income are dealt with under Section
36 of the Act which opens with the words `the deduction provided for in the
following clauses shall be allowed in respect of matters dealt with therein, in
computing the income referred to in Section 28'. In other words for the
purposes of computing the income chargeable to tax, beside specific deductions,
`other deductions' postulated in different clauses of Section 36 are to be
allowed by the assessing officer, in accordance with law.
16.
Sections
36(1)(vii) and 36(1)(viia) provide for such deductions, which are to be
permitted, in accordance with the language of these provisions. A bare reading of
these provisions show that Sections 36(1)(vii) and 36(1)(viia) are separate items
of deduction. These are independent provisions and, therefore, cannot be
intermingled or read into each other. It is a settled canon of interpretation of
fiscal statutes that they need to be construed strictly and on their plain
reading.
17.
The
provisions of Section 36(1)(vii) would come into play in the grant of
deductions, subject to the limitation contained in Section 36(2) of the Act. Any
bad debt or part thereof, which is written off as irrecoverable in the accounts
of the assessee for the previous year is the deduction which the assessee would
be entitled to get, provided he satisfies the requirements of Section 36(2) of the
Act.
Allowing of deduction
of bad debts is controlled by the provisions of Section 36(2). The argument advanced
on behalf of the Revenue is that it would amount to allowing a double deduction
if the provisions of Sections 36(1)(vii) and 36(1)(viia) are permitted to operate
independently. There is no doubt that a statute is normally not construed to
provide for a double benefit unless it is specifically so stipulated or is
clear from the scheme of the Act.
As far as the
question of double benefit is concerned, the Legislature in its wisdom introduced
Section 36(2)(v) by the Finance Act, 1985 with effect from 01.04.1985. Section 36(2)(v)
concerns itself as a check for claim of any double deduction and has to be read
in conjunction with Section 36(1)(viia) of the Act. It requires the assessee to
debit the amount of such debt or part thereof in the previous year to the
provision made for that purpose.
Effect of Circulars
18.
Now,
we shall proceed to examine the effect of the circulars which are in force and are
issued by the Central Board of Direct Taxes (for short, `the Board') in
exercise of the power vested in it under Section 119 of the Act. Circulars can
be issued by the Board to explain or tone down the rigours of law and to ensure
fair enforcement of its provisions. These circulars have the force of law and
are binding on the income tax authorities, though they cannot be enforced adversely
against the assessee. Normally, these circulars cannot be ignored.
A circular may not override
or detract from the provisions of the Act but it can seek to mitigate the
rigour of a particular provision for the benefit of the assessee in certain specified
circumstances. So long as the circular is in force, it aids the uniform and
proper administration and application of the provisions of the Act. {Refer to UCO
Bank, Calcutta v. Commissioner of Income Tax, W.B. (1999) 4 SCC 599]}.
19.
In
the present case, after introduction of Section 36(1)(viia) by the Finance Act,
1979, [(1981) 131 ITR (St.) 88], with effect from 1st April, 1980, Circular No.
258 dated 14th June, 1979 was issued by the Board to clarify the application of
the new provisions. The provisions were introduced in order to promote rural
banking and assist the scheduled commercial banks in making adequate provision
from their current profits to provide for risks in relation to their rural advances.
The deductions were to be limited as specified in the Section.
A `rural branch' for
the purpose of the Act had meant a branch of a scheduled bank, situated in a
place with a population not exceeding 10,000, according to the last preceding census
of which the relevant figures have been published. Under clause 13.3, the Circular
found it relevant to mention that the provisions of new clause (viia) of
Section 36(1), relating to the deduction on account of provisions for bad and
doubtful debts, is distinct and independent of the provisions of Section 36(1)(vii)
relating to allowance of deduction of the bad debts. In other words, the scheduled
commercial banks would continue to get the benefit of the write-off of the
irrecoverable debts under Section 36(1)(vii) in addition to the benefit of
deduction of the provision for bad and doubtful debts under Section
36(1)(viia).
20.
The
Finance Act, 1985, which was given effect from 1st April, 1985, added the proviso
to Section 36(1)(vii), amended Section 36(1)(viia) and also introduced clause (v)
to Section 36(2) of the Act. To complete the history of amendments to these clauses,
we may also notice that proviso to Section 36(1)(viia)(a) was introduced by Finance
Act, 1999 with effect from 1st April, 2000 and explanation to Section 36(1)(vii)
was introduced by Finance Act, 2001 with effect from 1st April, 2001.
21.
A
Circular No.421 dated 12th June, 1985 [(1985) 156 ITR (St.) 130] attempted to explain
the amendments made to Section 36 and also explained the provisions of clause
(viia) of Section 36(1). It reads as under : "Deduction in respect of provisions
made by banking companies for bad and doubtful debts. 17.1 Section 36(1)(vii) of
the Income-tax Act provides for a deduction in the computation of taxable profits
of the amount of any debt or part thereof which is established to have become a
bad debt in the previous year.
This allowance is
subject to the fulfilment of the conditions specified in sub-section (2) of
section 36.17.2 Section 36(1)(viia) of the Income-tax Act provides for a deduction
in respect of any provision for bad and doubtful debts made by a scheduled bank
or a non-scheduled bank in relation to advances made by its rural branches, of
any amount not exceeding 1= per cent of the aggregate average advances made by such
branches.17.3 Having regard to the increasing social commitments of banks, section
36(1)(viia) has been amended to provide that 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 section 36(1)(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 the proposed new provision) or two per cent of the
aggregate average advances made by rural branches of such banks, whichever is higher,
shall be allowed as a deduction in computing the taxable profits.
17.4 Section 36(1)(vii)
of the Act has also been amended to provide that in the case of a bank to which
section 36(1)(viia) applies, the amount of bad and doubtful debts shall be debited
to the provision for bad and doubtful debts account and that the deduction admissible
under section 36(1)(vii) 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.17.5 Section 36(2) has been amended by insertion of a new clause (v) to
provide that where a debt or a part of a debt considered bad or doubtful
relates to advances made by a bank to which section 36(1)(viia) applies, no such
deduction shall be allowed unless the bank has debited the amount of such debt or
part of debt in that previous year to the provision for bad and doubtful debt
account made under clause (viia) of section 36(1)."
22.
Still
another circular being Circular No.464, dated 18th July, 1986 [(1986) 161 ITR(St.)
66] was issued with the intention to explain the amendments made by the Income
Tax (Amendment) Act, 1986. Clause 5 of the Circular dealt with the modifications
introduced in respect of the deductions on provisions for bad and doubtful
debts made by the banks and it stated as follows : "5. Modification in respect
of deduction on provisions for bad and doubtful debts made by the banks 5.1
Under the existing provisions of clause (viia) of sub-section (1) of section 36
of the Income-tax Act inserted by the Finance Act, 1979, provision for bad and doubtful
debts made by scheduled or a non-scheduled Indian bank is allowed as deduction within
the prescribed limits.
The limit prescribed
is 10% of the total income or 2% of the aggregate average advances made by the rural
branches of such banks, whichever is higher. It had been represented to the
Government that the foreign banks were not entitled to any deduction under this
provision and to that extent, they were being discriminated against. Further, it
was felt that the existing ceiling in this regard, i.e., 10% of the total income
or 2% of the aggregate average advances made by the rural branches of Indian banks,
whichever is higher, should be modified.
Accordingly, by the Amending
Act, the deduction presently available under clause (viia) of sub- section (1)
of section 36 of the Income-tax Act has been split into two separate provisions.
One of these limits the deduction to an amount not exceeding 2% of the aggregate
average advances made by the rural branches of the banks concerned. It may be clarified
that foreign banks do not have rural branches and hence this amendment will not
be relevant in the case of the foreign banks.
The other provisions secure
that a further deduction shall be allowed in respect of the provision for bad and
doubtful debts made by all banks, not just the banks incorporated in India, limited
to 5% of the total income (computed before making any deduction under this clause
and Chapter VI-A). This will imply that all scheduled or non-scheduled banks
having rural branches would be allowed the deduction up to 2% of the aggregate average
advances made by such branches and a further deduction up to 5% of their total
income in respect of provision for bad and doubtful debts."
23.
Reference
usefully can also be made to the Statement of Objects and Reasons for the
Finance Act, 1986, wherein, inter alia, it was stated that the amendments were intended
to provide a deduction on the provisions for bad debts made by all banks upto 5
per cent of their total income and an additional 2 per cent of the aggregate
average advances made by the rural branches of the banks. These percentages
stood altered by subsequent amendments in 1993 and 2001.
24.
Clear
legislative intent of the relevant provisions and unambiguous language of the circulars
with reference to the amendments to Section 36 of the Act demonstrate that the
deduction on account of provisions for bad and doubtful debts under Section 36(1)(viia)
is distinct and independent of the provisions of Section 36(1)(vii) relating to
allowance of the bad debts.
The legislative
intent was to encourage rural advances and the making of provisions for bad
debts in relation to such rural branches. Another material aspect of the
functioning of such banks is that their rural branches were practically treated
as a distinct business, though ultimately these advances would form part of the
books of accounts of the principal or head office branch. Thus, this Court would
be more inclined to give an interpretation to these provisions which would serve
the legislative object and intent, rather than to subvert the same.
The Circulars in question
show a trend of encouraging rural business and for providing greater
deductions. The purpose of granting such deductions would stand frustrated if these
deductions are implicitly neutralized against other independent deductions specifically
provided under the provisions of the Act. To put it simply, the deductions permissible
under Section 36(1)(vii) should not be negated by reading into this provision, limitations
of Section 36(1)(viia) on the reasoning that it will form a check against double
deduction. To our mind, such approach would be erroneous and not applicable on
the facts of the case in hand.Interpretation and Construction of Relevant
Sections
25.
The
language of Section 36(1)(vii) of the Act is unambiguous and does not admit of two
interpretations. It applies to all banks, commercial or rural, scheduled or
unscheduled. It gives a benefit to the assessee to claim a deduction on any bad
debt or part thereof, which is written off as irrecoverable in the accounts of the
assessee for the previous year. This benefit is subject only to Section 36(2)
of the Act. It is obligatory upon the assessee to prove to the assessing officer
that the case satisfies the ingredients of Section 36(1)(vii) on the one hand and
that it satisfies the requirements stated in Section 36(2) of the Act on the other.
The proviso to Section
36(1)(vii) does not, in absolute terms, control the application of this provision
as it comes into operation only when the case of the assessee is one which
falls squarely under Section 36(1)(viia) of the Act. We may also notice that
the explanation to Section 36(1)(vii), introduced by the Finance Act, 2001, has
to be examined in conjunction with the principal section. The explanation specifically
excluded any provision for bad and doubtful debts made in the account of the
assessee from the ambit and scope of `any bad debt, or part thereof, written
off as irrecoverable in the accounts of the assessee'.
Thus, the concept of making
a provision for bad and doubtful debts will fall outside the scope of Section
36(1)(vii) simplicitor. The proviso, as already noticed, will have to be read
with the provisions of Section 36(1)(viia) of the Act. Once the bad debt is
actually written off as irrecoverable and the requirements of Section 36(2) satisfied,
then, it will not be permissible to deny such deduction on the apprehension of double
deduction under the provisions of Section 36(1)(viia) and proviso to Section
36(1)(vii). This does not appear to be the intention of the framers of law.
The scheduled and non-scheduled
commercial banks would continue to get the full benefit of write off of the
irrecoverable debts under Section 36(1)(vii) in addition to the benefit of
deduction of bad and doubtful debts under Section 36(1)(viia). Mere provision for
bad and doubtful debts may not be allowable, but in the case of a rural advance,
the same, in terms of Section 36(1)(viia)(a), may be allowable without
insisting on an actual write off.
26.
The
Special Bench of the ITAT had rejected the contention of the Revenue that proviso
to Section 36(1)(vii) applies to all banks and with reference to the circulars
issued by the Board, held that a bank would be entitled to both deductions, one
under clause (vii) of Section 36(1) of the Act on the basis of actual write off
and the other on the basis of clause (viia) of Section 36(1) of the Act on the
mere making of provision for bad debts.
This, according to the
Revenue, would lead to double deduction and the proviso to Section 36(1)(vii) was
introduced with the intention to prevent this mischief. The contention of the
Revenue, in our opinion, was rightly rejected by the Special Bench of the ITAT and
it correctly held that the Board itself had recognized the position that a bank
would be entitled to both the deductions. Further, it concluded that the
proviso had been introduced to protect the Revenue, but it would be meaningless
to invoke the same where there was no threat of double deduction.
27.
As
per this proviso to clause (vii), the deduction on account of the actual write
off of bad debts would be limited to excess of the amount written off over the amount
of the provision which had already been allowed under clause (viia). The
proviso by and large protects the interests of the Revenue. In case of rural advances
which are covered by clause (viia), there would be no such double deduction. The
proviso, in its terms, limits its application to the case of a bank to which
clause (viia) applies. Indisputably, clause (viia)(a) applies only to rural
advances.
28.
As
far as foreign banks are concerned, under Section 36(1)(viia)(b) and as far as
public financial institutions or State financial corporations or State industrial
investment corporations are concerned, under Section 36(1)(viia)(c), they do not
have rural branches. Thus, it can safely be inferred that the proviso is self
indicative that its application is to bad debts arising out of rural advances.
29.
In
a recent judgment of this Court, in Southern Technologies Ltd. v. Joint Commissioner
of Income Tax, Coimbatore [(2010) 2 SCC 548] (authored by one of us, Kapadia, J.,
as he then was), both Sections 36(1)(vii) and 36(1)(viia) were discussed. Then,
this Court went on to state how these provisions operate in the case of a Non Banking
Financial Corporations (NBFC) vis-`-vis bank covered under Section 36(1)(viia).
The Court held as under: "
37. To understand the
above dichotomy, one must understand "how to write off". If an
assessee debits an amount of doubtful debt to the P&L account and credits
the asset account like sundry debtor's account, it would constitute a write-off
of an actual debt. However, if an assessee debits "provision for doubtful debt"
to the P&L account and makes a corresponding credit to the "current liabilities
and provisions" on the liabilities side of the balance sheet, then it would
constitute a provision for doubtful debt. In the latter case, the assessee would
not be entitled to deduction after 1-4-1989. XXX XXX XXX58.
Section 36(1)(vii) provides
for a deduction in the computation of taxable profits for the debt established
to be a bad debt. Section 36(1)(vii-a) provides for a deduction in respect of any
provision for bad and doubtful debt made by a scheduled bank or non-scheduled bank
in relation to advances made by its rural branches, of a sum not exceeding a specified
percentage of the aggregate average advances by such branches.59. Having regard
to the increasing social commitment, Section 36(1)(vii-a) has been amended to provide
that in respect of provision for bad and doubtful debt made by a scheduled bank
or a non-scheduled bank, an amount not exceeding a specified per cent of the total
income or a specified per cent of the aggregate average advances made by rural
branches, whichever is higher, shall be allowed as deduction in computing the
taxable profits.
Even Section 36(1)(vii)
has been amended to provide that in the case of a bank to which Section
36(1)(vii-a) applies, the amount of bad and doubtful debt shall be debited to the
provision for bad and doubtful debt account and that the deduction shall be
limited to the amount by which such debt exceeds the credit balance in the provision
for bad and doubtful debt account.60. The point to be highlighted is that in
case of banks, by way of incentive, a provision for bad and doubtful debt is
given the benefit of deduction, however, subject to the ceiling prescribed as stated
above. Lastly, the provision for NPA created by a scheduled bank is added back
and only thereafter deduction is made permissible under Section 36(1)(vii-a) as
claimed."
30.
The
scope of the proviso to clause (vii) of Section 36(1) has to be ascertained from
a cumulative reading of the provisions of clauses (vii), (viia) of Section
36(1) and clause (v) of Section 36(2) and only shows that a double benefit in
respect of the same debt is not given to a scheduled bank. A scheduled bank may
have both urban and rural branches. It may give advances from both branches
with separate provision accounts for each.
31.
It
was neither in dispute earlier, nor dispute before us, that the assessee bank
is maintaining two separate accounts, one being a provision for bad and doubtful
debts other than provisions for bad debts in rural branches and another
provision account for bad debts in rural branches for which separate accounts
are maintained. This fact is evinced by the entries in the profit and loss
account, balance sheet and break up details. We need not deliberate this aspect
with reference to records at any greater length as this is not a matter in
issue before us.
It was contended on
behalf of the Revenue that the Revenue is only concerned with the assessee as a
single unit and not with how many separate accounts are being maintained by the
assessee and under what items. The Department, therefore, would assess an assessee
with reference to a single account maintained in the head office of the concerned
bank. This, according to the learned counsel appearing for the Department,
would further substantiate the argument of the Department that the interpretation
given by the Full Bench of the High Court is the correct interpretation of
Section 36(1)(vii). This argument has to be rejected, being without merit.
32.
In
the normal course of its business, an assessee bank is to maintain different accounts
for the rural debts for non-rural/urban debts. It is obvious that the branches
in the rural areas would primarily be dealing with rural debts while the urban branches
would deal with commercial debts. Maintenance of such separate accounts would not
only be a matter of mere convenience but would be the requirement of accounting
standards.
33.
It
is contended, and rightly so, on behalf of the assessee bank that under law, it
is obliged to maintain accounts which would correctly depict its statement of
affairs. This obligation arises implicitly from the requirements of the Act and
certainly under the mandate of accounting standards.
34.
Inter
alia, following are the reasons that would fully support the view that a bank should
maintain the accounts with separate items for actual bad and irrecoverable
debts as well as provision for such debts.
It could, for valid reasons,
have rural accounts more distinct from the urban, commercial accounts. (a) It is
obligatory upon each bank to ensure that the accounts represent the correct statement
of affairs of the bank. (b) Maintaining the common account may result in over stating
the profits or the profits will shoot up which would result in accruing of
liabilities not due. (c) Accounting Standard (AS) 29, issued in 2003, which concerns
treatment of `provisions, contingent liabilities and contingent assets'. Under the
head `Use of Provisions', clauses 53 and 54 state as under:- "53. A provision
should be used only for expenditures for which the provision was originally recognised.
54. Only expenditures that relate to the original provision are adjusted against
it. Adjusting expenditures against a provision that was originally recognised for
another purpose would conceal the impact of two different events."
35.
The
above clauses justify maintenance of distinct and different accounts.
36.
Merely
because the Department has some apprehension of the possibility of double
benefit to the assessee, this would not by itself be a sufficient ground for accepting
its interpretation. Furthermore, the provisions of a section have to be interpreted
on their plain language and could not be interpreted on the basis of apprehension
of the Department.
This Court, in the case
of Vijaya Bank v. Commissioner of Income Tax & Anr. [(2010) 5 SCC 416], held
that under the accounting practice, the accounts of the rural branches have to tally
with the accounts of the head office. If the repaid amount in subsequent years is
not credited to the profit and loss account of the head office, which is what ultimately
matters, then there would be a mismatch between the rural branch accounts and
the head office accounts.
Therefore, in order
to prevent such mismatch and to be in conformity with the accounting practice, the
banks should maintain separate accounts. Of course, all accounts would
ultimately get merged into the account of the head office, which will
ultimately reflect one account (balance sheet), though containing different
items.
37.
Another
example that would support this view is that, a bank can write off a loan
against the account of `A' alone where it has advanced the loan to party `A'. It
cannot write off such loan against the account of `B'. Similarly, a loan advanced
under the rural schemes cannot be written off against an urban or a commercial
loan by the bank in the normal course of its business.
38.
The
Full Bench of the Kerala High Court expressed the view that the Legislature did
not make any distinction between provisions created in respect of advances by rural
branches and advances by other branches of the bank. It also returned a finding
while placing emphasis on the proviso to Section 36(1)(vii), read with clause (v)
of Section 36(2) of the Act that the interpretation given by a Division Bench
of that Courts in the case of South Indian Bank (supra) was not a correct
enunciation of law, inasmuch as the same would lead to double deduction.
It took the view that
in a claim of deduction of bad debts written off in non-rural/urban branches in
the previous year, by virtue of proviso to Section 36(1)(vii), the banks are entitled
to claim deduction of such bad debts only to the extent it exceeds the provision
created for bad or doubtful rural advances under clause (viia) of Section 36(1)
of the Act. We are unable to persuade ourselves to contribute to this reasoning
and statement of law.
39.
Firstly,
the Full Bench ignored the significant expression appearing in both the proviso
to Section 36(1)(vii) and clause (v) of Section 36(2), i.e., `assessee to which
clause (viia) of sub-section (1) applies'. In other words, if the case of the
assessee does not fall under Section 36(1)(viia), the proviso/limitation would
not come into play.
40.
It
is useful to notice that in the proviso to Section 36(1)(vii), the explanation to
that Section, Section 36(1)(viia) and 36(2)(v), the words used are `provision for
bad and doubtful debts' while in the main part of Section 36(1)(vii), the
Legislature has intentionally not used such language. The proviso to Section 36(1)(vii)
and Sections 36(1)(viia) and 36(2)(v) have to be read and construed together. They
form a complete scheme for deductions and prescribe the extent to which such deductions
are available to a scheduled bank in relation to rural loans etc., whereas Section
36(1)(vii) deals with general deductions available to a bank and even non-banking
businesses upon their showing that an account had become bad and written off as
irrecoverable in the accounts of the assessee for the previous year, satisfying
the requirements contemplated in that behalf under Section 36(2).
The provisions of Section
36(1)(vii) operate in their own field and are not restricted by the limitations
of Section 36(1)(viia) of the Act. In addition to the reasons afore-stated, we
also approve the view taken by the Special Bench of ITAT and the Division Bench
of the Kerala High Court in the case of South Indian Bank (supra).
41.
To
conclude, we hold that the provisions of Sections 36(1)(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 in 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 under Section 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).
42.
Consequently,
while answering the question in favour of the assessee, we allow the appeals of
the assessees and dismiss the appeals preferred by the Revenue. Further, we
direct that all matters be remanded to the assessing officer for computation in
accordance with law, in light of the law enunciated in this judgment.
...................................J.
(A.K. Patnaik)
...................................J.
(Swatanter Kumar)
New
Delhi;
February
17, 2012
Catholic Syrian Bank
Ltd. Vs. Commissioner of Income Tax, Thrissur
[Civil Appeal No.
1143 of 2011]
Civil Appeal Nos. 1147/11,
1151/11, 1155/11, 1156-1160/11, 1170/11, 1171/11, 1172/11, 1173/11, 1174/11,
1175/11, 1176/11, 1177/11, 1178/11, 1179/11, 1180/11, 1181/11, 1182/11, 1183/11,
1184/11, 1185/11, 1186/11, 1187/11, 1188/11, 1189/11, 1190-1193/11, 1194/11,
1396/11, and 1397/11.
J U D G M E N T
S. H. KAPADIA, CJI
1.
I
have gone through the judgment of my esteemed brother Swatanter Kumar, J. and I
agree with the conclusions contained therein. However, I would like to give my own
reasons. The question for our consideration is - whether on the facts and
circumstances of the case, the assessee(s) is eligible for deduction of the bad
and doubtful debts actually written off in view of Section 36(1)(vii) which limits
the deduction allowable under the proviso to 38 the excess over the credit
balance made under clause (viia) of Section 36(1) of Income Tax Act, 1961 ("ITA"
for short)?
2.
Under
Section 36(1)(vii) of the ITA 1961, the tax payer carrying on business is entitled
to a deduction, in the computation of taxable profits, of the amount of any debt
which is established to have become a bad debt during the previous year, subject
to certain conditions. However, a mere provision for bad and doubtful debt(s) is
not allowed as a deduction in the computation of taxable profits. In order to
promote rural banking and in order to assist the scheduled commercial banks in making
adequate provisions from their current profits to provide for risks in relation
to their rural advances, the Finance Act, inserted clause (viia) in sub-section
(1) of Section 36 to provide for a deduction, in the computation of taxable profits
of all scheduled commercial banks, in respect of provisions made by them for bad
and doubtful debt(s) relating to advances made by their rural branches.
The deduction is
limited to a specified percentage of the aggregate average advances made by the
rural branches computed in the manner prescribed by the IT Rules, 1962. Thus,
the provisions of clause (viia) of Section 36(1) relating to the deduction on
account of the provision for bad and doubtful debt(s) is distinct and
independent of the provisions of Section 36(1)(vii) relating to allowance of the
bad debt(s). In other words, the scheduled commercial banks would continue to
get the full benefit of the write off of the irrecoverable debt(s) under
Section 36(1)(vii) in addition to the benefit of deduction for the provision made
for bad and doubtful debt(s) under Section 36(1)(viia).
A reading of the
Circulars issued by CBDT indicates that normally a deduction for bad debt(s) can
be allowed only if the debt is written off in the books as bad debt(s). No deduction
is allowable in respect of a mere provision for bad and doubtful debt(s). But
in the case of rural advances, a deduction would be allowed even in respect of a
mere provision without insisting on an actual write off. However, this may
result in double allowance in the sense that in respect of same rural advance
the bank may get allowance on the basis of clause (viia) and also on the basis of
actual write off under clause (vii). This situation is taken care of by the proviso
to clause (vii) which limits the allowance on the basis of the actual write off
to the excess, if any, of the write off over the amount standing to the credit
of the account created under clause (viia).
However, the Revenue disputes
the position that the proviso to clause (vii) refers only to rural advances. It
says that there are no such words in the proviso which indicates that the
proviso apply only to rural advances. We find no merit in the objection raised by
the Revenue. Firstly, CBDT itself has recognized the position that a bank would
be entitled to both the deduction, one under clause (vii) on the basis of actual
write off and another, on the basis of clause (viia) in respect of a mere
provision.
Further, to prevent
double deduction, the proviso to clause (vii) was inserted which says that in respect
of bad debt(s) arising out of rural advances, the deduction on account of actual
write off would be limited to the excess of the amount written off over the
amount of the provision allowed under clause (viia). Thus, the proviso to
clause (vii) stood introduced in order to protect the Revenue.
It would be meaningless
to invoke the said proviso where there is no threat of double deduction. In
case of rural advances, which are covered by the provisions of clause (viia),
there would be no such double deduction. The proviso limits its application to the
case of a bank to which clause (viia) applies. Clause (viia) applies only to
rural advances. This has been explained by the Circulars issued by CBDT. Thus, the
proviso indicates that it is limited in its application to bad debt(s) arising
out of rural advances of a bank. It follows that if the amount of bad debt(s)
actually written off in the accounts of the bank represents only debt(s) arising
out of urban advances, the allowance thereof in the assessment is not affected,
controlled or limited in any way by the proviso to clause (vii).
3.
Accordingly,
the above question is answered in the affirmative, i.e., in favour of the assessee(s).
For the above reasons, I agree that the appeals filed by the assessees stand
allowed and the appeals filed by the Revenue stand dismissed with no order as
to costs.
..........................C.J.I.
(S.H. Kapadia)
New
Delhi;
February
17, 2012
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