Canara Bank Vs DCIT (ITAT Bangalore)
ITAT Bangalore held that assessee is eligible to avail deduction of an amount representing actual write off in the books of account of bad debts relating to nonrural/urban advances in terms with section 36(1)(vii), as proviso to the said section would not apply to non-rural advances.
Facts- The assessee filed its return of income on 28.11.2016 declaring total income of Rs.101,07,97,040. The case was selected for scrutiny and assessment u/s. 143(3) was completed on 27.03.2018 assessing total income at Rs.675,71,81,077/- under the regular provisions of the Act and deemed total income of Rs.696,42,91,164/- under the MAT provisions. The assessee filed appeal before the CIT(Appeals) which was partly allowed. Aggrieved, the assessee is in appeal before the Tribunal.
Conclusion- Held that assessee would be eligible to avail deduction of an amount representing actual write off in the books of account of bad debts relating to nonrural/urban advances in terms with section 36(1)(vii), as proviso to the said section would not apply to non-rural advances. Accordingly, we delete the addition made by AO and confirmed by ld. CIT(A).
Held that the while calculating average aggregate advances of rural branches under section 36(1)(viia), both advance outstanding as well as fresh advances are to be considered.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These two appeals by the assessee are against the separate DIN & Order Nos. ITBA/NFAC/S/250/2023-24/1053532978(1) for AY 2016-17 dated 2.6.2023 and DIN & Order Nos. ITBA/NFAC/S/ 250/2022-23/1051549418(1) for AY 2017-18 dated 29.3.2023 passed by the CIT(Appeals), National Faceless Appeal Centre, Delhi [NFAC] u/s. 250 of the Act. Since common issues are involved in both these appeals, they are heard together and disposed of by this order for the sake of brevity and convenience.
AY 2016-17
2. The revised grounds for AY 2016-17 are as under:-
“1. The order of the learned CIT(A) is against the law and facts of the case.
2. The learned CIT(A) erred in upholding disallowance u/s.14A of the I.T. Act r.w. Rule 8D, a sum of Rs. 45,95,01,000/- being expenditure incurred towards earning exempt income.
2.1. The learned CIT(A) failed to appreciate the fact that the investments held by the Appellant bank are stock in trade and hence no disallowance u/s 14A can be made.
2.2. The learned CIT(A) failed to appreciate the fact that, as per Section 14A, for justifying a disallowance under that section, a finding on the incurring of expenditure for earning the exempt income is absolutely necessary on the part of the Assessing Officer. The learned Assessing Officer has not brought out any specific expenditure which has been incurred by the Appellant Bank for earning of exempt income. Under these circumstances, the addition now made is liable to be deleted.
2.3. The learned CIT(A) erred in invoking the provisions of Rule 8D without pointing out any defect in the computation of the disallowance made by the Appellant bank.
2.4. The learned CIT(A) failed to appreciate the fact that the application of Rule 8D is neither automatic nor mandatory.
2.5. The learned CIT(A) erred in holding that exempt income will always have a notional interest cost attached to it.
2.6. The learned CIT(A) erred in not appreciating the fact that no disallowance towards interest can be made on the facts of the case.
2.7. Without prejudice to the above, the learned CIT(A) failed to appreciate that with effect from AY 2016-17, no disallowance of indirect interest expense can be made.
2.8. The learned CIT(A) erred in not following the decision of the Hon’ble jurisdictional High Court and the Apex Court applicable to the facts of the case.
2.9. Without prejudice to the above, the learned CIT(A) failed to appreciate the fact that the disallowance u/s 14A cannot exceed the exempt income.
3. The learned CIT(A) erred in upholding the disallowance of Rs.1296,71,17,882/- u/s 36(1)(vii) & not allowing Rs. 1386,54,31,160/- as deduction u/s 36(1)(vii) in respect of debts written off by the non rural branches of the Appellant Bank.
3.1. The learned CIT(A) erred in holding that the Appellant bank had not written off bad debts.
3.2. The learned CIT(A) failed to appreciate the fact that this issue which was decided in favour of the Appellant has been accepted by the Department.
3.3. The learned CIT(A) failed to appreciate the fact that the Appellant bank had written off bad debts by debiting to Provision account and reducing the same from the Gross Loans & Advances.
3.4. The learned CIT(A) erred in holding that non rural debts written off should be adjusted against the provision account u/s 36(1)(viia).
3.5. The learned CIT(A) failed to appreciate the fact that non rural debts written off are not covered by the proviso to section 36(1)(vii).
3.6. The learned CIT(A) erred in not admitting the ground of the Appellant Bank with regard to the claim of Rs. 1386,54,31,160/- as deduction u/s 36(1)(vii).
3.7. The learned CIT(A) erred in not allowing the deduction of Rs. 1386,54,31,160/- u/s 36(1)(vii) being the bad debts written off by the non rural branches of the Appellant Bank.
3.8. The learned CIT(A) erred in not following the binding decisions of High Courts & Tribunals.
4. The learned CIT(A) erred in upholding the disallowance of Rs.1498,66,51,713 /- out of the amount claimed as deduction u/s.36(1)(viia).
4.1. The learned CIT(A) erred in considering only the incremental advance for the purpose of arriving at the deduction u/s 36(1)(viia).
4.2. The learned CIT(A) failed to appreciate the fact that for the purpose of arriving at the Aggregate Average Advances as per Rule 6ABA, the outstanding balance at the end of each month needs to be considered and not the incremental advances.
4.3. The learned CIT(A) failed to follow the binding decisions of the jurisdictional High Court and Tribunal.
4.4. The learned CIT(A) failed to appreciate the fact that the deduction u/s 36(1)(viia) has to be allowed on the basis of the calculation as provided in the section and not with reference to the amount of provision made in the books of account.
4.5. The disallowance made by the learned Assessing Officer and upheld by the learned CIT(A) is based on surmises and conjunctures.
5. The learned CIT(A) erred in upholding the disallowance of Rs.14,64,961/- being the loss on surrender of leased premises.
5.1. The learned Assessing Officer failed to appreciate the fact that the loss is a business loss and not a capital loss.
5.2. The learned Assessing Officer erred in holding that the lease is a capital asset of the Appellant bank.
6. The learned CIT(A) erred in disallowing a sum of Rs. 1,38,637/- being the club expenses.
6.1. The learned CIT(A) erred in holding that the club expenses are not for business purposes and he failed to appreciate the fact that the same is for business purpose.
6.2. The learned CIT(A) erred in holding that the club expenses are not for business purpose without any evidence and finding in this regard.
7. The learned CIT(A) erred in upholding the disallowance of Rs. 4,01,907/- being write off various small value items purchased.
7.1. The CIT(A) failed to appreciate the fact that the write off pertains to various small value items purchased.
8. The learned CIT(A) erred in upholding the order of learned Assessing Officer with regard to applicability of the provisions of Section 115JB of Income Tax Act, 1961 to the Appellant Bank.
8.1. The learned CIT(A) failed to appreciate that provisions of Section 115JB of the Income Tax Act, 1961 are not applicable to the appellant and as such, is not liable to pay tax under the said provisions.
8.2. Without prejudice to the above, the learned CIT(A) erred in adding various items to arrive at the book-profit which are beyond the scope of the section.
8.3. The learned CIT(A) failed to appreciate the fact that the various items added to the book profits are not covered by the Explanation to Section 115JB
8.3.1. Provision for depreciation on investments of Rs.224,63,37,633/-
8.3.2. Provision for Bad & Doubtful debts of Rs.3638,37,12,000/-
8.3.3. Provision for Fraud of Rs. 21,42,61,000/-
8.3.4. Provision for Premises of Rs. 49,39,000/-
8.3.5. Provision for Block differences of Rs. 2,00,41,255
8.3.6. Provision for Miscellaneous Items of Rs. 48,92,73,269/-
8.4. The learned CIT(A) erred in adding an amount of Rs. 45,89,56,504/- being disallowance u/s 14A.
9. The order passed by the learned CIT(A) is against the principles of natural justice.
9.1. The learned CIT(A) passed the impugned order without affording an opportunity of hearing through VC, which was specifically requested by the Appellant.
The appellant craves the permission to add, amend, modify, alter, revise, substitute, delete any or all grounds of appeal, if deemed necessary at the time of hearing of the appeal.”
3. The brief facts of the case for AY 2016-17 are that the assessee filed its return of income on 28.11.2016 declaring total income of Rs.101,07,97,040. The case was selected for scrutiny and assessment u/s. 143(3) was completed on 27.03.2018 assessing total income at Rs.675,71,81,077/- under the regular provisions of the Act and deemed total income of Rs.696,42,91,164 under the MAT provisions. The assessee filed appeal before the CIT(Appeals) which was partly allowed. Aggrieved, the assessee is in appeal before the Tribunal.
4. Ground No.1 is general in nature.
5. Ground 2 is regarding disallowance of Rs.45,95,01,000 u/s. 14A r.w.s. Rule 8D being expenditure incurred towards earning exempt income. The AO noted that the assessee has claimed exemption u/s. 10(34) towards dividend of Rs.6,52,31,200 and interest of Rs.19,78,29,636 on tax free bonds u/s. 10 totaling to Rs.26,30,60,836. The assessee made an adhoc disallowance of Rs.5,44,496 in relation to income not forming part of total income under ‘proportionate expenditure of treasury department in terms of section 14A’. The assessee was asked to furnish details in this regard and under Rule 8D. The assessee submitted that securities held by the bank are stock in trade. The interest income and profit on redemption and profit on sale of investments are offered to tax under the head business income, therefore no disallowance can be made u/s. 14A in respect of investments held as stock in trade. It was also submitted that there was no additional cost incurred by the bank in earning exempt income and the bank has not incurred any direct expenses to earn tax free income. The bank has sufficient own funds in the form of share capital and reserves and non-interest bearing funds in the form of current account, sundry creditors, etc. The details of the own funds which were non-interest bearing funds totaling to Rs.35,920.81 crores were submitted. The total value of exempt investments were only Rs.365.47 crores. It is therefore submitted that no interest disallowance can be made. It was also submitted before the AO that the total investment portfolio of the bank was Rs.68,621.87 crores and as such the bank has to have regular treasury department known as funds and investments management division to handle such a huge portfolio. Therefore, no additional expenditure is incurred in relation to earning tax exempt income. Further , the assessee submitted calculation for disallowance u/s. 14A r.w. Rule 8D. The calculation was examined by the AO and he was not satisfied and observed that provisions of section 14A are to determine the cost relatable to income which is exempt and make disallowance as provided under the relevant Rules. When the assessee fails to prove it to the satisfaction of the AO, the disallowance portion worked out by the assessee, by adopting its self-advised formula, does not suffice the requirement of proving that disallowed part of expenses are exclusive and its relatable to investments made for earning exempt income only. The availability of surplus/interest free funds does not really matter as the expenditure is worked out either on actual basis to the satisfaction of the AO or worked out on the basis of rules provided for the same under the Income Tax statute. The formula provided by the assessee cannot be held as proper and satisfy the requirements of provisions as the assessee has not adopted the formula given under the Rules. The actual income which qualifies for exemption can be ascertained only after considering the expenses related to it and such expenses are disallowable under the provisions of section 14A of the Act. Without utilizing the resources and adjusting establishment of assessee bank, it would not have been possible to earn the exempt income and the investment made on shares/bonds/mutual funds etc. for earning exempt income will always have a notional interest part attached to it. The AO further noted that the submission made by the assessee are contradictory. Finally the AO observed that in the absence of direct nexus between assessee’s own funds and investments, the investments will be treated from common pool of account having both borrowed as well as own funds of the assessee. The AO also relied on various judgments and calculated the disallowance u/s. 14A of Rs.45,95,01,000.
5.1 During the course of arguments, the ld. AR of the assessee submitted that this issue has been settled by the jurisdictional High Court in assessee’s own case in favour of the assessee for AYs 200506 to 2012-13 and has observed that no disallowance u/s. 14A can be made to the assessee. The has provided the list of judgement of the Hon’ble jurisdictional High Court which is placed on record.
5.2 On the other hand, the ld. DR relied on the order of lower authorities and further submitted that the CIT(A) after relying on various judgments observed that “ In view of the above, I am not inclined to concur with this plea of the appellant that it had held the securities as stock-in-trade, not with the intention to dividend income. The various judicial precedents relied upon by the appellant, on the above issue, are of no avail as the facts of the instant case are distinguished, as elaborated in preceding paragraphs”. The ld. DR further submitted that the department has not accepted the judgment of the jurisdictional High Court and has filed appeal before the Hon’ble Supreme Court and SLP for the AY 2009-10 to 2011-12 is accepted. Therefore, he requested that the issue should be decided in favour of revenue.
6. Considering rival submissions, we note that this issue has been settled by the Hon’ble jurisdictional High Court in assessee’s own case for AY 2011-12 & 2012-13 in ITA No.258/2020 dated 8.2.2021 observing as under:-
“ 4. Even though four substantial questions of law are raised in the appeal Memorandum cited supra, among them, substantial question of law Nos.2 & 4 are covered by the judgment and are answered by the co-ordinate bench of this court vide judgment dated 31..01.2020 in ITA No.481/2014. Paras 8 to 10 of the said judgment dated 31.01.2020 passed in the aforesaid case, reads as under:
“8. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note of Section 14A of the Act:
Section 14A (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.
(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-Section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in rei-3tion to income which does not form part of the total income under this Act.
Provided that nothing contained in this Section shall empower the Assessing Officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154, for any assessment year beginning on or before the 1st day of April 2001.
9. From perusal of Section 14A of the Act, it is evident that for the purposes of computing the total income under this chapter, no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation of the income which does not form part of his total income under the Act. The expenditure, the return of investment and cost of requisition are distinct concepts. Therefore the word ‘incurred’ in Section 14A of the Act have to be read in the context of the scheme of the Act and if so read, it is clear that it disallows certain expenditures incurred to earn exempt income from being deducted from other incomes which is includable in the total income for the purposes of chargeability to the Lax. It i4 equally well settled that expenditure is a pay out. In order to attract applicability of section 14,4 of the Act, there has to be a pay out and return of investment or a pay back is not such a debit item. [See: WALFORT SHARE AND STOCK BROKERS (P) LTD SUPRA as well as M.4XOP INVESTMENTS LTD SUPRA]. In the instant case, the assessee has admittedly not incurred any expenditure. This case pertains to income on dividend, which by no stretch of imagination can be treated to be an expenditure to attract the provisions of Section 14A of the Act. In view of aforesaid enunciation of law by the Supreme Court, the first substantial question of law framed by this court is answered in favour of the assessee and against the revenue.
10. Learned counsel for parties, have fairly admitted that in case this court frames a substantial question of law that whether provisions of Section 115JA apply to the Banking Companies are not the remaining substantial questions of lay,/ would be reduced otiose. This court has already framed a substantial question of law in this regard today. This court by an order passed on 16.01.2020 passed in ITA No.13/2014 has already held that the provisions of Section 11514 do not apply to the banking companies. Therefore, the substantial questions of law Nos_3, 4 and 5 and substantial question of law framed in ITA 99/2010 are rendered academic and need not be answered. So far as substantial; question of law No.2 in ITA No.97/2010 is concerned, the same is squarely covered by the decision of the Supreme Court in ‘CIT VS. ESSAR TELEHOLOINGS LTD.’,(2018) 401 ITR 445, wherein it has been held that provisions of Section 114A read with rule 8D of the Income Tax Rules are prospective in nature and can not be applied to any assessment year prior to Assessment Year 2008-09. Accordingly, the aforesaid substantial question of law is answered against the revenue and in favour of the assessee.”
5. In this regard, a memo is also filed by the learned counsel for the appellant, which reads as under:
“MEMO ON BEHALF OF THE APPELLANT
The appellant respectfully submits that in view of the substantial questions of law 2 and 4 having been covered in favour of the assessee in the earlier orders in assessee’s own case, it is submitted that substantial questions of law 1 and 3 become academic and need not be answered by this Hon’ble Court.
Therefore, it is most humbly prayed that this Hon’ble Court may be pleased to take the memo on record and pass appropriate orders in the interests of justice and equity.”
6. As per the Memo, question Nos.1 & 3 would only be treated as academic and hence, not answered. in view of the same, in terms of the order dated 31.01.2020, the substantial questions of law Nos.2 & 4 are answered in favour of the assessee and in terms of the aforesaid judgment.”
6.1 Respectfully following the above judgment, we decide the issue in the above terms of the judgment. The ld. DR has submitted that the Hon’ble Apex court has admitted the SLP filed by the revenue but the status of the same could not be furnished by the ld. DR, accordingly, we are bound by the order of the Jurisdictional High Court
7. Ground No.3 is regarding disallowance of Rs.1296,71,17,882 u/s. 36(1)(vii) in respect of bad debts written off by the bank.
7.1 The AO noted that the assessee claimed deduction of bad debts u/s. 36(1)(vii) without actually writing-off the debts as irrecoverable in the individual accounts of the debtors concerned. The assessee was asked to clarify the procedure followed while writing off at H O level and branch level. The assessee submitted reply. The AO from the submissions observed, majority of the write off is Prudential Write Off (PWO) done at the Head Office level actually with a view to write create provision for NPAs in the books of accounts as per RBI guidelines. The fact of write off of bad debt has not been allowed to be communicated to the branch level, where the individual loan accounts are outstanding, which implies that the debts have actually not been written off in the individual loan accounts. Further, the amounts have been debited to P&L account under the head ‘Provisions & Contingencies’ and claim of bad debt written off has been made only in the computation of income. Thus it indicates that the amounts have been charged to profit for creating provisions and not for actual write off of bad debts in the individual accounts. The AO further noted that the write off of bad debts has been made by way of executive decision, much after the finalization of books of accounts and AGM which indicates that claim of bad debt is only an afterthought for reducing tax liability. He further observed that assessee did not charge the amount of bad dets written off to the Provision for Bad & Doubtful debts account, even though there was sufficient credit balance available in the provisions created for this very purpose. The opening balance of brought forward provisions was Rs.7264,47,17,510 which was more than adequate to cover the entire claim of bad debts written off. AO relied on first proviso to section 36(1)(vii) which states that claim of bad debts written off shall be admissible, only to the extent the same exceeds the credit balance in provisions for bad and doubtful debts. As per Explanation 2 to section 36(1)(vii), there shall be only one account of provision for bad and doubtful debts, against which all claims of bad debts actually written off during the year shall be first set off, without any distinction between rural advances and other advances. The AO also relied on the judgements of Southern Technologies Vs. CIT reported in 352 ITR 577(SC), M/s Vijaya Bank vs CIT reported in 320 ITR 166 (SC) & CIT vs Hotel Ambassdor [2002] reported in 253 ITR 430 (Ker). Thus, only the excess amount of bad debts written off, remaining after such set off, is admissible for deduction u/s. 36(1)(vii).
7.2 On appeal, the assessee submitted before the CIT(Appeals) that it had written off total amount of Rs.1296,56,16,023 during the year. The entire sum of Rs.130,81,22,967 being bad debts written off by rural branches has been charged to provisions account made u/s. 36(1)(viia) and there was no excess amount left. Therefore, no deduction has been claimed towards bad debts written off by rural branches. It claimed a sum of Rs.1296,56,16,023 being bad debts written off by non-rural branches u/s. 36(1)(vii) as the same need not be charged to the provisions account u/s. 36(1)(viia). The assessee submitted a brief note on system followed for write off of bad debts as under:-
“A) Procedure followed for technical write off and branch level write off The appellant bank identifies individual bad debts that are to be written off. The bad debts are written off by the branches and also at the HO level after obtaining the requisite permission from the respective authorities. The write off carried out at the branch level is called actual write off in which case the customer account is written off and closed forever. However, the write off under taken at HO level is called Technical/Prudential write-off in which case, the customer account still appears in the branch books, though the same is written off at HO level. In both cases, (write off at branch level) as well as at HO level, the actual amount written off is reduced from the loans and advances of the bank. The working in this regard is enclosed as Annexure-C.
It is also pertinent to mention that the recovery made in written off account is credited to Profit and Loss account as recovery from written off accounts and disclosed as Miscellaneous income in the audited Profit and Loss Account under Schedule No 14 — Other income. The fact can be ascertained from the breakup of other income enclosed as Annexure-D.”
7.3 The assessee further submitted that the issue of actual write-off of debts in the loan account of the debtors, is covered in favour of the appellant Bank in the following cases,-
(i) Vijaya Bank Vs CIT (2010) (323 ITR 166) (SC)
(ii) UCO Bank Vs CIT (240) (ITR 355) (SC)
(iii)Southern Technologies Vs CIT (352 ITR 577) (SC)
(iv) Canara Bank Vs DCIT (2022 (1) TMI 124) (Trib.- Bangalore) (i.e Appellants own case)
7.4 The assessee further argued that the issue that the bad debt written off should be first adjusted against the credit balance in the Provisions account and only the excess can be claimed as deduction, is also covered in favour of the appellant Bank in the following cases,-
i. Catholic Syrian Bank Vs CIT (2012) (343 ITR 270) (SC)
ii. Vatika Township Pvt Ltd (2014)(367 ITR 466)(SC)
iii. State Bank of Hyderabad (2015) ((8) TMI 836) (Trib.-Hyderabad)
iv. IDBI Bank Ltd (2017) ((9) TMI 1289) (Trib.-Mumbai)
v. Oriental Bank of Commerce (2017)((11 TMI 1589)(Trib.-Delhi)
7.5 The assessee further submitted that any subsequent recovery made in the loan accounts, which have been written-off, either at the Head Office level or at the branch level, are credited to the Profit and Loss account and shown as other income. The amounts subsequently recovered are duly offered to tax under section 41(1) of the Act, in the year of recovery. It was pointed out that any recovery made in a loan account which is still live, i.e. not written off, is credited to that loan account only, and not to the Profit and Loss account.. However, recovery made in an account which has been written off, is credited to the profit and loss account. Thus, it was argued that the very fact that the recovery is credited to the Profit and Loss account, shows that the loan account has been written off and that the recovery of Rs. 387,05,52,549/- has been offered to tax under section 41(4) during the year under consideration.
8. The CIT(Appeals) noted that the AO has noted two important factual findings; (i) that the appellant bank has not actually written-off the debts in the individual loan accounts, & (ii) that the appellant did not charge the amount of bad debts written-off to the Provision for bad and doubtful debts account, even though there was sufficient credit balance available in the provisions created for this very purpose. Thus, the AO has made out a case that the deduction of bad debts was not admissible on both these grounds. The assessee has not been able to controvert these factual findings in his submission made during the appellate proceedings, but relied on certain judicial precedents and stated that both the above issues are covered in favour of the assessee.
8.1 The CIT(A) observed that from the provisions of section 36(1)(vii), it is evident that clause (vii) of Section 36(1) allows deduction in respect of any bad debt or part thereof which is actually written off as irrecoverable in the accounts of the assessee during the year. The clause (viia) of section 36(1) allows deduction in respect of any provision for bad and doubtful debts made by certain banks and financial institutions up-to the limits specified therein. In order to prevent the possibility of double deduction, proviso to the clause (vii) was inserted by the Finance Act 1985 with effect from 1st April 1985, which provided that in case of an assessee to which clause (viia) applies, the deduction of bad debts written off would be limited to the amount by which such bad debt exceeds the provisions for bad and doubtful debts made under clause (viia). Further, clause (v) was inserted in section 36(2) which laid down that where the bad debt relates to advances made by an assessee to which clause (viia) applies, no deduction of bad debt shall be allowed unless the assessee has debited the amount of bad debt in that previous year to the provisions for bad and doubtful debts made under clause (viia).
8.2 He referred to the scope and effect of amendments made by the Finance Act 1985 to the provisions of section 36(1) and 36(2), explained in the CBDT Circular No. 421 dated 12.06.1985 and observed that the positing emerges is that the bad debts actually written off as irrecoverable in case of such assessee [to which clause (viia) applies] should be first charged to the provisions made for bad and doubtful debts, and the excess amount, if any, shall be charged to the profits for the year and such excess amount only shall be allowed deduction clause (vii). The Hon’ble Supreme Court in Catholic Syrian Bank (supra) held that deduction u/s. 36(1)(vii) is available to banks in respect of bad debts written off, other than rural advances, subject to s. 36(2)(v) and independent of s. 36(1)(viia). In other words, proviso to s. 36(1)(vii) applies only to provision made for bad and doubtful debts relating to rural branches.
8.3 The CIT(A) observed that in order to clarify the purport of said proviso, Explanation 2 was inserted to section 36(1)(vii) by Finance Act, 2013 w.e.f. 1.4.2014 which clarified that for the purposes of proviso to s. 36(1)(vii) and s. 36(2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts and such account shall relate to all advances, including advances made by rural branches. Further, the scope and effect of this amendment has been explained in the CBDT Circular No.3 of 2014 dated 24.1.2014. He noted that from the Explanatory Memorandum that Explanation 2 to clause (vii) of section 36(1) was inserted by the Finance Act, 2013 only with a view to clarify the legislative intent of existing provisions which was clear from the words “for removal of doubts” and “it is hereby clarified” in Explanation 2 and hence the amendment was clarificatory in nature and can be applied retrospectively. He relied on the Hon’ble Supreme Court judgment in the case of CIT v. Gold Coin Health Food Pvt. Ltd. (2008) 304 ITR 308 (SC) wherein it was held that if a statute is curative or merely declaratory of the previous law, it has to be applied retrospectively. Thus, the CIT(A) observed that the import of Explanation 2 refer to only one account of provision for bad and doubtful debts, relating to all types of advances including advances made by rural branch. Thus, the amount of deduction of bad debts actually written off shall be subject to the amount by which such debts exceed the provisions for bad & doubtful debts, without making any distinction between rural advances and other advances. Therefore, the banks cannot claim double deduction, one on provisioning basis and again on actual write off basis for the same amount, separately and independently. Therefore, the contentions of the assessee were rejected.
8.4 He noted that the question whether the credit balance referred in the said proviso of the Act refers to opening or closing credit balance was answered by the CBDT Instruction No.17 of 2008 dated 26.11.2008 as the opening credit balance i.e., the balance brought forward as on 1st April of the relevant accounting year. Therefore, as noted by the AO, in the computation submitted by the assessee, the opening credit balance of brought forward provision for bad & doubtful debts is at Rs.7265 crores which far exceeds the claim of bad debts written off at Rs.1296 crores. Therefore the entire claim was not admissible and relied on the decision of Kerala High Court in South India Bank Ltd. v. CIT (2019) 410 ITR 50 (Ker).
8.5 In view of the above, the CIT(Appeals) sustained the order of the AO. Aggrieved, the assessee is in appeal before the Tribunal.
9. The ld.AR reiterated the submissions made before the lower authorities and submitted that an identical issue has been decided in favour of the assessee by the coordinate bench of the Tribunal in ITA No.1884/Bang/2018 dated 27.12.2021 for AY 2013-14 and ITA No.1885/Bang/2018 dated 28.09.2018 for AY 2014-15 in assessee’s own case.
10. The ld. DR relied on the order of lower authorities. On the other hand, the ld. DR relied on the orders of the lower authorities and he submitted that the Hon’ble SC has accepted the SLP of the revenue on similar issue in the case of Commissioner of Income Tax, LTU vs Vijaya Bank, reported in (2021) 130 com 149 dated AUGUST 9, 2021 in SLP LEAVE (C) NO.7351 OF 2021, against the judgement of the Hon’ble jurisdictional High Court, therefore, the issue should be decided in favour of the revenue.
11. We have heard the rival submissions and perused the material on record. We notice that the from the decisions of the coordinate Bench quoted by the assessee in ITA No. 1885/Bang/2018 for AY 2014-15 (supra) in its own case, the issue has been decided in favour of the assessee as under:-
“12.3 We have heard rival submissions and perused the material on record. We notice that the CIT(A) had expressed the view that provision allowed u/s 36(1)(viia) of the Act would apply to non-rural advances also. An identical issue has been examined by the Hyderabad Bench of the ITAT in the case of State Bank of Hyderabad v. DCIT in ITA No.450/Hyd/2015, ITA No.498 and 499/Hyd/2015 (order dated 14.08.2015) wherein the Tribunal had not accepted the above said view expressed by the CIT(A). The Bangalore Bench of the Tribunal in assessee’s own case for assessment year 2013-2014 by following the Hyderabad Bench order of the Tribunal in the case of State Bank of Hyderabad (supra), had set aside the view expressed by the CIT(A) that proviso to section 36(1)(vii) which requires adjustment of bad debts against the provisions allowed u/s 36(1)(viia) would apply to non-rural advances also. The relevant finding of the Bangalore Bench of the Tribunal in assessee’s own case for assessment year 2013- 2014 reads as follows:-
“6.4 We heard the parties on this issue and perused the record. We notice that the Ld CIT(A) has expressed the view that the provision allowed u/s 36(1)(viia) of the Act would cover bad debts pertaining to non-rural advances also. An identical issue has been examined by Hyderabad bench of ITAT in the case of State Bank of Hyderabad vs. DCIT (ITA No.450/Hyd/2015, ITA No.498 and 499/Hyd/2015 dated August 14, 2015), wherein the Tribunal has not accepted the above said view expressed by Ld CIT(A). The relevant observations made by the Tribunal are extracted below:-
“19. We have considered the rival submissions and perused the materials on record as well as the orders of revenue authorities. As could be seen from the finding of AO as well as ld. CIT(A), only reason for which claim of deduction for Rs. 209,07,50,831 representing actual write off of bad debts relating to non-rural advances u/s 36(1)(vii) was denied is, assessee having already availed deduction u/s 36(1)(viia), it is not eligible to claim deduction u/s 36(1)(vii) as it will amount to double deduction. In our view, both AO as well as ld. CIT(A) have committed fundamental error by mixing up provisions of sections 36(1)(vii) and 36(1)(viia). While 36(1)(vii) speaks of actual write off of bad debts in the books of account, section 36(1)(viia) even allows provision made towards bad and doubtful debts in respect of rural advances to the extent of provision made in the books of account subject to the ceiling fixed under clause (viia) of section 36(1). Proviso to section 36(1)(vii) operates only in a case where deduction is also claimed under section 36(1)(viia). In other words, proviso to section 36(1)(vii) applies to write off of bad debts relating to rural advances to the extent it exceeds the provision made u/s 36(1)(viia). If we examine the facts of the present case in the context of aforesaid statutory provision, it will be evident that assessee, though, has written off in the books of account an amount of Rs. 210.74 crore, but, in the computation of total income, the actual deduction claimed u/s 36(1)(vii) is Rs. 209.08 crore representing bad debts written off relating to non-rural/urban advances. The balance amount of bad debts relating to rural advances was not claimed as deduction by assessee in terms with the proviso to section 36(1)(vii) as it has not exceeded the provision for bad and doubtful debts relating to rural advances created u/s 36(1)(viia). Both AO and ld. CIT(A) have misconstrued the statutory provisions while observing that proviso to section 36(1)(vii) would also apply in case of bad debts relating to non-rural advances. The Hon’ble Supreme Court in case of Catholic Syrian Bank Vs. CIT (supra) while analyzing provisions of section 36(1)(vii) and 36(1)(viia) have observed that section 36(1)(viia) applies only to rural advances. The observations made by Hon’ble Apex Court in this regard in paras 26 & 27 of the judgment is extracted hereunder for convenience.
“26. The Special Bench of the Tribunal had rejected the contention of the Revenue that proviso to s. 36(1)(vii) applies to all banks and with reference to the circulars issued by the Board, held that a bank would be entitled to both deductions, one under cl. (vii) of s. 36(1) of the Act on the basis of actual write off and the other on the basis of cl. (viia) of s. 36(1) of the Act on the mere making of provision for bad debts. This, according to the Revenue, would lead to double deduction and the proviso to s. 36(1)(vii) was introduced with the intention to prevent this mischief. The contention of the Revenue, in our opinion, was rightly rejected by the Special Bench of the Tribunal and it correctly held that the Board itself had recognized the position that a bank would be entitled to both the deductions. Further, it concluded that the proviso had been introduced to protect the Revenue, but it would be meaningless to invoke the same where there was no threat of double deduction.
27. As per this proviso to cl. (vii), the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed under cl. (viia). The proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by cl. (viia), there would be no such double deduction. The proviso, in its terms, limits its application to the case of a bank to which cl. (viia) applies. Indisputably, cl. (viia)(a) applies only to rural advances.”
Concurring with the aforesaid majority view, Hon’ble CJI, S.H. Kapadia, as the then he was, held as under:
“2. Under Section 36(1)(vii) of the ITA 1961, the tax payer carrying on business is entitled to a deduction, in the computation or taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act, inserted clause (viia) in subsection (1) of Section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debts relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the IT Rules, 1962. Thus, the provisions of clause (viia) of Section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of Section 36(11(vii) relating to allowance of the bad debt(s). In other words, the scheduled commercial banks continue to get the full benefit of the write off of the irrecoverable debt(s) under Section 36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) under section 36(1)(viia). A reading of the Circulars issued by CBDT indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write off However, this may result in double allowance in the sense that in respect of same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of actual write off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write off to the excess, if any, of the write off over the amount standing to the credit of the account created under clause (viia). However, the Revenue disputes the position that the proviso to clause (vii) refers only to rural advances. It says that there are no such words in the proviso which indicates that the proviso apply only to rural advances. We find no merit in the objection raised by the Revenue. Firstly, CBDT itself has recognized the position that a bank would be entitled to both the deduction, one under clause (vii) on the basis of actual write off and another, on the basis of clause (viia) in respect of a mere provision. Further, to prevent double deduction, the proviso to clause (vii) was inserted which says that in respect of bad debt(s) arising out of rural advances, the deduction on account of actual write off would be limited to the excess of the amount written off over the amount of the provision allowed under clause (viia). Thus, the proviso to clause (vii) stood introduced in order to protect the Revenue. It would be meaningless to invoke the said 1 proviso where there is no threat of double deduction. In case of rural advances, which are covered by the provisions of clause (viia), there would be no such double deduction. The proviso limits its application to the case of a bank to which clause (viia) applies. Clause (viia) applies only to rural advances. This has been explained by the Circulars issued by CBDT. Thus, the proviso indicates that it is limited in its application to bad debt(s) arising out of rural advances of a bank. It follows that if the amount of bad debt(s) actually written off in the accounts of the bank represents only debt(s) arising out of urban advances, the allowance thereof in the assessment is not affected, controlled or limited in any way by the proviso to clause (vii).”
Thus, considered in light of principle laid down as referred to above, when the proviso to section 36(1)(vii) applies to bad debts written off relating to rural advances, the same cannot be applied for disallowing deduction claimed on account of write off of bad and doubtful debts relating to nonrural/urban advances. As far as application of explanation to section 36(1)(vii) is concerned, we agree with the ld. AR that its operation will be prospective and will not apply to the impugned AY. For this proposition, we rely upon the decision of the ITAT Mumbai in case of Bank of India Vs. Addl. CIT (supra). Even otherwise also, careful reading of explanation to section 36(1)(vii) would indicate that nowhere it suggests that the proviso to section 36(1)(vii) would apply in respect of bad debt written off relating to non-rural advances. In the aforesaid view of the matter, we hold that assessee would be eligible to avail deduction of an amount of Rs. 209.94 crore representing actual write off in the books of account of bad debts relating to nonrural/urban advances in terms with section 36(1)(vii), as proviso to the said section would not apply to non-rural advances. Accordingly, we delete the addition made by AO and confirmed by ld. CIT(A).”
6.5 Following the above said decision, we hold that the view expressed by Ld CIT(A) is not legally correct. Accordingly, we set aside the order passed by Ld CIT(A) with regard to his alternative decision, i.e., the view that the proviso to sec. 36(1)(vii) which requires adjustment of bad debts against provision allowed u/s 36(1)(viia) would apply to non-rural advances also. Accordingly, we direct the AO to delete the disallowance of Rs.1258.47 crores.”
12.4 In view of the above co-ordinate Bench order of the Tribunal in assessee’s own case for assessment year 2013- 2014 (supra), we hold that the view expressed by the CIT(A) is not correct. Therefore, the alternative decision taken by the CIT(A) (i.e. the proviso to section 36(1)(vii) which requires adjustment of bad debts against provision allowed u/s 36(1)(viia) would apply to non-rural advances also) is hereby set aside. Hence, we direct the A.O. to delete the disallowance made by the CIT(A). It is ordered accordingly.”
11.1 Similar issue has also been decided by the coordinate Bench of the Tribunal in the case of Bank of Baroda v. Addl. CIT, LTU, in ITA No.321/Bang/2019 dated 25.4.2023 in favour of the assessee. The ld. DR has submitted that the Hon’ble Apex court has admitted the SLP filed by the revenue but the status of the same could not be furnished by the ld. DR, accordingly, we are bound by the order of the Jurisdictional High Court. Accordingly respectfully following the above decisions, we delete the addition made u/s. 36(1)(vii). This ground is allowed.
12. Ground No.4 is regarding disallowance of Rs.1498,66,51,713 u/s. 36(1)(viia). The AO noted that the bank has claimed a sum of Rs.1779,82,44,990 as deduction in respect of provision made for bad & doubtful debts u/s.36(1)(viia) and computed 10% of aggregate average advances (AAA) of the rural branches which comes to Rs. 1638,71,17,882/- & 7.5% of the total income before 36(1)(viia) which comes to Rs.141,11,27,108 & provisions created in the books is Rs. 3187,60,52,000/-. The AO noted discrepancies in the computation of AAA made by the rural branches and discussed the issue in detail at pages 13 to 24 of the assessment order. The AO held that only fresh advances made during the month by the rural branches should be considered for computing the AAA as per Rule 6ABA and observed certain discrepancies in the classification of rural branches by the assessee bank that 37 branches could not be classified as rural branches, as the population as per Census 2011 exceeds 10,000 in those areas, and accordingly held that incremental advances made by non-rural branches shall be excluded for computation the AAA. He finally computed 10% of AAA of the rural branches at Rs.58,96,29,768 and in addition 71/2 of total income at Rs.222,19,63,509. Thus, AO computed the total deduction admissible u/s. 36(1)(viia) at Rs.281,15,93,277and disallowed excess claim of deduction to the extent of Rs.1498,66,51,713.
13. On appeal before the CIT(Appeals), the assessee stated that the assessee bank has computed the AAA by considering the outstanding loans of each rural branch at the end of the last day of each month separately and divided the resultant figure by the number of months comprised therein and this method of working is as per Rule 6ABA and the method adopted by the AO is not in accordance with law. The assessee relied on the following decisions:-
1. Uttarbanga Kshetriya Gramin Bank (2018) (408 1TR 393) (Cal)
2. Canara Bank (2017) (60 ITR (Trib.) 1) (Trib.-Bangalore)
3. Nizamabad District Cooperative Central Bank Ltd Vs /TO (2014)(12 TMI 562)(Trib.-Hyderabad)
4. DCIT Vs Madurai District Central Co-operative Bank Ltd (2014)(51 com 194) (Chennai-Trib.)
5. DCIT Vs City Union Bank Ltd in 1TA No 1485/Mds/07 order dated 30.10.2009
13.1 The assessee has also submitted that section 36(1)(viia) is a beneficial provision, allowing deduction to banks having rural branches, with a view to promote rural banking. It is settled position of law that beneficial provisions should be interpreted liberally so that the intended benefits can be passed on the eligible assessee. The appellant has also claimed that the 37 branches excluded by the AO, should also be regarded as rural branches, as population of these branches is less than ten thousand as per 2011 Census.
14. The CIT(Appeals) after considering the submissions of the assessee and material facts on record, observed that clause (viia) of section 36(1) provides that any provision for bad and doubtful debts (PBDD) made by certain category of banks shall be allowed as deduction in computing business incomes, subject to the limit specified therein. The deduction of PBDD is subject to the upper limit of 7.5% of total income and 10 percent of the AAA made by the rural branches of such bank computed in the prescribed manner. The method of computation of AAA made by the rural branches of a scheduled bank has been prescribed under rule 6ABA. The moot point for adjudication is whether for computing the AAA made by the rural branches, as per Rule 6ABA, only the fresh advances made by the rural branches during the month should be considered, or the outstanding loans at the end of each month should be considered. In this context, he referred to the provision and that clause (viia) of sub-section (1) of section 36 was inserted by the Finance Act 1979, with effect from 1980. The scope and effect of the originally inserted clause (viia) has been explained in the CBDT Circular No. 258 dated 14.06.1979. The CIT(A) observed that it is clear from the above Explanatory Memorandum that the legislative intent for insertion of the said clause (viia) was to promote rural banking and help the scheduled banks in making adequate provisions to cover the risks related to rural advances. As per the newly inserted clause, the provisions for bad and doubtful debts made by a bank could be claimed as deduction subject to an upper limit. This upper limit laid down in the clause (viia) has been amended several times. The upper limit, for the year under consideration, is to be computed as 7.5 percent of total income and 10 percent of the AAA made by the rural branches. The method of computation of aggregate average advances made by the rural branches has been prescribed under rule 6ABA. He noted that as per Rule 6ABA, the computation prescribed therein envisages a three step process. The first two steps provide the method of computing average advance made by a particular rural branch. First, the advances made by each rural branch, as outstanding at month end, have to be aggregated. Second, average of this aggregated sum has to be taken over the period of months for which the advances have been outstanding. This average figure shall be the amount of average advance made by that particular rural branch. In the third step, the average advances of all rural branches (computed separately for each rural branch) have to be aggregates and that total figure shall be the aggregate average advances made by the rural branches. Accordingly, for the first step, the fresh advances made by each rural branch only have to considered. The outstanding amounts against such fresh advances have to aggregated month wise, and then the average of the aggregated sum has to be taken for the period of months for which the advance was outstanding. The process of averaging out would take care of the fluctuating balance in a particular account due to repayments and further advances. This construction of the rule is aligned with the legislative intent namely to encourage rural banking. If outstanding loans at the end of each month for a rural branch were to be considered (as the appellant has claimed), this would lead to an anomaly in a situation where a particular rural branch does not make any fresh advance during the entire year, but does have outstanding loans brought forward from earlier years. In such an event, the rural branch in example would continue to report the same amount of aggregate advances year after year, without having made any fresh advances all these years. Hence, this construction of the rule would clearly defeat the very purpose of enactment of clause (viia), namely to encourage rural banking, as this would enable the banks to claim deduction of provisions made for bad and doubtful debts, without making any efforts to increase their exposure to rural loans. The primary idea of permitting deduction for a provision, which is normally not admissible, in case of certain banks is to create a fiscal incentive for generating rural credit, which of course is more prone to risk and default. Therefore, the CIT(Appeals) concurred with the view of the AO that only the fresh advances made during the month by the rural branches should be considered for computing the aggregate average advances as per Rule 6ABA. He further observed that the jurisdictional High Court in the assessee’s own case reported as DCIT Vs Syndicate Bank (2022) (145 taxmann.com 336) (Karnataka) has allowed the review petition filed by Revenue on the issue and held that deduction towards bad and doubtful debts under section 36(1)(viia) computed at rate of 7.5 per cent of total income should be computed after setting off of brought forward losses.
14.1 Regarding the assessee’s contention that the 37 branches excluded by the AO for the purpose of computing AAA should also be included as the population in those branches was less than ten thousand, the CIT(Appeals) observed that the that AO has given a clear factual finding in the assessment order that population in these 37 branches exceeded ten thousand as per Census 2011. The assessee in appellate proceedings has merely asserted that the population was less than ten thousand, but has failed to bring any documentary evidence on record to substantiate this assertion. In absence of any evidence, he reject this claim of the assessee on facts.
14.2 In view of the above, the CIT(Appeals) upheld the action of AO in restricting the claim of deduction in respect of provision made for bad and doubtful debts u/s. 36(1)(viia), by considering only the fresh advances made by the rural branches for computing the AAA under Rule 6ABA. However, in this regard, the CIT(Appeals) also directed the jurisdictional Assessing Officer (JAO) to consider the effect of jurisdictional High Court ruling in the appellant’s own case, as mentioned above, and re-compute, if found necessary, the admissible quantum of deduction in respect of the provisions made by the appellant bank towards bad and doubtful debts under section 36(1)(viia) in that light after providing a reasonable opportunity to the appellant to adduce the supporting evidence in support of its claim. The CIT(Appeals) therefore partly allowed this issue.
15. The ld. AR submitted/reiterated the submissions made before the lower authorities and further submitted that the issue is covered in assessee’s own case in ITA No. 208/Bang/2019 & in ITA NO. 227 to 229/Bang/2023 in favour of the assessee.
16. The ld. DR relied on the order of the CIT(Appeals).
17. After considering the rival submissions, we find that this issue was considered by this Tribunal in the latest judgement in assessee’s own case for AYs 2014-15 & 2015-16 in ITA Nos.388 & 389/Bang/2023 by order dated 26.09.2023 and it was held as under:-
“9. After considering rival contentions, we note that the issue of allowance u/s. 36(1)(viia) has been settled by the Hon’ble jurisdictional High Court of Karnataka in the case of CIT, LTU v. Canara Bank, [2023] 147 taxmann.com 171 (Karnataka)[05-12-2022] in which it has been held as under:-
“6. Insofar as question No. 4 is concerned, adverting to section 36(1)(viia) of the Income-tax Act, 1961, Shri Aravind submitted that the word used in the statute is aggregate average advances “made” by the rural branches. To quote an example, he submitted that for A.Y. is 2013-14 (F.Y. 2012-13) if the bad debt as on 31-3-2012 is considered to be as Rs. 1 Crore by virtue of making provisions subsequently, the assessee will be entitled for double benefit because provisions in respect of 10% of the bad debt of provisions of Rs. 1 Crore towards bad debt was already made as on 31-3-2012. Therefore, if the same amount is carried forward for the next F.Y., the assessee will be entitled for the double benefit because it would be making a provision for Rs. 1 Crore in addition to the 10% to the bad debt made in the relevant F.Y.
7. Shri Suryanarayana, adverting to the Para 7 of the impugned order, submitted that in identical circumstances, in assessee’s own case, the assessee had made provision in similar manner as made in A.Y. 201314. A co-ordinate bench of the Tribunal had accepted the provision made by the assessee benefit in Canara Bank v. Jt. CIT [2018] 99 com 357/[2017] 60 ITR (Trib.) 1 (Bengaluru – Trib.). He further submitted that the said order has been followed by the Tribunal in Vijaya Bank v. Jt. CIT [IT Appeal Nos. 915 & 845 (Bang.) of 2017, dated 5-1-2018] and the said method of making provision has been approved by the Calcutta High Court in Uttarbanga Kshetriya Gramin Bank case.
8. We have carefully considered the rival contentions and perused the records.
9. In Para 7.2 of the impugned order, the Tribunal has recorded thus,
“7.2 Before us, the learned Authorised Representative for the assessee reiterated the submission that the language of Rule 6ABA is very clear and does not mandate that only incremental advances has to be considered and nothing can be read into it as has been done by the authorities below. It was submitted that this issue has been considered and decided in favour of the assessee by the co-ordinate bench of this Tribunal in the case of Canara Bank v. JCIT (2017) 60 ITR (Trib) 1 [ITAT (Bang)]”
10. It is further held that the said decision has been followed in Vijaya Bank case. The manner in which the computation has been made has been given in the case of Vijaya Bank Case. Order passed by the Tribunal in Canara Bank’s case followed in Vijaya Bank case has attained finality and the Revenue has not challenged the said order. Further, the High Court of Calcutta, while considering an identical situation as recorded thus,
“Mr. 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 provided 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.
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.”
11. In view of the above, these appeals with regard to question No. 4 must fail and it is also answered in favour of the assessee and against the Revenue.”
12. Respectfully following the above judgment of the jurisdictional High Court, we hold that while calculating average aggregate advances of rural branches under section 36(1)(viia), both advance outstanding as well as fresh advances are to be considered. Ground No.3 is allowed.”
17.1 Following the above decision, we hold that the while calculating average aggregate advances of rural branches under section 36(1)(viia), both advance outstanding as well as fresh advances are to be considered. We further note that AO has reverted a clear factual finding in the assessment order that population in these 37 branches exceeded ten thousand as per Census 2011. Before that CIT (A) the assessee could not produce credible evidence. Considering the totality of facts, we remit this issue to the CIT(A) for verification of population of 2011 Census of 37 branches and the assessee is directed to produce the documentary evidence in support of its claim. Accordingly this ground is partly allowed for statistical purpose.
18. During the course of hearing, ground Nos.5, 6 & 7 were not pressed and left open.
19. Ground No.8 is regarding applicability of provisions of section 115JB of the Act to the assessee bank. The ld. AR submitted as under:-
1. “Brief facts:
1.1. The Appellant Bank (the Bank) is constituted u/s 3 of the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970 (Acquisition Act). It is not a Company registered under the Companies Act. It did not compute its income under the provisions of section 115JB of the Income Tax Act, 1961 since according to the Bank, the provisions of section 115JB dealing with Minimum Alternate Tax (MAT) are not applicable to them. The learned Assessing Officer held that the MAT provisions are applicable to the Bank and computed the Book Profit by applying the provisions of section 115JB. He made various additions to the Book Profit. On an appeal by the Bank, the learned CIT(A) held that the provisions of section 115JB are applicable to the Bank. Further, he also held that the various additions made by the learned Assessing Officer to the Book Profit are as per the provisions of section 115JB and upheld the same. The Appellant Bank has filed an appeal against the order of the learned CIT(A) challenging his decision on the applicability of MAT provisions and also adjustment made to the Book Profit.
2. Our Submissions:
2.1. Issue & the decisions prior to 01-04-2013:
Section 115JB(2) of the Income Tax Act, 1961 before its amendment by the Finance Act 2012 w.e.f. 01-04-2013 read as follows:
“(2) Every assessee, being a company, shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1of 1956)”
2.2. The Bank was subjected to MAT provisions by the learned Assessing Officer based on the provisions of section 115JB(2) as existed upto 3103-2013 for the Asst Years upto 2012-13. The Bank disputed the decision of the learned Assessing Officer and obtained favourable orders from the higher appellate authorities. Infact, various High Courts including the jurisdictional Bombay High Court in the case of CIT vs Union Bank of India reported in [2019] 13 ITR-OL 655 (Bom) held that the provisions of section 115JB(2) are not applicable to Banks.
2.3. Dispute after 01-04-2013:
There was an amendment to section 115JB(2) by the Finance Act, 2012 w.e.f. 01-04-2013. The amended section reads as follows:
Every assessee,-
(a) being a company, other than a company referred to in clause (b), shall, for the purposes of this section, prepare its statement of profit and loss] for the relevant previous year in accordance with the provisions of Schedule III to the the Companies Act, 2013 (18 of 2013) ; or
(b) Being a company, to which the second proviso to sub-section (1) of section 129 of the Companies Act, 2013 (18 of 2013) is applicable, shall, for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company:
Provided that while preparing the annual accounts including statement of profit and loss,-
(i) the accounting policies;
(ii) the accounting standards adopted for preparing such accounts including statement of profit and loss;
(iii) the method and rates adopted for calculating the depreciation,
shall be the same as have been adopted for the purpose of preparing such accounts including 37[statement of profit and loss] and laid before the company at its annual general meeting in accordance with the provisions of section 129of the Companies Act, 2013 (18 of 2013):
Provided further that where the company has adopted or adopts the financial year under the the Companies Act, 2013 (18 of 2013), which is different from the previous year under this Act,-
(i) the accounting policies;
(ii) the accounting standards adopted for preparing such accounts including statement of profit and loss;
(iii) the method and rates adopted for calculating the depreciation,
shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including 37[statement of profit and loss] for such financial year or part of such financial year falling within the relevant previous year.
Explanation. 1 …………………. ”
2.4. From the above amended section, it can be seen that the provisions of sub clause 2(a) are not applicable to the Bank as decided by various appellate authorities and the High Court.
2.5. Sub clause 2(b) is applicable to a Company to which the second proviso to sub section (1) of section 129 of the Companies Act, 2013 is applicable. It is the submission of the Bank that the second proviso to section 129(1) of the Companies Act 2013 is not applicable to the Bank.
2.6. The second proviso to Section 129(1) of the Companies Act, 2013 reads as follows:
“Provided further that nothing contained in this sub-section shall apply to any insurance or banking company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company.”
2.7. The proviso uses the term “banking company”. Therefore, unless the Bank is covered by the term banking company, as defined in the Companies Act 2013, the second proviso will not be applicable to it.
2.8. Since the provisions of the Companies Act 2013 have been referred to in section 115JB(2), as per the principles of interpretation, the words defined in the said Act are to be adopted. Companies Act 2013, defines the term banking company. In section 2(9), of the Companies Act 2013, the term banking company is defined as follows:
“(9) ―banking company means a banking company as defined in clause (C) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);”
2.9. Since the Companies Act 2013 refers to the definition of the term banking company as defined in the Banking Regulation Act, 1949 (BR Act), the definition contained in the said Act needs to be considered.
2.10. Section 5(c) of the BR Act defines the term banking company as follows:
(c) “banking company” means any company which transacts the business of banking[in India];”
2.11. Section 5(d) of the BR Act defines the term Company as follows:
(c) “company” means any company as defined in section 3 of the Companies Act 1956 (1 of 1956); and includes a foreign company within the meaning of section 591 of that Act;”
2.12. From the above definition, it can be seen that a Company as per section 3 of the Companies Act 1956 and carrying on the business of banking is a banking company as per the provisions the BR Act.
2.13. Section 3 of the Companies Act 1956 defines the term “Company” as follows:
“3. DEFINITIONS OF “COMPANY”, “EXISTING COMPANY”, “PRIVATE COMPANY” AND “PUBLIC COMPANY”
(1) In this Act, unless the context otherwise requires, the expressions “company”, “existing company”, “private company” and “public company”, shall, subject to the provisions of sub-section (2), have the meanings specified below: –
(i) “company” means a company formed and registered under this Act or an existing company as defined in clause (ii);
(ii) “existing company” means a company formed and registered under any of the previous companies laws specified below : –
(a) any Act or Acts relating to companies in force before the Indian Companies Act, 1866 (10 of 1866), and repealed by that Act ;
(b) the Indian Companies Act, 1866 (10 of 1866) ;
(c) he Indian Companies Act, 1882 (6 of 1882) ;
(d) the Indian Companies Act, 1913 (7 of 1913) ;
(e) the Registration of Transferred Companies Ordinance, 1942 (54 of 1942) ; and
(f) any law corresponding to any of the Acts or the Ordinance aforesaid and in force-
(2) in the merged territories or in a Part B States (other than the State of Jammu and Kashmir), or any part thereof, before the extension thereto of the Indian Companies Act, 1913 (7 of 1913) ; or
(3) in the State of Jammu and Kashmir, or any part thereof, before the commencement of the Jammu and Kashmir (Extension of Laws) Act, 1956 (62 of 1956), insofar as banking, insurance and financial corporations are concerned, and before the commencement of the Central Laws (Extension to Jammu & Kashmir) Act, 1968 (25 of 1968), insofar as other corporations are concerned ; and
(g) the Portuguese Commercial Code, insofar as it relates to “sociedades anonimas“
……………………..”
2.14. Based on the above, it can be seen that only a Company registered under the Companies Act 1956 or any other previous Companies Act can be called a Company.
2.15. The Bank is not registered either under the Companies Act 1956 or under any other previous Companies Act. It is constituted by an Act of Parliament being the Acquisition Act. It does not owe its existence to the Companies Act 1956. Therefore, it is not a Company as per the provisions of the Companies Act. If it is not a Company as per the provisions of the Companies Act, then, it cannot be termed as a Banking Company as per the provisions of the BR Act and as a consequence, it is not a Banking Company for the purpose of the Companies Act. Therefore, the second proviso to section 129(1) of the Companies Act 2013 is not applicable to the Bank.
2.16. It is submitted that the Bank is defined separately in the BR Act. Section 5(da) of the BR Act, defines the Bank as under:
“(da) “corresponding new bank” means a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980)”
2.17. It is settled principle of law that once a term is defined in an Act specifically, then, that should be adopted over the general definition. The term banking company is different from the term corresponding new bank. As submitted above, the Bank does not fall within the definition of the term banking company. However, it is squarely covered by the term corresponding new bank. Even on this count, the second proviso to section 129(1) of the Companies Act 2013 is not applicable to the Bank since the said proviso does not cover the term corresponding new bank.
2.18. Since the second proviso to section 129(1) of the Companies Act 2013 is not applicable to the Bank, the provisions of section 115JB(2) are not applicable to the Bank.
2.19. In this regard, reliance is placed on the following decisions:
