Bank of Ceylon, CHENNAI V. DDIT, CHENNAI

ITA 518/CHNY/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9394 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-05-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 29-02-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 13-03-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: DR B NISCHAL
• Keywords: General deduction; Bad and doubtful debts
• Section: 143(3)

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . , BEFORE SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO. 51 8/MDS/2015 / ASSESSMENT YEAR :20 1 0 - 11 M/S. BANK OF CEYLON , 20/21, CASA MAJOR ROAD, NEW NO.2, ZERART GARDEN II LANE, EGMORE, CHENNAI 600 008. [PAN: A AACB2218C ] VS. THE DEPUTY DIRECTOR OF INCOME TAX , INTERNATIONAL TAXATION I , CHENNAI 600 034 . ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : SHRI V .S. JAYAKUMAR , ADVOCAT E SHRI S. GANAPATHI SUBRAMANIAN, CA / RESPONDENT BY : DR. B. NISCH AL , J CIT / DATE OF HEARING : 29 . 0 2 .201 6 / DATE OF P RONOUNCEMENT : 06 . 0 5 .201 6 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) 16 , C HENNAI , DATED 2 0 . 0 1 .20 1 5 RELEVANT TO THE ASSESSMENT YEAR 20 1 0 - 11 . T HE ONLY EFFECTIVE GROUND RAISED IN THE APPEAL OF THE ASSESSEE IS WITH REGARD TO CONFIRMATION OF DISALLOWANCE OF .42,36,327/ - REPRESENTING THE PRO VISION FOR BAD AND DOUBTFUL DEBTS MADE UNDER SECTION 36(1)(VIIA)(B) OF THE INCOME TAX ACT, 1961 [ ACT IN SHORT]. I.T.A. NO . 51 8 /M/ 15 2 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, BRANCH OF M/S. BANK OF CEYLON, CHENNAI WITH HEADQUARTERS AT COLOMBO, SRI LANKA IS ASSESSED IN INDIA AS FOREIGN COMPANY. THE ASSESSEE HAS FILED ITS RETURN OF INCOME DECLARING INCOME OF .8,04,90,211/ - . THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND STATUTORY NOTICES WERE SERVED UPON THE ASSESSEE. THE DETAILS FILED BY THE ASSESSEE WERE EXAMINED AND AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE ASSESSMENT WAS COMPLETED UND ER SECTION 143(3) OF THE ACT DETERMINING TOTAL INCOME OF THE ASSESSEE AT .8,48,20,940/ - BY MAKING VARIOUS ADDITIONS. 3. ON APPEAL, THE LD. CIT(A) SUSTAINED THE DISALLOWANCE OF DEDUCTION CLAIMED UNDER SECTION 36(1)(VIIA)(B) OF .42,36,327/ - . 4. AGGRI EVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 5. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. WITH REGARD TO THE DISALLOWANCE OF DEDUCTION UNDER SECTION 36(1)(VIIA)(B) OF THE ACT, TH E RELEVANT PROVISIONS OF SECTION IS REPRODUCED AS UNDER: (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 UNDE R 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: I.T.A. NO . 51 8 /M/ 15 3 [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 GUID ELINES 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 COMMENCIN G ON OR AFTER THE 1 ST DAY OF APRIL, 2003 AND ENDING BEFORE THE 1 ST 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 SCHE DULED 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 SECURITI ES 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 PROFE SSION.'] [EXPLANATION. - FOR THE PURPOSES OF THIS SUB - CLAUSE, 'RELEVANT ASSESSMENT YEARS' MEANS THE FIVE CONSECUTIVE ASSESSMENT YEARS COMMENCING ON OR AFTER THE 1 ST DAY OF APRIL, 2000 AND ENDING BEFORE THE 1ST DAY OF APRIL, 2005;] (B) A BANK, BEING A BAN K 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 VIA);] [(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 FINA NCIAL 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 1 ST DAY OF APRIL, 2003 AND ENDING BEFORE THE 1 ST DAY O F APRIL, 2005, DEDUCTION IN RESPECT OF ANY PROVISION MADE BY IT FOR ANY I.T.A. NO . 51 8 /M/ 15 4 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.] 6. THE ASSESSING OFFICER HAS OBSERVED THAT A S PER THE SECTION , THE ASSESSEE COMPANY FALLS UNDER THE CATEGORY (B), WHEREIN , AN AMOUNT NOT EXCEEDING 5% OF THE TOTAL INCOME IS ALLOWED AS DEDUCTION FOR THE PROVISION MADE FOR BAD AND DOUBTFUL DEBTS. IN THE INSTANT CASE NO SUCH PROVISION IS MADE. THE ARGUMENT OF THE ASSESSEE IS THAT THE PROVISIONS HAS BEEN MA DE IN COMPLIANCE WITH THE RESERVE BANK OF INDIA'S IRAC NORMS AND IN ACCORDANCE WITH THE BANKING REGULATIONS ACT WA S NOT ACCEPT ED BY THE ASSESSING OFFICER AS THESE PROVISIONS ARE APPLICABLE ONLY FOR THE COMPANIES INCORPORATED IN INDIA AND NOT TO A FOREIGN B ANKING COMPANY. IT WAS FURTHER ARGUED BEFORE THE ASSESSING OFFICER THAT THE PROVISION FOR NON PERFORMING ASSETS IS A GENERIC EXPRESSION FOR PROVISION FOR BAD AND DOUBTFUL DEBTS AND THAT IT IS ONLY THE HEAD UNDER WHICH IT IS CLASSIFIED . EVEN THOUGH THE NATU RE IS THE SAME , THE ASSESSING OFFICER HAS NOT ACCEPT ED AS A LOAN ON WHICH THE BORROWER IS NOT MAKING INTEREST PAYMENTS OR REPAYING ANY PRINCIPAL. AT WHAT POINT THE LOAN IS CLASSIFIED AS NON - PERFORMING BY THE BANK, AND WHEN IT BECOMES BAD DEBT, DEPENDS ON LO C AL REGULATIONS. BANKS NORMALLY SET ASIDE MONEY TO COVER POTENTIAL LOSSES ON LOANS ( LOCAL LOSS PROVISIONS) AND WRITE OFF BAD DEBT IN THEIR PROFIT AND LOSS ACCOUNT. IN SOME COUNTRIES, BANKS THAT HAVE ACCUMULATED TOO MANY NPLS ARE ABLE TO SELL THEM ON - A T A DISCOUNT - TO SPECIALLY ESTABLISHED ASSET MANAGEMENT COMPANIES (AMCS), WHICH ATTEMPT TO RECOVER AT LEAST SOME OF THE MONEY OWED. THERE EXISTS A CLEAR DISTINCTION BETWEEN WHAT IS CLASSIFIED AS NPA AND BAD DEBT. THUS THE ASSESSEE'S ARGUMENT THAT BOTH ARE SAME IS NOT ACCEPTABLE. I.T.A. NO . 51 8 /M/ 15 5 THE PROVISION OF THE ACT IS VERY CLEAR AND THERE IS NO AMBIGUITY REGARDING THE SAME. SINCE THE ASSESSEE COMPANY HAS NOT CREATED ANY PROVISION FOR BAD AND DOUBTFUL DEBTS , THE DEDUCTION CLAIMED UNDER SECTION 36(I)(VIIA)(B) OF THE ACT WA S DISALLOWED AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. ON APPEAL, THE LD. CIT(A) DISMISS THE GROUND RAISED BY THE ASSESSEE BY OBSERVING AS UNDER: FROM THE ABOVE COMPUTATION, IT IS SEEN THAT ASSESSEE IS DEDUCTED ACTUAL BAD DEBT WRITTEN OF F U/S 36(1)(VII) AND ALSO REDUCED PROVISION FOR BAD AND DOUBTFUL DEBTS U/S 36(1)(VIIA). HOWEVER, BEFORE THE ASSESSING OFFICER, IT WAS EMPHATICALLY STATED BY THE APPELLANT IN WRITING: 'DEDUCTION FOR BAD DEBT WRITTEN OFF CLAIMED BY THE ASSESSEE IS ONLY I N RESPECT OF THE EXCESS OF THE AMOUNT WRITTEN OFF OVER THE DEDUCTION ALREADY ALLOWED TO THE ASSESSEE U/S 36(1) (VIIA) EVERY YEAR I.E. 5% OF THE TOTAL INCOME. AS ALREADY MENTIONED DURING THE COURSE OF HEARING, THE ENTIRE BALANCE IN THE PROVISIONS AND CONTI NGENCIES HAS BEEN ADDED BACK AND OFFERED AS INCOME EVERY YEAR. THUS NO DEDUCTION HAS BEEN CLAIMED FOR THE PROVISION MADE, AND ONLY THE ACTUAL WRITE OFF OF BAD DEBTS HAS BEEN CLAIMED AS DEDUCTION.' (EMPHASIS OURS) EVEN THOUGH, IT WAS STATED THAT NO DEDUCT ION HAS BEEN CLAIMED FOR THE PROVISIONS MADE AND ONLY THE ACTUAL WRITE OFF OF BAD DEBTS HAS BEEN CLAIMED AS DEDUCTION, IT IS NOTICED THAT THE APPELLANT CLAIMED BOTH. THIS WILL RAISE ANOTHER ISSUE FOR ADJUDICATION, 'WHETHER THE PROVISO TO SECTION 36(1)(VII) LIMITS THE DEDUCTION IN RESPECT OF BAD DEBTS WRITTEN OFF WHEN IT EXCEEDS THE PROVISION MADE UNDER SECTION 36(1)(VIIA)?' 7.2 THERE IS ANOTHER SIGNIFICANT MISREPRESENTATION OF FACTS AS EMANATED FROM THE DETAILS FILED BY THE APPELLANT DURING THE ASSESSMEN T PROCEEDINGS. APPELLANT HAS CLAIMED DEDUCTION U] S. 36(1)(VIIA)(B) @ 5% OF TOTAL INCOME I.E. AMOUNTING TO RS. 42,36,327/ - . THE APPELLANT HAD DEBITED 'ITEMS INCLUDED UNDER PROVISION AND CONSISTENCIES' AMOUNTING TO RS. 4,64,65,785/ - . APPELLANT ADDED THE SAM E IN COMPUTATION AND CLAIMED DEDUCTION FOR 'PROVISION FOR BAD AND DOUBTFUL DEBTS' U/S 36(1)(VIIA)(B) AMOUNTING TO RS.42,36,327/ - . THE AO TOOK A STAND THAT PROVISIONS FOR NPA CAN'T BE EQUATED WITH PROVISION FOR BAD AND DOUBTFUL DEBTS AND SINCE SUCH PROVISIO NS WAS NOT MADE, APPELLANT IS NOT ENTITLED FOR DEDUCTION. BUT THE APPELLANT REPEATEDLY CLAIM BEFORE THE I.T.A. NO . 51 8 /M/ 15 6 ASSESSING OFFICER AS WELL THE CIT(A) THAT PROVISION FOR NON PERFORMING ASSETS AMOUNTS TO RS.4,64,65,786/ - WAS MADE IN ACCOUNTS. BUT THE DETAILS OF 'I TEMS INCLUDED UNDER PROVISION AND CONSISTENCIES AMOUNTING TO RS.4,64,65,785/ - AS FURNISHED BY THE APPELLANT [ANNEXURE - I OF THIS ORDER) ARE AS FOLLOWS: SL. NO. DESCRIPTION YEAR ENDED 31.03.2009 (RS.) YEAR ENDED 31.03.2009 (RS.) 1. PROVISION FOR DEPRECI ATION IN INVESTMENTS 18,10,000 38,65,000 2. PROVISION FOR NON PERFORMING ASSETS (2,98,48,652) 20,17,436 3. PROVISION FOR STANDARD ASSETS 9,27,000 - 4. PROVISION FOR INCOME TAX 5,44,00,000 3,91,69,866 5. PROVISION FOR FBT & FLOATING PROVISION ETC. 26 ,82,000 13,47,757 6. PROVISION FOR RESTRICTED ADVANCE 1,01,448 65,727 TOTAL 3,00,71,796 4,64,65,786 THUS, THE CLAIM OF APPELLANT THAT THERE IS PROVISION FOR NON PERFORMING ASSETS AMOUNTS TO RS.4,64,65,786/ - MADE ACCOUNTS IS A MIS - REPRESENTATION. THE PROVISION FOR NON PERFORMING ASSETS AMOUNTS TO RS.20,17,436/ - ONLY WHEREAS THE CLAIM OF THE APPELLANT IN THE COMPUTATION IS RS.42,36,327/ - . WITH THESE FACTUAL INACCURACIES LET US HAVE A LOOK AT THE STATUTORY PROVISIONS AND LEGISLATIVE HISTORY. 7.3 THE STATUTE: SECTION 36(1)(VII) MEANT FOR BAD DEBT DEDUCTION SAYS THAT ANY DEBT OR A PART THEREOF WHICH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE IS ELIGIBLE FOR DEDUCTION. THE PROVISO TO THE SECTION SAYS THAT WHERE THE ASSESSEE IS A B ANK , ETC., THE AMOUNT OF DEDUCTION SHALL BE LIMITED TO THE AMOUNT BY WHICH SUCH DEBT OR PART THEREOF EXCEEDS THE CREDIT BALANCE MAINTAINED IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS. THE EXPLANATION TO THE SECTION SAYS THAT ANY DEBT WRITTEN OFF AS IRRECOV ERABLE WOULD NOT INCLUDE ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE IN THE ACCOUNTS OF THE ASSESSEE. SECTION 36(1)(VIIA) IS MEANT FOR DEDUCTION TOWARDS PROVISION FOR BAD AND DOUBTFUL DEBTS FOR SCHEDULED BANKS AND THE QUANTUM OF DEDUCTION IS WITH REFER ENCE TO 7.5% OF THE TOTAL INCOME COMPUTED BEFORE ANY DEDUCTION UNDER CHAPTER VI - A AND AN AMOUNT NOT I.T.A. NO . 51 8 /M/ 15 7 EXCEEDING 10% OF THE AGGREGATE AVERAGE ADVANCES MADE BY THE RURAL BRANCHES OF SUCH BANKS. SECTION 36(2) IMPOSES THE CONDITIONS WHICH ARE TO BE SATISFIED W HEN A DEBT IS WRITTEN OFF AND DEDUCTION IS CLAIMED UNDER SECTION 36(1)(VII) OF THE ACT. IT WILL NOT APPLY TO DEDUCTION TOWARDS PROVISION MADE FOR BAD AND DOUBTFUL DEBTS APPLICABLE TO BANKS UNDER SECTION 36(1)(VIIA). 7.4 LEGISLATIVE HISTORY: INITIALLY T HE CLAUSE 36(VIIA) WAS INTRODUCED WITH A VIEW TO PROMOTING RURAL BANKING AND ASSISTING THE SCHEDULED COMMERCIAL BANKS IN MAKING ADEQUATE PROVISIONS FROM THEIR CURRENT PROFITS TO PROVIDE FOR RISKS IN RELATION TO THEIR RURAL ADVANCES. EFFECTIVE FROM THE AS S T. YR. 1987 - 88, THIS CLAUSE PROVIDES FOR DEDUCTION IN RESPECT OF NOT ONLY RURAL ADVANCES BUT ALSO ANY ADVANCES IN GENERAL AND THE CONCESSION UNDER THIS CLAUSE WAS EXTENDED TO BANKS INCORPORATED OUTSIDE INDIA, WITH THE RESULT THAT THE DEDUCTION IS NOW AVAIL ABLE TO ALL BANKS IN RESPECT OF ALL THEIR BRANCHES. THE OBJECT OF THE SUBSTITUTION, AS EXPLAINED IN PARA 5 OF THE CBDT CIRCULAR NO. 464, DT. 18TH JULY, 1986 TC15S.1714, WAS TO GIVE THE SEPARATE DEDUCTION, VIZ., ONE IN RESPECT OF RURAL ADVANCES AND THE OTHE R FOR PROVISION FOR BAD AND DOUBTFUL DEBTS IN GENERAL AND ALSO TO EXTEND THE BENEFIT OF DEDUCTION TO ALL BANKS INCLUDING FOREIGN BANKS. 'CIRCULAR NO. 464, DATED 18TH JULY, 1986 ........ ACCORDINGLY, BY THE AMENDING ACT, THE DEDUCTION PRESENTLY AVAILABL E UNDER CL. (VIIA) OF SUB - SO (1) OF S. 36 OF THE IT ACT HAS BEEN SPLIT INTO TWO SEPARATE PROVISIONS. ONE OF THESE LIMITS THE DEDUCTION TO AN AMOUNT NOT EXCEEDING 2% OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCHES OF THE BANKS CONCERNED. IT MAY BE CLARIFIED THAT FOREIGN BANKS DO NOT HAVE RURAL BRANCHES AND HENCE THIS AMENDMENT WILL NOT BE RELEVANT IN THE CASE OF THE FOREIGN BANKS. THE OTHER PROVISION SECURES THAT A FURTHER DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE PROVISION FOR BAD AND DOUBTFUL D EBTS MADE BY ALL BANKS NOT JUST THE BANKS INCORPORATED IN INDIA, LIMITED TO 5% OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI - A). THIS WILL IMPLY THAT ALL SCHEDULED OR NON - SCHEDULED BANKS I.T.A. NO . 51 8 /M/ 15 8 HAVING RURAL BRANCHES WO ULD BE ALLOWED THE DEDUCTION UPTO 2% OF THE AGGREGATE AVERAGE ADVANCES MADE BY SUCH BRANCHES AND A FURTHER DEDUCTION UPTO 5% OF THEIR TOTAL INCOME IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS. [REPORTED IN (1986) 161 ITR (ST) 66]'. 7.5 QUANTUM OF DEDUCTION: IN THE CASE OF BANKS INCORPORATED OUTSIDE INDIA, THE QUANTUM OF DEDUCTION AVAILABLE IS 5% OF THE TOTAL INCOME (COMPUTED BEFORE MAKING DEDUCTION UNDER THIS CLAUSE AND CHAPTER VIA). OVERRULING THE DECISION IN SOUTH INDIAN BANK LTD. VS. CIT (2003) 262 ITR 579 (KER) AND DISSENTING FROM DY. CIT VS. KARNATAKA BANK LTD. (2009) 316 ITR 345 (KAR), THE FULL BENCH OF KERALA HIGH COURT IN CIT VS. SOUTH INDIAN BANK LTD. 326 ITR 174 (KER)(FB) HELD THAT BANKS WHICH ARE ENTITLED TO CLAIM DEDUCTION OF PROVISION F OR BAD DEBTS IN TERMS OF CL. (VIIA) OF S. 36(1) ARE COVERED BY THE PROVISO TO CL. (VII) IRRESPECTIVE OF THE NATURE OF ADVANCES WITH RESPECT TO WHICH THE BAD DEBT WRITTEN OFF IS CLAIMED AS DEDUCTION; IN VIEW OF PROVISO TO CL. (VII) WHEN BAD DEBTS WRITTEN OF F ARE ALSO CLAIMED AS DEDUCTION UNDER CL. (VII), THE SAME IS ALLOWABLE ONLY TO THE EXTENT IT IS IN EXCESS OF THE PROVISION CREATED AND ALLOWED AS DEDUCTION UNDER CL. (VIIA). BUT IN CATHOLIC SYRIAN BANK LTD. VS. CIT (2012) 343 ITR 270 (SC), IT WAS HELD THAT PROVISIONS OF SS. 36(1)(VII) AND 36(1)(VIIA) ARE DISTINCT AND INDEPENDENT ITEMS OF DEDUCTION AND OPERATE IN THEIR RESPECTIVE FIELDS. BUT PROVISO TO S. 36(1)(VII) OPERATES IN CASES FALLING UNDER CL. (VIIA) TO LIMIT THE DEDUCTION TO THE EXTENT OF DIFFERENCE BETWEEN THE DEBT OR PART THEREOF WRITTEN OFF IN THE PREVIOUS YEAR AND THE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS MADE UNDER CL. (VIIA). THUS WHETHER THE PROVISO TO SECTION 36(1)(VII) LIMITS THE DEDUCTION IN RESPECT OF BAD DEBTS WRITTEN OFF WHEN IT EXCEEDS THE PROVISION MADE UNDER SECTION 36(1)(VIIA) ARE TO BE EXAMINED. 8. PROVISIONS FOR NPA VS. PROVISION FOR BAD AND DOUBTFUL DEBTS THE ASSESSMENT ORDER AND THE GROUNDS OF APPEAL CENTERED ON THE ISSUE OF PROVISIONS FOR NPA. THE AO TOO K A STAND THAT PROVISIONS FOR NPA CAN'T BE EQUATED WITH PROVISION FOR BAD AND DOUBTFUL DEBTS AND SINCE THE BAD DEBT PROVISIONS WERE NOT MADE, APPELLANT IS NOT ENTITLED FOR DEDUCTION. HE IS OF THE VIEW THAT THERE EXISTS A CLEAR DISTINCTION BETWEEN WHAT IS C LASSIFIED AS NPA AND BAD DEBT. I.T.A. NO . 51 8 /M/ 15 9 AT THE SAME TIME APPELLANT ARGUED THAT PROVISION FOR NON - PERFORMING ASSETS IS A GENERIC EXPRESSION FOR PROVISION FOR BAD AND DOUBTFUL DEBTS AND THAT IT IS ONLY THE HEAD UNDER WHICH IT IS CLASSIFIED. EVEN IN GROUNDS OF APPEA L THE APPELLANT STATED: 'THE WORD 'ANY PROVISION' SHOULD BE INTERPRETED LIBERALLY AND WILL INCLUDE PROVISION FOR NON PERFORMING ASSETS. IT WOULD ALSO BE PERTINENT TO STATE HERE THAT TO CLAIM THAT NPA PROVISION IS NOT A PROVISION FOR BAD AND DOUBTFUL DEBT S WILL ONLY BE IGNORANCE OF ACCOUNTING METHODS. THE LD. DDIT ALSO FAILED TO APPRECIATE THAT ANY PROVISION MADE IN THE BOOKS BY WHATSOEVER NAME IS ADDED BACK TO THE APPELLANT'S TOTAL INCOME AND ONLY THE ACTUAL WRITE OFF OF BAD DEBT IS CLAIMED AS DEDUCTION. THE WORDS 'NON PERFORMING ASSET IS COMMONLY UNDERSTOOD TO MEAN BAD DEBTS IN BANKING PARLANCE.' 8.2 THE CONTENTION OF THE APPELLANT IS ERRONEOUS. NPA AND BAD DEBT ARE NOT EQUAL IN ALL RESPECT. APPELLANT TRIED TO IGNORE THE DISTINCTIONS BETWEEN THEM ONLY TO MAKE A CASE FOR DEDUCTIONS. NON - PERFORMING ASSETS (NPAS) FOR THE BANKS: THE LOANS AND ADVANCES GIVEN TO THE CUSTOMERS FORM THE BIGGEST PART OF BANK'S INCOME GENERATING ASSETS. THE INCOMES ON THESE LOANS ARE GENERATED IN THE FORM OF INTEREST OR DISCOUNT . WHEN THE REPAYMENT OF THE INTEREST OR INSTALLMENTS ON THESE LOANS REMAIN UNPAID FOR A SPECIFIED PERIOD (6 MONTHS OR 2 QUARTERS), AFTER THEY ARE DUE FOR PAYMENT, THESE LOANS OR ADVANCES ARE CLASSIFIED AS NON - PERFORMING ASSETS (NPAS) TO DISTINGUISH THESE LOANS FROM THE STANDARD ASSETS (PERFORMING ASSETS). DEPENDING ON THE AGE OF THESE LOANS, AFTER BEING IDENTIFIED AS NPAS, AND THE AVAILABILITY OF THE REALISABLE VALUE OF SECURITIES, THEY ARE FURTHER CLASSIFIED AS SUB - STANDARD, DOUBTFUL OR LOSS ASSETS. BUT, A BAD DEBT ON LOAN IS TERMED AS A BAD DEBT, WHEN THE RECOVERY OF THE LOAN BECOMES IMPOSSIBLE. THUS IT MAY POSSIBLE THAT ALL THE BAD DEBTS MAY BE NON - PERFORMING ASSETS (NPAS), ALL THE NPAS ARE NOT NECESSARILY THE BAD DEBTS. 8.3 IN T.N. POWER FINANCE & I NFRASTRUCTURE DEVELOPMENT CORPORATION LTD. VS. JT. CIT (2006) 280 ITR 491 (MAD), ASSESSEE ENGAGED IN THE BUSINESS OF LONG - TERM FINANCE FOR INFRASTRUCTURE DEVELOPMENT. THE COMPANY HAD MADE PROVISION FOR NON - PERFORMING ASSETS AS PER DIRECTIVES OF RESERVE BAN K OF INDIA AND HAD DEBITED THE SAID PROVISION TO PROFIT AND LOSS ACCOUNT AND HAD CLAIMED DEDUCTION AS BAD DEBT. IT WAS HELD THE MERE PROVISION WAS I.T.A. NO . 51 8 /M/ 15 10 NOT DEDUCTIBLE UNDER SECTION 36(1)(VII) AND AS FAR AS SECTION 36(1)(VIIA) WAS CONCERNED, IT STIPULATED A DEDU CTION NOT EXCEEDING FIVE PER CENT OF THE TOTAL INCOME ONLY IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS WHICH ARE PREDOMINANTLY REVENUE IN NATURE OR TRADE RELATED AND NOT FOR PROVISION FOR NON - PERFORMING ASSETS WHICH ARE PREDOMINANTLY CAPITAL IN NATU RE . THUS THE JURISDICTIONAL HIGH COURT, CLEARLY DIFFERENTIATED THE PROVISION FOR BAD AND DOUBTFUL DEBTS WITH PROVISION FOR NON - PERFORMING ASSETS. 8.4 EVEN THE SUPREME COURT OPINED THAT THERE ARE DEVIATIONS BETWEEN RBI DIRECTIONS 1998 AND COMPANIES ACT I N CREATING PROVISIONS. THE DEVIATIONS ARE DUE TO DIFFERENCES IN CREATING A PROVISION FOR ALL NPAS SUMMARILY AS AGAINST CREATING A PROVISION ONLY WHEN THE DEBT IS DOUBTFUL OF RECOVERY UNDER THE NORMS OF THE ACCOUNTING STANDARDS ISSUED BY THE ICAI. THESE DEV IATIONS PREVAIL TO PROTECT THE DEPOSITORS IN THE CONTEXT OF INCOME RECOGNITION AND PRESENTATION OF THE ASSETS AND PROVISIONS CREATED AGAINST THEM. [PARA 28, SOUTHERN TECHNOLOGIES LTD. VS. JCIT (2010) 320 ITR 577 ] 8.5 THUS, I HELD THAT NPA IS NOT SAME A S BAD AND DOUBTFUL DEBTS AND ACCORDINGLY THE REQUIREMENT OF PROVISION FOR BAD AND DOUBTFUL DEBTS IS NOT SATISFIED BY THE APPELLANT. THE IT ACT DEALS ONLY WITH DOUBTFUL DEBT. IT IS FOR THE ASSESSEE TO ESTABLISH THAT THE PROVISION IS MADE AS THE LOAN IS IRRE COVERABLE. HENCE THE APPELLANT FAILS ON GROUND NO. 1 AND 2. HOWEVER, COMING TO THIS CONCLUSION I AGAIN REITERATED THAT APPELLANT HAD MADE A PROVISION OF ONLY RS. 20,17,436/ - UNDER THE HEAD PROVISIONS FOR NPA (DISCUSSED IN PARA 7.2). 9. RBI'S DIRECTIVE S AND ITS RELEVANCE . THE APPELLANT ALSO ARGUED THAT THE PROVISION FOR NPA HAS BEEN MADE IN COMPLIANCE WITH THE RESERVE BANK OF INDIA'S IRAC NORMS AND IN ACCORDANCE WITH THE BANKING REGULATIONS ACT. BUT AO VIEWED THAT THESE PROVISIONS ARE APPLICABLE ONLY FOR THE COMPANIES INCORPORATED IN INDIA AND NOT TO A FOREIGN BANKING COMPANY. THIS VIEW OF AO IS ERRONEOUS AS THE APPELLANT IS SCHEDULED BANK AND ITS ACCOUNTS ARE TO CONCUR WITH BANKING REGULATIONS ETC. I.T.A. NO . 51 8 /M/ 15 11 THE APPELLANT SUBMITTED THAT BANKS ARE REQUIRED TO FOLLOW RBI GUIDELINES [RESERVE BANK OF INDIA'S MASTER CIRCULAR #DBOD #BP. BC.17/21.4.048/2009 - 10 DATED 01.07.2009 FOR THE RELEVANT YEAR] AND FINANCIAL STATEMENTS ARE DRAWN UP ONLY IN ACCORDANCE WITH THESE GUIDELINES / CIRCULARS. IT IS ARGUED THAT BANKS ARE REQUIRED TO MAKE A PROVISION FOR 'NON PERFORMING ASSETS', WHICH AS PER APPELLANT, IS PROVISION FOR BAD AND DOUBTFUL DEBTS ONLY. SUCH PROVISIONING FOR BAD DEBTS BY BANKS INCLUDING FOREIGN BANKS OPERATING IN INDIA, IS GOVERNED BY INCOME RECOGNITION AND ASSE T CLASSIFICATION NORMS (IRAC NORMS) LAID DOWN BY RESERVE BANK OF INDIA. IN ESSENCE RBI DIRECTIONS CITED BY APPELLANT [MASTER CIRCULAR - PRUDENTIAL NORMS ON INCOME RECOGNITION, ASSET CLASSIFICATION, AND PROVISIONING PERTAINING TO ADVANCES #DBOD #BP.BC.17/2 1.4.048/ 2009 - 10 DATED 01.07.2009] ARE PRUDENTIAL/ PROVISIONING NORMS ISSUED BY RBI. THESE NORMS DEAL ESSENTIALLY WITH INCOME RECOGNITION. THEY FORCE THE BANKS TO DISCLOSE THE AMOUNT OF NPA IN THEIR FINANCIAL ACCOUNTS. THEY FORCE THE BANKS TO REFLECT 'TRUE AND CORRECT' PROFITS. HOWEVER, THESE DIRECTIONS HAVE NOTHING TO DO WITH COMPUTATION OF TAXABLE INCOME AND DEDUCTIONS. THESE DIRECTIONS CANNOT OVERRULE THE 'PERMISSIBLE DEDUCTIONS' OR 'THEIR EXCLUSION' UNDER THE IT ACT. THERE ARE INCONSISTENCY BETWEEN THES E DIRECTIONS AND INCOME TAX ACT IN THE MATTER OF INCOME RECOGNITION AND PRESENTATION OF FINANCIAL STATEMENTS. THE ACCOUNTING POLICIES ADOPTED BY A BANK CANNOT DETERMINE THE TAXABLE INCOME . THE ENTIRE THRUST OF RBI DIRECTIONS IS ON PRESENTATION OF NPA PROV ISION IN THE BALANCE SHEET OF BANK. PRESENTATION/ DISCLOSURE IS DIFFERENT FROM COMPUTATION/TAXABILITY OF THE PROVISION FOR BANK. THE NATURE OF EXPENDITURE UNDER THE IT ACT CANNOT BE CONCLUSIVELY DETERMINED BY THE MANNER IN WHICH ACCOUNTS ARE PRESENTED IN T ERMS OF MASTER CIRCULAR. THERE ARE CASES WHERE ON FACTS COURTS HAVE TAKEN THE VIEW THAT THE SO - CALLED PROVISION IS IN EFFECT A WRITE OFF. THEREFORE, RBI DIRECTIONS, THOUGH DEVIATE FROM ACCOUNTING PRACTICE AS PROVIDED IN THE COMPANIES ACT, DO NOT OVERRIDE T HE PROVISIONS OF THE IT ACT. IT IS RELEVANT REPRODUCE THE OBSERVATION OF SUPREME COURT IN SOUTHERN TECHNOLOGIES LTD. VS. JCIT (2010) 320 ITR 577: I.T.A. NO . 51 8 /M/ 15 12 'THEREFORE, IN OUR VIEW, RBI DIRECTIONS 1998, THOUGH DEVIATE FROM ACCOUNTING PRACTICE AS PROVIDED IN THE COM PANIES ACT, DO NOT OVERRIDE THE PROVISIONS OF THE IT ACT. SOME COMPANIES, FOR EXAMPLE, TREAT WRITE OFFS OR EXPENSES OR LIABILITIES AS CONTINGENT LIABILITIES. FOR EXAMPLE, THERE ARE COMPANIES WHICH DO NOT RECOGNIZE MARK - TO - MARKET LOSS ON ITS DERIVATIVE CON TRACTS EITHER BY CREATING RESERVE AS SUGGESTED BY ICAI OR BY CHARGING THE SAME TO THE P&L A/C IN TERMS OF ACCOUNTING STANDARDS. CONSEQUENTLY, THEIR PROFITS AND RESERVES AND SURPLUS OF THE YEAR ARE PROJECTED ON THE HIGHER SIDE. CONSEQUENTLY, SUCH LOSSES ARE NOT ACCOUNTED IN THE BOOKS, AT THE HIGHEST; THEY ARE MERELY DISCLOSED AS CONTINGENT LIABILITY IN THE NOTES TO ACCOUNTS. THE POINT WHICH WE WOULD LIKE TO MAKE IS WHETHER SUCH LOSSES ARE CONTINGENT OR ACTUAL CANNOT BE DECIDED ONLY ON THE BASIS OF PRESENTATI ON. SUCH PRESENTATION WILL NOT BIND THE AUTHORITY UNDER THE IT ACT. ULTIMATELY, THE NATURE OF TRANSACTION HAS TO BE EXAMINED. IN EACH CASE, THE AUTHORITY HAS TO EXAMINE THE NATURE OF EXPENSE/LOSS. SUCH EXAMINATION AND FINDING THEREON WILL NOT DEPEND UPON P RESENTATION OF EXPENSE/LOSS IN THE FINANCIAL STATEMENTS OF THE NBFC IN TERMS OF THE 1998 DIRECTIONS. THEREFORE, IN OUR VIEW, THE RBI DIRECTIONS 1998 AND THE IT ACT OPERATE IN DIFFERENT FIELDS.' WITH THE REASONING CITED ABOVE I CONCLUDE THAT THE ACCOUNTIN G POLICIES ADOPTED BY A BANK FOLLOWING RBI GUIDELINES, CANNOT DETERMINE THE TAXABLE INCOME. THUS, THE CONTENTION OF THE APPELLANT IS NOT ACCEPTED. 10. APPLICATION OF THE PROVISO TO SECTION 36(L)(VII) IN RESPECT OF BAD DEBTS WRITTEN OFF WHEN IT EXCEEDS T HE PROVISION MADE UNDER SECTION 36(L)(VIIA). THE S. 36(1)(VII) APPLIES TO ALL BANKS, COMMERCIAL OR RURAL, SCHEDULED OR UNSCHEDULED. IT GIVES A BENEFIT TO THE ASSESSEE TO CLAIM A DEDUCTION ON ANY BAD DEBT OR PART THEREOF, WHICH IS WRITTEN OFF AS IRRECOVER ABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR. THE PROVISO TO S. 36(1)(VII) CONTROL THE APPLICATION OF THIS PROVISION AND IT COMES INTO OPERATION WHEN THE CASE OF THE ASSESSEE WHICH FALLS UNDER S. 36(1)(VIIA) OF THE ACT. SEC. 36(1)(VIIA) PROVI DES FOR A DEDUCTION IN RESPECT OF ANY PROVISION FOR BAD AND DOUBTFUL DEBT MADE. IF THE CASE OF THE ASSESSEE DOES NOT FALL UNDER I.T.A. NO . 51 8 /M/ 15 13 S. 36(1)(VIIA), THE PROVISO/LIMITATION WOULD NOT COME INTO PLAY. IN THE INSTANT CASE THE APPELLANT FALL UNDER CLAUSE (B) OF S. 3 6(1)(VIIA). THE APEX COURT IN CATHOLIC SYRIAN BANK LTD. VS. CIT (2012) 343 ITR 270 (SC) HELD: '41. TO CONCLUDE, WE HOLD THAT THE PROVISIONS OF SS. 36(L)(VII) AND 36(L)(VIIA) OF THE ACT ARE DISTINCT AND INDEPENDENT ITEMS OF DEDUCTION AND OPERATE IN THEIR RESPECTIVE FIELDS. THE BAD DEBTS WRITTEN OFF IN DEBTS, OTHER THAN THOSE FOR WHICH THE PROVISION IS MADE UNDER CL. (VIIA), WILL BE COVERED UNDER THE MAIN PART OF S. 36(1)(VII), WHIL E THE PROVISO WILL OPERATE IN CASES UNDER CL. (VIIA) TO LIMIT DEDUCTION TO T HE EXTENT OF DIFFERENCE BETWEEN THE DEBT OR PART THEREOF WRITTEN OFF IN THE PREVI Q US YEAR AND CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER CL. (VIIA). THE PROVISO TO S. 36(1)(VII) WILL RELATE TO CASES COVERED UNDER S. 36(1) (VIIA) AND HAS TO BE READ WITH S. 36(2)(V) OF THE ACT. THUS, THE PROVISO WOULD NOT PERMIT BENEFIT OF DOUBLE DEDUCTION, OPERATING WITH REFERENCE TO RURAL LOANS WHILE UNDER S. 36(L)(VII), THE ASSESSEE WOULD BE ENTITLED TO GENERAL DEDUCTION UPON AN ACCOUNT HAVING BECOME BAD DEBT AND BEING WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR. THIS, OBVIOUSLY, WOULD BE SUBJECT TO SATISFACTION OF THE REQUIREMENTS CONTEMPLATED UNDER S. 36(2).' (EMPHASIS SUPPLIED) EXAMINATI ON OF RECORDS REVEAL THAT THE ASSESSEE HAD WRITTEN OFF RS.2,76,55,332/ - IN ITS BOOKS OF ACCOUNTS, AND THE WRITE OFF RELATES TO THE ACCOUNT OF ANANTHMAL KASI RICE MILL. THE APPELLANT IN ITS COMPUTATION DEDUCTED THE BALANCE LYING IN PROVISION AS PER SECTION 36(1)(VIIA)(B) AS ON 01.04.2009 AMOUNTING TO RS.77,73,147/ - . FURTHER, ASSESSEE HAD ALSO CLAIMED DEDUCTION 36(1)(VIIA)(B) AMOUNTING TO RS.42,76,327/ - . AS PER THE PROVISO TO SECTION 36(1)(VII) AND THE ABOVE JUDICIAL ANALYSIS, THE SAID DEDUCTION IS ALSO NOT ALLOWABLE. HENCE, THE APPEAL OF THE ON THESE GROUNDS OF APPEAL (GROUND NO. I & II) ARE DISMISSED. 7. BY ANALYSING THE ISSUE IN DETAIL AFTER VERIFYING THE PARTICULARS AVAILABLE ON RECORD, THE LD. CIT(A) HAS PASSED THE WELL REASONED ORDER. IN VIEW OF TH E ABOVE, I.T.A. NO . 51 8 /M/ 15 14 SINCE THE LD. CIT(A) HAS RIGHTLY HELD THAT THE PROVISIONS FOR NON - PERFORMING ASSETS CANNOT BE EQUATED WITH PROVISION FOR BAD AND DOUBTFUL DEBTS AND SINCE SUCH PROVISIONS WAS NOT MADE, THE ASSESSEE IS NOT ENTITLED FOR DEDUCTION, WE FIND NO INFIRMIT Y IN THE ORDER PASSED BY THE LD. CIT(A) ON THIS ISSUE AND ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE IS DISMISSED. 8 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED . ORDER PRONOUNCED ON THE 6 TH MAY , 201 6 AT CHENNAI. SD/ - SD/ - ( CHA NDRA POOJARI ) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 06 . 0 5 .201 6 VM/ - / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.