Andhra Pradesh State Co-operative Bank Ltd. Vs ACIT (ITAT Hyderabad)
Summary: The ITAT Hyderabad disposed of two appeals filed by Andhra Pradesh State Co-operative Bank Ltd. against orders of the CIT(A)-III, Hyderabad concerning bad debts, employees’ gratuity, the Agricultural Debt Waiver and Debt Relief Scheme, 2008, investment depreciation and profit on sale of investments, and rectification under S.154. On the principal bad-debt issue, the Tribunal held that after the amendment to S.36(1)(vii) with effect from 1.4.1989, it was not necessary to establish that the debt had actually become irrecoverable where the bad debt had been written off in the books, and allowed the deduction under S.36(1)(vii) read with S.36(2), notwithstanding the State Government guarantee. The amount of Rs.70,96,83,398 disallowed by the Assessing Officer and sustained by the CIT(A) was accordingly deleted. The issue concerning Rs.21,55,72,052 paid to LIC towards Employees Gratuity Fund was restored to the Assessing Officer in light of subsequent approval of the fund. In respect of Rs.173,15,46,253 claimed under ADWDRS, the Tribunal modified the CIT(A)’s direction and required verification of S.36(2)(v), keeping in view that S.36(1)(viia) applied to cooperative banks only from 1.4.2007. The issue relating to Rs.7,05,18,382 investment depreciation and Rs.5,11,09,716 profit on sale of investments was also restored. The separate S.154 appeal was dismissed as infructuous.
Cases Discussed
- TRF Limited Vs. CIT (323 ITR 397) — relied upon for the position that, after 1.4.1989, it is not necessary for an assessee to establish that a debt had actually become irrecoverable where the bad debt is written off as irrecoverable in the accounts.
- Vijaya Bank Vs. CIT (323 ITR 126) — relied upon by the assessee before the CIT(A) in relation to the requirements for claiming deduction on bad debts.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
Out of these two appeals filed by the assessee, ITA No.1481/Hyd/2013 is an appeal filed against the order of the learned Commissioner of Income-tax(Appeals) III, Hyderabad dated 16th August, 2013 passed under S.246A of the Act, while ITA No.88/Hyd/14 is an appeal, which is directed against the order of the learned Commissioner of Income-tax(Appeals) III, Hyderabad dated 14th November,2013 passed under S.154 of the Act. Since one of the issues involved therein is interlinked, these appeals have been heard together and are being disposed of by a single consolidated order for the sake of convenience.
ITA No.1481/Hyd/2013
2. First, we shall take up the appeal of the assessee, being ITA No.1481/Hyd/2013. The common issue involved in grounds Bank Ltd., Hyderabad no.1 and 2 of this appeal relates to disallowance of Rs.70,96,83,398 made by the Assessing Officer and sustained by the learned CIT(A) on account of bad debts written off, which were covered by the State Government Guarantee.
3. Assessee in the present case is a state level Apex Cooperative Credit institution for the State of Andhra Pradesh, which provides agricultural loans to the farmers in the State, through its affiliated District Cooperative Central Banks and the primary agricultural co-operative credit societies. The return of income for the year under consideration was originally filed by it on 30.9.2009, declaring total income of Rs.62,19,22,600.th Subsequently, a revised return was filed by the assessee on 30 March, 2011, claiming therein, further deduction of Rs.99,18,76,416 on account of bad debts written off and Rs.24,46,49,000 on account of gratuity payments. During the course of assessment proceedings, the claim of the assessee for deduction on account of bad debts written off was examined by the Assessing Officer. On such examination, he found that the debt balances outstanding in the name of six creditors were written off by the assessee as bad debts and out of these six debts, at least five debts were covered by State Governent Guarantee. Enquiry made in this regard by the Assessing Officer also revealed that there was a Circular issued by NABARD stipulating that the credit facilities backed by guarantee of the State Government, though overdue, may be treated as NPAs only when the State Government repudiates its guarantee when invoked. He noted that no evidence in this regard was furnished by the assessee regarding the repudiation of the guarantee by State Government, and there was also no evidence produced by the assessee except the minutes of internal board meeting and audit committee meeting to show any Bank Ltd., Hyderabad steps taken to recover dues from the concerned debtors. He therefore, held that there was a failure on the part of the assessee to establish that the debts written off had actually become bad and since the debt so written off to the extent of Rs.97.90 crores was covered by State Government guarantee, the claim of the assessee for deduction on account of bad debts written off was disallowed by the Assessing Officer to that extent.
4. The disallowance made by the Assessing Officer on account of bad debts written off was challenged by the assessee in an appeal filed before the learned CIT(A) and it was submitted on behalf of the assessee before the learned CIT(A) inter alia relying on the decisions of the Hon’ble Supreme Court in the case of Vijaya Bank V/s. CIT(323 ITR 126) and TRF Limited V/s. CIT (323 ITR 397) that in order to claim deduction on account of bad debts under S.36(1)(vii) as amended with effect from 1.4.1989, there was no requirement to show that the debts written off had actually become bad, and the only requirement was that such debts should be written off by the assessee in its books of account. The learned CIT(A) did not find merit in this stand of the assessee. According to him, it was necessary to ascertain whether the decision to write off the relevant debts as bad was a bona fide decision taken by the assessee. In this regard, he found that the decision to write off debts outstanding in the names of APSEB, the Amadalavalasa CSF/Srikakulam DCCB and the Swaroop Agro Oil Mills, was a bona fide business decision taken by the assessee, after following proper procedure and obtaining the concurrence of the audit. He also found that the guarantee given by the State Government in these cases had either been revoked or did not exist. He therefore, allowed the claim of the assessee for deduction on account of these bad debts written off. As regards the other debts written off by the Bank Ltd., Hyderabad assessee, he held that proper procedure had not been followed by the assessee and these loans were very much recoverable. He accordingly sustained the disallowance made by the Assessing Officer on account of bad debts written off in respect of these debtors, amounting to Rs.70,96,83,398.
5. The learned counsel for the assessee submitted that the deduction claimed by the assessee on account of bad debts written off was disallowed by the Assessing Officer mainly on the ground that the said debts had actually not become bad during the year under consideration because of the guarantee given by the State Government. He submitted that the learned CIT(A) has also sustained the said disallowance mainly for the same reasons, as given by the Assessing Officer, by holding that the decision of the assessee to write off some of the debts as bad was not a bona fide decision as the said debts were secured by the guarantee given by the State Government and the same had not become actually irrecoverable. He contended that the Assessing Officer as well as the learned CIT(A), however, have overlooked that as per the provisions of S.36(1) of the Act as amended with effect from 1.4.1989, it is not relevant to see whether the debts written off have actually become bad and the only requirement is that the said debts should be written off by the assessee from his books of account as irrecoverable. In this regard, he invited our attention to paragraph 4.2 of the assessment order to point out that a specific finding is given by the Assessing Officer that the concerned debts have been written off by the assessee as bad in its books of account. He also invited our attention to the provisions of S.36(2), and submitted that the debts written off by the assessee actually represented the monies lent in the ordinary course of business of banking, which is carried on by the assessee, and thus, the Bank Ltd., Hyderabad condition stipulated in clause (i) of S.36(2) was duly satisfied. He contended that the assessee thus is entitled to claim deduction on account of bad debts written off as per the provisions of S.36(1)(viii) read with S.36(2) as applicable to the year under consideration and the authorities below are not justified in disallowing the claim of the assessee for the said deduction on the grounds which are no more relevant.
6. The Learned Departmental Representative on the other hand strongly relied on the impugned order of the learned CIT(A) in support of the Revenue’s case on this issue. He contended that the claim of the assessee for bad debts written off was a premature claim and as rightly held by the learned CIT(A), the decision of the assessee to write off the relevant debts as bad was not a bona fide business decision, keeping in view that the said debts were secured by the State Government guarantee and there was nothing brought on record to establish that the said debts had become actually bad during the year under consideration.
7. We have considered the rival submissions and also perused the relevant material on record. It is observed that the claim of the assessee for deduction on account of bad debts written off was disallowed by the Assessing Officer and the said disallowances has been partly sustained by the learned CIT(A) mainly on the ground that the relevant debts written off by the assessee had not actually become bad during the year under consideration. As held by the Hon’ble Supreme Court in the case of TRF Ltd. (supra), every assessee, prior to 1.4.1989 had to establish, as a matter of fact, that the debt advanced by him, had in fact become irrecoverable in order to claim deduction under S.36(1)(vii). As held by the Hon’ble Supreme Court, this position, Bank Ltd., Hyderabad however, has got altered by the amendment made in S.36(1)(vii) of the Act with effect from 1.4.1989 and it is not necessary for the assessee after 1.4.1989 to establish that the debt in fact has become irrecoverable. Explaining further, Hon’ble Supreme Court has held that if the bad debt is written off as irrecoverable in the accounts of the assessee, it is enough for the assessee to claim deduction on account of bad debts under S.36(1(vii). In the present case, the relevant debts were admittedly written off by the assessee in the books of account and since the same represented the money lent in the ordinary course of business of banking carried on by the assessee, we are of the view that the assessee is entitled to claim deduction on account of bad debts written off under S.36(1)(vii) read with S.36(2) of the Act. We, therefore, delete the addition made by the Assessing Officer and sustained by the CIT(A) on this issue and allow grounds No.1 and 2 of appeal.
8. Grounds Nos.3 and 4 of the assessee’s appeal involve a common issue relating to disallowance of Rs.21,55,72,052 made by the Assessing Officer and confirmed by the learned CIT(A) on account of amount paid to LIC towards Employees Gratuity Fund.
9. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that the amount paid by the assessee to LIC towards Employees Gratuity Fund was disallowed by the Assessing Officer and the said disallowance was confirmed by the learned CIT(A) on the ground that the said Fund was not approved by the prescribed authority under the Income tax Act, although application seeking such approval was filed by the assessee. As submitted by the learned counsel for the assessee at the time of hearing before us, the Employees Group Gratuity Fund has since been approved by the Bank Ltd., Hyderabad Commissioner of Income-tax II, Hyderabad with effect from 1.3.2009 vide letter dated 1.3.2013, a copy of which is filed at page No.109 of the Paper-book. Keeping in view the said approval, the learned representatives of both sides have agreed that the matter should be sent back to the Assessing Officer for deciding the same afresh in the light of the said approval. Accordingly, the impugned order of the learned CIT(A) on this issue is set aside and the matter is restored to the file of the Assessing Officer for deciding the same afresh in the light of the approval granted by the competent authority to the LIC Group Gratuity Fund. Ground Nos.3 and 4 of the assessee’s appeal are treated as allowed for statistical purposes.
10. Ground Nos, 5, 6 and 7 of the assessee’s appeal involve a common issue relating to disallowance of Rs.173,15,46,253 made by the Assessing Officer and confirmed by the learned CIT(A) on account of bad debts written off under the Agricultural Debt Waiver and Debt Relief Scheme, 2008 (ADWDRS).
11. In its Profit & Loss Account filed alongwith the return of income, assessee had debited an amount of Rs.173,15,46,253 on account of its share in the waiver of interest and other charges. While substantiating its claim on this issue, it was submitted before the Assessing Officer by the assessee that it had provided credit loans to farmers through PACs at concessional rates of interest with Government of India and State Government support. It was submitted that as per the scheme formulated, the farmers were extended certain relief on account of waiver of excess of interest over the principal amount, unapplied interest, penal interest, legal charges, inspection charges and miscellaneous charges. It was further submitted that as per the Waiver Scheme, the relief allowed Bank Ltd., Hyderabad was shared amongst the three tiers of cooperatives in an equitable manner to sustain/balance the system and accordingly the amount shared by the assessee was claimed as expenditure by debiting the same to the Profit & Loss Account. This explanation of the assessee was not found acceptable to the Assessing Officer. According to him, the relief allowed under the Relief Scheme was to be finally reimbursed by the Central Government and the same therefore, did not amount to any expenditure incurred by the assessee. He also held that the assessee was only acting as a mediator in the process and it was not going to suffer any loss on account of waiver given by the Government of India, as amount of relief was finally to be reimbursed to it by the Government of India. He therefore, disallowed the claim of the assessee for deduction on account of its share in waiver of interest and other charges.
12. On appeal, the learned CIT(A) agreed in principle with the stand of the assessee on this issue that the amount in question represented debt of the assessee being money lent in the ordinary course of business of banking carried on by it and the same having been written off in the books of account, the assessee was entitled to claim deduction. He however, held that the provisions of S.36(1)(viia) are applicable in the case of the assessee, and, therefore, the deduction on account of bad debts was allowable subject to the satisfaction of the condition stipulated in S.36(2)(v) of the Act. Accordingly, he directed the Assessing Officer to determine the amount of provision created and allow the deduction on account of bad debts written off as per the condition stipulated in S.36(2)(v) of the Act.
13. We have heard the arguments of both the sides and also perused the relevant material on record. As per clause (v) of Bank Ltd., Hyderabad sub-section (2) of S.36, no deduction for a bad debt or part thereof can be allowed, where such debt or part thereof relates to advances made by an assessee to which clause (viia) of sub-section (1) applies, unless the assessee has debited such debt or part of the debt in that previous year to the provision for bad and doubtful debts account made under that clause. At the time of hearing before us, the learned counsel for the assessee has not disputed the fact that S.36(1)(viia) is applicable in the case of the assessee for the year under consideration and the deduction on account of bad debt, therefore, is allowable subject to satisfaction of the condition stipulated in S.36(2)(v) of the Act. He, however, has contended that the provisions of S.36(1)(viia) introduced in the statute book with effect from 1.4.1979 are made applicable to cooperative banks only from 1.4.2007, and therefore, the learned CIT(A) ought to have directed the Assessing Officer to satisfy himself about the fulfilment of the conditions stipulated in S.36(2)(v) by the assessee keeping in view that S.36(1)(viia) was applicable in the case of the assessee only with effect from 1.4.2007. Since this contention raised by the learned counsel for the assessee is duly supported by the Board Circular No.258/1979 dated 14.6.1979 and No.3 of 2008 dated 12.3.2008, clarifying that the provisions of S.36(1)(viia) introduced from 1979 would not be applicable to cooperative banks from 1.4.1979, but only from 1.4.2007 and the Learned Departmental Representative has also not disputed this position, we accept this contention raised by the learned counsel for the assessee. Accordingly, the direction given by the learned CIT(A) is modified to the extent that the Assessing Officer shall satisfy himself about the fulfillment of the condition stipulated in S.36(2)(v) by the assessee, keeping in view that S.36(1)(viia) is applicable in the case of the assessee only with Bank Ltd., Hyderabad effect from 1.4.2007 while considering the claim of the assessee for deduction on account of bad debts under the Agricultural Debt Waiver and Debt Relief Scheme, 2008. Subject to this modification, the impugned order of the learned CIT(A) on this issue is upheld and ground Nos.5 to 7 of the assessee’s appeal are treated as partly allowed.
14. Ground No.8 raised by the assessee in its appeal reads as follows
“The Commissioner of Income-tax(Appeals) ought to have appreciated the fact that the Assessing Officer while computing the income from business should not have included investment depreciation of Rs.7,05,18,382/- and profit on sale of investments of Rs.5,11,09,716/- and the same should be excluded from the taxable income as these do not form part of the taxable income.”
15. After considering the rival submissions and perusing the relevant material on record, it is observed that the ld CIT(A) by his impugned order has directed the Assessing Officer to consider the claim of the assessee for relief on the issues involved in ground No.8, after verifying the same from the relevant records. As submitted by the learned counsel for the assessee at the time of hearing before us, a similar issue was restored by the Tribunal also to the file of the Assessing Officer in assessee’s own case for assessment year 2008-09, vide its order dated 1.1.2014 passed in ITA No.851/Hyd/2013, for deciding the same afresh, after giving the assessee proper and sufficient opportunity of being heard. Accordingly, the issue involved in ground No.8 of the assessee’s appeal is restored to the file of the Assessing Officer for deciding the same afresh, as per the same directions as given by the Tribunal in assessee’s own case for assessment year 2008-09.
Bank Ltd., Hyderabad Ground No.8 is accordingly treated as allowed for statistical purposes.
ITA No.88/Hyd/2014
16. As regards the assessee’s appeal being ITA No.88/Hyd/2014, which is directed against the order of the learned CIT(A) passed under S.154 rejecting the application filed by the assessee for rectification, it is observed that rectification of the learned CIT(A)’s order, by way of application under S.154 was sought by the assessee, on the same issues as raised in ground Nos.5 to 7 of its appeal, being ITA No.1481/Hyd/2013, which has already been decided by us in the foregoing portion of this order. Since the grievance of the assessee, as raised by way of rectification application under S.154 before the learned CIT(A), has already been addressed by us, while deciding ground Nos. 5 to 7 by directing the Assessing Officer to satisfy himself regarding fulfilment of conditions stipulated in S36(2)(v) by the assessee, keeping in view that S.36(1)(viia) is applicable in its case only with effect from 1.4.2007, this appeal filed by the assessee against the order of the learned CIT(A) passed under S.154 has become infructuous. The same is accordingly dismissed.
17. In the result, appeal of the assessee being ITA No.1481/Hyd/2013 is partly allowed and the appeal of the assessee being ITA No.88/Hyd/2014 is dismissed.
Order pronounced in the court on 9th October, 2014
