Standard assets of banks are not provision for bad and doubtful debts

IN THE ITAT CHENNAI BENCH ‘C’

Bharat Overseas Bank Ltd.

Versus

Commissioner of Income-tax

IT APPEAL NO. 1191 (MDS.) OF 2012

[ASSESSMENT YEAR 2007-08]

AUGUST 28, 2012

ORDER

Abraham P. George, Accountant Member 

In this appeal filed by the assessee, it assails an order dated 28.3.2012 under Section 263 of Income-tax Act, 1961 (in short ‘the Act’) passed by Commissioner of Income Tax, Chennai-I, Chennai, for the impugned assessment year. As per the assessee, Section 36(1)(viia) allowed deduction of any amount charged as ‘provision for bad and doubtful debts’, once such provision was made in compliance with the regulations of regulatory authority. As per the assessee, if the provision made towards standard assets were also considered, the total provisions for bad and doubtful debts made exceeded the percentage mentioned in Section 36(1)(viia) of the Act and therefore, CIT erred in coming to a conclusion that the order of Assessing Officer was erroneous insofar as it was prejudicial to the interests of Revenue.

2. Facts apropos are that assessee, a public sector bank, had filed its return for impugned assessment year declaring income of Rs. 51,28,68,844/-. While completing assessment under Section 143(3) of the Act, Assessing Officer allowed deduction under Section 36(1)(viia) at 7.5% of gross total income and a further sum of 10% of rural advances. This assessment was later revised to give effect to the order of CIT(Appeals) on assessee’s appeal, which resulted in gross total income coming down to Rs. 26,91,50,893/-. Deduction allowed under Section 36(1)(viia) also proportionately went down. Thereafter, CIT initiated proceedings under Section 263 of the Act, for according to him, the actual provision for bad and doubtful debts as per books were only Rs. 4,01,44,027/-, and a higher claim was allowed under Section 36(1)(viia) of the Act. Assessee had made provision of Rs. 2,23,00,000/- for standard assets and claimed this also as provision for bad and doubtful debts. As per the CIT, the provision for standard assets could not be considered as provision for bad and doubtful debts, which could be allowed under Section 36(1)(viia) of the Act. Thus, according to the CIT, deduction of Rs. 8,46,72,461- allowed in original assessment under Section 36(1)(viia), which was later scaled down to Rs. 5,38,05,015/- in the order subsequent to CIT(Appeals) directions, was incorrect. According to him, assessee having actually made a provision of Rs. 4,01,44,027/- only for bad and doubtful debts in its books, the claim under Section 36(1)(viia) had to be limited to such amount. Assessing Officer having given a deduction of Rs. 5,38,05,015/-, such order was erroneous and prejudicial to the interests of Revenue.

3. To the notice issued on the above lines, reply of the assessee was that provisions were made by it in accordance with Section 36(1)(viia) of the Act. As per the assessee, the actual provision for bad and doubtful debts came to Rs. 6,24,44,027/-. This amount was arrived at by aggregating the provision for bad and doubtful debts of Rs. 4,01,44,027/-with provision of Rs. 2.23 Crores on standard assets. Hence, according to it, the provision of Rs. 5,38,05,015/- allowed by the A.O. in the assessment was below the amount Rs. 6,24,44,027/-, and there was neither error in the order of the Assessing Officer nor any prejudice caused to the Revenue. Reliance was placed on the decision of Mumbai Bench of this Tribunal in the case of Syndicate Bank v. Dy. CIT [2001] 78 ITD 103 (Bang.). Argument of the assessee was that when Assessing Officer had taken a view which was possible in law, provisions of Section 263 could not be invoked. In any case, as per the assessee, any provision made for bad and doubtful debts was allowable under Section 36(1)(viia) of the Act and the Act did not provide for any restriction based on actual provision made in the books. Again, as per the assessee, provision made for standard assets was also a provision for bad and doubtful debts, though the assets were of standard nature. Such provision was made as per RBI stipulation for taking care of the risk involved in recovery of the advances based on the element of risk of possible default even in standard advances.

4. However, the CIT was not impressed. According to him, the decision of co-ordinate Bench of this Tribunal in the case of Syndicate Bank (supra) stood overruled by the decision of Hon’ble Punjab & Haryana High Court in the case of State Bank of Patiala v. CIT [2005] 272 ITR 54. Further, according to him, provision for standard assets could not be considered as provision for bad and doubtful debts. Assessing Officer had also not considered Instruction No. 17/2008 dated 26.11.2008 of CBDT where it was clearly specified that the deduction allowed for bad and doubtful debts should be restricted to the amount actually provided in the books for the relevant year. As per the CIT, Assessing Officer had failed to examine the correct and relevant facts before allowing the claim of assessee under Section 36(1)(viia) of the Act and such failure had resulted in assessment order being erroneous and prejudicial to the interests of Revenue. He, therefore, set aside the order of Assessing Officer and directed him to examine all relevant facts and pass a fresh order in accordance with law.

5. Now before us, learned A.R., strongly assailing the order of CIT, submitted that provision for standard assets was also a provision for bad and doubtful debts, since such provision was made in accordance with the prudential norms of RBI. According to him, 10% of standard assets was mandatorily required to be provided for, and if this was also taken into consideration, claim of assessee under Section 36(1)(viia) was well within the parameters laid down under the said section. Further, according to him, CIT had only considered the provision made during the year, whereas, the provision standing at the beginning of the year alone stood at 22.5 Crores. According to him, provision made for the previous year alone was not relevant, but other total of the provisions created had to be considered while applying Section 36(1)(viia) of the Act. Assessing Officer had taken a lawful view and therefore, CIT could not substitute his view with that of Assessing Officer. The order of A.O. was not at all erroneous. A.O. had considered the claim of the assessee under Section 36(1)(viia) and accepted such claim. Therefore, according to him, the order of CIT was liable to be quashed.

6. Per contra, learned D.R. supported the order of CIT (Appeals).

7. We have perused the orders and heard the rival submissions. The original claim, which was allowed by the Assessing Officer under Section 36(1)(viia) of the Act, was as follows:-

Thereafter, assessee had moved in appeal against some of the additions made by the Assessing Officer on other issues and pursuant to the relief granted in such appeal, the gross total income which earlier stood at Rs. 76,54,31,493/- came down to Rs. 35,38,65,546/-. As a result of the reduction in gross total income, deduction under Section 36(1)(viia) was also scaled down from Rs. 5,74,07,362/- to Rs. 2,65,39,916/-. This sum when aggregated with 10% of rural advances coming to Rs. 2,72,65,099/-, resulted in the sum of Rs. 5,38,05,015/- being eventually allowed as deduction under Section 36(1)(viia) of the Act. In the books of the assessee, actual provision for bad and doubtful debts was only Rs. 4,01,44,027/-. Assessee had also made a provision of Rs. 2.23 Crores on its standard assets. If the provision for bad and doubtful debts alone was considered, then the total allowance under Section 36(1)(viia) was in excess of such provision. However, if the provision for standard assets was also considered as provision for bad and doubtful debts, then the total provision could go up to Rs. 6,24,44,027/-. Then of course, assessee’s claim as finally allowed was well within the limits specified under Section 36(1)(viia) of the Act. At this juncture, a look at Section 36(1)(viia) is necessary and this is reproduced hereunder, for brevity:-

“36(1)(viia) a scheduled bank [not being a bank incorporated by or under the laws of a country outside India] or a non-scheduled bank [or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], an amount [not exceeding seven and one-half per cent] of the total income (computed before making any deduction under this clause and Chapter VIA) 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.”

It is clear from the above that it is not a standard allowance which is given, but, the allowance is subject to the actual provision made by the assessee, which in no case shall exceed 7.5% of the gross total income. Therefore, the argument of the assessee that whatever the provision it had actually made in its books, a provision of 7.5% of the gross total income had to be allowed, is not in accordance with law. Now considering the second aspect, whether provision for standard assets could be considered as provision for bad and doubtful debts, admittedly a provision on standard assets is not against any debts which had become doubtful. Standard assets are always considered recoverable, in the sense, bank has no doubt of recoverability. When the bank itself has treated such assets as good and recoverable, any provision made on such assets cannot be considered as a provision for bad and doubtful debts. The debt itself being good, a provision made on good debt cannot be considered as a provision for bad and doubtful debts. May be, the RBI has made a regulation for 10% provision for standard assets also a prudential norm. This can however be considered as a measure prescribed in abundant caution, to deal with a situation where banks are not to suffer shock of sudden delinquency that could happen in future. There is always a possibility that an asset, which is fully recoverable, may not be so at future date. Nevertheless, possibility of happening of such a contingency cannot be a sufficient reason to consider a provision made on standard assets also as a provision for bad and doubtful debts. Therefore, claim of the assessee that provision for standard assets also has to be considered for applying the condition set out under Section 36(1)(viia) is not in accordance with law. If the provision for standard assets is not considered as provision for bad and doubtful debts, the actual provision for bad and doubtful debts made by the assessee in its books Rs. 4,01,44,027/- fall much below the sum of Rs. 5,38,05,015/- allowed by the Assessing Officer. In any case, a look into the original assessment order clearly show that but for the deduction allowed to the assessee as claimed by it in its return, there was no discussion as to how Section 36(1)(viia) was applied and whether the limits were corrected worked out. Admittedly, no question was asked to the assessee during the course of assessment proceedings also with regard to the claim made by it under Section 36(1)(viia), insofar as it concerns the quantum of such claim. This obviously show that there was no application of mind by the Assessing Officer at the time of assessment. Assessing Officer had not come to any conclusion at all having not considered the claim in the light of the conditions set out in Section 36(1)(viia) of the Act. We cannot say that he had taken a view which was in accordance with law. It is not a case where the Assessing Officer had adopted one of the courses possible in law. Of course, a cryptic order of the Assessing Officer by itself may not show that there was no thought given by him on a claim of the assessee. However, here there was no enquiry made during the course of assessment proceedings. Therefore, the order which was silent on the claim made by the assessee, and allowing such claim, without any discussion, will definitely render it erroneous and prejudicial to the interests of Revenue. As held by Hon’ble Apex Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, “prejudicial to the interests of the Revenue” is a term of wide import and not confined to loss of tax. An order without application of mind is definitely prejudicial to the interests of the revenue. We are in agreement with ld. CIT that the order of Assessing Officer was erroneous insofar as it was prejudicial to the interests of Revenue. No interference is required.

8. In the result, appeal filed by the assessee is dismissed.