DCIT, Bangalore v. M/s ING Vysya Bank Ltd.,, Bangalore

ITA 53/BANG/2013 | 2003-2004
Pronouncement Date: 25-10-2013 | Result: Partly Allowed

Appeal Details

RSA Number 5321114 RSA 2013
Assessee PAN AABCT0529M
Bench Bangalore
Appeal Number ITA 53/BANG/2013
Duration Of Justice 9 month(s) 13 day(s)
Appellant DCIT, Bangalore
Respondent M/s ING Vysya Bank Ltd.,, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 25-10-2013
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 25-10-2013
Date Of Final Hearing 26-09-2013
Next Hearing Date 26-09-2013
Assessment Year 2003-2004
Appeal Filed On 11-01-2013
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN JUDICIAL MEMBER AND SHRI JASON P. BOAZ ACCOUNTANT MEMBER ITA NOS.53 & 54/BANG/2013 ASSESSMENT YEARS : 2003-04 & 2004-05 THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 11(4) BANGALORE. VS. ING VYSYA BANK LTD. ING VYSYA HOUSE NO.22 M.G. ROAD BANGALORE 560 001. PAN : AABCT 0529M APPELLANT RESPONDENT APPELLANT BY : SMT. PRISCILLA SINGSIT CIT-III(DR) RESPONDENT BY : SHRI S. ANANTHAN C.A. DATE OF HEARING : 26.09.2013 DATE OF PRONOUNCEMENT : 25.10.2013 O R D E R PER N.V. VASUDEVAN JUDICIAL MEMBER BOTH THESE APPEALS ARE BY THE REVENUE AGAINST THE SEPARATE ORDERS EACH DATED 28.09.2012 OF THE CIT(APPEALS)-I BANGA LORE RELATING TO ASSESSMENT YEARS 2003-04 & 2004-05. ITA NOS. 53 & 54/BANG/2013 PAGE 2 OF 35 ITA 53/BANG/2013 2. GROUND NO.2 RAISED BY THE REVENUE READS AS FOLLO WS:- 2. THE LEARNED CIT(A) IS NOT JUSTIFIED IN ALLOWING THE DEDUCTION CLAIMED IN RESPECT OF PROVISION TOWARDS F RAUDS AND HAS FAILED TO APPRECIATE THAT DEDUCTION IF ANY CAN BE ALLOWED IF FRAUD IS ESTABLISHED AND LOSS TO THE BANK IS CRYSTALLIZED . 3. THE ASSESSEE IS A SCHEDULED BANK. THE ASSESSEE HAD CLAIMED AS A DEDUCTION A SUM OF RS.67 39 411 UNDER THE HEAD PRO VISION FOR FRAUDS IN THE PROFIT & LOSS ACCOUNT. IN THE COMPUTATION OF T OTAL INCOME THE ASSESSEE ADDED THE AFORESAID SUM AND CLAIMED DEDUCTION OF A SUM OF RS.52 39 411 ON ACCOUNT OF PROVISION FOR FRAUDS. THE ASSESSEE S UBMITTED THAT IN THE REGULAR OPERATIONS OF THE BANK IRREGULARITIES AND EMBEZZLEMENTS OCCUR. SUCH LOSSES HAVE A DIRECT AND PROXIMATE CONNECTION TO THE CARRYING ON OF THE BUSINESS AND THEREFORE CLAIM OF THE ASSESSEE FO R DEDUCTION ON ACCOUNT OF ANTICIPATED LIABILITY TOWARDS IRREGULARITIES AND EMBEZZLEMENT IS BUSINESS EXPENDITURE. THE ASSESSEE FURTHER POINTED OUT THAT THE BANK HAS A VIGILANCE DEPARTMENT. WHEREVER A FRAUD OR EMBEZZLE MENT OCCURS THE VIGILANCE DEPARTMENT SUBMITS A REPORT AND ALSO SUGG ESTS RECOVERY ACTION TO THE AUDIT COMMITTEE. THE ASSESSEE ALSO POINTED OUT THAT SUCH CASES OF FRAUD ARE REPORTED TO RBI AS PER THE RBI DIRECTIONS . THE ASSESSEE ALSO SUBMITTED THAT THE PROVISIONS WERE MADE ONLY AFTER NETTING OF THE RECOVERIES IF ANY MADE BY THE BANK. THE ASSESSEE ALSO POINTED OUT THAT FIRS WERE FILED IN RESPECT OF SUCH FRAUDS. THE ASS ESSEE THUS SUBMITTED ITA NOS. 53 & 54/BANG/2013 PAGE 3 OF 35 THAT THE LIABILITY IN QUESTION HAS CRYSTALLIZED DUR ING THE PREVIOUS YEAR RELEVANT TO A.Y. 2003-04. 4. IT MAY BE RELEVANT TO POINT OUT THAT THIS AMOUNT WAS ALLOWED AS A DEDUCTION IN THE ORIGINAL ASSESSMENT COMPLETED BY T HE AO U/S. 143(3) IN MARCH 2006. THE CIT IN EXERCISE OF HIS POWERS U/S . 263 OF THE ACT HAD SET ASIDE THE ORDER OF THE AO AND DIRECTED THE AO TO EX AMINE THE CRYSTALLIZATION OF LIABILITY FOR ALLOWING THE DEDUC TION IN A.Y. 2003-04. IT IS PURSUANT TO THE SAID ORDER OF THE CIT THAT THE ASSE SSMENT PROCEEDINGS WERE COMPLETED BY THE AO U/S. 143(3) R.W.S. 263 OF THE ACT. 5. THE AO FOUND THE FOLLOWING DETAILS WITH REGARD T O THE CLAIM MADE BY THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF PROVISION FOR FRAUDS AND HELD AS UNDER:- BRANCH NAME DATE OF FIR AMOUNT IN LAKHS FIR VIGILANCE REPORT AMOUNT CONSIDERED AS CRYSTALLIZED UPPAL (H) 21 JUN 01 10.55 0.83 0.83 MOUNT ROAD 16 TH AUG 02 6.11 7.16 6.11 RAJAHMUNDRY 6 TH FEB 03 0.32 0.32 0.32 ERNAKULAM 4 TH JAN 02 NOT STATED 18.82 -- COIMBATORE NO FIR -- 22.23 -- CHEMBUR 26 TH JAN 02 5.65 2.99 2.99 TOTAL 22.63 52.35 10.25 ITA NOS. 53 & 54/BANG/2013 PAGE 4 OF 35 6. THE AO AFTER GOING THROUGH THE VIGILANCE REPORT AND THE FIR FILED ACCEPTED THE FACT THAT THE ASSESSEE HAS A WELL-PLAC ED MECHANISM TO IDENTIFY FRAUDS AND INITIATE RECOVERY ACTION. THE AO HOWEVER WAS OF THE VIEW THAT THE AMOUNT WHICH SHOULD BE CONSIDERED TO HAVE CRYSTALLIZED AS LIABILITY OF THE ASSESSEE SHOULD ONLY BE THE AMOUNT SHOWN AS RECOVERABLE IN THE FIR OR VIGILANCE REPORT WHICHEVER IS LOWER. ACCORDINGLY ONLY A SUM OF RS.10.25 LACS AS SHOWN IN THE LAST COLUMN OF TH E ABOVE CHART WAS CONSIDERED AS LIABILITY WHICH HAD CRYSTALLIZED IN T HE PREVIOUS YEAR AND THE SAID SUM WAS ALLOWED AS DEDUCTION IN AY 2003-04 AND THE REMAINING SUM OF RS.52 39 411/- WAS DISALLOWED BY THE AO. 7. IT CAN BE SEEN FROM THE AFORESAID ORDER OF THE A O THAT HE HAS TAKEN THE LESSER OF THE FIGURES OF LOSS EITHER AS PER THE VIGILANCE REPORT OR AS PER FIR. IT IS ALSO RELEVANT TO POINT OUT THAT THE LAS T COLUMN OF THE ABOVE TABLE IN WHICH THE AO HAS CONSIDERED THE LIABILITY OF THE ASSESSEE AS CRYSTALLIZED IS THE ONE DONE BY THE AO AND NOT BY THE ASSESSEE. 8. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE P REFERRED APPEAL BEFORE THE CIT(APPEALS). THE ASSESSEE REITERATED S UBMISSIONS MADE BEFORE THE AO. IT WAS SUBMITTED THAT THE LOSS ON A CCOUNT OF IRREGULARITIES AND EMBEZZLEMENT IS CONSIDERED AFTER THE VIGILANCE REPORT AND THE VIGILANCE DEPARTMENT CONSIDERS THE LOSS AS HAVING BEEN CRYSTA LLIZED. IT WAS SUBMITTED THAT THE FACT THAT FIRS WERE LODGED CANN OT MEAN CRYSTALLIZATION ITA NOS. 53 & 54/BANG/2013 PAGE 5 OF 35 OF LIABILITY HAS NOT OCCURRED. SINCE THE LOSS RELA TES TO THE PREVIOUS YEAR THE SAME HAS TO BE ALLOWED AS DEDUCTION FOR THE RELEVAN T ASSESSMENT YEAR. 9. THE CIT(APPEALS) ACCEPTED THE CLAIM OF THE ASSES SEE. HE WAS OF THE VIEW THAT THE ACTUAL AMOUNT INVOLVED IN THE FRA UD AS MADE OUT BY THE VIGILANCE REPORT OF THE VIGILANCE CELL SHOULD BE AC CEPTED AS CRYSTALLIZED LIABILITY OF THE ASSESSEE. THE CLAIM OF THE ASSESS EE WAS ACCORDINGLY DIRECTED BY THE CIT(A) TO BE ACCEPTED. 10. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVEN UE HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. 11. WE HAVE HEARD THE SUBMISSIONS OF THE LD. DR WH O RELIED UPON THE ORDER OF THE ASSESSING OFFICER. THE LD. COUNSEL FO R THE ASSESSEE REITERATED THE SUBMISSIONS AS WERE MADE BEFORE THE CIT(A). 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THER E IS NO DISPUTE THAT THE LOSS THAT OCCURRED ON ACCOUNT OF IRREGULARITIES AND EMBEZZLEMENT IS A LOSS INCIDENTAL TO THE BUSINESS AND HAS TO BE ALLOW ED AS DEDUCTION. THE ONLY DISPUTE IS WITH REGARD TO THE WHETHER THE LOSS CLAIMED BY THE ASSESSEE CAN BE SAID TO HAVE CRYSTALLIZED DURING THE PREVIOU S YEAR. IN THIS REGARD IT IS SEEN THAT THE BANK HAS A VIGILANCE CELL WHICH D OES AN IN-HOUSE INVESTIGATION AND REPORTS CASES OF IRREGULARITIES A ND EMBEZZLEMENT TO THE MANAGEMENT. THE BANK ALSO HAS A SYSTEM OF REPORTIN G SUCH IRREGULARITIES AND FRAUDS TO THE RBI WHICH IS ALSO MANDATORY AS PE R THE RELEVANT LAW ITA NOS. 53 & 54/BANG/2013 PAGE 6 OF 35 GOVERNING THE BANKS. A PERUSAL OF THE ORDER OF THE AO SHOWS THAT THE AO ACCEPTED THE FACT THAT THE ASSESSEE BANK HAS A WELL PLACED MECHANISM TO IDENTIFY FRAUDS AND INITIATE RECOVERY ACTION. THE AO HAS GONE BY THE FIGURES AS STATED IN THE FIRS OR THE VIGILANCE REPORT WHIC HEVER IS LESS. WE ARE OF THE VIEW THAT THE FIGURES MENTIONED IN THE FIR IS O NLY A PROVISIONAL FIGURE WHICH IS ARRIVED AT FOR THE PURPOSE OF FILING AN FI R IMMEDIATELY ON OCCURRENCE OF THE FRAUD. THE VIGILANCE REPORT ON THE OTHER HAND IS PREPARED AFTER DETAILED STUDY. THUS THERE IS BOUN D TO BE A DIFFERENCE IN THE FIGURES BETWEEN THE VIGILANCE REPORT AND FIR LODGED . SINCE THE VIGILANCE REPORT IS PREPARED AFTER A DEEPER STUDY IN OUR VIE W THAT FIGURE SHOULD BE CONSIDERED AS A LOSS TO THE ASSESSEE. IT IS NOT IN DISPUTE THAT THE INCIDENT WHICH RESULTED IN IRREGULARITIES/EMBEZZLEMENT OCCUR RED DURING THE PREVIOUS YEAR. IN SUCH CIRCUMSTANCES THE LOSS IN QUESTION HAS TO BE HELD TO HAVE CRYSTALLIZED DURING THE PREVIOUS YEAR. IN THAT VIE W OF THE MATTER WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(APPE ALS). CONSEQUENTLY GROUND NO.2 RAISED BY THE REVENUE IS DISMISSED. 13. GROUNDS 3 TO 5 RAISED BY THE REVENUE IN THIS AP PEAL AND THE GROUNDS OF APPEAL RAISED BY THE REVENUE IN ITA NO.54/BANG/2 013 RELATE TO ONE AND THE SAME ISSUE. 14. THE ASSESSEE IS A SCHEDULED BANK. FOR THE A.Y. 2003-04 IN ITS BOOKS OF ACCOUNTS THE ASSESSEE HAD CREATED PROVISIO N FOR BAD AND DOUBTFUL DEBTS (PBDD) OF RS.10 00 000 IN RESPECT OF RURAL ADVANCES. ITA NOS. 53 & 54/BANG/2013 PAGE 7 OF 35 THE OPENING BALANCE AS ON 1.4.2003 WAS NIL. THE PB DD IN RESPECT OF RURAL ADVANCES MADE DURING THE YEAR WAS RS.10 00 000. A SUM OF RS.4 36 165 WAS ACTUALLY WRITTEN OFF OUT OF THE PBDD OF RURAL A DVANCES. THE CLOSING BALANCE IN PBDD IN RESPECT OF RURAL ADVANCES AS ON 31.3.2003 WAS RS.5 63 835. THE ASSESSEE CLAIMED A SUM OF RS.23 8 0 55 247 AS A DEDUCTION U/S.36(1)(VIIA)(A) OF THE INCOME TAX ACT 1961 (THE ACT) IN THE COMPUTATION OF TOTAL INCOME. U/S.36(1)(VIIA) OF TH E ACT A DEDUCTION ON ACCOUNT OF PROVISION FOR BAD AND DOUBTFUL DEBTS OF AMOUNT NOT EXCEEDING TEN PER CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCHES OF A BANK COMPUTED IN THE PRESCRIBED MANNE R WILL BE ALLOWED AS A DEDUCTION. RULE 6ABA OF THE INCOME TAX RULES 19 62 (THE RULES) LAYS DOWN THE MANNER OF COMPUTATION OF AGGREGATE AVERAGE ADVANCES FOR THE PURPOSE OF CLAUSE (A) (VIIA) OF SEC.36(1). THE ABO VE SUM OF RS.23 80 55 247 IS 10% OF THE AGGREGATE AVERAGE ADV ANCES MADE BY THE RURAL BRANCHES CALCULATED IN ACCORDANCE WITH THE P ROVISIONS OF RULE 6ABA OF THE RULES. 15. APART FROM THE ABOVE THE ASSESSEE HAD ALSO CRE ATED A PBDD IN RESPECT OF NON-RURAL ADVANCES OF RS.88 20 47 000. THE ASSESSEE WROTE OFF A SUM OF RS.88 26 10 825 AS BAD DEBTS ON ACCOUNT OF NON-RURAL ADVANCES AND CLAIMED THE SAME AS DEDUCTION U/S.36(1)(VII) OF THE ACT. 16. THE PBDD IN RESPECT OF RURAL AND NON RURAL ADV ANCES OF RS.88 30 47 000 (RS.88 20 47 000 FOR NON RURAL ADVA NCES AND ITA NOS. 53 & 54/BANG/2013 PAGE 8 OF 35 RS.10 00 000 FOR RURAL ADVANCES) WHICH WAS DEBITED IN THE PROFIT AND LOSS ACCOUNT WAS ADDED TO THE PROFIT AS PER PROFIT AND L OSS ACCOUNT IN THE COMPUTATION OF TOTAL INCOME AND THE DEDUCTION ON AC COUNT OF PBDD U/S.36(1)(VIIA) OF RS.23 80 55 247 WAS CLAIMED BY T HE ASSESSEE AND DEDUCTION OF RS.88 26 10 265 ON ACCOUNT OF BAD DEBT S WRITTEN OFF WAS CLAIMED U/S.36(1)(VII) OF THE ACT. 17. THE QUESTION BEFORE THE AO WAS AS TO WHETHER TH E AFORESAID SUM OF RS.23 80 55 247 CAN BE ALLOWED AS A DEDUCTION U/S.3 6(1)(VIIA)(A) OF THE ACT WHILE COMPUTING TOTAL INCOME OF THE ASSESSEE. TH E ASSESSEE HAD ALSO CLAIMED DEDUCTION OF A SUM OF RS.88 26 10 825 ON AC COUNT OF BAD DEBTS WRITTEN OFF IN RESPECT OF NON-RURAL ADVANCES U/S.3 6(1)(VII) OF THE ACT. THIS WAS ALLOWED BY THE AO AND THERE IS NO DISPUTE REGAR DING THE SAID DEDUCTION. THERE IS A DISCUSSION ABOUT THE CONTENT ION OF THE ASSESSEE REGARDING DEDUCTION U/S.36(1)(VII) AND (VIIA)(A) OF THE ACT BEING TWO DIFFERENT DEDUCTIONS AND THAT THEY ARE INDEPENDENT DEDUCTIONS . THESE DISCUSSIONS ARE NOT RELEVANT FOR THE PURPOSE OF DECIDING THE IS SUE UNDER CONSIDERATION FOR THE REASON THAT THE CASE MADE OUT BY THE AO FOR REFUSING THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S.36(1)(VIIA)(A) OF TH E ACT OF RS.23 80 55 247 RESTS ON A DIFFERENT FOOTING. ACCORDING TO THE AO THE DEDUCTION IS ALLOWED ONLY TO THE EXTENT PBDD IN RESPECT OF RURAL ADVANCE S IS CREATED IN THE BOOKS OF ACCOUNTS. ACCORDING TO HIM THE LIMITS UPT O TO WHICH SUCH DEDUCTION IS ALLOWED ALONE IS LAID DOWN IN RULE 6AB A OF THE RULES. ACCORDING TO THE ASSESSEE IT IS ENTITLED TO DEDUCT ION OF THE SUM COMPUTED ITA NOS. 53 & 54/BANG/2013 PAGE 9 OF 35 IN ACCORDANCE WITH RULE 6ABA OF THE RULES IRRESPEC TIVE OF THE PBDD IN RESPECT OF RURAL ADVANCES ACTUALLY MADE IN THE BOOK S OF ACCOUNTS. THE AO ALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF PBDD IN RESPECT OF RURAL ADVANCES TO THE EXTENT OF PROVISIO N CREATED IN THE BOOKS OF ACCOUNTS BY THE ASSESSEE. 18. ON APPEAL BY THE ASSESSEE THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S.36(1)(VIIA)(A) OF THE AC T OF A SUM OF RS.23 80 55 247. ACCORDING TO HIM THE QUESTION TO BE CONSIDERED WAS AS TO WHETHER THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U /S 36(1)(VIIA) INDEPENDENTLY WITHOUT ANY RESTRICTION. HE THEREAFTE R REFERRED TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CATHOL IC SYRIAN BANK (343- ITR-270) WHEREIN IT WAS HELD THAT BANKS ARE ENTITLE D TO FULL DEDUCTION OF THE WRITE-OFF OF URBAN ADVANCES WITHOUT REDUCING ANY PA RT OF THE PROVISION MADE IN RESPECT OF RURAL ADVANCES. HE ALSO OBSERVED THAT THE ABOVE DECISION WAS APPLIED IN THE CASE OF KARNATAKA BANK LTD. WHEREIN THE KARNATAKA HIGH COURT UPHELD AND THE CLAIM FOR DEDUCTION U/S 36(1)( VIIA) FOR RURAL ADVANCES AND BAD DEBTS FOR NON-RURAL ADVANCES. FOR THE ABOV E REASONS THE A.O WAS DIRECTED TO RECOMPUTE THE DEDUCTION U/S 36(1)(V IIA) OF THE ACT IN ACCORDANCE WITH THE DECISION OF THE APEX COURT CITE D ABOVE. 19. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVEN UE HAS RAISED GROUND NO. 3 TO 5 IN ITS GROUNDS OF APPEAL. ITA NOS. 53 & 54/BANG/2013 PAGE 10 OF 35 3. THE LEARNED CIT(A) IN ALLOWING RELIEF OF RS.23 70 55 274/- WITHOUT APPRECIATING THAT DEDUCTION U/S 36(1)(VIIA) CANNOT EXCEED PROVISION OF BAD AND DOUBTFUL DEBTS MADE IN RESPECT OF THE ADVANCES MADE BY THE RURAL BRANCHES OF THE BANK AND THE LD. CIT(A) FAILED TO APPRECIATE THAT SUCH PROVISIONS WA S ONLY OF RS.10 00 000/- DURING THE YEAR. 4. THE LD.CIT(A) ALLOWED RELIEF WITHOUT APPRECIATI NG THE LAW WHICH LAYS DOWN THAT DEDUCTION U/S 36(1)(VIIA) IS I N RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY THE BA NK IN ITS BOOKS ACCOUNT AND THAT THE DEDUCTION CAN NOT ANY SI TUATION BE MORE THAN THE PROVISION MADE AND THE AMOUNT OF DEDU CTION IS ALSO SUBJECT TO THE TWO CEILINGS LAID DOWN IN TERMS OF S ECTION 36(1)(VIIA) OF THE ACT. 5. THE LD.CIT(A) HAS ERRED IN ALLOWING THE DEDUCTIO N CLAIMED U/S 36(1)(VIIA) OF THE ACT RELYING ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF M/S CATHOLIC SYRIAN BA NK WITHOUT APPRECIATING THAT THE FACTS OF THE PRESENT CASE ARE DIFFERENCE THAN THE FACTS IN THE CASE BEFORE THE HONBLE SUPREME CO URT. 20. IN A.Y. 2004-05 THE FACTS ARE IDENTICAL. THE ASSESSEE MADE PBDD IN RESPECT OF NON-RURAL ADVANCES OF RS.51 72 00 000 AND IN RESPECT OF RURAL ADVANCES RS.10 00 000. THE ENTIRE PROVISION OF RS. 51 82 00 000 DEBITED TO THE PROFIT AND LOSS ACCOUNT WAS ADDED TO THE PRO FIT AS PER PROFIT AND LOSS ACCOUNT IN THE COMPUTATION OF TOTAL INCOME. BAD DE BT WRITTEN OFF IN RESPECT OF NON-RURAL BRANCHES WAS RS.88 26 10 825 AND NON-R URAL BRANCHES WAS RS.1 59 60 631. A SUM OF RS.50 22 39 369 WAS CLAIM ED AS DEDUCTION U/S.36(1)(VII) OF THE ACT AND A SUM OF RS.25 89 19 631 WAS CLAIMED AS DEDUCTION U/S.36(1)(VIIA) OF THE ACT. THE OPENIN G BALANCE IN THE PBDD IN RESPECT OF RURAL ADVANCES CREATED IN THE BOOKS WAS RS. 5 63 835. THE PROVISION MADE DURING THE PREVIOUS YEAR WAS RS.10 0 0 000. THE AMOUNT OF ITA NOS. 53 & 54/BANG/2013 PAGE 11 OF 35 BAD DEBTS WRITTEN OFF DURING THE PREVIOUS YEAR WAS RS.15 63 835 LEAVING A CLOSING BALANCE OF NIL. THE AO ALLOWED DEDUCTION OF ONLY RS.10 00 000. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE OF RS. 25 89 19 361. THE ORDER OF THE AO AND CIT(A) ARE IDENTICAL TO THE ORD ERS PASSED IN AY 03-04. AGGRIEVED BY THE ORDER OF CIT(A) THE REVENUE HAS RA ISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE LEARNED CIT(APPEALS) IN SO F AR IT IS PREJUDICIAL TO THE INTEREST OF REVENUE IS OPPOSED T O LAW FACTS AND THE CIRCUMSTANCES OF THE CASE; 2. THE LEARNED CIT(A) IN ALLOWING RELIEF OF RS.25 89 19 631/- WITHOUT APPRECIATING THAT DEDUCTION U/S 36(1)(VIIA) CANNOT EXCEED PROVISION OF BAD AND DOUBTFUL DEBTS MADE IN RESPECT OF THE ADVANCES MADE BY THE RURAL BRANCHES OF THE BANK AND THE ID. C1T(A) FAILED TO APPRECIATE THAT SUCH PROVISIONS WA S ONLY OF RS.10 00 000/- DURING THE YEAR. 3. THE LD.CIT(A) ALLOWED RELIEF WITHOUT APPRECIATI NG THE LAW WHICH LAYS DOWN THAT DEDUCTION U/S 36(1)(VIIA) IS I N RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY THE BA NK IN ITS BOOKS ACCOUNT AND THAT THE DEDUCTION CAN NOT IN ANY SITUATION BE MORE THAN THE PROVISION MADE AND THE AMOUNT OF DEDU CTION IS ALSO SUBJECT TO THE TWO CEILINGS LAID DOWN IN TERMS OF S ECTION 36(1)(VIIA) OF THE ACT. 4. THE LD. CIT(A) HAS ERRED IN ALLOWING THE DEDUCT ION CLAIMED U/S 36(L)(VIIA) OF THE ACT RELYING ON THE D ECISION OF HONBLE SUPREME COURT IN THE CASE OF M/S CATHOLIC S YRIAN BANK WITHOUT APPRECIATING THAT THE FACTS OF THE PRESENT CASE ARE DIFFERENT THAN THE FACTS IN THE CASE BEFORE THE HON BLE SUPREME COURT. 5. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE UR GED AT THE TIME OF HEARING IT IS HUMBLY PRAYED THAT THE ORDER OF THE CIT(A) BE REVERSED IN SO FAR AS IT RELATES TO THE ABOVE ME NTIONED ISSUE AND THAT OF THE ASSESSING OFFICER RESTORED. ITA NOS. 53 & 54/BANG/2013 PAGE 12 OF 35 6. THE APPELLANT CRAVES LEAVES TO ADD TO ALTER T O AMEND OR TO DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL. 21. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED CO UNSEL FOR THE ASSESSEE AND THE LEARNED DR. THE LEARNED DR RELIED ON THE ORDER OF THE AO. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ORIGINALLY WHEN SEC.36(1)(VIIA) OF THE ACT WAS INTRODUCED THE REQU IREMENT OF PBDD HAVING TO BE IN RELATION TO ADVANCES MADE BY ITS RURAL BRA NCH WAS A CONDITION FOR ALLOWING DEDUCTION ON ACCOUNT OF PBDD. AFTER AMEND MENT OF SEC.36(1)(VIIA) BY THE IT (AMENDMENT) ACT 1985 TH E REQUIREMENT THAT THE PBDD SHOULD BE IN RELATION TO RURAL ADVANCES WAS NO T A REQUIREMENT. THE PBDD COULD BE IN RELATION TO ANY ADVANCE AND DEDUCT ION WAS ALLOWED ONLY IN RESPECT OF RURAL ADVANCES SINCE THE CALCULATION WAS MAINLY BASED ON RURAL ADVANCES. WHAT HAS TO BE SEEN IS AS TO WHETH ER THE BANK HAD MADE ANY PROVISION FOR BAD AND DOUBTFUL DEBTS. THERE IS NO NEED TO BIFURCATE THE SAME INTO RURAL AND NON-RURAL DEBTS. ONCE A BANK C REATES PROVISION FOR BAD AND DOUBTFUL DEBT THEN THE DEDUCTION IS ALLOWED U/ S.36(1)(VIIA) BASED ON THE CALCULATION AS PROVIDED IN THE SECTION. IT WAS SUBMITTED THAT IN AY 03- 04 THE ASSESSEE MADE A PBDD OF RS.88 30 47 000. A S PER THE CALCULATION PROVIDED IN SEC.36(1)(VIIA) IT WAS ENTI TLED TO DEDUCTION OF RS.25 15 44 262 BUT IT CLAIMED DEDUCTION OF RS.23 8 0 55 247. FOR AY 04- 05 THE ASSESSEE MADE A PBDD OF RS.51 82 00 000. A S PER CALCULATION ITA NOS. 53 & 54/BANG/2013 PAGE 13 OF 35 PROVIDED IN SEC.36(1)(VIIA) IT WAS ENTITLED TO CLA IM DEDUCTION OF RS.25 89 19 631 AND HAD CLAIMED THE SAID SUM AS DED UCTION. 22. ELABORATING FURTHER THE LEARNED COUNSEL FOR TH E ASSESSEE SUBMITTED BEFORE US THAT WHEN SEC.36(1)(VIIA) WAS INTRODUCED IN THE YEAR 1979 THE PBDD HAD TO BE MADE IN RELATION TO ADVANCES MADE BY ITS RURAL BRANCHES. WHEN SEC.36(1)(VIIA) WAS SUBSTITUTED BY THE IT(AMEN DMENT) ACT 1985 THE REQUIREMENT OF THE PBDD HAVING TO BE IN RELATION TO ADVANCES MADE BY RURAL BRANCHES WAS DISPENSED WITH AND THAT THE PBDD NEED NOT BE IN RELATION TO ADVANCES MADE BY ITS RURAL BRANCHES. I T WAS POINTED OUT BY HIM THAT UNDER THE PROVISIONS OF SEC.36(1)(VIIA) AS SUB STITUTED BY THE IT (AMENDMENT) ACT 1986 :- (A) A SCHEDULED BANK (NOT BEING A BANK INCORPORATE D BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA) OR (B) A CO-OPERATIVE BANK OTHER THAN A PRIMARY AGRIC ULTURAL CREDIT SOCIETY OR A PRIMARY CO-OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK WOULD GET AN AMOUNT (I) NOT EXCEEDING SEVEN AND ONE-HALF PER CENT OF T HE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CL AUSE AND CHAPTER VI-A) AND (II) 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; AS DEDUCTION ON ACCOUNT OF PROVISION FOR BAD AND DO UBTFUL DEBTS WHILE COMPUTING ITS TOTAL INCOME. ITA NOS. 53 & 54/BANG/2013 PAGE 14 OF 35 23. ACCORDING TO HIM AFTER THE AFORESAID AMENDMENT THE REQUIREMENT OF THE PROVISION HAVING TO BE MADE IN RESPECT OF ADVAN CES BY RURAL BRANCHES HAS BEEN DISPENSED WITH. AS LONG AS THE BANK MAKE S ANY PROVISION FOR BAD AND DOUBTFUL DEBTS IT IS ELIGIBLE TO CLAIM DED UCTION U/S.36(1)(VIIA) AS PER THE CALCULATION PROVIDED THEREIN. IT WAS SUBMITTED THAT IN AY 03-04 THE ASSESSEE MADE PBDD TO THE EXTENT OF RS.88 30 47 000 IN ITS BOOKS OF ACCOUNTS. OUT OF WHICH RS.10 00 000 WAS PBDD IN RE SPECT OF RURAL ADVANCES AND RS.88 20 47 000 WAS PBDD IN RESPECT OF NON-RURAL ADVANCES. IT WAS ELIGIBLE TO CLAIM DEDUCTION OF RS.25 15 44 262 AS PER THE CALCULATION MADE U/S.36(1)(VIIA) OF THE ACT. S INCE THE PROVISION MADE IN THE BOOKS OF PBDD FOR NON-RURAL AND RURAL ADVANCES WAS MUCH MORE THAN THE DEDUCTION CLAIMED U/S.36(1)(VIIA)(A) OF THE ACT THE DEDUCTION CLAIMED HAS TO BE ALLOWED. SIMILARLY FOR AY 04-05 THE ASS ESSEE MADE PBDD IN RESPECT OF NON-RURAL ADVANCES OF RS.51 72 00 000 AN D IN RESPECT OF RURAL ADVANCES RS.10 00 000. THE ENTIRE PROVISION OF RS. 51 82 00 000 DEBITED TO THE PROFIT AND LOSS ACCOUNT WAS ADDED TO THE PRO FIT AS PER PROFIT AND LOSS ACCOUNT IN THE COMPUTATION OF TOTAL INCOME. BAD DE BT WRITTEN OFF IN RESPECT OF NON-RURAL BRANCHES WAS RS.88 26 10 825 AND NON-R URAL BRANCHES WAS RS.1 59 60 631. A SUM OF RS.50 22 39 369 WAS CLAIM ED AS DEDUCTION U/S.36(1)(VII) OF THE ACT AND A SUM OF RS.25 89 19 631 WAS CLAIMED AS DEDUCTION U/S.36(1)(VIIA) OF THE ACT. IT WAS CLA IMED THAT SINCE THE PBDD MADE BOTH RURAL AND NON-RURAL ADVANCES WAS MUCH MOR E THAN THE AMOUNT CLAIMED AS DEDUCTION U/S.36(1)(VIIA)(A) OF THE ACT THE DEDUCTION CLAIMED BY ITA NOS. 53 & 54/BANG/2013 PAGE 15 OF 35 THE ASSESSEE HAS TO BE ALLOWED. IT WAS SUBMITTED T HAT THE CLAIM WAS RIGHTLY ALLOWED BY THE CIT(A) AND THE ORDERS OF CIT(A) DO N OT CALL FOR ANY INTERFERENCE. 24. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. TO AP PRECIATE THE CONTENTION PUT FORTH BY THE LEARNED COUNSEL FOR THE ASSESSEE WE NEED TO LOOK INTO THE HISTORY OF SEC.36(1)(VIIA) AS IT EXIS TS IN THE PRESENT FORM. STAGE-I: SEC.36(1)(VIIA) WAS INSERTED BY THE FINANCE ACT 19 79 W.E.F. 1ST APRIL 1980 AND AT THE TIME OF ITS INSERTION THIS CLAUSE READ AS UNDER : '(VIIA) IN RESPECT OF ANY PROVISION FOR BAD AND DOU BTFUL DEBTS MADE BY A SCHEDULED BANK IN RELATION TO THE ADVANCES MAD E BY ITS RURAL BRANCHES AN AMOUNT NOT EXCEEDING ONE AND A HALF PE R CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY SUCH BRANCHES C OMPUTED IN THE PRESCRIBED MANNER. EXPLANATION : FOR THE PURPOSES OF THIS CLAUSE - (I) 'RURAL BRANCH' MEANS A BRANCH OF A SCHEDULED BA NK SITUATED IN A PLACE WHICH HAS A POPULATION OF NOT MORE THAN TEN T HOUSAND ACCORDING TO THE LAST PRECEDING CENSUS OF WHICH THE RELEVANT FIGURES HAVE BEEN PUBLISHED BEFORE THE FIRST DAY OF THE PRE VIOUS YEAR; (II) 'SCHEDULED BANK' HAS THE SAME MEANING AS IN TH E EXPLANATION AT THE END OF CL. (B) OF SUB-SECTION (2) OF SECTION 11 BUT DOES NOT INCLUDE A CO-OPERATIVE BANK.' THIS CLAUSE AS EXPLAINED IN PARA 13 OF THE CBDT CI RCULAR NO. 258 DT. 14TH JUNE 1979 WAS INSERTED TO PROMOTE RURAL BANKING A ND TO ASSIST THE SCHEDULED COMMERCIAL BANKS IN MAKING ADEQUATE PROVI SIONS IN RELATION TO THEIR RURAL ADVANCES. THE CIRCULAR READS THUS:- ITA NOS. 53 & 54/BANG/2013 PAGE 16 OF 35 DEDUCTION IN RESPECT OF PROVISIONS MADE FOR BAD AN D DOUBTFUL DEBTS RELATING TO RURAL BRANCHES OF SCHEDULED COMMERCIAL BANKS SEC. 36(1)(VIIA) 13.1 UNDER S. 36(1)(VIIA) OF THE IT ACT A TAXPAYE R CARRYING ON BUSINESS OR PROFESSION IS ENTITLED TO A DEDUCTION IN THE COMPUTATION OF THE TAXABLE PROFITS OF THE AMOUNT OF ANY DEBT W HICH IS ESTABLISHED TO HAVE BECOME BAD DURING THE PREVIOUS YEAR SUBJEC T TO CERTAIN CONDITIONS. HOWEVER A MERE PROVISION FOR BAD AND D OUBTFUL DEBTS IS NOT ALLOWED AS A DEDUCTION IN THE COMPUTATION OF TH E TAXABLE PROFITS. 13.2 IN ORDER TO PROMOTE RURAL BANKING AND ASSIST THE SCHEDULED COMMERCIAL BANKS IN MAKING ADEQUATE PROVISIONS FROM THEIR CURRENT PROFITS TO PROVIDE FOR RISKS IN RELATION TO THEIR R URAL ADVANCES THE FINANCE ACT HAS INSERTED A NEW CL. (VIIA) IN SUB-S. (1) OF S. 36 OF THE IT ACT TO PROVIDE FOR A DEDUCTION THE COMPUTATION OF THE TAXABLE PROFITS OF ALL SCHEDULED COMMERCIAL BANKS IN RESPECT OF PROVISIONS MADE BY THEM FOR BAD AND DOUBTFUL DEBTS RELATING TO ADVANCES MADE BY THE RURAL BRANCHES . THE DEDUCTION WILL BE LIMITED TO 1-1/2 PER CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCHES COMPUTED IN THE MANNER TO BE PRESCRIBED BY RULES IN THE IT RULES 1962. FOR THIS PURPOSE A 'RURAL BRANCH' MEA NS A BRANCH OF A SCHEDULED BANK SITUATED IN A PLACE WITH A POPULATIO N NOT EXCEEDING 10 000 ACCORDING TO THE LAST PRECEDING CENSUS OF WH ICH THE RELEVANT FIGURES HAVE BEEN PUBLISHED BEFORE THE FIRST DAY OF THE PREVIOUS YEAR. THE EXPRESSION 'SCHEDULED BANK' HAS THE SAME MEANIN G AS IN THE EXPLANATION BELOW S. 11(2)(B) OF THE IT ACT BUT DOE S NOT INCLUDE A CO- OPERATIVE BANK. THE EXPRESSION 'SCHEDULED BANK' WOU LD THEREFORE COVER THE STATE BANK OF INDIA CONSTITUTED UNDER THE STATE BANK OF INDIA ACT 1955 ANY SUBSIDIARY BANK OF THE STATE B ANK OF INDIA AS DEFINED IN THE STATE BANK OF INDIA (SUBSIDIARY BANK S) ACT 1959 A NATIONALISED BANK AS SPECIFIED IN S. 3 OF THE BANKI NG COMPANIES (ACQUISITION AND TRANSFER OF UNDERTAKINGS) ACT 197 0 OR ANY OTHER BANK INCLUDED IN THE SECOND SCHEDULE TO THE RESERVE BANK OF INDIA ACT 1934. IT MAY BE MENTIONED THAT ALL CO-OPERATIV E BANKS HAVE BEEN EXCLUDED FROM THE PURVIEW OF THIS PROVISION IN VIEW OF THE POSITION THAT UNDER S. 80P(2)(A)(I) OF THE IT ACT THE PROFITS AND GAINS OF A CO-OPERATIVE SOCIETY ENGAGED IN THE BUSINESS O F BANKING OR PROVIDING CREDIT FACILITIES TO ITS MEMBERS ARE COMP LETELY EXEMPT FROM INCOME-TAX. 13.3 IT MAY BE RELEVANT TO MENTION THAT THE PROVIS IONS OF NEW CL. (VIIA) OF S. 36(1) RELATING TO THE DEDUCTION ON ACC OUNT OF PROVISIONS FOR BAD AND DOUBTFUL DEBTS IS DISTINCT AND INDEPENDENT OF THE PROVISIONS OF S. 36(1)(VII) RELATING TO ALLOWANCE OF THE BAD D EBTS. IN OTHER WORDS THE SCHEDULED COMMERCIAL BANKS WOULD CONTINUE TO GE T THE FULL ITA NOS. 53 & 54/BANG/2013 PAGE 17 OF 35 BENEFIT OF THE WRITE OFF OF THE IRRECOVERABLE DEBTS UNDER S. 36(1)(VII) IN ADDITION TO THE BENEFIT OF DEDUCTION OF THE PROVISI ON FOR BAD AND DOUBTFUL DEBTS UNDER S. 36(1)(VIIA). 13.4 THIS PROVISION WILL TAKE EFFECT FROM 1ST APRI L 1980 AND WILL ACCORDINGLY APPLY IN RELATION TO THE ASST. YR. 1980 -81 AND SUBSEQUENT YEARS. 25. BY SECTION 10(A) OF THE FINANCE ACT 1982 IN TH E OPENING PORTION OF THE WORD (SCHEDULED BANK' WAS SUBSTITUTED WITH THE WORDS 'SCHEDULED BANK OR A NON-SCHEDULED BANK.' FURTHER IN THE EXPLANATI ON TO THIS CLAUSE THE EXISTING CL. (I) WAS RENUMBERED AS CL. (IA) AND THE FOLLOWING CLAUSE WAS INSERTED AS CL(I): 'NON-SCHEDULED BANK' MEANS A BANKING COMPANY AS DEF INED IN CL. (C) OF SECTION 5 OF THE BANKING REGULATION ACT 194 5 (10 OF 1949) WHICH IS NOT A SCHEDULED BANK'. 26. AS EXPLAINED IN PARA 17 OF THE CBDT CIRCULAR NO . 346 DT. 30TH JUNE 1982 THE OBJECT OF THE AMENDMENT WAS TO EXTEND THE BENEFIT OF THE DEDUCTION TO ADVANCES BY RURAL BRANCHES OF NON-SCHE DULED COMMERCIAL BANKS AS WELL. STAGE-II DEDUCTION ENHANCED - AMENDMENT BY THE FINANCE ACT 1985 27. FOR THE PORTION BEGINNING WITH THE WORDS 'IN RE SPECT OF ANY PROVISION' AND ENDING WITH THE WORDS 'IN THE PRESCRIBED MANNER ' THE FOLLOWING WAS SUBSTITUTED W.E.F. 1ST APRIL 1985 : ITA NOS. 53 & 54/BANG/2013 PAGE 18 OF 35 '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 BAN K 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 I NCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CL AUSE AND CHAPTER VI-A) OR AN AMOUNT NOT EXCEEDING TWO PER CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCH ES OF SUCH BANKS COMPUTED IN THE PRESCRIBED MANNER WHICHEVER IS HIGHER.' 28. PROVISO TO SEC.36(1)(VII) OF THE ACT WAS INTRO DUCED BY THE FINANCE ACT 1985 AND IT READS THUS: PROVIDED THAT IN THE CASE OF AN ASSESSEE TO WHICH CL. (VIIA) APPLIES THE AMOUNT OF THE DEDUCTION RELATING TO ANY SUCH DE BT OR PART THEREOF SHALL BE LIMITED TO THE AMOUNT BY WHICH SUCH DEBT O R PART THEREOF EXCEEDS THE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER THAT CLAUSE. 29. SIMULTANEOUSLY SEC.36(2)(V) WAS INTRODUCED BY THE FINANCE ACT 1985 AND IT READS THUS: SEC. 36(2) IN MAKING ANY DEDUCTION FOR A BAD DEBT OR PART THEREOF THE FOLLOWING PROVISIONS SHALL APPLY (I) TO (IV) .. (V) WHERE SUCH DEBT OR PART OF DEBT RELATES TO ADV ANCES MADE BY AN ASSESSEE TO WHICH CL. (VIIA) OF SUB-S. (1) APPLI ES NO SUCH DEDUCTION SHALL BE ALLOWED UNLESS THE ASSESSEE HAS DEBITED THE AMOUNT OF SUCH DEBT OR PART OF DEBT IN THAT PREVIOU S YEAR TO THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE U NDER THAT CLAUSE.' ITA NOS. 53 & 54/BANG/2013 PAGE 19 OF 35 30. AS EXPLAINED IN PARA 17 OF THE CBDT CIRCULAR NO . 421 DT. 12TH JUNE 1985 THE BENEFIT OF DEDUCTION UNDER THIS CLAUSE WA S ENHANCED HAVING REGARD TO THE INCREASING SOCIAL COMMITMENTS OF BANK S. 'DEDUCTION IN RESPECT OF PROVISIONS MADE BY BANKING COMPANIES FOR BAD AND DOUBTFUL DEBTS 17.1 SEC. 36(1)(VII) OF THE IT 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 D EBT IN THE PREVIOUS YEAR. THIS ALLOWANCE IS SUBJECT TO THE FUL FILMENT OF THE CONDITIONS SPECIFIED IN SUB-S. (2) OF S. 36. 17.2 SEC. 36(1)(VIIA) OF THE IT 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 EXCEE DING 1 PER CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY SUCH BRANCHES. 17.3 HAVING REGARD TO THE INCREASING SOCIAL COMMIT MENTS OF BANKS S. 36(1)(VIIA) HAS BEEN AMENDED TO PROVIDE THAT IN RESPECT OF ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY A SCHE DULED BANK [NOT BEING A BANK APPROVED BY THE CENTRAL GOVERNMENT FOR THE PURPOSES OF S. 36(1)(VIIIA) OR A BANK INCORPORATED BY OR UND ER THE LAWS OF A COUNTRY OUTSIDE INDIA] OR A NON-SCHEDULED BANK AN AMOUNT NOT EXCEEDING TEN PER CENT OF THE TOTAL INCOME (COMPUTE D BEFORE MAKING ANY DEDUCTION UNDER THE PROPOSED NEW PROVISION) OR TWO PER CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCH ES OF SUCH BANKS WHICHEVER IS HIGHER SHALL BE ALLOWED AS A D EDUCTION IN COMPUTING THE TAXABLE PROFITS. 17.4 SEC. 36(1)(VII) OF THE ACT HAS ALSO BEEN AMEN DED TO PROVIDE THAT IN THE CASE OF A BANK TO WHICH S. 36(1)(VIIA) APPLIES THE AMOUNT OF BAD AND DOUBTFUL DEBTS SHALL BE DEBITED TO THE P ROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT AND THAT THE DEDUCTION A DMISSIBLE UNDER S. 36(1)(VII) SHALL BE LIMITED TO THE AMOUNT BY WHI CH SUCH DEBT OR PART THEREOF EXCEEDS THE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT. 17.5 SEC. 36(2) HAS BEEN AMENDED BY INSERTION OF A NEW CL. (V) TO PROVIDE THAT WHERE A DEBT OR A PART OF A DEBT CONSI DERED BAD OR DOUBTFUL RELATES TO ADVANCES MADE BY A BANK TO WHIC H S. 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 ITA NOS. 53 & 54/BANG/2013 PAGE 20 OF 35 TO THE PROVISION FOR BAD AND DOUBTFUL DEBT ACCOUNT MADE UNDER CL. (VIIA) OF S. 36(1).' STAGE-III: 31. THE IT (AMENDMENT) ACT 1986 SUBSTITUTED THE PR ESENT CL. (VIIA) FOR THE ONE AS SUBSTITUTED BY THE FINANCE ACT 1985. T HESE PROVISIONS CAME INTO EFFECT FROM 1.4.1987. SECTION 36 - OTHER DEDUCTIONS THE SECTION READS AS UNDER : OTHER DEDUCTIONS.- (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 - VIIA) IN RESPECT OF ANY PROVISION FOR BAD AND DOUBT FUL DEBTS MADE BY - (A) A SCHEDULED BANK NOT BEING A BANK INCORPORATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA] OR A CO-OPERAT IVE 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 (CO MPUTED 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 CO MPUTED IN THE PRESCRIBED MANNER; PROVIDED THAT A SCHEDULED BANK OR A NON-SCHEDULED BANK REFERRED TO IN THIS SUB-CLAUSE SHALL AT ITS O PTION BE ALLOWED IN ANY OF THE RELEVANT ASSESSMENT YEARS DE DUCTION 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 Y EARS COMMENCING ON OR AFTER THE 1ST DAY OF APRIL 2003 A ND ENDING ITA NOS. 53 & 54/BANG/2013 PAGE 21 OF 35 BEFORE THE 1ST DAY OF APRIL 2005 THE PROVISIONS O F 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 AMOUN T NOT EXCEEDING THE INCOME DERIVED FROM REDEMPTION OF SEC URITIES IN ACCORDANCE WITH A SCHEME FRAMED BY THE CENTRAL GOVERNMENT: PROVIDED ALSO THAT NO DEDUCTION SHALL BE ALLOWED UN DER THE THIRD PROVISO UNLESS SUCH INCOME HAS BEEN DISCL OSED IN THE RETURN OF INCOME UNDER THE HEAD 'PROFITS AND GA INS OF BUSINESS OR PROFESSION'. EXPLANATION : FOR THE PURPOSES OF THIS SUB-CLAUSE 'RELEVANT ASSESSMENT YEARS' MEANS THE FIVE CONSECUTIVE ASSESS MENT YEARS COMMENCING ON OR AFTER THE 1ST DAY OF APRIL 2000 AND ENDING BEFORE THE 1ST DAY OF APRIL 2005. (B) A BANK BEING A BANK INCORPORATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA AN AMOUNT NOT EXCEEDING FIVE PER CENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI-A); PROVIDED THAT A PUBLIC FINANCIAL INSTITUTION OR A S TATE FINANCIAL CORPORATION OR A STATE INDUSTRIAL INVESTM ENT CORPORATION REFERRED TO IN THIS SUB-CLAUSE SHALL A T ITS OPTION BE ALLOWED IN ANY OF THE TWO CONSECUTIVE ASSESSMENT YEARS COMMENCING ON OR AFTER THE 1ST DAY OF APRIL 2003 A ND ENDING BEFORE THE 1ST DAY OF APRIL 2005 DEDUCTION IN RES PECT OF ANY PROVISION MADE BY IT FOR ANY ASSETS CLASSIFIED BY T HE RESERVE BANK OF INDIA AS DOUBTFUL ASSETS OR LOSS ASSETS IN ACCORDANCE WITH THE GUIDELINES ISSUED BY IT IN THIS BEHALF OF AN AMOUNT NOT EXCEEDING TEN PER CENT. OF THE AMOUNT OF SUCH A SSETS SHOWN IN THE BOOKS OF ACCOUNT OF SUCH INSTITUTION O R CORPORATION AS THE CASE MAY BE ON THE LAST DAY OF THE PREVIOUS YEAR. (C) A PUBLIC FINANCIAL INSTITUTION OR A STATE FINA NCIAL CORPORATION OR A STATE INDUSTRIAL INVESTMENT CORPORATION AN AMOUN T NOT EXCEEDING FIVE PER CENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI-A). ITA NOS. 53 & 54/BANG/2013 PAGE 22 OF 35 EXPLANATION : FOR THE PURPOSES OF THIS CLAUSE- (I) 'NON-SCHEDULED BANK' MEANS A BANKING COMPANY AS DEFINED IN CLAUSE (C) OF SECTION 5 OF TH E BANKING REGULATION ACT 1949 (10 OF 1949) WHICH IS NOT A SC HEDULED BANK;] (IA) 'RURAL BRANCH' MEANS A BRANCH OF A SCHEDULED BANK OR A NON-SCHEDULED BANK SITUATED IN A PLACE WH ICH HAS A POPULATION OF NOT MORE THAN TEN THOUSAND ACCORDING TO THE LAST PRECEDING CENSUS OF WHICH THE RELEVANT FIGURES HAVE BEEN PUBLISHED BEFORE THE FIRST DAY OF THE PREVIOUS YEAR ; (II) 'SCHEDULED BANK' MEANS THE STATE BANK OF INDI A CONSTITUTED UNDER THE STATE BANK OF INDIA ACT 1955 A SUBSIDIARY BANK AS DEFINED IN THE STATE BANK OF IND IA (SUBSIDIARY BANKS) ACT 1959 A CORRESPONDING NEW B ANK CONSTITUTED UNDER SECTION 3 OF THE BANKING COMPANIE S (ACQUISITION AND TRANSFER OF UNDERTAKINGS) ACT 197 0 OR UNDER SECTION 3 OF THE BANKING COMPANIES (ACQUISITI ON AND TRANSFER OF UNDERTAKINGS) ACT 1980 OR ANY OTHER B ANK BEING A BANK INCLUDED IN THE SECOND SCHEDULE TO THE RESER VE BANK OF INDIA ACT 1934; (III) 'PUBLIC FINANCIAL INSTITUTION' SHALL HAVE TH E MEANING ASSIGNED TO IT IN SECTION 4A OF THE COMPANI ES ACT 1956 (1 OF 1956); (IV) 'STATE FINANCIAL CORPORATION' MEANS A FINANCI AL CORPORATION ESTABLISHED UNDER SECTION 3 OR SECTION 3A OR AN INSTITUTION NOTIFIED UNDER SECTION 46 OF THE STATE FINANCIAL CORPORATIONS ACT 1951 (63 OF 1951) ; (V) 'STATE INDUSTRIAL INVESTMENT CORPORATION' MEAN S A GOVERNMENT COMPANY WITHIN THE MEANING OF SECTION 617 OF THE COMPANIES ACT 1956 (1 OF 1956) ENGAGED IN THE BUSINESS OF PROVIDING LONG-TERM FINANCE FOR INDUSTR IAL PROJECTS AND ELIGIBLE FOR DEDUCTION UNDER CLAUSE (VIII) OF T HIS SUB- SECTION; (VI) 'CO-OPERATIVE BANK' 'PRIMARY AGRICULTURAL CR EDIT SOCIETY' AND 'PRIMARY CO-OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK' SHALL HAVE THE MEANINGS RESPECTIV ELY ASSIGNED TO THEM IN THE EXPLANATION TO SUB-SECTION (4) OF SECTION 80P ITA NOS. 53 & 54/BANG/2013 PAGE 23 OF 35 32. THE OBJECT OF THE SUBSTITUTION AS EXPLAINED IN PARA 5 OF THE CBDT CIRCULAR NO. 464 DT. 18TH JULY 1986 WAS TO GIVE THE SEPARATE DEDUCTION VIZ. ONE IN RESPECT OF RURAL ADVANCES AND THE OTHE R FOR PROVISION FOR BAD AND DOUBTFUL DEBTS IN GENERAL AND ALSO TO EXTEND TH E BENEFIT OF DEDUCTION TO ALL BANKS INCLUDING FOREIGN BANKS. MODIFICATION IN RESPECT OF DEDUCTION ON PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY THE BANKS. 5.1 UNDER THE EXISTING PROVISIONS OF CL. (VIIA) OF SUB-S. (1) OF S. 36 OF THE IT ACT INSERTED BY THE FINANCE ACT 1979 PR OVISIONS FOR BAD AND DOUBTFUL DEBTS MADE BY A SCHEDULED OR A NON-SCH EDULED INDIAN BANK IS ALLOWED AS DEDUCTION WITHIN PRESCRIBED LIMI TS. 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 DEDUCTIO N UNDER THIS PROVISION AND TO THAT EXTENT THEY WERE BEING DISCRI MINATED AGAINST. FURTHER IT WAS FELT THAT THE EXISTING CEILING IN T HIS REGARD I.E. 10% OF THE TOTAL INCOME OR 2% OF THE AGGREGATE AVERAGE ADV ANCES MADE BY THE RURAL BRANCHES OF INDIAN BANKS WHICHEVER IS HI GHER SHOULD BE MODIFIED. ACCORDINGLY BY THE AMENDING ACT THE DED UCTION PRESENTLY AVAILABLE UNDER CL. (VIIA) OF SUB-S. (1) OF S. 36 O F THE IT ACT HAS BEEN SPLIT INTO TWO SEPARATE PROVISIONS. ONE OF THESE LI MITS THE DEDUCTION TO AN AMOUNT NOT EXCEEDING 2% OF THE AGGREGATE AVER AGE ADVANCES MADE BY RURAL BRANCHES OF THE BANKS CONCERNED. IT M AY BE CLARIFIED THAT FOREIGN BANKS DO NOT HAVE RURAL BRANCHES AND H ENCE THIS AMENDMENT WILL NOT BE RELEVANT IN THE CASE OF THE F OREIGN BANKS. THE OTHER PROVISION SECURES THAT A FURTHER DEDUCTION SH ALL BE ALLOWED IN RESPECT OF THE PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY ALL BANKS NOT JUST THE BANKS INCORPORATED IN INDIA LIM ITED 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 ALLO WED THE DEDUCTION UPTO 2% OF THE AGGREGATE AVERAGE ADVANCES MADE BY SUCH BRANCHES AND A FURTHER DEDUCTION UPTO 5% OF TH EIR TOTAL INCOME IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS. ITA NOS. 53 & 54/BANG/2013 PAGE 24 OF 35 33. TO COMPLETE THE SEQUENCE OF AMENDMENTS WE MAY ALSO MAKE A REFERENCE TO THE AMENDMENT TO SEC.36(1)(VIIA) OF TH E ACT BY THE FINANCE ACT 2013. BY THE FINANCE ACT 2013 IN SECTION 36 OF THE INCOME-TAX ACT IN SUB-SECTION (1) WITH EFFECT FROM THE 1ST DAY OF APRIL 2014 IN CLAUSE (VII) THE EXPLANATION WAS NUMBERED AS EXPLANATION 1 THERE OF AND AFTER EXPLANATION1 AS SO NUMBERED THE FOLLOWING EXPLANAT ION WAS INSERTED NAMELY: EXPLANATION 2.FOR THE REMOVAL OF DOUBTS IT IS HE REBY CLARIFIED THAT FOR THE PURPOSES OF THE PROVISO TO CLAUSE (VII) OF THIS SUB-SECTION AND CLAUSE (V) OF SUB-SECTION (2) THE ACCOUNT REFERRED TO THEREIN SHALL BE ONLY ONE ACCOUNT IN RESPECT OF PROVISION FOR BAD AN D DOUBTFUL DEBTS UNDER CLAUSE (VIIA) AND SUCH ACCOUNT SHALL RELATE T O ALL TYPES OF ADVANCES INCLUDING ADVANCES MADE BY RURAL BRANCHES ; 34. IT CAN BE SEEN FROM THE HISTORY OF SEC.36(1)(VI IA) OF THE ACT THAT AT STAGE-I THE DEDUCTION WAS ALLOWED IN RESPECT OF AN Y PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY A SCHEDULED BANK IN RELATION TO THE ADVANCES MADE BY ITS RURAL BRANCHES . AT THIS STAGE THE PBDD HAD TO BE LINKED TO THE ADVANCES MADE BY BANKS RURAL BRANCHES. AT STA GE-II OF SEC.36(1)(VIIA) THE DEDUCTION WHILE COMPUTING THE TAXABLE PROFITS WAS ALLOWED OF AN AMOUNT NOT EXCEEDING TEN PER CENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THE PRO POSED NEW PROVISION) OR TWO PER CENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCHES OF SUCH BANKS WHICHEVER IS HIGHER. AT THIS STAGE ALSO THE PBDD HAD TO BE CREATED AND DEBITED TO THE PROFIT AN D LOSS ACCOUNT BUT IT ITA NOS. 53 & 54/BANG/2013 PAGE 25 OF 35 WAS NOT REQUIRED TO BE DONE IN RELATION TO ADVANCES MADE BY BANKS RURAL BRANCHES AND CAN BE IN RELATION TO ANY DEBT. PB DD NEED NOT BE IN RELATION TO RURAL ADVANCES BUT CAN BE IN RELATION T O ANY ADVANCES BOTH RURAL AND NON-RURAL ADVANCES. THE TWO PERCENT AAA MADE B Y RURAL BRANCHES OF SUCH BANKS HAD TO BE COMPUTED AND THE PBDD MADE IN BOOKS HAS TO BE IN RELATION TO RURAL ADVANCES. THE OTHER ELIGIBLE SUM WHICH CAN BE CONSIDERED FOR DEDUCTION U/S.36(1)(VIIA) OF THE ACT VIZ. TEN PER CENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THE PRO POSED NEW PROVISION) DOES NOT REQUIRE COMPUTATION IN RELATION TO RURAL ADVANCES. NEVERTHELESS THE DEBIT OF PBDD TO PROFIT AND LOSS A CCOUNT IS NECESSARY OF THE HIGHER OF THE TWO SUMS TO CLAIM DEDUCTION U/S.3 6(1)(VIIA) OF THE ACT. IF THE CONCERNED BANK DOES NOT HAVE RURAL BRANCHES THE N THEY COULD NOT CLAIM THE DEDUCTION. THEREFORE THE DEDUCTION WAS CONFINE D ONLY TO BANKS THAT HAD RURAL BRANCHES. 35. AT STAGE-III OF THE PROVISIONS OF SEC.36(1)(VII A) OF THE ACT THE DEDUCTION ALLOWED EARLIER WAS ENHANCED. THE ENHANC EMENT OF THE DEDUCTION WAS CONSEQUENT TO REPRESENTATION TO THE G OVERNMENT THAT THE EXISTING CEILING IN THIS REGARD I.E. 10% OF THE TOT AL INCOME OR 2% OF THE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCH ES OF INDIAN BANKS WHICHEVER IS HIGHER SHOULD BE MODIFIED. ACCORDINGL Y BY THE AMENDING ACT THE DEDUCTION PRESENTLY AVAILABLE UNDER CL. (VIIA) OF SUB-S. (1) OF S. 36 OF THE IT ACT HAS BEEN SPLIT INTO TWO SEPARATE PROVISIONS. ONE OF THESE LIMITS THE DEDUCTION TO AN AMOUNT NOT EXCEEDING 2% (AS IT EXIS TED ORIGINALLY NOW IT IS ITA NOS. 53 & 54/BANG/2013 PAGE 26 OF 35 10%) OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURA L BRANCHES OF THE BANKS CONCERNED. THIS WILL IMPLY THAT ALL SCHEDUL ED OR NON-SCHEDULED BANKS HAVING RURAL BRANCHES WOULD BE ALLOWED THE DE DUCTION (A) UPTO 2% (NOW 10%) OF THE AGGREGATE AVERAGE ADVANCES MADE BY SUCH BRANCHES AND (B) A FURTHER DEDUCTION UPTO 5% OF THEIR TOTAL INCOME IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS. THE FURTHER DEDUCTION OF 5% OF TOTAL INCOME WAS AVAILABLE TO BANKS WHICH DID NOT HAVE RU RAL BRANCHES. 36. THEREFORE AFTER 1.4.1987 SCHEDULED OR NON-SCHE DULED BANKS HAVING RURAL BRANCHES WERE ALLOWED DEDUCTION. (A) UPTO 2% (NOW 10%) OF THE AGGREGATE AVERAGE ADVANCES MADE BY SUCH BRANCHES AN D (B) SCHEDULE OR NON-SCHEDULED BANKS WHETHER IT HAD RURAL BRANCHES O R NOT A DEDUCTION UPTO 5% OF THEIR TOTAL INCOME IN RESPECT OF PROVISION FO R BAD AND DOUBTFUL DEBTS. EVEN UNDER THE NEW PROVISIONS CREATING A PBDD IN TH E BOOKS OF ACCOUNTS IS NECESSARY. 37. THOUGH UNDER STAGE-II AND STAGE-III OF THE PROV ISIONS OF SEC.36(1)(VIIA) OF THE ACT PBDD HAS TO BE CREATED BY DEBITING THE PROFIT AND LOSS ACCOUNT OF THE SUM CLAIMED AS DEDUCTION T HE CONDITION THAT THE PROVISION SHOULD BE IN RESPECT OF RURAL ADVANCES IS NOT NECESSARY. AT STAGE-II OF THE PROVISIONS OF SEC.36(1)(VIIA) OF TH E ACT THIS CONDITION WAS DONE AWAY WITH AND IT WAS ONLY NECESSARY TO CREATE PBDD IN THE BOOKS OF ACCOUNTS AND DEBIT TO PROFIT AND LOSS ACCOUNT. THE QUANTIFICATION OF THE MAXIMUM DEDUCTION PERMISSIBLE U/S.36(1)(VIIA) OF TH E ACT HAD TO BE DONE. ITA NOS. 53 & 54/BANG/2013 PAGE 27 OF 35 FIRSTLY IT HAS TO BE ASCERTAINED AS TO WHAT IS 10% OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCHES IF THE BANK HAS RU RAL BRANCHES OTHERWISE THAT PART OF THE DEDUCTION U/S.36(1)(VIIA ) OF THE ACT WILL NOT BE AVAILABLE TO THE BANK. THE SECOND PART OF THE DED UCTION U/S.36(1)(VIIA) HAS TO BE ASCERTAINED VIZ. 7.5% SEVEN AND ONE-HALF PE R CENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI-A). THE ABOVE ARE THE PERMISSIBLE UPPER LIMITS OF DEDUCTIONS U/S.36(1)(VIIA) OF THE ACT. THE ACTUAL PROVISION M ADE IN THE BOOKS BY THE ASSESSEE ON ACCOUNT OF PBDD (IRRESPECTIVE OF WHETHE R IT IS RURAL OR NON- RURAL) HAS TO BE SEEN. TO THE EXTENT PBDD IS SO CR EATED THEN SUBJECT TO THE PERMISSIBLE UPPER LIMITS REFERRED TO ABOVE THE DEDUCTION HAS TO BE ALLOWED TO THE ASSESSEE. THE QUESTION OF BIFURCATI NG THE PBDD AS ONE RELATING TO RURAL ADVANCES AND OTHER ADVANCES (NON- RURAL ADVANCES) DOES NOT ARISE FOR CONSIDERATION. 38. IN THE PRESENT CASE AS FAR AY 03-04 IS CONCERNE D THE ASSESSEE DEBITED IN THE PROFIT AND LOSS A/C. ON ACCOUNT OF PBDD IN RESPECT OF RURAL AND NON- RURAL ADVANCES OF RS.88 30 47 000 (RS.88 2 0 47 000 FOR NON-RURAL ADVANCES AND RS.10 00 000 FOR RURAL ADVANCES). A S UM OF RS.4 36 165 WAS ACTUALLY WRITTEN OFF OUT OF THE PBDD OF RURAL A DVANCES. THE ASSESSEE WROTE OFF A SUM OF RS.88 26 10 825 AS BAD DEBTS ON ACCOUNT OF NON-RURAL ADVANCES AND CLAIMED THE SAME AS DEDUCTION U/S.36(1 )(VII) OF THE ACT. THE SAID CLAIM FOR DEDUCTION WAS ALLOWED BY THE AO. THE ASSESSEE MADE A CLAIM FOR DEDUCTION U/S.36(1)(VIIA)(A) OF THE ACT OF RS.23 80 55 247. THIS ITA NOS. 53 & 54/BANG/2013 PAGE 28 OF 35 WAS REJECTED BY THE AO FOR THE REASON THAT THE DEDU CTION U/S.36(1)(VIIA) OF THE ACT IS ALLOWED ONLY TO THE EXTENT PBDD IN RESPE CT OF RURAL ADVANCES IS CREATED IN THE BOOKS OF ACCOUNTS. AS WE HAVE ALREA DY EXPLAINED ABOVE THIS IS NOT A RELEVANT CONSIDERATION. WHAT HAS TO BE SEEN BY THE AO IS AS TO WHETHER PBDD IS CREATED (IRRESPECTIVE OF WHETHER IT IS IN RESPECT OF RURAL OR NON-RURAL ADVANCES) BY DEBITING THE PROFIT & LOSS A /C. TO THE EXTENT PBDD IS SO CREATED THE ASSESSEE IS ENTITLED TO DED UCTION SUBJECT TO THE UPPER LIMIT OF DEDUCTION LAID DOWN IN SEC.36(1)(VII A) OF THE ACT. TO AVOID POSSIBLE CLAIM FOR DOUBLE DEDUCTION IN RESPECT OF O NE AND THE SAME DEBT FIRST AS PBDD AND THEREAFTER AS BAD DEBTS THE LEGI SLATURE HAS ALREADY PROVIDED IN SEC.36(2)(V) OF THE ACT THAT WHERE SUCH DEBT OR PART OF DEBT RELATES TO ADVANCES MADE BY AN ASSESSEE TO WHICH CL . (VIIA) OF SUB-S. (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 U NDER THAT CLAUSE. FURTHER THE PROVISO ALSO LIMITS THE CLAIM FOR DEDUC TION U/S.36(1)(VII) OF THE ACT TO AN ASSESSEE TO WHICH SEC.36(1)(VIIA) OF THE ACT APPLIES TO THE AMOUNT BY WHICH SUCH DEBT OR PART THEREOF (WRITTEN OFF AS BAD DEBTS) EXCEEDS THE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER CLAUSE(VIIA) TO SEC.36(1) OF THE ACT. IT WOULD BE JUST AND FAIR IF THE ORDER OF CIT(A) IS SET ASIDE AND TH E AO DIRECTED TO EXAMINE THE CLAIM OF THE ASSESSEE IN THE LIGHT OF THE DISCU SSION MADE ABOVE. SIMILAR ORDER WOULD BE JUST AND FAIR IN AY 04-05 AL SO. WE HOLD AND DIRECT ITA NOS. 53 & 54/BANG/2013 PAGE 29 OF 35 ACCORDINGLY BY ALLOWING THE RELEVANT GROUNDS RAISED BY THE REVENUE FOR STATISTICAL PURPOSE. 39. WE MAY ALSO CLARIFY THAT THE DECISION RENDERED BY THE HONBLE SUPREME COURT IN THE CASE OF CATHOLIC SYRIAN BANK ( SUPRA ) HAS NO RELEVANCE TO THE PRESENT CASE. THE FACTS OF THE CA SE BEFORE THE HONBLE SUPREME COURT IN THE CASE OF CATHOLIC SYRIAN BANK ( SUPRA ) WAS THAT THE ASSESSEE CLAIMED DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF IN RESPECT OF NON-RURAL BRANCHES U/S.36(1)(VII) OF THE ACT. T HE AO NOTICED THAT THERE WAS ALREADY CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT U/S.36(1)(VIIA)(A) OF THE ACT WHICH WAS IN EXCESS OF THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF BAD DEBTS. THE AO AFTER MAKING REFERENCE TO PROVISO TO SEC.36(1)(VII) OF THE ACT A ND ALSO SEC.36(2)(V) OF THE ACT WAS OF THE VIEW THAT THE ASSESSEE COULD NOT BE ALLOWED THE DEDUCTION CLAIMED BECAUSE (I) THE AMOUNT CLAIMED AS DEDUCTION ON ACCOUNT OF BAD DEBTS WAS NOT THE EXCESS AVAILABLE IN THE CREDIT OF THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT CREATED U/S.36(1)(VIIA)( A) OF THE ACT AND; (II) THAT U/S.36(2)(V) OF THE ACT THE AMOUNT OF BAD DEBTS WRITTEN OFF SHOULD FIRST BE DEBITED IN THE PROVISION FOR BAD AND DOUBT FUL DEBTS ACCOUNT CREATED U/S.36(1)(VIIA)(A) OF THE ACT. THE STAND O F THE ASSESSEE WAS THAT SINCE THE CLAIM OF DEDUCTION OF BAD DEBTS MADE BY T HE ASSESSEE WAS U/S.36(1)(VII) OF THE ACT AND PERTAINED TO BAD DEBT S OF NON-RURAL ADVANCES ITA NOS. 53 & 54/BANG/2013 PAGE 30 OF 35 THE CREDIT BALANCE IN THE PBDD ACCOUNT SHOULD NOT B E LOOKED INTO AT ALL. THE HONBLE SUPREME COURT HELD: (I) THE PROVISIONS OF SECTION 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. (II) CLEAR LEGISLATIVE INTENT OF THE RELEVANT PROVI SIONS AND UNAMBIGUOUS LANGUAGE OF THE CIRCULARS WITH REFERENC E TO THE AMENDMENTS TO S. 36 DEMONSTRATE THAT THE DEDUCTION ON ACCOUNT OF PROVISIONS FOR BAD AND DOUBTFUL DEBTS UNDER S. 3 6(1)(VIIA) IS DISTINCT AND INDEPENDENT OF THE PROVISIONS OF S. 36 (1)(VII) RELATING TO ALLOWANCE OF THE BAD DEBTS. THE LEGISLATIVE INTE NT WAS TO ENCOURAGE RURAL ADVANCES AND THE MAKING OF PROVISIO NS FOR BAD DEBTS IN RELATION TO SUCH RURAL BRANCHES. (III) THE LANGUAGE OF S. 36(1)(VII) IS UNAMBIGUOUS AND DOES NOT ADMIT OF TWO INTERPRETATIONS. IT APPLIES TO ALL BAN KS COMMERCIAL OR RURAL SCHEDULED OR UNSCHEDULED. IT GIVES A BENE FIT TO THE ASSESSEE TO CLAIM A DEDUCTION ON ANY BAD DEBT OR PA RT THEREOF WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUN TS OF THE ASSESSEE FOR THE PREVIOUS YEAR. THIS BENEFIT IS SUB JECT ONLY TO S. 36(2). IT IS OBLIGATORY UPON THE ASSESSEE TO PROVE TO THE AO THAT THE CASE SATISFIES THE INGREDIENTS OF S. 36(1)(VII) ON THE ONE HAND AND THAT IT SATISFIES THE REQUIREMENTS STATED IN S. 36(2) ON THE OTHER. THE PROVISO TO S. 36(1)(VII) DOES NOT IN AB SOLUTE TERMS CONTROL THE APPLICATION OF THIS PROVISION AS IT COM ES INTO OPERATION ONLY WHEN THE CASE OF THE ASSESSEE IS ONE WHICH FAL LS SQUARELY UNDER S. 36(1)(VIIA). THE EXPLANATION TO S. 36(1)(V II) SPECIFICALLY EXCLUDED ANY PROVISION FOR BAD AND DOUBTFUL DEBTS M ADE 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 PRO VISION FOR BAD AND DOUBTFUL DEBTS WILL FALL OUTSIDE THE SCOPE OF S . 36(1)(VII) SIMPLICITER. (IV) AS PER THE PROVISO TO CL. (VII) OF S. 36(1) T HE 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 CL. (VIIA). TH E PROVISO BY AND LARGE PROTECTS THE INTERESTS OF THE REVENUE. IN CASE OF RURAL ITA NOS. 53 & 54/BANG/2013 PAGE 31 OF 35 ADVANCES WHICH ARE COVERED BY CL. (VIIA) THERE WOU LD BE NO SUCH DOUBLE DEDUCTION. THE PROVISO IN ITS TERMS LIMITS ITS APPLICATION TO THE CASE OF A BANK TO WHICH CL. (VIIA) APPLIES. INDISPUTABLY CL. (VIIA)(A) APPLIES ONLY TO RURAL ADVANCES. 40. THUS IT CAN BE SEEN THAT IN THE CASE OF CATHOLIC SYRIAN BANK ( SUPRA ) THE CASE MADE OUT BY THE AO WAS THAT PBDD IS ONE ACCOUNT AND WHENEVER CLAIM FOR DEDUCTION IS MADE U/S.36(1)(VII) THE SAME SHOULD BE DEBITED TO THE PBDD ACCOUNT. FURTHER THE LAW LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CATHOLIC SYRIAN BANK ( SUPRA) HAS TO BE UNDERSTOOD IN THE CONTEXT OF ITS ASSUMPTION THAT BA NKS WOULD MAINTAIN SEPARATE PBDD A/C. IN RESPECT OF RURAL BRANCHES AND NON-RURAL BRANCHES AND THEREFORE IT IS POSSIBLE TO DISCERN PBDD AS ONE IN RESPECT OF RURAL BRANCHES AND NON-RURAL BRANCHES AND THEREFORE THERE IS NO BASIS FOR THE ASSUMPTION THAT BANKS WOULD GET DOUBLE BENEFIT OF DEDUCTION BY WAY OF PROVISION FOR BAD AND DOUBTFUL DEBTS AND ALSO BY WA Y OF BAD DEBTS WRITTEN OFF. THE FOLLOWING OBSERVATIONS OF THE HONBLE SUP REME COURT IN THE CASE OF CATHOLIC SYRIAN BANK (SUPRA) WOULD BE RELEVANT I N THIS REGARD. 30. THE SCOPE OF THE PROVISO TO CL. (VII) OF S. 3 6(1) HAS TO BE ASCERTAINED FROM A CUMULATIVE READING OF THE PROVIS IONS OF CLS. (VII) (VIIA) OF S. 36(1) AND CL. (V) OF S. 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 BRAN CHES. IT MAY GIVE ADVANCES FROM BOTH BRANCHES WITH SEPARATE PROV ISION ACCOUNTS FOR EACH. 31. IT WAS NEITHER IN DISPUTE EARLIER NOR DISPUTE D BEFORE US THAT THE ASSESSEE BANK IS MAINTAINING TWO SEPARATE ACCOU NTS ONE BEING A PROVISION FOR BAD AND DOUBTFUL DEBTS OTHER THAN P ROVISIONS FOR BAD DEBTS IN RURAL BRANCHES AND ANOTHER PROVISION ACCOU NT FOR BAD DEBTS ITA NOS. 53 & 54/BANG/2013 PAGE 32 OF 35 IN RURAL BRANCHES FOR WHICH SEPARATE ACCOUNTS ARE M AINTAINED. THIS FACT IS EVINCED BY THE ENTRIES IN THE P&L A/C BALA NCE SHEET AND BREAK UP DETAILS. WE NEED NOT DELIBERATE THIS ASPEC T WITH REFERENCE TO RECORDS AT ANY GREATER LENGTH AS THIS IS NOT A M ATTER IN ISSUE BEFORE US. IT WAS CONTENDED ON BEHALF OF THE REVENU E THAT THE REVENUE IS ONLY CONCERNED WITH THE ASSESSEE AS A SI NGLE UNIT AND NOT WITH HOW MANY SEPARATE ACCOUNTS ARE BEING MAINT AINED BY THE ASSESSEE AND UNDER WHAT ITEMS. THE DEPARTMENT THER EFORE WOULD ASSESS AN ASSESSEE WITH REFERENCE TO A SINGLE ACCOU NT MAINTAINED IN THE HEAD OFFICE OF THE CONCERNED BANK. THIS ACCORD ING TO THE LEARNED COUNSEL APPEARING FOR THE DEPARTMENT WOULD FURTHER SUBSTANTIATE THE ARGUMENT OF THE DEPARTMENT THAT TH E INTERPRETATION GIVEN BY THE FULL BENCH OF THE HIGH COURT IS THE CO RRECT INTERPRETATION OF S. 36(1)(VII). THIS ARGUMENT HAS TO BE REJECTED BEING WITHOUT MERIT. 32. IN THE NORMAL COURSE OF ITS BUSINESS AN ASSES SEE 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 URB AN BRANCHES WOULD DEAL WITH COMMERCIAL DEBTS. MAINTENANCE OF SUCH SEP ARATE 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 OBL IGATION ARISES IMPLICITLY FROM THE REQUIREMENTS OF THE ACT AND CER TAINLY UNDER THE MANDATE OF ACCOUNTING STANDARDS. 34. INTER ALIA FOLLOWING ARE THE REASONS THAT WOU LD FULLY SUPPORT THE VIEW THAT A BANK SHOULD MAINTAIN THE ACCOUNTS W ITH SEPARATE ITEMS FOR ACTUAL BAD AND IRRECOVERABLE DEBTS AS WEL L 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 OVERSTATING THE PROFITS OR THE PROFITS WILL SHOOT U P WHICH WOULD RESULT IN ACCRUING OF LIABILITIES NOT DUE. (C) ACCOUNTING STANDARD (AS) 29 ISSUED IN 2003 W HICH CONCERNS TREATMENT OF 'PROVISIONS CONTINGENT LIABI LITIES AND ITA NOS. 53 & 54/BANG/2013 PAGE 33 OF 35 CONTINGENT ASSETS'. UNDER THE HEAD 'USE OF PROVISIO NS' CLS. 53 AND 54 STATE AS UNDER : '53. A PROVISION SHOULD BE USED ONLY FOR EXPENDITUR ES 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 ORIGINALL Y RECOGNISED FOR ANOTHER PURPOSE WOULD CONCEAL THE IMPACT OF TWO DIFFERENT EVENTS.' 35. THE ABOVE CLAUSES JUSTIFY MAINTENANCE OF DISTIN CT AND DIFFERENT ACCOUNTS. 36. MERELY BECAUSE THE DEPARTMENT HAS SOME APPREHEN SION OF THE POSSIBILITY OF DOUBLE BENEFIT TO THE ASSESSE E THIS WOULD NOT BY ITSELF BE A SUFFICIENT GROUND FOR ACCEPTING ITS INTERPRETATION. FURTHERMORE THE PROVISIONS OF A SE CTION HAVE TO BE INTERPRETED ON THEIR PLAIN LANGUAGE AND COULD NOT BE INTERPRETED ON THE BASIS OF APPREHENSION OF THE DEP ARTMENT. THIS COURT IN THE CASE OF VIJAYA BANK VS. CIT & AN R. (2010) 231 CTR (SC) 209 : (2010) 37 DTR (SC) 401 : (2010) 5 SCC 416 HELD THAT UNDER THE ACCOUNTING PRACTICE THE A CCOUNTS 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 P&L A/C OF THE HEAD OFFICE WHICH I S WHAT ULTIMATELY MATTERS THEN THERE WOULD BE A MISMATCH BETWEEN THE RURAL BRANCH ACCOUNTS AND THE HEAD OFFICE ACCOU NTS. 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 I S THAT A BANK CAN WRITE OFF A LOAN AGAINST THE ACCOUNT OF 'A ' ALONE WHERE IT HAS ADVANCED THE LOAN TO PARTY 'A'. IT CAN NOT 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 I N THE NORMAL COURSE OF ITS BUSINESS. ITA NOS. 53 & 54/BANG/2013 PAGE 34 OF 35 41. IN THE PRESENT CASE ACCORDING TO THE AO THE D EDUCTION U/S.36(1)(VIIA)(A) IS ALLOWED ONLY TO THE EXTENT PB DD IN RESPECT OF RURAL ADVANCES IS CREATED IN THE BOOKS OF ACCOUNTS. ACCO RDING TO HIM THE LIMITS UPTO TO WHICH SUCH DEDUCTION IS ALLOWED ALONE IS LA ID DOWN IN RULE 6ABA OF THE RULES. ACCORDING TO THE ASSESSEE IT IS ENTITL ED TO DEDUCTION OF THE IRRESPECTIVE OF CONSIDERATIONS WHETHER PBDD CREATED IN THE BOOKS OF ACCOUNTS IS IN RESPECT OF RURAL ADVANCES OR NON-RUR AL ADVANCES SUBJECT TO THE UPPER LIMITS LAID DOWN IN SEC.36(1)(VIIA)(A) OF THE ACT. THUS THE CASE MADE OUT BY THE AO STANDS ON A TOTALLY DIFFERENT FO OTING. THEREFORE THE DECISION IN THE CASE OF CATHOLIC SYRIAN BANK ( SUPRA ) IN OUR VIEW IS NOT RELEVANT TO THE ISSUE IN THE PRESENT CASE. 42. FOR THE REASONS GIVEN ABOVE WE ALLOW FOR STATI STICAL PURPOSES GR.NO.3 TO 5 RAISED BY THE REVENUE IN ITA NO.53/B/1 3 AND THE GROUNDS RAISED IN ITA NO.54/B/13 AND RESTORE THE ISSUE TO T HE AO FOR FRESH CONSIDERATION IN ACCORDANCE WITH THE DIRECTIONS GIV EN IN THIS ORDER. 43. IN THE RESULT ITA NO.53/BANG/2013 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND ITA NO.54/BANG/2013 IS ALLOWED FOR STATISTICAL PURPOSES . ITA NOS. 53 & 54/BANG/2013 PAGE 35 OF 35 PRONOUNCED IN THE OPEN COURT ON THIS 25 TH DAY OF OCTOBER 2013. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE DATED THE 25 TH OCTOBER 2013. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT BANGALORE.