Canara Bank Vs DCIT (ITAT Bangalore)
ITAT Bangalore held that 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.
Facts- For AY 2011-12, the AO noted that the assessee had claimed deduction of bad debts under Section 36(1)(vii) Income Tax Act without actually writing off the debts as irrecoverable in the individual loan accounts of the debtors concerned. The AO found that majority of the write-off was Prudential Write Off (PWO) at the Head Office level with a view to create provisions for Non-Performing Assets (NPAs) in the books of accounts as per RBI Guidelines.
The AO further noted that the assessee did not charge the amount of bad debts written off to the provision for bad and doubtful debts account, even though there was a sufficient credit balance available in the provisions created for the very purpose. The AO relied on the first proviso to Section 36(1)(vii) of the Income Tax Act which expressly stated that the claim of bad debt written off should be admissible, only to the extent the same exceeds the credit balance in provisions for bad and doubtful debts.
CIT(A) upheld the order of the AO in denying the claim of deduction in respect of bad debts u/s. 36(1)(vii) of the Act. Being aggrieved, assessee preferred the present appeal.
Conclusion- The issue is decided in favour of the assessee, wherein, court has held that 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. 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.
Accordingly respectfully following the above decisions, we direct the AO to delete the addition made u/s. 36(1)(vii). This ground for AYs 2011-12 and 2012-13 is allowed.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These three appeals are by the assessee against the separate orders dated 21.3.2023, 23.3.2023 & 24.03.2023 of the CIT(Appeals), National Faceless Appeal Centre, Delhi [NFAC] for the assessment years 2011-12 to 2013-14. Certain common issues are involved in these appeals and therefore they are heard together and disposed of by this consolidated order for the sake of convenience and brevity.
2. The assessee is a public sector bank carrying on the business of The original assessment order was passed in the name of M/s. Syndicate Bank, which merged with M/s. Canara Bank w.e.f. 1.4.2020 vide Govt. of India Notification No.GSR 155(E) dated 4.3 .2020.
3. The legal issue common in all these appeals with regard to reopening of assessment u/s. 147 of the Income-tax Act, 1961 [the Act] was not pressed at the time of hearing of the appeals, hence the same is dismissed as not pressed for all the assessment years under
4. The brief facts of the case are that the assessee, a public sector bank, filed its return of Rs.558,39,58,312 for AY 2011-12 originally on 29.9.2011 under the regular provisions of the Act and Rs.986,79,76,772 under the MAT provisions.. The return was processed u/s. 143(1) on 5.7.2012 granting refund of Rs.368,88,85, 120. Subsequently assessee filed a revised return on 27.11.2012 admitting income of Rs.230,26,47,624 under regular computation after set off of brought forward losses of Rs.289,41,70,061 and current year loss under other sources of Rs. 1,14,94,402. MAT income declared is Rs.406,47,28 ,293. The case was under scrutiny and assessment u/s. 143(3) was made on 22.2.2013 determining total income at Rs.1349,88,63,070 under regular provisions and at Rs.1848,74,25,223 under u/s. 115JB.
5. During the course of scrutiny proceedings for AY 20 16-17, it was noted that the assessee bank had been regularly claiming depreciation on consolidated value of land & building including vacant land also at the rate applicable for building. Notice u/s. 148 was issued on 29.3.2018 on the ground that assessee was claiming excess The assessee furnished return of income electronically on 21.8.2018 wherein the claim of depreciation was reduced to the extent of Rs.50,25, 197. Assessment was completed u/s. 143(3) r.w.s. 147 of the Act on 3 1.12.2018 determining total income at Rs. 1502,69,05,350 under regular provisions and at Rs. 1848,74,25,220 under MAT provisions after making certain disallowances.
6. The first common issue that arises for consideration in AYs 2011-12 & 2012-13 is the disallowance u/s. 36(1)(vii) of the Act. The grounds raised in AY 2011-12 are as follows:-
“3. The learned CIT(A) erred in upholding the disallowance of Rs. 462,79,56,763/-u/s 36(1)(vii).
3.1. The disallowance made by the learned Assessing Officer and upheld by the learned CIT(A) is based on change of opinion and as such, not tenable in law.
3.2. The learned CIT(A) erred in holding that the Appellant bank had not written off bad debts.
3.3. 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.
3.4. 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.
3.5. 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 holding that the Explanation 2 to section 36(1)(vii) is applicable retrospectively.
3.7. The learned CIT(A) erred in not following the binding decisions of High Courts & Tribunals.”
7. For AY 2011-12, the AO noted that assessee has claimed deduction of bad debts u/s. 36(1)(vii) without actually writing off the debts are irrecoverable in the individual loan accounts of the debtors concerned. The AO found that majority of the write-off is Prudential Write Off (PWO) at the Head Office level with a view to create provisions for Non-Performing Assets (NPAs) in the books of accounts as per RBI Guidelines. In the PWO 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. According to the AO, this implies that debts have not been actually written off in the individual loan accounts. Further, the amounts have been debited to the P&L account under the head ‘Provisions & Contingencies’ and the claim of bad debt written off has been made in the computation of income only. The amounts have been charged to profit for creating provisions and not for actual write off of bad debts. The write off of bad debts is by way of executive decision, much after the finalization of books of accounts and holding of AGM which indicates that the claim of bad debt is only an afterthought for reducing the tax liability of the assessee.
8. The AO further noted that the assessee did not charge the amount of bad debts written off to the provision for bad and doubtful debts account, even though there was a sufficient credit balance available in the provisions created for the very purpose. The AO relied on the first proviso to section 36(1)(vii) which expressly states that the claim of bad debt written off shall be admissible, only to the extent the same exceeds the credit balance in provisions for bad and doubtful Further Explanation 2 below section 36(1)(vii) makes it amply clear that there shall be only one account of provision for bad and doubtful dets, 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. Thus, only the excess amount of bad debts written off, remaining after such set off, is admissible as deduction u/s. 36(1)(vii).
9. On appeal before the CIT(Appeals), the assessee submitted that it had written off total amount of Rs.462,79,563 as bad debts during the year comprising a sum of Rs.48,85,56,of rural branches and a sum of Rs.413,94,00,446 of non-rural branches. The following break-up was furnished:-
