Case Law Details

Case Name : The Kangra Co-operative Bank Vs JCIT (ITAT Delhi)
Appeal Number : ITA No. 840/Del/2013
Date of Judgement/Order : 16/10/2015
Related Assessment Year :
Courts : All ITAT (4887) ITAT Delhi (1078)

The Assessing Officer disallowed the bad debts written off of Rs. 20,24,842/- on the ground that the amount of deduction claimed and allowed under the provisions of Section 36(1)(viia) of the Act for bad and doubtful debts of Rs. 3 8,00,870/- is more than the bad debts claimed and also on the ground that the bad debts claimed pertained to the period when the appellant claimed deduction under section 80P of the Act. The Commissioner of Income Tax (Appeals) also upheld the addition holding that the claim for deduction of bad debts were not allowable as the same is over and above the limits specified under Section 36(1)(viia) of the Act. The relevant provisions of the Act are reproduced as under:

“Section 36(1) (vii): subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year:

Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.

Following second proviso shall be inserted after the first proviso to clause (vii) of sub-section (1) of section 36 by the Finance Act, 2015, w.e.f. 1-4- 2016 :

Provided further that where the amount of such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under sub-section (2) of section 145 without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written off as irrecoverable in the accounts for the purposes of this clause.

[Explanation 1].—For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee;

[Explanation 2.—For the removal of doubts, it is hereby clarified that for the purposes of the proviso to clause (vii) of this sub-section and clause (v) of sub-section (2), the account referred to therein shall be only one account in respect of provision for bad and doubtful debts under clause (viia) and such account shall relate to all types of advances, including advances made by rural branches;]

36(1)(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 co­operative 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 per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner :

Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year:

Provided further that for the relevant assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, the provisions of the first proviso shall have effect as if for the words “five per cent”, the words “ten per cent” had been substituted :

Provided also that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed a further deduction in excess of the limits specified in the foregoing provisions, for an amount not exceeding the income derived from redemption of securities in accordance with a scheme framed by the Central Government:

Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head “Profits and gains of business or profession.”

Explanation.—For the purposes of this sub-clause, “relevant assessment years” means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005;

(b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A);

(c) a public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A) :

Provided that a public financial institution or a State financial corporation or a State industrial investment corporation referred to in this sub-clause shall, at its option, be allowed in any of the two consecutive assessment years commencing on or after the 1st day of April, 2003 and ending before the 1st day of April, 2005, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, of an amount not exceeding ten per cent of the amount of such assets shown in the books of account of such institution or corporation, as the case may be, on the last day of the previous year.

Explanation.—For the purposes of this clause,—

(i) “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;

(ia) “rural branch” means a branch of a scheduled bank or a non­scheduled 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 the previous year;

(ii)  “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 the 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);

(iii) “public financial institution” shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956);

(iv) “State financial corporation” means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951);

(v) “State industrial investment corporation” means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and eligible for deduction under clause (viii) of this sub-section;

(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;

The Interpretation of above provisions had come before the Hon’ble Apex Court in the case of Catholic Syrian Bank Ltd. Vs. CIT, (2012) 343 ITR 270 (SC) wherein the Hon’ble Supreme Court held that the provisions of Section 36(1)(vii) and 36(1)(viia) are separate, distinct and independent from each other. As a result, the provisions of Section 36(1)(vii) governing the allowance of bad
debts are not controlled or limited by the provisions of Section 36(1)(viia) but once the bad debt is actually written off as irrecoverable and the requirements of the provisions of Section 36(2) of the Act are satisfied then it will not be permissible to deny such deduction on the apprehension of the double deduction under the provisions of Section 36(1)(viia) and the proviso to section 36(1)(vii) of the Act. The proviso to Section 36(1)(vii) only limits its application to the case of bank to which clause 36(1)(viia) applies. The proviso is limited in its application to bad debts arising out of the rural advances of banks. The provisions of Section 36(1)(viia) of the Act in no way control the application of the provisions of Section 36(1)(vii). The benefit of deduction under Section 36(1)(vii) should be allowed subject to the fulfillment of the conditions laid down under Section 3 6(2) of the Act. The provisions of Sections 36(1)(vii) and 36(1)(viia) of the Act are distinct and independent from each other. However, by virtue of the proviso to Section 36(1)(vii) of the Act, what is allowed as a provision for bad and doubtful debts under the provisions of Section 36(1)(viia) cannot be allowed under the provisions of Section 36(1 )(vii). In the case in hand, the Assessing Officer denied the deductions under Section 36(1)(vii) solely on the ground that the bad debts which were written off were pertaining to the period when the income was exempt under the provisions of Section 80P of the Act and also on the ground that the deduction claimed under Section 36(1)(viia) is more than the deduction claimed under Section 36(1)(vii) of the Act. The reasoning of the Assessing Officer does not stand test of the law laid down by the Hon actually written off in the books of account and in the light of the fact that the provisions for bad debts was not claimed in the earlier years which goes to prove that the claim is not hit by the proviso to Section 36(1)(vii) of the Act. Therefore, we direct the Assessing Officer to allow the bad debts claimed to Rs. 20,24,842/-. Accordingly, this ground of appeal is allowed.

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Category : Income Tax (27006)
Type : Judiciary (11177)
Tags : ITAT Judgments (5068) Section 80P (48)

One response to “Section 36(1)(vii) and 36(1)(viia) are separate, distinct and independent from each other”

  1. holebasayya says:

    very amazing sir

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