Income Tax Appellate Tribunal - Mumbai
The Greater Bombay Co Op Bank Ltd , Mumbai vs Dcit 1(3), Mumbai on 23 November, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "G", MUMBAI
BEFORE SHRI AMIT SHUKLA (JUDICIAL MEMBER)
AND
SHRI ASHWANI TANEJA (ACCOUNTANT MEMBER)
I.T.A. No.1112/Mum/2015
(Assessment Year: 2011-12)
The Greater Bombay Co-op Bank Vs The Dy.CIT 1(3), Mumbai
Ltd, 89, GBCB House
Bhuleshwar, Mumbai 20002
PAN : AABAT4497N
(Appellant) (Respondent)
Appellant by Shri A.L. Sharma
Respondent by Shri Prakash Mane
Date of hearing : 08-11-2016
Date of order : 23 -11-2016
ORDER
Per ASHWANI TANEJA, AM:
This appeal has been filed by the assessee against the order of Commissioner of Income-tax (Appeals)-3, Mumbai [hereinafter called CIT(A)] dated 29-01-2015 passed against the assessment order u/s 143(3) dated 29-03-2012 for A.Y. 2010-11 on the following grounds:
"1] A] The learned CIT(A) erred in confirming the disallowance of claim of bad debts of Rs. 5,50,44,192/-. B] The learned CIT(A) erred in concluding that there is no write off since according to him the amount in question is not debited to Profit & Loss Account not appreciating the fact that the provision for bad and doubtful debts reserve is made in Profit & Loss AI c. year to year and the 2 I.T.A. No.1112/Mum/2015 same being added to total income.
C] The learned CIT(A) erred in not appreciating the fact that provision for bad debts reserve is created year to year by debiting the amount to Profit & Loss and crediting to provision for bad and doubtful debt account.
2. The solitary issue raised in this appeal is with regard to disallowance of claim of bad debt amounting to Rs.5,50,44,192/-.
3. The brief facts as culled out from the order of the AO are that during the course of assessment proceedings, the AO noted that the assessee had debited Rs 1,35,31,333/- towards the bad debts reserve, whereas in the computation of income it had claimed bad debts of Rs 5,50,44,192/-. The AO therefore, disallowed the claim of the assessee on the grounds that bad debts have not been written off to the Profit & Loss A/c as required by the provisions of section 36(
1) (vii). The reason of disallowance was also that the 'Bad Debts Provision Account' had a credit balance of Rs 8.62 crores, and as the Amount of Bad Debts written off was less than the opening balance of the provision, the same could not be allowed in view of the first proviso to section 36( 1 )
(vii).
4. Being aggrieved, the assessee filed appeal before the Ld.CIT(A) and the submissions of the assessee made before the Ld.CIT(A) have been summarized by the Ld.CIT(A) as under:-
"(i) Bad debts have been claimed u/s 36(1) (vii) and not u/s 36( 1) (viia), as claimed by the AO;
(ii) The provision for bad debts has been created by debiting the P&L A/c. However, the same is added 3 I.T.A. No.1112/Mum/2015 back in the computation of income;
(iii) Similar issue rose before the CIT(A) for AY 2007-
08. The CIT(A) has granted relief to the appellant;
(iv) Lastly, it was submitted that the bad debts ore written off in the books by debiting the bad and doubtful debts reserve account and crediting the debtor's accounts."
5. Thereafter, Ld. CIT(A) analysed the entire facts of the case and agreed with the assessee on the first limb of argument that in case assessee did not make claim u/s 36(1)(viia), then, the assessee was entitled to make claim of deduction u/s 36(1)(vii) of the Act as a normal assessee by observing as under:-
"I have perused the facts of the matter. The first objection of the AO is that the assessee has not debited the provision account. I find that this issue came up before my predecessor for AY 2007-08, who held as follows:
"1.2 I have perused the facts of the case and I do not agree with the findings of the AO. The crux of the provisions contained in proviso to section 36(I) (vii) and in section 36(2) (v) is that no assessee is allowed to claim deduction twice on account of debts which are in the category of bad, first in the form of a provision and secondly in the form of actual write off of the debt, in the present case, it is not a situation where no provision was created in the accounts in the earlier years. In the books of account provision for bad debts is being created year after year but in the computation of income this provision is disallowed and is not claimed. Consequently, becaus e provision has not been claimed independently, there is no question of any double claim, second claim, i n the form of bad debts actually written off. Therefore , to my mind the finding of AO is not correct and appellant is entitled to claim of bad debts. The ground of appeal is therefore allowed.4
I.T.A. No.1112/Mum/2015 1.3 I am in agreement with the decision of my predecessor that keeping in view the facts of the matter that the appellant had (lot claimed the provision u/s 36(1)(viia), it was not required to debit the write off to the said provision. In this regard, I find that I am also supported by the decision of the Cochin Bench of the Tribunal in the case of Kannur District Co-op Bank Ltd. [136 1TD 102]."
6. But with regard to the second limb of the objection made by the AO that amount should be debited in the P&L Account which was not done by the assessee since the amount was debited to the account of provisions only and not to P&L account, Ld. CIT(A) did not agree with the submission of the assessee and on this ground, he rejected the claim of the assessee by observing as under:-
"1.4 Now coming to the second objection that the amount written off should have been debited to the P&L A/c, and hence the same is not allowable. In this regard, the facts are that in the balance sheet the appellant has created "bad and doubtful fund reserve". The said reserve had a credit balance of Rs 8.62 crores in the year ending 31.03.2010, which now stands reduced to Rs 4.08 crores in the year ending 31.03.2011. It is against the said reserve that the appellant has debited this year's write off Rs 5.50 crores and credited the loan accounts with the same figure. Now it is the appellant's submission that this would constitute a write off within the meaning of section 36(1)(vii). The AO on the other hand has held that write off would necessarily involve a debit to the P&L A/c. It is an accepted position that provision and reserves are two separate items. The provision is a liability, whereas reserve is assessee's own funds. A reserve is appropriation of the profits, whereas a provision is an expenditure on the profits. Therefore, assessee is required to make only a provision in its 5 I.T.A. No.1112/Mum/2015 accounts for bad debts, even though the amount was not actually written off by debiting the P&L A/c of the assessee. However, by insertion of new explanation in section 36(1)(vii) w.e.f. AY 1989-90, it was clarified that any bad debt written off as irrecoverable in the account of the assessee will not include any provision for bad and doubtful debts. In the present case, the appellant has debited the reserve account and credited the sundry debtors. There is therefore, clearly no debit in the P&L A/c in either the current year or in the earlier years. In fact, the appellant has not created any provision for bad and doubtful debts in its balance sheet. A reserve is not a charge on the profits and hence, it cannot be held that there has been any write off. For this reason no relief can be given to the appellant on this ground."
7. Being aggrieved, the assessee filed appeal before the Tribunal.
8. During the course of hearing, Ld. Counsel made vehement arguments and submitted that this issue has been now settled by the judgment of the Hon'ble Supreme Court in the case of Catholic Syrian Bank Ltd vs CIT 343 ITR 270 (SC) wherein it was held that the provisions of section 36(1)(vii) and 36(1)(viia) of the Act are distinct and independent items of deduction and operate in their respective fields. Reliance was also placed upon the judgment of Hon'ble Supreme Court in the case of DCIT vs Karnataka Bank Ltd 349 ITR 705 (SC) wherein it was held that scheduled commercial banks are entitled to benefit of write off of irrecoverable debts u/s 36(1)(vii) in addition to deduction of provision for bad and doubtful debts u/s 36(1)(viia). Following judgments were also relied upon by 6 I.T.A. No.1112/Mum/2015 the Ld. Counsel in support of this proposition:-
1. South Indian Bank Ltd vs CIT 262 ITR 579 (Ker)
2. Bank of Baroda vs ACIT ITA No.2927/Mum/2011
3. Andhra Pradesh State Co-operative Bank Ltd vs Addl CIT 36 ITR 131 (Hyd)
4. ACIT vs State Bank of Travancore (2009) 121 TTJ 418 (ITAT Cochin Bench)
5. CIT vs Bank of Rajasthan Ltd 124 Taxman 781 (Raj) 8.1. It was also submitted by the Ld. Counsel that since the assessee did not have any rural advances, it was not eligible for the deduction under clause (viia) and thus assessee made claim u/s 36(1)(vii) only. There was no claim of do uble deduction and since no contrary facts were brought on record by the lower authorities, denial of deductio n was merely on doubts and apprehensions.
8.2. With regard to the other objection of the lower authorities for not debiting the amount in P&L account, it was submitted that the amount was already debited in the provisions of the earlier years. Thus, the amount was debited in the earlier years, but was not claimed as bad debt in the earlier years, since the same was not written off in the account of the respective debtors in those years. But in the year before us, the amount has been written off / credited in the account of the respective debtors, and thus both the conditions of section 36(1)(vii) stood complied with in the year before us. Therefore, the assessee became entitled for deduction in the year before us and that the claim was 7 I.T.A. No.1112/Mum/2015 rightly made which should have been allowed. The Ld. Counsel also drew our attention on various pages of the paper book with a view to demonstrate these facts.
9. Per contra, the Ld. DR fairly and principally agreed that the assessee has to be allowed claim of bad debts in any one of the years, i.e. either in the year when provision was made or in the year when amount is credited in the respective debtor's account. The deduction could not have been allowed without crediting the amount written off in the debtor's account, and therefore, as per law the deduction of bad debt can be allowed in the year when ultimately amounts were credited in the respective debtor's account. He also submitted that the facts could not be fully demonstrated by the assessee that all the impugned amounts were duly credited in the debtor's account.
11. In the rejoinder, the Ld. Counsel took us through various pages of the paper book showing that that the amount written off was credited to the respective debtor's account which was not disputed by the lower authorities and thus, case of the assessee was fully proved on law as well as on facts.
12. We have gone through the facts and circumstances of the case. The assessee is an urban co-operative bank eligible for deduction for bad debts on account of provision for bad and doubtful debts u/s 36(1)(viia). It was informed that since assessee was not having any rural advances, it was not eligible for the benefit of deduction u/s 36(1)(vii a). Under 8 I.T.A. No.1112/Mum/2015 these circumstances, the assessee made claim on account of bad debts u/s 36(1)(vii) as normal assessee, i.e. an assessee other than a bank. But, the AO denied the benefit of deduction, firstly for the reason that the assessee cannot claim double deduction. However, this objection was rightly removed by the Ld.CIT(A) by observing that in case assessee has not made claim u/s 36(1)(viia), then the assessee was entitled to claim deduction u/s 36(1)(vii). The assessee has furnished the following brief note in this regard before us:
"With reference to our Scrutiny Assessment we have to state that we have claimed a sum of Rs. 5,50,44,192/ - as bad debts in the Computation of Total Income. The statement showing the Name of the Parties, Address, PAN No. [wherever available], Account Number and the amount written off being submitted. The bank makes a provision for bad and doubtful debts and the provision amount is debited to the profit & Loss A/ c under the head provision for bad and doubtful debt fund. This amount is added to the income in the computation of total income. The bank has not claimed any deduction u/s s. 36(1)(viia) of the LT. Act, 1961, since the total income computed before making any deduction under this clause and Chapter VIA is Rs. Nil. The bank has claimed bad debts as a deduction u/s 36(1)(vii)."
12.1. We have analysed the facts of the law applicable thereon and find that assessee had rightly claimed deduction u/s 36(1)(vii). It was fairly stated by the Ld. DR that there is nothing on record to show that assessee had made any double claim of deduction. Thus, order of Ld. CIT(A) on this issue is upheld. However, the Ld. CIT(A) has rejected the 9 I.T.A. No.1112/Mum/2015 claim of the assessee on the other ground that there was no debit in the P&L account by the assessee during the year before us. In this regard, we have analysed the complete facts and find that the lower authorities could not appreciate the accounting procedure followed by assessee in this regard. With the assistance of the parties, we understood the accounting procedure followed by the assessee for making provision and claim of bad debts. It is noted that first of all the assessee makes following entry in the year when provision is made:-
Profit & Loss Account.........................Dr To Provision for Bad & Doubtful Debts Reserve (Being provision made for bad debts) Thereafter, in the year when bad debts are written off in the account of respective debtors, following entry is made by the assessee in its books of account:-
Provision for Bad & Doubtful Debts Reserve.................Dr To Advance (Debtor's) Account (Being bad debts claimed) 12.2. Thus, from the above, it may be noted that P&L account is debited in the year when provision is made and debtors' accounts are credited in the year when finally debtors' accounts are written off. The bad debt has been claimed in the year when the account is finally written off in the debtors' accounts. Provisions of section 36(1)(vii) 10 I.T.A. No.1112/Mum/2015 envisage that bad debts shall be allowed to the ass essee when the amount of any bad debt or part thereof is written off as irrecoverable in the accounts of the assessee for the previous year. Thus, in the case before us, the bad debt has been written off in the account in the year before us as is evident from the fact that when the amount was credited in the respective debtors' account, the debtors were reduced to that extent. Further, the Profit & Loss account has already been debited with the corresponding amount as per the accounting procedure followed by the assessee as narrated above. Thus, both the conditions stand fulfilled.
The second condition was fulfilled in the year before us. Thus, in our view, the assessee became eligible to claim deduction on account of bad debts in the year befor e us. Under these circumstances, we find that the assessee is principally eligible to claim bad debts in the year before us.
13. Having held so, let's now analyse further facts in this regard. It is noted that the assessee has submitted a party- wise list of debtors showing that an amount aggregating to Rs.5,50,44,192/- has been written off in respective debtors' accounts. But, as per the reconciliation submitted, the net amount credited in debtors account was Rs.5,37,41,411/- only. During the course of hearing, the Ld. Counsel was not able to reconcile this difference. In response to our query, it was fairly submitted by him that amount to the extent of Rs.13,023,780/- was not credited to the debtors' accounts and it represented actually the excess provision which has 11 I.T.A. No.1112/Mum/2015 been written back. Under these circumstances, we find that assessee is not eligible for bad debt to this extent. Thus, the AO is directed to allow claim of bad debt to the extent of Rs.5,37,41,411. Thus, this ground is partly allowed.
Order was pronounced in the open court at the conclusion of the hearing.
Sd/- Sd/-
(AMIT SHUKLA) (ASHWANI TANEJA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
rd
Mumbai, Dt : 23 November, 2016
Pk/-
Copy to :
1. The appellant
2. The respondent
3. The CIT(A)
4. The CIT
5. The Ld. Departmental Representative for the Revenue, G-Bench (True copy) By order ASSTT.REGISTRAR, ITAT, MUMBAI BENCHES