In respect of Non-rural advances both provision and bad debts actually written off are allowable simultaneously

Brief of the case:

• The ITAT Hyderabad in the case of State Bank of Hyderabad vs. DCIT held that 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 non-rural/urban advances.
• It is because deduction in respect of provision for NPAs u/s 36(1)(viia) and deduction in respect of bad u/s 36(1)(vii) are independent of one another and no restriction has been provided to restrict any one deduction for non-rural advances unlike in case of rural advances.

Facts of the case:

• The assessee made a provision for NPAs u/s 36(1)(viia) Rs. 428.83 crores in addition to claim of bad debts of Rs. 210.74/- in its books out of which Rs. 209.08 representing provision towards non-rural advances were claimed as deduction u/s 36(2)(vii).
• AO observed that an assessee is entitled to make provision for both urban and rural advances u/s 36(1)(viia), but then proviso u/s 36(1)(vii) will apply and assessee will not be entitled to write off bad debts claimed u/s 36(1)(vii) for the amount of Rs. 209.08 crores.
• CIT (A) also upheld the order passed by AO and held that A debt cannot be claimed both on the basis of its being written off and its being part of the provision. Thus, the disallowance of bad debts claimed was upheld by CIT(A).Aggrieved assessee is in appeal before ITAT Hyderabad.

Contention of the Assessee:

• It was submitted that assessee can claim deduction both u/s 36(1)(vii) and 36(1)(viia) subject to restrictions put under the proviso to section 36(1)(vii) of the Act, which only applies to rural debts. Reliance was placed on the decision of Hon’ble Supreme Court in the case of Catholic Syrian Bank wherein the court held that proviso to section 36(1)(vii) is applicable only in respect of rural advances and not non-rural advances.
• Therefore, the debts relating non-rural advances actually written off in the books of account cannot be disallowed by applying proviso to section 36(1)(vii).
• Thus, in the instant case the amount of Rs. 209.08 crores represents the debts actually written off relating to non-rural advances claim of deduction u/s 36(1)(vii) cannot be disallowed.

Issue before ITAT:

Whether the provisio to Sec 36(1)(vii) restricting deduction in respect of rural advances bad debts would also apply in respect of non-rural advances, so as to restrict double deduction benefit for non-rural advances too?

Held by ITAT Hyderabad:

• The AO as well as CIT(A) disallowed deduction of Rs. 209,07,50,831/- representing bad debts written off relating to non-rural advances on the ground that assessee having already availed deduction u/s 36(1)(viia), is not eligible to claim deduction u/s 36(1)(vii) as it will amount to double deduction.
• As per Sec 36(1)(vii) bad debts actually written off in the books of account is allowable as deduction , whereas 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) subject to the condition that bad debts in respect of rural branch advances u/s 36(1)(vii) to be restricted to the excess of bad debts w/off over the provision made in respect of rural advances u/s 36(1)(viia).
• The issue involved is identical to the issue arised in case of Catholic Syrian Bank case wherein the Hon’ble Supreme Court held that the claiming of bad debts in respect of non-rural advances along with claiming deduction in respect of provision made for non-rural advances even if amounts to double deduction allowed simultaneously because the provisio to Sec 36(1)(vii) restrict only the bad debts allowable for rural advances and not so restrict non-rural advances.
• Further, Sec 36(1)(vii) and 36(1)(viia) as regards to urban advances are independent of on another and , therefore, separate claims allowable under these two for non-rural advances in the absence of any restriction elsewhere provided.
• Considering the above observations , tribunal 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 non-rural/urban advances.