Income Tax Appellate Tribunal - Mumbai
Indusind Bank Ltd, vs Assessee on 25 October, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "G", MUMBAI
BEFORE SHRI I.P. BANSAL JUDICIAL MEMBER AND
SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER
ITA No. 6566/Mum/2002
Assessment Year : 1998-99
ITA No. 606/Mum/2003
Assessment Year : 1999-2000
M/s. IndusInd Bank Limited Asstt. Commissioner of Income
IndusInd House 425 tax -Circle 2(3)
Dadasaheb Bhadkamkar Marg Vs. Room No.555, 5th floor
Mumbai-400 004. Aayakar Bhavan, M.K. Marg
PAN No. AAACI 1314 G Mumbai-400 020.
(Appellant) (Respondent)
Appellant by : Shri /Ms. D.S. Monikar
Respondent by : Shri Pavan Ved
Date of hearing : 25.10.2012
Date of Pronouncement : 23.11.2012
ORDER
PER BENCH:
These appeals by the assessee are directed against different orders dated 19.8.2002 and 30.10.2002 of CIT(A) for the assessment years 1998-99 and 1999-2000 respectively. Since there are some common issues involved, these appeals are being disposed of by a single consolidated order for the sake of convenience. The disputes raised in these appeals relate to assessment of interest on securities, 2 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 allowability of depreciation on leased assets, disallowance of entertainment expenses, disallowance of bad debt and disallowance of loss on unmatured foreign exchange contracts.
2. We first take up the dispute relating to assessment of interest income earned from securities which is common in both the appeals. The assessee had earned interest income from government and other securities. The interest as per securities became payable on the dates specified in the instrument at six monthly intervals. One of the due dates fell after the end of the previous year i.e. after 31st March. For the broken period till 31st March when the interest had not become due, the assessee did not offer the interest income on the ground that no interest income had accrued. Though the assessee had accounted such income in the books of account which had been prepared as per mercantile system of accounting, in the computation of income, the assessee had deducted the interest for the broken period from the taxable income, which came to Rs.38,36,31,175/- and Rs.24,27,32,189/- respectively for assessment years 1998-99 and 199-2000. The AO held that the assessee had right to receive the interest for the broken period and, therefore, interest income had accrued as the assessee was following mercantile system of accounting. Accordingly he assessed the interest for the broken 3 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 period. CIT(A) confirmed the view taken by the AO aggrieved by which the assessee is in appeal before the Tribunal in both the years. 2.1 Before us, the ld. AR for the assessee reiterated the submissions made before lower authorities that interest accrued only on the due dates and therefore interest could not be assessed for the broken period as the assessee had no right to receive the interest during the said period. The ld. AR further submitted that the issue was covered in favour of the assessee by the judgment dated 9.2.2012 of the Hon'ble High Court of Bombay in the case of Director (International Taxation) vs. Credit Swisse First Boston (Cyprus) Ltd. and also by the decision of the Tribunal in assessee's own case for the assessment year 2001-02 in ITA No.4343/M/05.
2.2 The CIT-DR appearing for the revenue on the other hand strongly supported the orders of authorities below. It was argued that interest on securities was assessable on due basis under specific provisions of section 18 of the Income tax Act, 1961 up to assessment year 1988-89 and thereafter section was omitted. Therefore, from assessment year 1989-90, interest on securities was required to be assessed on accrual basis as the assessee being a banking company was following the mercantile system of accounting. It was further argued that interest was required to be computed as a function of time 4 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 and accrued from day to day. Although, it became due at six monthly intervals as per terms of securities, this did not mean that interest did not accrue. The accrual of interest was different from payment of interest. Though interest was payable at six monthly intervals, the same accrued on day to day basis. Ld. CIT-DR gave the example of estimated warranty expenses which has been held by the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. (314 ITR
62) to be allowable in the year of sale itself even though the expenditure is required to be incurred subsequently. On the same analogy, though interest was payable later it accrued from day to day basis. He also referred to the judgment of Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation (228 ITR 802) in which it was held that the discount on issue of debenture redeemable after 12 years has to be allowed proportionately over the 12 year period and not in the year of the issue itself. The ld. CIT-DR placed reliance on the judgment of Hon'ble Supreme Court in the case of Rama Bai vs. CIT (181 ITR 400) in support of the proposition that interest accrued on day to day basis. In that case, the assessee had been allowed interest on enhanced compensation by the court and issue was whether the interest income had to be assessed in the year in which amount of enhanced compensation was finally settled or from year to year basis. Hon'ble Supreme Court held that interest accrued 5 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 on year to year basis. The ld. CIT(DR) further argued that the judgment of Hon'ble High Court of Bombay in case of DIT vs. Credit Swisse First Boston (Cyprus) Ltd. (supra) was per innqurium as the same had been passed without considering the binding judgment of Hon'ble Supreme Court in the case of Rama Bai (supra). It was thus argued that the judgment of Hon'ble Court was not a binding precedent. The ld. DR also pointed out that the assessee had shown the broken period interest as accrued and thus had recognized it as revenue in the books of account but excluded it from taxable income in computation of income. It was submitted that the Hon'ble High Court of Bombay was not concerned with the situation in which the income had had been recognized by the assessee itself in the books of account. The High Court had also not considered the aspect as to whether even after the deletion of section 18, the interest on securities could still be assessed on due basis. It was accordingly submitted that the judgment of Hon'ble High Court of Bombay could not be followed and issue had to be decided in favour of the revenue. 2.3 In reply the ld. AR submitted that the judgment of Hon'ble Supreme Court in the case of Rama Bai (supra) related to interest payable under section 28 and section 34 of Land Acquisition Act, 1984 which accrued from day to day basis as there were no due dates prescribed whereas the Hon'ble High Court of Bombay in case of Credit 6 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 Swisse First Boston (Cyprus) Ltd. (supra), was concerned with identical issue of interest on securities which became due on specified dates. It was also submitted that the judgment of Hon'ble Bombay High Court was not per inqurium as judgment of Hon'ble Supreme Court in case of Rama Bai (supra), had been rendered in a different context and was not applicable on the facts of that case. As regards the argument of Ld. CIT-DR that the assessee had accounted the interest income in the books of account, it was submitted that the issue was settled by the judgment of the Hon'ble Supreme Court in the case of Shoorji Vallabhdas & Co. (46 ITR 146) in which it was held that book keeping by itself does not result in real income. It was submitted that interest income was required to be assessed under the provisions of law and not on the basis of entries in the books of account. The ld. AR also pointed out that the judgments of Hon'ble Supreme Court in the case Rotorks Controls India P. Ltd.(supra), and the judgment in case of Madras Industrial Investment Corporation(supra), were rendered in different contexts and, therefore, were not applicable to the facts of the present case whereas the judgment of the Hon'ble High Court of Bombay in case of Credit Swisse First Boston (Cyprus) Ltd. (supra), was directly on the issue and, therefore, has to be followed. It was accordingly urged that addition made by the AO should be deleted.
7 ITA No.6566/M/02 & 606/M/03
A.Y. 98-99 & 99-00 2.4 We have perused the records and considered the rival contentions carefully. The dispute is regarding assessment of interest income from securities. The assessee held government and other securities on which as per terms of securities interest became due on the dates specified in the securities on six monthly intervals. One of the due dates fell after the end of the previous year i.e. after 31st March. The issue is whether any income on account of interest had accrued to the assessee during the broken period from the previous due date till 31st March of the previous year which was not the due date. The case of the department is that interest was accruing on day to day basis but it became payable only on the due dates. The argument advanced on behalf of the revenue is that income accrues on day to day basis in a mercantile system of accounting irrespective of the date of payment which may be at a later date as accrual of income is different from actual payment or receipt thereof. The case of the assessee is that income on account of interest accrued only on due dates as the assessee had right to demand interest only on due dates. It has also been argued on behalf of the assessee that the case is covered by the judgment of Hon'ble Jurisdictional High Court in the case of Director of (International Taxation) vs. Credit Swisse First Boston (Cyprus) Ltd. dated 9.2.2012 in which identical issue of accrual of interest on securities was decided by the Hon'ble Court. 8 ITA No.6566/M/02 & 606/M/03
A.Y. 98-99 & 99-00 2.5 We have carefully considered the material on record and, perused the judgment of Hon'ble High Court of Bombay in case of Director (International Taxation) vs. Credit Swisse First Boston (Cyprus) Ltd. (supra). We find that identical issue of accrual of income on account of interest from securities for the broken period had been considered by the Hon'ble High Court of Bombay. In the said case, the Hon'ble High Court noted that as per terms of securities, the interest became payable to the holder of security and only on the due dates. In other words, the interest is not payable to the holder of security on a date other than the one stipulated in the instrument. The Hon'ble High Court observed that income can be said to accrue or arise only when a person had acquired the right to receive the same as held by the Hon'ble Supreme Court in the case of E.D. Sassoon & Company Ltd. vs. CIT (26 ITR 27). The right to receive interest on the securities was vested in the assessee only on the due dates mentioned in the securities. Therefore, at the end of the previous year which was not the due date, the assessee had no enforceable right to demand interest for the broken period from the previous due date till the end of the previous year. It was accordingly held by the Hon'ble High Court that income on account of interest on securities for the broken period till the end of the previous year had not accrued to the assessee. The case of the assessee is identical. Therefore in our view the issue is 9 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 covered by the above judgment of the Hon'ble High Court of Bombay (supra).
2.6 Ld. CIT-DR has argued that the judgment of Hon'ble High Court of Bombay in case of Director ( International Taxation) vs. Credit Swisse First Boston (Cyprus) Ltd. (supra), could not be considered as a binding precedent as the same had been passed without considering the judgment of Hon'ble Supreme Court in the case of Ramabai (supra). In case of Ramabai (supra), the Hon'ble Supreme Court was concerned with the year of assessability of interest awarded by court on enhanced compensation. It was held by the Hon'ble Apex Court that the interest income had to be assessed from year to year basis and not in the year in which the amount of enhanced compensation was settled. It has therefore been argued by the ld. CIT-DR that the issue was covered by the judgment of of Hon'ble Supreme Court in the case of Ramabai as per which interest accrued from day to day basis. The judgment of Hon'ble High Court of Bombay in case of Credit Swisse First Boston (Cyprus) Ltd. (supra), which had not considered the judgment the binding of Supreme Court in case of Rama Bai (supra) is therefore per incurium. We however do not agree with the argument advanced by the ld. CIT-DR . It has been rightly pointed out by the ld. AR for the assessee that in case of Ramabai (supra), the interest payable was under section 28 and section 34 of Land 10 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 Acquisition Act which accrued from day to day basis as there were no due dates prescribed on which the interest accrued. Therefore, we agree with the ld. AR that the judgment in the case of Ramabai (supra), is distinguishable on facts and not applicable to the facts of the present case in which we are concerned with the interest on securities which became due only on specified dates. Accordingly the judgment of Hon'ble High Court of Bombay in case of Director (International Taxation) vs. Credit Swisse First Boston (Cyprus) Ltd. (supra), could not be considered per inquirium. 2.7 Ld. CIT-Departmental Representative has also distinguished the judgment of Hon'ble High Court of Bombay in the case of Director (International Taxation) vs. Credit Swisse First Boston (Cyprus) Ltd. (supra), on the ground that in the present case the assessee itself had shown the interest income as accrued in the books of account for the broken period which was not show so case of Credit Swisse First Boston (Cyprus) Ltd. (supra). This argument is also not convincing. As rightly pointed out by the ld. AR., the book keeping by itself does not result in real income as held by Hon'ble Supreme Court in the case of Shoorji Vallabhdas & Co. (supra). It is a settled legal position that entry in the books of account is not conclusive regarding nature of income or accrual of income which has to be decided on the basis of provisions of law and method of accounting being followed by the 11 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 assessee . We also agree with the submissions of the ld. AR that the judgment of Hon'ble Supreme Court in the case of Rotork Control India pvt. Ltd. (supra) and in the case of Madras Industrial Investment Corporation (supra) relied upon by the ld. CIT-DR are not applicable to the facts of the present case as those cases were not concerned with the accrual of income from securities which became payable on due dates six monthly. If the argument of ld. CIT-DR that the interest from security accrues from day to day basis even though it became payable on due dates, is accepted, then a person has right to demand interest even after selling securities for the broken period from the previous due date till the date of sale for which he had held the securities. But it is not so as the person in that case has no right to demand interest for the broken period as only holder of security is entitled for interest and that too only on the due dates.
2.8 In view of the foregoing discussion, we are of the view that the issue is fully covered by the judgment of Hon'ble High Court of Bombay in case of Director (International Taxation) vs. Credit Swisse First Boston (Cyprus) Ltd. (supra). We therefore, hold that interest from securities for the broken period till the end of the previous year is not assessable in case of the assessee. We accordingly set aside the order of CIT(A) and delete the additions made in both the years. 12 ITA No.6566/M/02 & 606/M/03
A.Y. 98-99 & 99-00
3. The second dispute which is also common in both the appeals is regarding disallowance of depreciation on the assets leased by the assessee during the course of banking operations by the assessee bank. The assessee had entered into a solitary transaction during the financial year 1997-98 relevant to assessment year 1998-99 in which it had leased out a boiler to Indo Gulf Fertilizer & Chemical Corporation after purchasing it from its original manufacturer M/s. Thermax Ltd. The AO on interpretation of various clauses of the lease agreement and on examination of documents, disallowed the claim of depreciation on the ground that the transaction in question was a financial transaction and not a genuine lease transaction. The AO thus disallowed depreciation amounting to Rs.17,59,47,475/- and Rs.1,44,40,632/- respectively for the assessment year 1998-99 and assessment year 1999-2000. In appeal, CIT(A) confirmed the disallowance aggrieved by which the assessee is in appeal before the Tribunal.
3.1 we have heard both the parties in the matter. We find that the issue of allowability of depreciation on leased assets in case of the assessee had been referred by the division Bench of the Tribunal to the Hon'ble President, ITAT, for constitution of a Special Bench. The Special Bench has since decided the issue vide order dated 14.3.2012 in ITA No.6566/M/2002 and ITA No.606/Mum/2003 in which it has 13 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 been held that it was a case of mere advancing of loan by the assessee to Indo Gulf Fertilizers & Chemical Corpn. and there was no genuine leasing of the boiler. The Special Bench therefore held that no depreciation was allowable in case of the assessee lessor. Respectfully following the decision of the Special Bench, we confirm the order of CIT() disallowing depreciation in both the years.
4. The third issue which is relevant only for the assessment year 1998-99 is regarding disallowance of entertainment expenditure on estimate basis. The AO after obtaining details of entertainment expenses of Rs.25,76,498/- noted that the same included expenses incurred on employees during official visits. The assessee submitted that the expenses incurred were entirely in connection with the clients and business visitors of the bank and for business purposes and has no personal element. It was also submitted that provisions of section 37(2) relating to disallowance of entertainment expenses had been deleted w.e.f. 1.4.1988. The AO however did not accept the contentions raised. It was observed that even after deletion of provisions of section 37(2), the allowability of expenses was governed by provisions of section 37(1). The AO held that these expenses had not been incurred wholly and exclusively for the purpose of business and accordingly disallowed the same.
14 ITA No.6566/M/02 & 606/M/03
A.Y. 98-99 & 99-00 4.1 The assessee disputed the decision of AO and submitted before CIT(A) that expenditure pertained mainly to providing snacks to the employees during office hours and a small portion related to entertainment of clients and business visitors to the bank and, therefore the expenditure was allowable as deduction. The assessee further submitted that the amount of about Rs.25.00 lacs was far from being ostentatious considering the net profit of Rs.91.00 crores and gross income of Rs.705.00 crores of the assessee. Considering the volume of business, CIT(A) restricted the disallowance to Rs.25% of such expenditure aggrieved by which the assessee is in appeal before the Tribunal .
4.2 Before us, the ld. AR reiterated the submissions made before the lower authorities that after deletion of provisions of section 37(2), the entertainment expenses could not be disallowed. These expenses which were incurred wholly and exclusively for the purpose of deduction were allowable as deduction and, therefore, disallowance confirmed by CIT(A) was not justified. Ld. DR on the other hand placed reliance on the orders of authorities below.
4.3 We have perused the records and considered the rival contentions carefully. The dispute is regarding disallowance of entertainment expenses on estimate basis. The entertainment 15 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 expenses included expenses incurred on employee during official visits. The case of the assessee is that the expenses incurred were entirely in connection with clients and business visitors of the bank and therefore, for business purpose. The AO had disallowed the expenditure holding that the same was not wholly and exclusively incurred for the purposes of business. CIT(A) restricted the disallowance to 25% of the claim. After careful consideration we are of the view that disallowance of expenditure is not justified. The claim of the assessee that the expenses had been incurred in connection with clients and business visitors has not been controverted before us. Therefore, we agree with the submission of the assessee that the expenses had been incurred wholly and exclusively for the purpose of business. Earlier there was specific provision for disallowance of entertainment of expenses under section 37(2) but the said provision has been deleted w.e.f. 1.4.88. Therefore, from assessment year 1988-89 there is no provision for disallowance of entertainment expenses. The expenses incurred by the assessee bank on employees during the official visits and in connection with clients and business visitors have to be allowed as incurred wholly and exclusively for business purposes. There is no case made out by the revenue that expenses are not properly vouched. CIT(A) in principle had agreed that expenses were allowable but has restricted the same to 75% when there is no limit provided under the Act. 16 ITA No.6566/M/02 & 606/M/03
A.Y. 98-99 & 99-00 Therefore in our view order of CIT(A) can not be sustained and the same is set aside and the claim of the assessee is allowed.
5. The fourth dispute which is relevant only to the appeal for assessment year 1999-2000 is regarding disallowance of loss amounting to Rs.2,37,82,608/- on unmatured foreign exchange contracts . The assessee had entered into forward contracts with clients to buy or sell foreign exchange at an agreed price on a future date. Before the maturity of contracts, the assessee calculated the value on the balance sheet date which showed loss of Rs.2,37,82,068/-. The assessee explained that as per FEDAI guidelines, the banks were required to revalue unmatured contracts on the balance sheet date at the end of each financial year based on exchange rate prevailing on that date and provisions of profit or loss were made which were adjusted in the year of maturity. The AO however did not accept the explanation given. It was observed by him that in case of forward contract, the liability to purchase or sell foreign exchange would arise only on the date of maturity and loss/profit computed on the balance sheet date was only notional. The AO further observed that in the mercantile system of accounting, the income/expenses have to be computed on accrual basis and not notional basis. The loss/profit accrued only on the date of maturity and not earlier. The AO therefore disallowed the claim. In appeal, CIT(A) 17 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 agreed with the finding of the AO that loss on account of revaluation of foreign exchange contract would accrue only at a future date and therefore loss computed on the balance sheet date which was only notional and estimated could not be allowed. CIT(A) accordingly confirmed the disallowance aggrieved by which the assessee is in appeal before the Tribunal.
5.1 We have heard both parties, perused the records and considered the matter carefully. The dispute is regarding allowability of loss computed by the assessee on the balance sheet date in respect of unmatured forward contract on the basis of rates prevailing on that date. The authorities below have disallowed the claim on the ground that loss was only notional and could be allowed only in the year of maturity of contract. We find that the issue is covered by the decision of the Tribunal in assessee's own case for the assessment year 2000- 01 in ITA No.931/M/04 dated 14.1.2011 in which the Tribunal following the decision of the Special Bench of the Tribunal in the case of DCIT (Intl. Taxation) vs. Bank of Bahrain & Kuwait (41 SOT 290) has allowed the claim of the assessee. The assessee had made the claim as per the method of accounting and as per FEDAI guidelines which is allowable. We, therefore, respectfully following the decision of the Tribunal in assessee's own case in assessment year 2000-01 18 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 (supra), set aside the order of CIT(A) on this point and allow the claim of the assessee.
6. The fifth dispute which again relates only to assessment year 1999-00 is regarding reduction of claim of bad debt under section 36(1)(vii) from Rs.44,95,22,581/- to Rs.34,76,45,118/-. The claim of bad debt is allowable under the provisions of section 36(1)(vii) as per which any bad debt or part thereof which is irrecoverable is allowable as deduction. The provisions of bad debt relating to banks are contained in clause (viia) and, in case of foreign banks, clause (viia)(b) is applicable as per which the amount not exceeding 5% of total income computed before making any deduction under this clause and Chapter VI-A is allowable as deduction. Further, the proviso to clause (vii) makes it clear that in case of banks, deduction shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provisions of bad and doubtful debts account. The assessee had claimed bad debt written off of Rs.44,95,22,581/-. From the said claim, the AO reduced the opening provision as on 31.3.98 of Rs.5,31,40,012/- and closing provision as on 31.3.99 of Rs.4,87,37,451/- and allowed the balance amount as deduction. In appeal, the CIT(A) noted that from bad debt written off amounting to Rs.44,95,22,581/- the assessee had deducted the opening provisions of Rs.5,31,40,012/- and claimed net amount of Rs.39,63,82,569/-. 19 ITA No.6566/M/02 & 606/M/03
A.Y. 98-99 & 99-00 CIT(A) held that AO had rightly deducted 5% of profit i.e. Rs.4,87,37,451/- from the bad debt. Aggrieved by the said decision, the assessee is in appeal before the Tribunal.
6.1 After hearing both parties, we find that the same issue has already been considered by the Tribunal in assessee's own case in assessment year 2000-01 vide order dated 14th January, 2011 in ITA No.9312/Mum/2004. In the said order the Tribunal noted that the issue had already been decided by the Mumbai Bench of the Tribunal in the case of Oman International Bank, SAOG vs. DCIT (92 ITD 76) and decided the appeal following the said decision. The relevant portion of the order in the case of Oman international Bank, SAOG is reproduced below as ready reference :-
"5. We consider it useful to reproduce the relevant legal provisions before proceeding to address ourselves to the core issue in this appeal. The relevant provisions are as follows:
Sec. 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 s. 28- (vii) Subject to the provisions of sub-s. (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 cl. (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts 20 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 account made under that clause; (viia)(b) in respect of any provision for bad and doubtful debts made by- (a) [Not relevant for our purposes] (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);
6. On a careful analysis of these provisions, it is immediately clear that the deduction s. 36(1)(vii), so far as a foreign bank is concerned, is only supplemental in nature inasmuch as it comes to the play only when, and is admissible to the extent, the provision for bad and doubtful debts allowed under s. 36(1)(viia)(b) falls short of the actual bad debts written off as irrecoverable.
Learned Departmental Representative, however, contends that the expression used in sub-s. 36(1)(vii) being "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", it is not material as to what was the actual deduction under s. 36(1)(viia) allowed by the Revenue, but as long as the bad debt is less than the total credit balance in the provision account, deduction under s. 36(1)(vii) cannot be allowed in respect of the same. This objection, in our considered view, is fallacious inasmuch as the reference is for "credit balance in the provision for bad and doubtful debts account made under that cl. [36(1)(viia)]", and, therefore, only such provision can be taken into account as is admissible under s. 36(1)(viia). Clauses (vii) and (viia) are two independent clauses of s. 36(1) `and as per the scheme of the Act, in our considered view, the deduction under s. 36(1) (vii) is supplemental in nature and it, therefore, comes to the play to the extent deduction already allowed under s. 36(1)(viia) falls short of the actual bad debts. It is, therefore, at first sight quite logical to assert that deduction under s. 36(1)(vii) only be allowed to the extent actual bad debts unrecoverable written off fall short of deductions allowable under s.36(1) (viia)(b) but then there has to be a mechanism to enable such a computation. The deduction under s. 36(1)(viia)(b) is in the nature of an ad hoc deduction and obviously without any regard to the actual loss suffered by the assessee- bank on account of bad debts. As this deduction is in the nature of a ' taxable business income based deduction' , this deduction can only be quantified after computing the taxable business income of the assessee, though before making any deduction under s. 36(1)(viia)(b) itself. This 21 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 process of determining the taxable business profits necessarily takes into account all other deductions under s. 36, including, inter alia, deduction admissible under s. 36(1) (vii). In other words, deduction under s. 36(1)(vii) is required to be computed and allowed before computation of deduction of s. 36(1)(viia). Therefore, at the stage of computing admissible deduction under s. 36(1) (vii), admissible deduction under s.36(1)(viia)(b) cannot be worked out. In this view of the matter, in our considered view, the scheme of the Act does not visualize taking into account admissible provision under s. 36(1)(viia)(b) for the current previous year, for the purpose of computing deduction under s. 36(1)(vii) of the Act. The computations made by the AO in the impugned order show that deduction allowed under s. 36(1)(viia) is Rs. 40,48,390 and net business income is Rs.
6,41,77,764, but then the deduction under s. 36(1)(viia) does not work out to 5 per cent of the profits before allowing this deduction (6,41,77,764 + 40,48,390 = 6,82,26,154) which should have been then Rs.
34,11,307. The inconsistency has arisen because the AO computed the admissible deduction under s.
36(1)(viia)(b) even before computing deduction under s. 36(1)(vii) because he wanted to restrict the deduction under s. 36(1)(vii) on the basis of deduction permissible for the current year under s. 36(1)(viia)(b). This methodology adopted by the AO is inherently contrary to the scheme of the Act, and is, in our humble understanding, bound to give results which fail the equation. We are, therefore, of the opinion that the CIT(A) indeed erred in upholding the action of the AO in taking into account the admissible deduction under s. 36(1)(viia)(b) for the relevant previous year, for computing shortfall for the purpose of s. 36(1) (vii) of the Act. As for the learned CIT(A) 's reliance on Hon'ble Punjab & Haryana High Court 's judgment in the case of Nandlal Sohanlal vs. CIT 1978 CTR (P&H)(FB) 5 : (1977) 110 ITR 170 (P&H)(FB) suffice to mention that, in our considered view, the view canvassed by the Revenue is not a correct or acceptable view of the matter. We, therefore, reject the same as an untenable view and decline to go into the controversy as to what will be the legal position in a situation in which more than one views on an issue are possible views.
7. We must, however, also deal with the judgment of Hon'ble Rajasthan High Court in the case of CIT vs. Bank of Rajasthan Ltd. (2002) 174 CTR (Raj) 400: (2002) 255 22 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 ITR 599 (Raj) which has been heavily relied upon by the learned Departmental Representative. In particular, learned Departmental Representative has invited our attention to the following observations made by their Lordships in the aforesaid judgment:
"The use of the words 'any such debt or part thereof' clearly indicate that the exclusion of provision in proviso to s.36(1)(vii) will apply only in cases, where a provision for bad and doubtful debts have been made in the relevant accounting year on the bad and doubtful debts, which were outstanding at the commencement of the relevant accounting year and/or were also outstanding at the end of the relevant year. The aggregate average advances with reference to which the deduction in respect of provision for bad and doubtful debt can be allowed necessarily implies that such a provision has to be made in respect of loan and advances made at the end of the year." The above observation has been made in the context of s. 36(1)(vii) and to state that the provision under that section can only be made in respect of a bad and doubtful debt which is outstanding at the beginning or end of the relevant previous year. There is no dispute about the fact that even a debt at the end of the year can be subject-matter of provision under s. 36(1)(vii), and it need not be confined to the debt outstanding at the beginning of the year. It is noteworthy that the reference is for the debts not the provision at the end of the year. There is no suggestion, however, that for the purpose of computing shortfall of provision for the purpose of s. 36(1)(vii), it is open to the AO to take into account balance of provision created under s. 36(1)(viia)(b) at the end of the relevant year. The above observations made by the Hon'ble Rajasthan High Court, therefore, do not come in our way in taking the stand that we have taken in the preceding paragraph.
8. We now come to another plea strenuously argued by the learned Departmental Representative, and that is with regard to the proposition that in case the assessee's plea is to be upheld, the assessee will get undue benefit in the first year of operations, because, on one hand, the assessee will be entitled to an ad hoc claim on the basis of taxable business income and, on the other hand, such an ad hoc claim will not be set off in deduction for actual bad debts. According to the learned Departmental Representative, this incongruity will end up in a situation that the assessee will get deduction for more than actual 23 ITA No.6566/M/02 & 606/M/03 A.Y. 98-99 & 99-00 bad debts -- something which is clearly contrary to the scheme of the Act and patently absurd.
9. There are two aspects to this issue. In the first place, the ad hoc deduction under s. 36(1)(viia) (b) being the last item on the computation of taxable business profits, it cannot be taken into account at the time of allowing deduction under s 36(1)(vii), and, to that extent, the actual deduction attributable to bad debts [i.e. 36(1)(vii) plus 36)(1)(vii)(b)] will indeed be more than the actual bad debts in that year However, since the provision so allowed under s 36(1)(viia)(b) is be taken into account while allowing deduction for actual bad debts in the subsequent year, the effect of excess deduction, if any, will be squared up in that subsequent year. Secondly, a view seems perfectly acceptable that the provision for bad debts allowable under s. 36(1)(viia)(b) being inherently attributable to the debts outstanding at the end of the year, provision allowable as such is against future bad debts out of debts outstanding at the year end, and, therefore, It need not he mixed up with actual bad debts incurred during the year. Viewed from these points of view, there, is no such incongruity as perceived by the learned Departmental Representative. Accordingly, we are not inclined to uphold the objection taken by the Revenue.
10. For the detailed reasons set out above, we deem it fit an proper to direct the AO to allow deduction under s. 36(1)(vii), without taking into account the admissible deduction under s.. 36(1) (viia)(b) for the relevant previous year, which, in our considered view, can only be taken into account for computing deduction under s. 36(1)vii) .for subsequent year(s) The AO shall also make consequential amendments in deduction admissible under s. 36(1)(viia)(b) in terms of the observations above." 6.2 We, therefore respectfully following the decision of the Tribunal (supra), direct the AO to compute deduction allowable on account of bad debt in line with the decision of the Tribunal in case of Oman International Bank, SAOG vs. DCIT (supra).
24 ITA No.6566/M/02 & 606/M/03
A.Y. 98-99 & 99-00
7. In the result both the appeals are partly allowed. Order pronounced in the open court on 23.11.2012.
Sd/- Sd/-
(I.P. BANSAL ) (RAJENDRA SINGH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 23.11.2012.
Jv.
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT(A) Concerned, Mumbai
The DR " " Bench
True Copy
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.