Karnataka Bank Ltd Vs DCIT (ITAT Bangalore)
Conclusion: Section 36(1)(vii) of ITA applied separately to non-rural debts, while Section 36(1)(viia) of the tax statute only applied to rural debts, making it clear that banks were entitled to claim both deductions, provided they pertained to different types of advances. Only rural advances were subject to the proviso under Section 36(1)(viia) of tax statute, and non-rural bad debts could be claimed as a deduction without being adjusted against provisions for bad and doubtful debts.
Held: Assessee-bank maintained that Section 36(1)(vii) which dealt with actual bad debts and section 36(1)(viia) which pertains to provisions for rural bad debts, were independent of each other. Assessee argued that the proviso to Section 36(1)(vii), which limit deductions in cases where provisions had already been made under Section 36(1)(viia), only applies to rural debts. Therefore, bad debts from non-rural branches should be allowed as a deduction without needing to be adjusted against the provisions for rural branches. The dispute began when assessee-bank claimed a deduction of Rs. 218.09 crore for bad debts, primarily from non-rural branches. Of this, Rs. 145.16 crore was disallowed by AO, who argued that these amounts were merely prudential write-offs, not actual bad debts eligible for deduction under Section 36(1)(vii) of the tax statute. AO further claimed that bank had already claimed deductions for these bad debts under Section 36(1)(viia), which allowed banks to make provisions for bad and doubtful debts, and that allowing a deduction under both provisions would result in a double benefit to the bank. It was held that in Catholic Syrian Bank Ltd. vs. CIT, the bank stressed that the two sections were distinct and should not be conflated. The Supreme Court had previously held that Section 36(1)(vii) of ITA applies separately to non-rural debts, while Section 36(1)(viia) of the tax statute only applied to rural debts, making it clear that banks were entitled to claim both deductions, provided they pertained to different types of advances. AO had misinterpreted the provisions of Section 36 of the tax legislature. Tribunal observed that proviso to Section 36(1)(vii) of ITA was wrongly applied to non-rural debts by AO. It reaffirmed that only rural advances were subject to the proviso under Section 36(1)(viia) of tax statute, and non-rural bad debts could be claimed as a deduction without being adjusted against provisions for bad and doubtful debts. ITAT observed that the legislative intent of Section 36(1)(viia) of ITA was to support rural banking, and the two sections were meant to operate independently. By disallowing the deduction for non-rural bad debts, the AO had incorrectly applied the law, which the Tribunal corrected by allowing the full deduction for the bank’s non-rural bad debts.
