Case Law Details
DECIDED BY: HIGH COURT OF KERALA, IN THE CASE OF: ACIT Vs. Hukum Chand Jain, APPEAL NO: ITA Nos. 18 and 20 to 22 of 2006, DECIDED ON August 10, 2009
JUDGMENT
Ramachandran Nair, J.
Though the issue raised in these connected appeals filed by the Revenue stands decided in favour of the assessees by Division Bench judgment of this court in SOUTH INDIAN BANK LTD. V. COMMISSIONER OF INCOME-TAX reported in 262 ITR 579, the department while arguing these appeals before a Division Bench of this court canvassed against the correctness of the said judgment and the Division Bench on being prima facie satisfied, referred the matter for decision by Full Bench and hence the matter is before us.
2. When the appeals were taken up, Senior counsel Sri.Sarangan appearing for the assessees submitted that appeal filed by the department against the above judgment of this court is pending before the Supreme Court and, therefore, hearing should be deferred until Supreme Court decides the matter. He has also relied on two decisions of the Supreme Court in CENTRAL COALFIELDS & OTHERS V. H.M.P. & OTHERS reported in 1994 Supp.(1) SCC 323 and in D.K.TRIVEDI & SONS V. STATE OF GUJARAT reported in AIR 1986 SC 1323 for the proposition that in matters like this, the recourse open to the High Court is to keep the matter pending until decision of the Supreme Court in the pending SLP/Appeals on same issue. However, we find that more than 40 cases are listed before us for hearing, that too, on reference made by another Division Bench doubting the correctness of the judgment which is under appeal before the Supreme Court. The issue is very important and it arises on an year to year basis in the assessment of every Bank in Kerala. Since the department has not accepted the above Division Bench judgment which is pending in appeal in the Supreme Court, Assessing Officers are not following the said judgment, but are making assessments disallowing the claim which is consistent with their stand. This leads to repetitive appeals for every year in the case of each Bank. The reason why Supreme Court expects the High Court to keep matters pending in the High Court on issues pending in SLP in the Supreme Court, is to avoid unnecessary filing of appeals to the Supreme Court. In these cases since the Division Bench of this court doubted the correctness of the earlier decision of this court which is pending in Supreme Court, it is a matter for us to consider whether the said Division Bench decision is correct or not. If we decide the issue either way and if the parties accept the same, then the same will put an end to all litigations in this court and down below before the appellate authorities including the Tribunal. Therefore, we feel the above decisions of the Supreme Court cited by the Senior counsel appearing for the assessees do not stand in the way of our proceeding to decide the questions referred to us by the Division Bench. Accordingly we have heard Sri.P.K.R.Menon, Senior Standing Counsel appearing for the appellants and Senior counsel Sri.Sarangan and other counsel appearing for the respondent-Banks.
3. The short question referred to us by the Division Bench is whether by virtue of the prohibition contained in the proviso to Section 36(1)(vii) of the Income Tax Act (hereinafter referred to as “the Act”), the respondents-Banks are entitled to deduction of bad debts written off which is not in excess of the credit balance in the provision for bad and doubtful debts account made under clause (viia) of Section 36(1) Act. In other words, the controversy is only on the application of proviso to Section 36(1)(vii) in respect of the respondents-Banks’ claim for deduction of bad debts actually written off in the accounts. We, therefore, make it clear that there is no controversy on respondents- Banks’ entitlement for deduction of provision for bad and doubtful debts which is allowed in terms of the claim made under Section 36(1) (viia) of the Act and all what we are concerned with is whether the dis allowance made under proviso to Section 36(1)(vii) of the claim of deduction of bad debt written off in the accounts by the respondent- Banks on the ground that the bad debt or part thereof so written off and claimed by the respective assessees was not in excess of the credit balance available in the provision for bad and doubtful debts created by Banks covered by Section 36(1)(viia) of the Act. While the case of the department is that ceiling contained in the proviso to Section 36(1) (vii) applies to the bad debts claimed by all Banks to which sub- section (viia) applies, the respondents-Banks’ case is that proviso applies only in respect of bad debts pertaining to rural Branches and so much so, they are entitled under Section 36(1)(vii) to claim deduction of all other bad debts written off even if the same is not in excess of the credit balance in the provision created for bad and doubtful debts under clause (viia) of Section 36(1). Before proceeding to examine the matter, we have to necessarily refer to the relevant provisions of the Act which are extracted hereunder with the amendments made by Finance Act, 1985 and Income Tax (Amendment) Act, 1986.
Before Amendment in 1985
“36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section (vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year; (viia) 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, an amount not exceeding one and a half per cent of the aggregate average advances made by such branches, computed in the prescribed manner.”
Clause (vii) & (viia) after Amendment by Finance Act, 1985
“36(1) ……..
(vii) subject to the provisions of sub-section (2), the amount of any debt, or part thereof, which is established to have become a bad debt in 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 scheduled bank (not being a bank approved by the Central Government for the purposes of clause (viiia) or a bank incorporated by or under the laws of a country outside India) or a non-scheduled bank, an amount not exceeding ten per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) or an amount not exceeding two per cent of the aggregate average advances made by the rural branches of such bank, computed in the prescribed manner, whichever is higher.”
Clause (viia) after Amendment by Income Tax (Amendment) Act, 1986
“(viia) in respect of any provision for bad and doubtful debts made by–
(a) a scheduled bank (not being a bank approved by the Central Government for the purposes of clause (viia) or 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 two per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner.”
Section 36(2)(v) introduced by the Finance Act, 1985, which is relevant for the purpose of this case, reads as follows:
“36.(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply- ……….
……….
(v) where such debt or part of debt relates to advances made by a bank to which clause (viia) of sub- section (1) applies, no such deduction shall be allowed unless the bank has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause.”
4. While the Senior Standing Counsel appearing for the department has in support of his contention relied on the reasoning in the Reference Order of the Division Bench, the Senior counsel appearing for the respondents- assessees has relied on the Division Bench judgment of this court in SOUTH INDIAN BANK LTD. V.COMMISSIONER OF INCOME-TAX (262 ITR 579), and the judgment of the Karnataka High Court in DEPUTY COMMISSIONER OF INCOME-TAX VS. KARNATAKA BANK LTD. (2009) 316 ITR 345. We notice that the Karnataka High Court has decided the case following the judgment of this court abovereferred which is pending in appeal before the Supreme Court. Therefore, what is required to be considered is whether the scope and meaning assigned to the provisions by the Division Bench of this court in SOUTH INDIAN BANK’s case is correct.
5. As already stated, the respondents-assessees were granted deduction of provision for bad debts in terms of the claim made subject to the ceiling provided in Section 36(1)(viia) of the Act. The question that arises is with regard to the limitation provided under proviso to Section 36(1)(vii) on claim of bad debt actually written off which also respondents are entitled to claim besides the claim of deduction of provision under Section 36(1)(viia). A Division Bench of this court in SOUTH INDIAN BANK’s case referred above took the view that the proviso to Section 36(1)(vii) applies only to so much of the bad debt written off in respect of advances made by Rural Branches of the Bank concerned. So much so, according to the judgment, proviso to Section 36(1)(vii) does not stand in the way of allowing deduction of bad debt written off other than those relating to advances made by Rural Branches, even if such bad debt or part thereof is not in excess of the provision for bad debt created under clause (viia). The Division Bench further held that the requirement of Section 36(2)(v) will be satisfied for the purpose of eligibility for deduction of bad debt actually written off, if bad debt written off relating to advances made by Rural Branches is debited to the provision created under sub-clause (viia), that too in respect of rural advances. This court therefore concluded that proviso to Section 36(1)(vii) and Section 36(2)(v) containing restrictions and limitations on deduction of bad debts written off apply only to bad credits written off and provision for bad debt created in respect of advances made by Rural Branches of the Banks. However, on a close scrutiny of the proviso to Section 36(1) (vii), we are of the view that for the application of the ceiling provided therein, the Legislature does not make any distinction between provision created in respect of advances by Rural Branches and advances made by other Branches of the Bank. In fact, what the proviso refers is “to the Bank to which clause (viia) applies” and not to the debt in respect of which provision is created and claimed as deduction under clause (viia). In other words, the proviso to sub- clause (vii) which is an exception to main clause by way of ceiling of the eligible deduction, in the first place, applies to only such category of Banks to which clause (viia) applies. This means that such of the Banks which are entitled to claim deduction of provision for bad debt in terms of clause (viia) will be covered by the proviso to clause (vii) irrespective of the nature of advances with respect to which the bad debt written off is claimed as deduction. In fact, it is pertinent to note that prior to the amendment in 1985 the Banks were entitled to claim deduction of bad written off without any ceiling whatsoever and simultaneously they were entitled to deduction of provision covered by clause (viia) of Section 36(1) as well. However, when progressively clause (viia) was liberalized providing deduction of provision created even in respect of a percentage of income and along with it and alternate to it percentage of advances made by rural branches, simultaneous restrictions were introduced in regard to the Banks’ eligibility for deduction of bad debt actually written off. It is worthwhile to note that an Explanation was added to clause (vii) of Section 36(1)(vii) by the Finance Act, 2001 with effect from 1.4.1989 in the following lines:
“Explanation:- For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee.”
What is clear from the above is that provision for bad and doubtful debts normally is not an allowable deduction and what is allowable under main clause is bad debt actually written off. However, so far as Banks to which clause (viia) applies are concerned, they are entitled to claim deduction of provision under sub-clause (viia), but at the same time when bad debt written off is also claimed deduction under clause (vii), the same will be allowed as a deduction only to the extent it is in excess of the provision created and allowed as a deduction under clause (viia). It is worthwhile to note that deduction under Section 36(1)(vii) is subject to sub-section (2) of Section 36 which in clause (v) specifically states that any bad debt written off should be claimed as a deduction only after debiting it to the provision created for bad and doubtful debts. What is clear from the above provisions is that though respondent-Banks are entitled to claim deduction of provision for bad and doubtful debts in terms of clause (viia), such Banks are entitled to deduction of bad debt actually written off only to the extent it is in excess of the provision created and allowed as deduction under clause (viia). Further, in order to qualify for deduction of the bad debt written off, the requirement of Section 36(2)(v) is that such amount should be debited to the provision created under clause (viia) of Section 36(1). Therefore, we are of the view that the distinction drawn by the Division Bench in SOUTH INDIAN BANK’s case between the bad debts written off in respect of advances made by Rural Branches and bad debts pertaining to advances made by other Branches does not exist and is not visualized under proviso to Section 36(1)(vii). We, therefore, hold that the said decision of this court does not lay down the correct interpretation of the provisions of the Act. Admittedly all the respondent- assessees have claimed and have been allowed deduction of provision in terms of clause (viia) of the Act. Therefore, when they claim deduction of bad debt written off in the previous year by virtue of the proviso to Section 36(1)(vii), they are entitled to claim deduction of such bad debt only to the extent it exceeds the provision created and allowed as deduction under clause (viia) of the Act.
6. In the normal course we should answer the question referred to us by the Division Bench and send back the appeals for the Division Bench to decide the appeals consistent with the Full Bench decision. However, since this is the only issue that arises in the appeals, we feel it would be only an empty formality to send back the matter to the Division Bench for disposal of appeals consistent with our judgment. In order to avoid unnecessary posting of appeals before the Division Bench, we allow the appeals by setting aside the orders of the Tribunal and by restoring the assessments confirmed in first appeals.
