Income Tax Appellate Tribunal - Bangalore
Syndicate Bank vs Deputy Commissioner Of Income-Tax on 23 June, 2000
Equivalent citations: [2001]78ITD103(BANG)
ORDER
T.J. Joice, Accountant Member
1. This appeal has been preferred by the assessee against the order of the Commissioner of Income-tax, Karnata-ka-III, Bangalore (hereinafter referred to as the 'Commissioner' for short), dated 21-3-1991 for the assessment year 1987-88 passed under Section 263 of the Income-tax Act, 1961.
2. In the impugned order of revision under Section 263, the Commissioner directed the Assessing Officer to recompute the total income of the assessee by disallowing in toto the claim of the assessee under Section 36(1)(viia) of the Act as the assessee has failed to create any separate provision in respect of the advances made from rural branches. The assessee is aggrieved on this score and questions the validity of the impugned order on the ground of jurisdiction and also on merits.
3. Shri K.P. Kumar, advocate, appearing for the assessee, has raised a preliminary objection on the ground of jurisdiction to the impugned order of the Commissioner. It is pointed out by the learned counsel that the assessment for the assessment year 1987-88 was subject-matter of appeal before the Commissioner of Income-tax (Appeals) (hereinafter referred to as 'CIT (A)' for short). Since the CIT(A) has decided the issue relating to relief under Section 36(1)(viia) vide para 20 of the appellate order, the Commissioner has no jurisdiction to invoke the revisionary powers under Section 263 with respect to the order of the Assessing Officer which has got merged with the appellate order. Reliance in this connection is placed on the Full Bench decision of the Hon'ble Karnataka High Court in the case of CIT v. Hindustan Aeronautics Ltd. [1986] 157 ITR 315 : 27 Taxman 751.
4. On merits also, the learned counsel objects to the order of the Commissioner by stating that the assessee bank has made a provision for bad and doubtful debts and, therefore, it is eligible for deduction under Section 36(1)(viia) which only prescribes the method of quantification of deduction which is relatable to advances made by the rural branches. He further points out that the Commissioner erred in linking the proviso to Section 36(1)(vii) to Section 36(1)(viia) for arriving at a conclusion against the assessee because the former clause only requires only limiting of claim for bad debts written off as irrecoverable to the credit balance in the provision for bad and doubtful debts made under the latter clause. Further, it is argued by t,he learned counsel that both the clauses are independent and the Assessing Officer has correctly allowed the deduction in accordance with the direction of the learned CIT(A). It is also pointed out that the learned Commissioner misinterpreted the views expressed by the authors at pages 612 & 613 of the "Law and Practice of Income-tax" by Kanga & Palkiwala (VII Edition Vol-I).
5. The learned counsel further took us through the legislative history of the provisions of Section 36(1)(vii) and 36(1)(viia) and the various departmental circulars explaining the provisions issued from time to time in order to emphasise the point that in the case of scheduled banks having rural branches deduction under Section 36(1)(viia) is to be allowed in respect of provision for bad and doubtful debts. This deduction is to be quantified at 5 per cent of the total income (before allowing the deduction under this clause and under Chapter VIA) and also at 2 per cent of the aggregate average advances made by the rural branches of the bank computed in the prescribed manner as provided for under Rule 6ABA of the IT Rules, 1962. In support of the plea that Sections 36(1)(vii) and 36(1)(viia) are independent of each other and that an assessee is entitled to deduction under both clauses separately subject to the restriction regarding double deduction, reliance is placed on the decision of the ITAT, Calcutta 'D' Bench in the case of United Bank of India v. Dy. CIT [1999] 68 ITD 332.
6. On the other hand, the learned Departmental Counsel, Dr. R.B. Krishna, stoutly supported the order of the Commissioner passed under Section 263. He points out that the CIT(A) did not in fact adjudicate on the issue which is the subject matter of revision by the Commissioner. Since the Assessing Officer has already allowed the deduction under Section 36(1)(viia) in the assessment order dated 30-1-1989, the assessee could not have any grievance regarding deduction under Section 36(1)(viia) in the first appeal filed before the CIT(A). The only possible grievance of the assessee before the CIT(A) was that since the Assessing Officer enhanced the returned income by making various additions, the 5 per cent deduction mentioned in Section 36(1)(viia) should have been with reference to such enhanced income as against the total income returned by the assessee. Hence, Dr. Krishna asserts that the Commissioner did have the jurisdiction under Section 263 to revise the order passed by the Assessing Officer.
7. Countering the arguments of the learned counsel of the assessee with regard to the merits of the case, the learned cousnel for the Revenue argues that the assessee bank did not make any provision for bad and doubtful, debts in respect of advances made from rural branches and, therefore, in view of the specific provisions of Section 36(1)(viia) r.w. Section 36(1)(vzz) and the proviso thereunder, the assessee is not eligible for the deduction claimed. Therefore, the impugned order of the Commissioner under Section 263 does not call for any interference, it is argued by the learned counsel for the Revenue.
8. We have considered the rival submissions, the ratio of the decisions cited and the evidence on record. We shall first deal with the preliminary objection raised with regard to the jurisdiction of the Commissioner under Section 263 in the present case. It is found that the assessment order under Section 143(3) passed by the Assessing Officer on 30-1 -1989 was the subject matter of appeal before the CIT(A) who in his order dated 9-8-1989 allowed the claim of the assessee relating to deduction under Section 36(1)(viia). In this connection, it is pertinent to note that in the assessment order, the Assessing Officer computed the business income of the assessee by starting from the net profit as per the profit and loss account amounting to Rs. 6,51,19,714 and adding back inter alia bad and doubtful debts amounting to Rs. 7,76,34,738. Afterwards, the Assessing Officer has made deduction towards allowable expenses and allowances including inter alia "bad debts written off against provision" amounting to Rs. 38,86,800 and a further "deduction under Section 36(1)(viia) as per certificate" amounting to Rs. 7,40,70,973. On going through the appeal memo filed by the assessee before the CIT(A) in Form No. 35 and the accompanying documents, we find that the following extracts relate to the claim of deduction under Section 36(1)(viia):
(Statement of facts)....
Your appellant has claimed deduction under Section 36(1)(viia) in respect of provision for bad and doubtful debts to the extent of 2 per cent of the aggregate average advances and 5 per cent of income as computed with reference to the appellant's return of income. The Dy. Commissioner, while completing assessment and arriving at the enhanced income has not allowed the eligible deduction of 5 per cent of the income as per assessment order.
Among 17 grounds of appeal, ground No. 12 reads as under :
12. The Dy. Commissioner (Asst.) erred in law by not allowing eligible deduction of 5 per cent of income as per assessment order in terms of Section 36(1)(viia) of I.T. Act.
Again at page 6 of the appeal papers, it is stated inter alia as under :
For these and other reasons that may be adduced at the time of hearing your appellant craves for the following relief:
(b) ....
(c) ....
(d) ....
(e) ....
(f) ....
(g) ....
(h) ....
(i) ....
(j) Further eligible allowance of 5 per cent of income under Section 36(1) (viia) in respect of provision for bad and doubtful debts.
On referring to the order of, the CIT(A) dated 9-8-1989 in ITA 168/MNG/ CIT(A)/88-89, for the assessment year 1987-88, we find that para 20 of the appellate order reads as under :
20. Relief under Section 36(1)(viia).-The Assessing Officer has apparently through oversight omitted to allow the appellant's claim in this regard. He is directed to allow a deduction of 2 per cent of the advances made by the appellant in the rural branches and further 5 per cent on the income, before allowing the above, in accordance with the provisions of this Section.
From the above, it is abundantly clear that the specific issue relating to the quantification of deduction under Section 36(1)(vii'a) was raised by the assessee before the first appellate authority who has also adjudicated the issue vide para 20 of the appellate order which we have extracted above. In the circumstances, the Revenue's contention that this issue was not subject matter of appeal before the CIT(A) cannot be accepted as correct.
9. It is well settled law that the revisionary powers of the Commissioner under Section 263 does not extend to matters which have been considered and decided by the appellate authority. This principle based on the doctrine of merger has been emphasised by the Hon'ble Karnataka High Court in its full Bench decision in the case of Hindustan Aeronautics Ltd. (supra). Reference in this connection may also be made to the following decisions :
• Oil India Ltd. v. CIT [1982] 138 ITR 836 : 9 Taxman 262 (Cal.), • Hamilton & Co. (P.) Ltd. v. CIT [1991] 187 ITR 568 : 57 Taxman 194 (Cal.), • CIT v. Haryana Sugar Mills Ltd. [1990] 181 ITR (St.) 226, • J.K. Synthetics v. Addl. CIT [1976] 105 ITR 344 (All.), • CIT v. P. Muncherji & Co. [1987] 167 ITR 671 : 32 Taxman 551 (Bom.), • CIT v. Paul Bros. [1995] 216 ITR 548 : 79 Taxman 378 (Bom.), • CIT v. Saraf Bandhu (P.) Ltd. [1995] 216 ITR 833 : 75 Taxman 392 (Bom.), • M.S.P. Spices (P.) Ltd. v. CIT [1991] 188 ITR 491 : 59 Taxman 69 (Kar.), • Addl. CIT v. Vijayalakshmi Lorry Service [1986] 157 ITR 327 (Kar.), • CIT v. Hindustan Aeronautics Ltd. [1994] 206 ITR 220 (Kar.), • CIT v. Orissa Assam Oil Industries Ltd. [1992] 193 ITR 183 : 60 Taxman 123 (Ori.), and • General Beopar Co. (P.) Ltd. v. CIT [1987] 67 ITR 86 (Cal.).
In view of the ratio of the above decisions and also in view of Clause (c) of Explanation under Section 263, which has been brought into the statute book by the Finance Act, 1988 w.e.f. 1-6-1988, it is crystal clear that since the issue relating to deduction under Section 36(1)(viia) was adjudicated by the CIT(A). The learned Commissioner erred in law in invoking the revisionary powers under Section 263 in relation to an order passed by the Assessing Officer which is deemed to have merged with the appellate order. Even if it is true that only one aspect of the quantification of deduction was disputed before the CIT(A), the first appellate authority has clearly considered the applicability of the deduction claimed under Clause (viia) of Sub-sectiqn (1) of Section 36 in its entirety as the very title of paragraph 20 of the appellate order indicates when read in conjunction with the text of the second sentence in the paragraph wherein he has directed the Assessing Officer "to allow a deduction at 2 per cent of the advances made by the appellant in the rural branches .... in accordance with the provisions of this Section". This is especially so because the first appellate authority has the power to traverse the entire ground of appeal before him as his powers are co-terminus and co-extensive with those of the assessing authority and even extend to the power of enhancement in appropriate cases. We are fortified in taking this view by the ratio of the following decisions :
• CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 (SC), • Jute Corporation of India Ltd. v. CIT [1981] 187 ITR 688 : 53 Taxman 85 (SC), • CIT v. Mc. Millan & Co. Ltd. [1958] 33 ITR 182 (SC), • CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891 (SC), • CIT v. Rai Bahadur Hardutroy Motilal Chamaria [1967] 66 ITR 443 (SC), • J.K. Synthetics (supra), • CIT v. Karamchand Premchand (P.) Ltd. [1969] 74 ITR 254 (Guj.), • CIT v. Scindia Steam Navigation Co. Ltd. [1971] 80 ITR 589 (Bom.).
It has also been ruled by the Hon'ble Calcutta High Court that when a particular point is subject matter of an appeal and the same is decided by the appellate authority, the Commissioner is not competent to revise the order on that point on the ground that a particular aspect of that point was not dealt, with by the appellate authority [vide Oil India Ltd. (supra); CIT v. Kanti Kumar Kanoria. Respectfully following the ratio of the decisions cited supra, we find merit in the assessee's preliminary objection and on this ground alone the impugned order of the Commissioner is liable to be quashed as having been passed without jurisdiction.
10-11. Coming to the merits of the case also we are of the considered view that the assessee should not be denied the benefit of deduction under Section 36(1)(viia) for the reason as stated by the Commissioner in the concluding paragraphs of the impugned order which read as under :
9. Coming to the question of merits, the contention that under the provisions of Section 36(1)(viia) it is not necessary that the provision for bad and doubtful debts should pertain to rural advances is not acceptable. Section 36(1)(vii) which reads as follows is very material for interpreting Section 36(1)(viia).
Section 36(1)(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 a bank 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].
10. The provision of Section 36(1)(viia) should be "understood and interpreted to logically allow the application of Section 36(1)(vzz) and proviso to that section as above. The proviso to Section 36(vii) means that a separate provision for rural advances should be made as rural debts which become bad have to be written off first against provision already allowed under Section 36(1)(viia) as otherwise it would mean a double deduction which is not intended. With the insertion of the proviso to Section 36(1)(vz'z), it casts a responsibility on the assessee to whom provisions of Section 36(1)(viia) applies to create a separate provision in respect of the advances made from rural branches. (In this connection attention of the assessee is drawn to the views of the commentator on pages 612 and 613 - Kanga and Palkhiwals - Law and Practice of Income-tax - Eighth Edition - Volume (I). Therefore, the assessee's contention in this regard is rejected also on merits and the Assessing Officer is directed to recompute the income disallowing in toto the claim of the assessee under Section 36(1)(viia) as the assessee has failed to create any separate provision in respect of the advances made from rural branches.
12. For a meaningful discussion of the dispute in this case, we consider it Cessary to reproduce the relevant clauses of Section 36(1) as applicable the assessment year in question :-
36(1). Other deductions.-The deduction 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) ....
(ia) ....
(ib) ....
(ii) ....
(iia) ....
(iii) ....
(iv)....
(v) ....
(va) ....
(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 a bank 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;] (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;
(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);
(c) a public financial institution or a State financial corporation of a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A).
Explanation - For the purpose of this clause,-
(i) "non-schedule bank" means a banking company as defined in Clause (c) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank;
(ii) "rural branch" means a branch of a scheduled bank (or a non-scheduled bank) situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year;
(iii) "scheduled bank" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under Section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under Section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a cooperative bank;
(iii) ....
(iv) ....
(v) ....
The relevant provisions of Section 36(2) read as under:
Section 36(2): "In making a deduction for a bad debt or part thereof, the following provisions shall apply
(i) ....
(i) ....
(iii) ....
(iv) ....
(v) Where such debt or part thereof relates to advances made by an assessee to which Clause (viid) of Sub-section (1) applies, no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of such debt in that previous year to the provision for bad and doubtful debts account made under that clause.
13. Rule 6ABA of the Income-tax Rules, 1962 reads as under :
6ABA. For the purposes of Clause (viia) of Sub-section (1) of Section 36, the aggregate average advances made by the rural branches of a scheduled bank shall be computed in the following manner, namely :-
(a) the amounts of advances made by each rural branch as outstanding at the end of the last day of each month comprised in the previous year shall be aggregated separately;
(b) the sum so arrived at in the case of each such branch shall be divided by the number of months for which the outstanding advances have been taken into account for the purposes of Clause (a);
(c) the aggregate of the sums so arrived at in respect of each of the rural branches shall be the aggregate average advances made by the rural branches of the scheduled bank.
Explanation - In this rule, "rural branch" and "scheduled bank" shall have the meanings assigned to them in the Explanation to Clause (viia) of Sub-section (1) of Section 36.
14. The relevant portion of the book by Kanga & Palkhiwala relied on by the learned Commissioner reads as under :-
Clause (viia). Provision by banks for bad debts - This clause grants a deduction in respect of a provision for bad and doubtful debts made by banks except the banks covered by Clause (viia). The deduction is subject to certain ceilings based upon percentages of the total income and of the advances made by the rural branches of banks. Rule 6ABA prescribes the manner of computing the aggregate average advances.
The banks covered by this clause are also entitled to deduction under the preceding Clause (vii) in respect of any bad debt written off as irrecoverable in their accounts for the relevant accounting year, but only to the extent such bad debt exceeds the credit balance in the provision for bad and doubtful debts account made under this clause. This is obviously to avoid a double deduction.
15. The order of the learned Commissioner is based on certain fallacies and misconceptions. The learned Commissioner seems to imply that Section 36(1)(viia) is not an independent clause separate from Section 36(1)(vii). Clause (vii) is in respect of bad and doubtful debts written off as irrecoverable whereas Clause (viia) is in respect of provision for bad and doubtful debts. These clauses are independent of each other as held by the ITAT in the case of United Bank of India mentioned supra. We have to add that the opening portion of Section 36(1), i.e. 'the deductions provided for in the following clause shall be allowed... when considered with the numbering of the clauses such as (i), (id), (ib), (ii), (iia). . . (vii), (viia)... makes it crystal clear that Clauses (vii) and (viia) are separate, distinct and independent of each other and the assessee is entitled to simultaneous deductions under these clauses subject, of course to the proviso under Clause (vii); read with Section 36(2)(v), the applicability of which in the instant case we will consider in an ensuing paragraph (vide para 19 infra).
16. The learned Commissioner also appears to have laboured under the impression that the assessee's case is not different from other cases where deduction for bad debts and provision for doubtful debts is claimed. The assessee is a scheduled bank in the present case and Clause (viia) is specifically meant for scheduled banks or a non-scheduled bank having rural branches in India. This clause has been specifically enacted for the purpose of covering the possible losses suffered by the rural branches in advancing monies to the rural sector and is in the nature of an incentive to the scheduled banks for providing the facility of rural credit. This has to be seen in the light of the economic policy of the Government of India and the credit policy laid down by the RBI with specific reference to programmes for rural development, economic aid to weaker sections of the society, creation of rural employment opportunities, credit to small and medium farmers in the rural areas and so on. A glance at the annual report of the assessee bank for the year under consideration reveals that the bank was actively involved in various such programmes relating to the rural sector.
17. That apart, the order of the learned Commissioner seems to imply that the assessee should make a provision for bad and doubtful debts relating specifically to advances made from rural branches. Such a presumption is unwarranted by the text of Clause (viia) of Section 36(1). This clause only makes a reference to any provision for bad and doubtful debts. The assessee in the present case has actually made a provision amounting to Rs. 77,63,438. Therefore, the assessee is clearly eligible for the deduction under Clause (viia). It is also not in dispute that the assessee bank has branches all over India, predominantly in the rural areas and that the assessee bank has extended rural credit in accordance with the policy guidelines issued by the Government of India and the RBI. As per the annual report for the year under consideration, the bank has a network of 1439 branches, out of which rural branches come to 664 constituting 46.0 per cent of the total branches of the bank. These branches are operating in 209 Districts in 18 States and 6 Union Territories.
18. Even assuming for the sake of argument that the assessee should make a provision for bad and doubtful debts in respect of advances made by rural branches, the assessee is deemed to have satisfied this condition on account of the fact thabwhat is submitted before the Assessing Officer while filing the return of income is the consolidated account of the bank as is evident from the report dated 23-3-1987 to the President of India made by the auditors of the assessee bank. Inasmuch as the profit and loss account and the balance sheet and the annual report filed by the assessee bank presents the consolidated picture of the bank's financial activities for the accounting year under consideration, it cannot be denied that the provision for bad and doubtful debts as shown by the assessee bank includes inter alia provision for bad and doubtful debts made by the rural branches of the bank in respect of advances made by them. In this view of the matter, we hold that the adverse inference drawn by the Commissioner against the assessee in the last sentence of the impugned order under Section 263 is unwarranted.
19. There cannot be any serious doubt with regard to the proposition in law that the proviso to Clause (vii) is meant for avoiding double deduction in respect of provision made initially and written off as bad debt subsequently. On going through the statement of account submitted by the bank before the lower authorities, we find that the bank has certified to the effect that the bad debts claimed as written off under Section 36(1)(va) is exclusive of the provision made for bad and doubtful debts for which deduction is claimed separately under Section 36(1)(viid). Therefore, the reliance placed by the learned Commissioner on the views expressed by Kanga & Palkhiwala (extracted in para 14 above) is misplaced. On the contrary the authors' views lend support to the assessee's claim in the present case as nothing is on record to suggest that the assessee is claiming double deduction in respect of the same items of debts.
20. The learned Commissioner has also acted under the misconception that deduction under Clause (viia) is related to the actual amount of provision made by the assessee for bad and doubtful debts. The true meaning of the clause, as indicated earlier, is that once a provision for bad and doubtful debts is made by a scheduled bank having rural branches, the assessee is entitled to a deduction which is quantified not with respect to the amount provided for in the accounts, but with respect to a certain percentage of the total income and also a certain percentage of the aggregate average advances made by the rural branches of the bank. In other words, this is a specific deduction given by the statute irrespective of the quantum provided by the assessee in its accounts towards provision for bad and doubtful debts.
21. In the light of the discussion above and also in view of the fact that the assessee-bank has to comply with the various norms and guidelines prescribed by the RBI, in respect of rural advances and matters relating to credit policy, accounting standards and reporting system, we are unable to find any merit in the reasoning adopted by the learned Commissioner in directing the Assessing Officer to disallow the claim under Section 36(1)(viia) in totoand that too in the light of the clear finding given by the learned first appellate authority on the very same issue in crystal clear terms to the effect that the assessee is entitled to deduction at 5 per cent of the total income and also at 2 per cent of the advances made by the rural branches "in accordance with the provisions of this section" [Emphasis supplied].
22. In the light of the foregoing discussion we hold that the impugned order is liable to be cancelled on ground of jurisdiction as well as on merits. We order accordingly.
23. In the result the appeal is allowed.