Case Law Details

Case Name : The Kannur Dist. Co-op Bank Ltd. Vs. ACIT (ITAT Cochin)
Appeal Number : I.T.A. No. 323/Coch/2010
Date of Judgement/Order : 23/03/2012
Related Assessment Year : 2007-08
Courts : All ITAT (4244) ITAT Cochin (62)

In this appeal, the only issue urged by the assessee is whether the AO was justified in netting the provision made for bad and doubtful debts, i.e. netting of new provision made during the year under consideration and the provision of earlier years written back during the year. As stated earlier, it will only be an academic exercise to address this issue.

Nevertheless, since both the tax authorities have dealt with this issue, we also proceed to decide the same. During the year under consideration, the assessee created net provision of Rs.7.35 crores, i.e., it created a new provision for bad and doubtful debts to the tune of Rs.35.27 crores and also wrote back a sum of Rs.27.92 crores from out of the opening balance of Provision for bad and doubtful debts. The assessee claimed a sum of Rs.35.27 crores under section 36(1)(viia) of the Act. However the AO took the view that the net amount of Provision for bad and doubtful debts debited to the Profit and Loss account, i.e., Rs.7.35 crores (Rs.35.27 crores less Rs.27.92 crores) should be treated as the provision for bad and doubtful debts, for the purpose of sec. 36(1)(viia) of the Act. The said view of the AO was upheld by Ld CIT(A).

Both the parties have failed to furnish the break up details or the modalities followed for creating the “Provision for bad and doubtful debts”. Prima facie, in our view, there is merit in the contention of the assessee. The decision to create a Provision for bad and doubtful debts is taken on the basis of the quality of “Advances and debts” as are available at the end of a particular year. Similarly the decision to write back the provision or reverse the provision that were created in earlier years is taken on the basis of the recovery pattern of the “Advances and debts”, against which the provision was created in earlier years. Thus both the decisions are taken on the basis of different set of facts and hence both the decisions constitute independent decisions, which are not related to each other. Hence, we agree with the contention of the assessee that the provision for bad and doubtful debts newly created during the year under consideration should not be netted against the amount written back or reversed. However, there might be a situation that the provision created for a particular debt needs enhancement and in that situation, only the enhanced amount should be treated as the new provision for the purpose of sec. 36(1)(viia) of the Act.

INCOME TAX APPELLATE TRIBUNAL, COCHIN

I.T.A. No. 323/Coch/2010 -Assessment Year : 2007-08

The Kannur Dist. Co-op Bank Ltd. Vs. ACIT

I.T.A. No. 433/Coch/2010 -Assessment Year : 2007-08

DCIT Vs. The Kannur Dist. Co-op Bank Ltd.  

Date of pronouncement 23/03/2012

ORDER

Per B.R.BASKARAN, Accountant Member:

These Cross appeals are directed against the order dated 31.3.2010 passed by Ld CIT(A)-II, Kochi and they relate to the assessment year 2007-08. Since the issues urged by both the parties are arising out of common set of facts, these two appeals were heard  together and are being disposed of by this common order, for the sake of convenience.

2. The issue urged by both the parties relate to the deduction of amount claimed under the head “Provision for bad and doubtful debts” u/s 36(1)(viia) of the Act. The department is assailing the decision of Ld CIT(A) in holding that the “Place” for the purpose of identifying the “rural branch” of the bank is the “Panchayat Ward”, where the bank branch is located and not the area where the services of the branch are provided. The assessee is assailing the decision of Ld CIT(A) in holding that the Provision for bad and doubtful debts created during the year should be netted off by the amount of provision created in earlier years and written back during the year and the amount of net provision so arrived at is only to be considered for the purpose of allowing deduction u/s 36(1)(viia) of the Act.

3. The facts relating to the issue are stated in brief. The assessee is a co-operative Bank. It enjoyed exemption u/s 80P of the Act in earlier years. During the year under consideration it was not entitled to deduction provided u/s 80P of the Act. Hence, it filed its return of income, which was revised a number of time, finally declaring a total loss of Rs.27.02 crores, after claiming deduction for “Provision for bad and doubtful debts” to the tune of Rs.35.27 crores.

4. Since the dispute is related to the deduction claimed u/s 36(1)(viia) of the Act, we feel it necessary to discuss the provisions of sec. 36(1)(viia) of the Act, which reads as under:-

“36(1). The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28:-

(viia) in respect of any provision for bad and doubtful debts made by— (a) 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 percent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner.”

Thus, under the provisions of sec. 36( 1)(viia), the claim in respect of any Provision for bad and doubtful debts should be restricted to (a) 7.5% of total income (computed before making any deduction under this clause and Chapter VI-A) and (b) 10% of the aggregate average advances made by the “RURAL BRANCHES” of such bank computed in the prescribed manner.

4.1 As per the return of income, the aggregate amount calculated as per (a) and (b) discussed above was claimed by the assessee at Rs.35.49 crores. However the assessee had created provision for bad and doubtful debts only to the tune of Rs.35.27 crores. Since the provision so created was less than the maximum allowable deduction, the assessee claimed Rs.35.27 crores as deduction u/s 36(1)(viia) of the Act. However the AO took the view that the claim of 10% relating to the “Rural Branches” made by the assessee was not in accordance with the law, since the branches of the assessee do not fall in the category of “Rural branches” as defined in the Act.

4.2 The term “rural branch” is defined as under Explanation (ia) to sec. 36( 1)(viia) of the Act as under:-

“rural branch” means a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of previous year”.

The dispute between the assessee and the AO was related to the interpretation of the word “Place” finding place in the above said definition of “rural branch”, as the population is to be determined with reference to the “Place”. The AO interpreted the term “Place” as all the “panchayat wards” falling under the “service area” of the concerned branch. However, the assessee interpreted the same as the “panchayat ward”, where the concerned branch is located. According to the interpretation made by the AO, none of the branches could be classified as a “rural branch” as the population of those “places” exceeded ten thousand. Hence, by following his interpretation, the AO did not allow deduction of 10% of the aggregate average advances made by the rural branches. Accordingly he restricted the deduction only to 7.5% of the total income.

4.3 In the books of account, the assessee had created a net provision for bad and doubtful debts to the tune of Rs.7.35 crores., i.e. it had created a new provision of Rs.35.27 crores and written back a sum of Rs.27.92 crores from the provision created in earlier years. The AO took the view that only the net provision of Rs.7.35 crores should be considered for the purposes of sec. 36(1)(viia) of the Act. It is pertinent to note that the deduction under the said section is allowable only to the extent of provision created, however subject to the maximum eligible amount computed in the manner provided in that section. According to the interpretation given by the AO, though the assessee was eligible for a deduction of Rs.35.49 crores according to its computation, the same would be restricted to Rs.7.35 crores as against the claim of Rs.35.27 crores made by the assessee. The assessee contended that it had enjoyed exemption u/s 80P in the earlier years and the amount of Rs.27.92 crores written back by it related to those periods. Hence the provision of Rs.35.27 crores created during the year under consideration alone should be considered. The said contention was not found acceptable to the AO. It may be noted that the said view of the AO was only an academic exercise, since he had already held that the assessee’s claim u/s 36(1)(viia) will be restricted to only 7.5% of the total income, which was well below the net provision amount of Rs.7.35 crores.

5. The assessee challenged the assessment order before Ld CIT(A). With regard to the meaning of the word “Place” for the purpose of ascertaining the rural branches, the Ld CIT(A) agreed with the interpretation given by the assessee, by following the decision of the ITAT, Cochin bench in the case of Lord Krishna Bank in ITA No.54/C/2000 and also in the case of Federal Bank Ltd in ITA No.33(Coch) 2002. With regard to the quantification of “Provision for bad and doubtful debts” created by the assessee during the year under consideration, the Ld CIT(A) upheld the view of the AO. Aggrieved by the order of Ld CIT(A), both the parties are in appeal before us on the points decided against each of them.

6. With regard to the interpretation of the word “Place” for the purpose of ascertaining rural branches, it was submitted by Ld D.R that the orders passed by the ITAT, which were relied upon by the Ld CIT(A), have since been reversed by the Hon’ble Kerala High Court. The Ld D.R also placed before us the order dated 07-10-20 10 passed by Hon’ble Kerala High Court in ITA No.234 of 2009 in the case of CIT Vs. The Lord Krishna Bank Ltd, which is reported in 195 Taxman 57. The relevant observations made by the Hon’ble Jurisdictional Kerala High Court are extracted below, for the sake of convenience:-

“In our view, the definition clause does not exclude the literal meaning of rural branch which necessarily excludes urban areas. If the assessee’s case accepted by the Tribunal that population in a Ward has to be reckoned for deciding as to whether the location of a Panchayat is in a rural area or not is accepted, then probably even in Municipal areas there may be Wards with less than 10000 population thereby answering the branch located in such Municipal area also as a rural Branch. Going by the ordinary meaning of Rural Branch, we feel only Branches of the Bank located in rural areas are covered. When the Legislature adopts population as the basis for classification of rural Branches, that too, with reference to the last Census report, we feel the basic unit as available for identification of rural area in the Census Report can be legitimately adopted. So much so, we feel the above meaning of rural area contained in the Census Report wherein revenue village is treated as a unit of rural area, can be rightly adopted. So much so, “place” referred to in the above definition clause for the purpose of identifying the branch of a Bank as a rural Branch with reference to its location is the revenue village. Therefore, in our view, the finding of the Tribunal that “place” referred to in the definition is the Ward of a local authority like Panchayat or Municipality is incorrect and in our view, a rural Branch has to be always in rural areas and the place referred can easily be taken as a Village. Several Wards may come within a village, whether it be in Corporation, Municipality or Panchayats. There can be no Village in a Municipal or Corporation area where the population is less than 10000. So much so, rural Branches are such of the Branches located in a Village where the population in the Village as a unit is less than 10000. We, therefore, allow the appeal on this issue by reversing the order of the Tribunal and by restoring the assessment.”

By respectfully following the decision of Jurisdictional High Court, we set aside the order of Ld CIT(A) on this issue and restore that of the assessing officer.

7. Before us, the Ld A.R took an alternative plea with regard to the issue of determination of “rural branch” by submitting that the definition of “rural branch” given in sec. 36(1)(viia) shall not apply to the Co-operative banks and hence the order of Hon’ble Jurisdictional High Court shall not apply to the assessee herein.

7.1 In order to understand this alternative plea, it is necessary to explain the relevant provisions. The section 36(1)(viia) opens with the words “in respect of any provision for bad and doubtful debts made by —

(a) 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….

Under the Explanation, “rural branch” is defined as under:- “rural branch” means a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of previous year”.

The definition of “rural branch” given in the Explanation does not include a “Co- operative Bank”, though the Co-operative bank is included in section 36( 1)(viia) of the Act. Accordingly, the Ld A.R contended that the definition of “Rural branch” does not cover a Co-operative Bank and hence the ordinary meaning given to the “rural branch” by the regulatory authorities should be taken into account. Accordingly the Ld A.R contended that the decision of Hon’ble Kerala High Court in the case of The Lord Krishna Bank Ltd, supra also does not apply to the assessee herein, since it is a co- operative Bank. Accordingly it is prayed that the matter requires re-examination at the end of AO.

7.2 We notice that the Ld A.R has taken this alternative plea, which is entirely a new one that too raised for the first time, without filing an additional ground along with a petition praying for its admission. This plea has not also been raised before the lower authorities. Hence, the alternative ground should not have been accepted normally. However, since the alternative plea of the assessee involves interpretation of the various provisions/clauses of the Act/other Central Act only, in the interest of natural justice, we proceed to address the alternative plea of the assessee in the coming paragraphs.

8. The Explanation below section 36(1)(viia) defines various terms. Some of the definitions, which are relevant to the issue under consideration, are extracted below:-

“non-scheduled bank” means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank.

“scheduled bank” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), 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 Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934).

(vi) “Co-operative bank”, “primary agricultural credit society” and “primary co-operative agricultural and rural development bank” shall have the meanings respectively assigned to them in the Explanation to sub-section (4) of section 80P.

In the Explanation to sub-section (4) of section 80P, the Co-operative bank is defined as under:-

“Co-operative bank” and “primary agricultural credit society” shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949)”.

8.1 Since the definition of “non-scheduled bank” and “Co-operative Bank” refer to the Banking Regulation Act, 1949, we have to refer the said Central Act in order to understand their respective meaning. We have also gone through the said Act. For understanding the meaning of “non-scheduled bank” we have to refer to clause (c) of section 5 of the Banking Regulation Act, 1949, which reads as under:- Sec. 5(c): “banking company” means any company which transacts the business of banking in India.

For understanding the meaning of “Co-operative Bank” we have to refer to Part V of the Banking Regulations Act, 1949. The said Part V starts with section 56, which reads as under:-

56:- Act to apply to Co-operative societies subject to modifications:- The provisions of this Act, as in force for the time being, shall apply to, or in relation to cooperative societies as they apply to, or in relation to banking companies subject to the following modifications namely:-

Throughout this Act, unless the context otherwise requires:-

References to a “banking company” or “the company” or “such company” shall be construed as reference to a Co-operative Bank”

In section (5), after clause (cc), the following clauses shall be inserted, namely–

(cci) “co-operative bank” means a state Co-operative bank, a Central Co- operative bank and a Primary co-operative bank.

On a careful perusal of relevant provisions of Part V of Banking Regulations Act, 1949, we notice that the term “banking Company” also includes a “Co-operative Bank”. Thus a co-operative bank falls under the definition of “banking company”. Further as per the definition given in Explanation under sec. 36(1)(viia) of the Income tax Act, a “banking company” as defined in sec. 5(c) of the Banking Regulation Act, which is not a scheduled bank, is classified as a “non-scheduled bank”. Consequently, a Co-operative bank, in our view, would be classified as a “non-scheduled bank” for the purpose of sec. 36(1)(viia) of the Act.

8.2 In view of the foregoing discussions, we are of the view that the decision rendered by Hon’ble Jurisdictional Kerala High Court in the case of The Lord Krishna Bank Ltd., supra, shall apply to the assessee herein. Accordingly, we reject the alternative plea raised by the assessee. Thus, the appeal of the revenue stands allowed.

9. Now we shall take up the appeal of the assessee. In this appeal, the only issue urged by the assessee is whether the AO was justified in netting the provision made for bad and doubtful debts, i.e. netting of new provision made during the year under consideration and the provision of earlier years written back during the year. As stated earlier, it will only be an academic exercise to address this issue. Nevertheless, since both the tax authorities have dealt with this issue, we also proceed to decide the same. During the year under consideration, the assessee created net provision of Rs.7.35 crores, i.e., it created a new provision for bad and doubtful debts to the tune of Rs.35.27 crores and also wrote back a sum of Rs.27.92 crores from out of the opening balance of Provision for bad and doubtful debts. The assessee claimed a sum of Rs.35.27 crores under section 36(1)(viia) of the Act. However the AO took the view that the net amount of Provision for bad and doubtful debts debited to the Profit and Loss account, i.e., Rs.7.35 crores (Rs.35.27 crores less Rs.27.92 crores) should be treated as the provision for bad and doubtful debts, for the purpose of sec. 36(1)(viia) of the Act. The said view of the AO was upheld by Ld CIT(A).

9.1 Both the parties have failed to furnish the break up details or the modalities followed for creating the “Provision for bad and doubtful debts”. Prima facie, in our view, there is merit in the contention of the assessee. The decision to create a Provision for bad and doubtful debts is taken on the basis of the quality of “Advances and debts” as are available at the end of a particular year. Similarly the decision to write back the provision or reverse the provision that were created in earlier years is taken on the basis of the recovery pattern of the “Advances and debts”, against which the provision was created in earlier years. Thus both the decisions are taken on the basis of different set of facts and hence both the decisions constitute independent decisions, which are not related to each other. Hence, we agree with the contention of the assessee that the provision for bad and doubtful debts newly created during the year under consideration should not be netted against the amount written back or reversed. However, there might be a situation that the provision created for a particular debt needs enhancement and in that situation, only the enhanced amount should be treated as the new provision for the purpose of sec. 36(1)(viia) of the Act. We shall explain this proposition with the following example.

Name of Debt /Advance                              Person A   Person B   Person C

Amount                                                         50,000        60,000     70000

Provision New

Provision Outstanding as on 1.4.06

Provision reversed.

Net Provision

(* Additional Provision of Rs.2000/-. In this type of cases, netting off is required)

In the above example, the new provision created appears to be Rs.23,000/-.

However, the new provision actually created is only Rs.17,000/- (I.e. Person A – Rs.10,000/- and Person-B – Rs.2,000/-).

Hence the claim of quantum of new provision made by the assessee, needs verification at the end of the AO. If the assessee has created a new provision on a particular asset by fully reversing the opening balance of provision relating to that asset, then the net accretion should only be treated as new provision. As stated earlier, it is only an academic exercise in the facts and circumstances of the instant case, which may be carried out if the situation warrants.

10 The assessee has also prayed that this matter may be set aside to the file of AO to determine the issue of taxing the amount of Provision written back. We notice that this issue does not arise out of the Ld CIT(A) or the Assessment order. Hence, we are unable to entertain the said request of the assessee.

11. In the result, the appeal of the revenue is allowed and the appeal of the assessee is partly allowed. Pronounced accordingly on 23-03-2012

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0 responses to “ITAT explains law on netting of Provision for bad & doubtful debts”

  1. Chandrahash Chaudhary says:

    Good case law on doubtful and bad debts

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