State Bank of India Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that deduction u/s 36(1)(via) is to be allowed on the total outstanding advances at the end of each month considering the opening balances.
Facts-
The assessee is a scheduled bank and has claimed deduction u/s. 36(1)(viia) of the Act in respect of provision made for bad and doubtful debts. The assessee, while claiming aforesaid deduction u/s. 36(1)(viia) of the Act, calculated the ‘aggregate monthly average advances’ by taking into consideration the outstanding balances of the previous month, i.e., the opening balance for computing the amount of advance as outstanding at the end of each month as per the language of Rule 6 ABA of the Income Tax Rules, 1962.
AO rejected the computation of the assessee and held that only incremental advances made during the month can be considered while calculating the figure of ‘aggregate monthly average advances’. The First Appellate Authority upheld the reasoning of AO on this issue. Being aggrieved, the assessee preferred further appeal before the Tribunal.
Conclusion-
We decide the question referred for our adjudication in favour of the assessee and held that the deduction under section 36(1)(viia) r/w Rule 6 ABA of the Income Tax Rules is to be allowed on the total outstanding advances at the end of each month considering the opening balances.
FULL TEXT OF THE ORDER OF ITAT CUTTACK
This Special Bench has been constituted by the Hon‟ble President, pursuant to reference by the Division Bench of the Tribunal, to decide the following question:
“Whether deduction under section 36(1)(viia) of the Income Tax Act, 1961 r.w.r. 6ABA of the Income Tax Act 1962 is to be allowed on the total outstanding advances including opening balances upon which the assessee bank has already claimed such deduction in earlier years or the same has to be allowed in respect of incremental advances made during the year?”
2. The brief background of the case, which resulted in constitution of this Special Bench is: The assessee is a scheduled bank and has claimed deduction under section 36(1)(viia) of the Act in respect of provision made for bad and doubtful debts. The assessee, while claiming aforesaid deduction under section 36(1)(viia) of the Act, calculated the „aggregate monthly average advances‟ by taking into consideration the outstanding balances of the previous month, i.e., the opening balance for computing the amount of advance as outstanding at the end of each month as per the language of Rule 6 ABA of the Income Tax Rules, 1962. The Assessing Officer rejected the computation of the assessee and held that only incremental advances made during the month can be considered while calculating the figure of „aggregate monthly average advances‟. The Assessing Officer was of the view that if the opening balance is also considered it would result in the assessee claiming deduction of more than actual advance especially where the advance has not been paid back. The First Appellate Authority upheld the reasoning of the Assessing Officer on this issue. Being aggrieved, the assessee preferred further appeal before the Tribunal.
3. During the course of hearing of the appeal, in support of its plea, the assessee placed reliance upon the decisions rendered by the Division Bench of the Tribunal in the following cases:
i) DCIT vs M/s City Union Bank Ltd in ITA No. 1485/Mds/2007 dated 30/10/2009;
ii) Nizamabad District Co-operative Central Bank Ltd., Nizamabad v/s ITO in ITA No.1161/Hyd./2014; and
iii) Indian Overseas Bank vs DCIT in ITA No. 2124 – 2125/Mds/2013 dated 26/09/2014.
4. After hearing the submissions of both sides, the Division Bench of the Tribunal, Chandigarh Bench, expressed its disagreement with the view so expressed by other Division Bench in aforesaid decisions. Accordingly, reference was made to the Hon‟ble President for constituting the Special Bench on this issue. The reasons mentioned in support of the reference are as follows:
“Reasons for referring an issue to the Special Bench of ITAT
One of the grounds raised by the assessee before us in its appeal in ITA No. 510, 538, and 1259/Chd/2017 was as under:
“The Ld. CIT(A) erred in holding that only the incremental advances in respect of rural branches is eligible for deduction under section 36(1)(viia) overlooking the express words in Rule 6ABA r.w.s. 36(1)(viia) and even when there was no such disallowance in any of the earlier assessment years.‖
Orders of the Coordinate Benches of the ITAT were cited before us by the Ld. Counsel for the assessee in support of its contention that provision for bad and doubtful debts allowable on rural advances made by banks as specified under section 36(1)(viia) of the Act r.w.r. 6ABA of the Rules was that made on cumulative aggregate average rural advances made, including the opening balances of the advances made. The decisions relied upon before us are as under:
i) DCIT vs. M/s City Union Bank Ltd. in ITA No. 1485/Mds/07 dated 30.10.2009.
ii) Nizamabad District Co-operative Central Bank Ltd.. Nizamabad vs. ITO in ITA No. 1161/H/2011 dated 10.12.2014.
iii) Indian Overseas Bank vs. DCIT in ITA No. 2124 2125/Mds/2013 dated 26.09.2014.
No decisions of any higher authorities was brought to our notice by either of the parties.
We are not in agreement with the decisions of the coordinate benches as cited above, since provision for bad and doubtful debts in our understanding are estimates of future losses and are made from profits of the year to cover such estimated future losses, which in the present case arises from the risk associated with making rural advances. Such an estimate can logically in our view be made only once on an advance. By allowing provision to be made on opening balance also the provision is being repeatedly made, which in our view goes against its basic nature itself and would also lead to an absurdity with the losses being provided for, exceeding the estimate itself and in some cases even exceeding the amount of advances made. Our detailed reasoning on the issue is part of our proposed order in the aforestated appeals which is annexed herewith. We therefore are referring the issue to the Hon’ble President for constituting a special bench of ITAT for deciding it, framing the following question.
“Whether deduction under section 36(1)(viia) of the Income Tax Act 1961 r.w.r 6ABA of the Income Tax Act 1962 is to be allowed on the total outstanding advances including opening balances upon which the assessee bank has already claimed such deduction in earlier years or the same has to be allowed in respect of incremental advances made during the year ?”
The proposed common order in respect of the appeals bearing ITA No. 510, 538 & 1259/Chd/2017 is attached herewith.‖
5. Accordingly, the question (as mentioned in paragraph 1) was referred to this Special Bench for adjudication.
6. During the course of hearing before us, learned counsel appearing for the assessee, after briefly explaining the facts resulting in the present reference, submitted that the issue pending for consideration before this Special Bench has been decided in favour of the taxpayer by the Hon’ble Calcutta High Court in PCIT vs Uttarbanga Kshetriya Gramin Bank, [2018] 408 ITR 393 (Cal.) and the Hon’ble Madras High Court in CIT vs M/s City Union Bank Ltd., in T.C.A. No. 961 of 2010, vide judgment dated 07/03/2022.
7. On the other hand, the learned Departmental Representative by vehemently relying upon the orders passed by the lower authorities submitted that Hon’ble Calcutta High Court upheld the conclusions of the Tribunal finding no substantial question of law in the appeal filed by the Revenue and thus, the merit of the issue was not discussed in detail.
8. We have considered the submissions of both sides and perused the material available on record. Since, it has been submitted that this issue has already been decided by the Hon’ble Calcutta High Court and the Hon’ble Madras High Court in aforesaid decisions, therefore, at the outset we have dealt with these decisions. We find that the following question of law was proposed for admission by the Revenue in its appeal before the Hon’ble Calcutta High Court in Uttarbanga Kshetriya Gramin Bank (supra):
“Whether on the facts and in the circumstances of the case the Ld. Tribunal has erred in law in allowing deduction under section 36(1)(viia) of the I.T. Act, 1961, for the same advances made for all previous years leading to multiple deductions in every assessment year by misinterpreting the Rule 6ABA of the I.T. Rules, 1962 and also against the ratio of judgment in the case of J.K Synthetics Ltd. v. UOI 199 ITR 43 (SC).?”
9. While dismissing the Revenue’s appeal and upholding the findings of the Tribunal, the Hon’ble Calcutta High Court, in the aforesaid decision, observed as under:
“5. The assessee’s appeal, however, was allowed by the Tribunal. The Tribunal’s interpretation of the aforesaid statutory provisions would appear from the following passage:—
“From this Rule, it is apparent that for the purpose of section 36(1) (viia), the aggregate average advance made by the rural branches of as scheduled bank shall be computed by taking the amount of advances made by each rural branch as outstanding at the end of the last day of each month comprised in the previous year has to be aggregated separately. The CIT (Appeals) instead of giving the direction to the Assessing Officer to take the amount of advances as outstanding at the end of the last day of each month in the previous year directed the Assessing Officer to take loans and advances made during the year only, we therefore, set aside the order of CIT (Appeals) on this issue and amend the direction of the CIT (Appeals) and direct the Assessing Officer to compute 10% of the aggregate monthly average advances made by the rural branch of such Bank by taking the amount of advances by each rural branch of such Bank by taking the amount of advances by each rural branch as outstanding at the end of the last day of each month comprised in the previous year and aggregate the same separately as given under Rule 6ABA of the Income Tax Rules, 1962.”
Nizamuddin, learned advocate appeared on behalf of the Revenue and submitted the amended direction made by the Tribunal on the ITO has resulted in the assessee getting double deduction which is not permissible on computation made under Rule 6ABA. He submitted a double deduction in the manner thus obtained by the assessee has not been expressly provided. He relied on a judgment of the Supreme Court in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 43, on the following portion in the said judgment appearing in page 64 of the report.
“A double deduction cannot be a matter of inference, it must be provided for in clear and express language, regard being had to its unusual nature and its serious impact on the revenues of the State.”
7. Khaitan, learned senior Advocate appeared on behalf of the assessee and submitted that the computation to be made as prescribed by Rule 6ABA is for the purpose of fixing the limit of the deduction available under section 36(1)(viia). Clauses (a) and (b) in Rule 6ABA cannot be given the restricted interpretation. The amounts of advances as outstanding at the last day of each month would be a fluctuating figure depending on the outstanding as increased or reduced respectively by advances made and repayments received. The assessee might provide for bad and doubtful debts but the deduction would only be allowed at the percentage of aggregate average advance, computation of which is prescribed by Rule 6ABA.
8. We find from the amended direction made by the Tribunal that such direction is in terms of Rule 6ABA. The ITO had made the computation of aggregate monthly advances taking loans and advances made during only the previous year relevant to assessment year 2009-10 as confirmed by CIT (A). The Tribunal amended such direction, in our view, correctly applying the rule.
9. For the reasons aforesaid we do not find the questions suggested to be substantial questions of law involved in the case. As such the application and appeal are dismissed.”
10. We further find that the following question of law came up for consideration before the Hon’ble Madras High Court in M/s City Union Bank Ltd. (supra):
“5. By order dated 29.11.2010, this court admitted the aforesaid tax case appeal on the following substantial questions of law:
1. ……………….
2. Whether in the facts and circumstances of the case, the Tribunal was right in deleting disallowance of provision before bad debts under Section 36 (1) (viia) of Rs.8.53 crores observing that as per Rule 62ABA of the Income Tax Rules 1962, the aggregate average advances made by the rural branches have to be computed by taking the amounts of advances made by each rural branch as outstanding at the end of last day of each month comprised in the previous year, whereas the aggregate average has to be worked out only in respect of advances made during the year as otherwise, there would be double deduction?“
11. While in principle agreeing with the submission of the taxpayer, the Hon’ble Madras High Court took into consideration the aforesaid decision of Hon’ble Calcutta High Court. The relevant observations of Hon’ble Madras High Court are as under:
“10.2 Similarly, the second issue relating to deduction of Rs.8.53 crores u/s 36(1)(viia) with regard to the provision for bad and doubtful debts, is covered by the decision in Principal Commissioner of Income Tax, Jalpaiguri v. Uttarbanga Kshetriya Gramin Bank [(2018) 94 taxmann. Com 90 (Calcutta), in favour of the assessee and the relevant passage of the same is usefully extracted below:
“6. Mr. Nizamuddin, learned advocate appeared on behalf of the Revenue and submitted the amended direction made by the Tribunal on the ITO has resulted in the assessee getting double deduction which is not permissible on computation made under Rule 6ABA. He submitted a double deduction in the manner thus obtained by the assessee has not been expressly provided. He relied on a judgment of the Supreme Court in the case of Escorts Ltd. v. Union of India reported in (1993) 199 ITR 43, on the following portion in the said judgment appearing in page 64 of the report.
“A double deduction cannot be a matter of inference, it must be provided for in clear and express language, regard being had to its unusual nature and its serious impact on the revenues of the State.”
7. Khaitan, learned senior Advocate appeared on behalf of the assessee and submitted that the computation to be made as prescribed by Rule 6ABA is for the purpose of fixing the limit of the deduction available under section 36(1)(viia). Clause (a) and (b) in Rule 6ABA cannot be given the restricted interpretation. The amount of advances as outstanding at the last day of each month would be a fluctuating figure depending on the outstanding as increased or reduced respectively by advances made and repayments received. The assessee might provide for bad and doubtful doubts but the deduction would only be allowed at the percentage of aggregate average advance, computation of which is prescribed by Rule 6ABA.
8. We find from the amended direction made by the Tribunal that such direction is in terms of Rule 6ABA. The ITO has made the computation of aggregate monthly advances taking loans and advances made during only the previous year relevant to assessment year 2009-10 as confirmed by CIT (A). The Tribunal amended such direction, in our view, correctly applying the rule.
9. For the reasons aforesaid we do not find the questions suggested to be substantial questions of law involved in the case. As such the application and appeal are dismissed.”
