THE CHURU CENTRAL COOPERATIVE BANK LIMITED, Jaipur V. DCIT, JHUNJHUNU

ITA 897/JPR/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 5436 (ITAT-JAIPUR)
• Duration Of Justice: 1 year(s) 1 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-02-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 29-12-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Double taxation relief; International transaction; Source of fund; Additional evidence; Cost of acquisition; Bad and doubtful debts
• Section: 14A; 145; 37

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR JH VH-VKJ-EHUK] YS[KK LNL; ,OA JH YFYR DQEKJ] U;KF; D LNL; DS LE{K BEFORE: SHRI T.R.MEENA, AM & SHRI LALIET KUMAR, JM VK;DJ VIHY LA-@ ITA NOS. 897/JP/2014 FU/KZKJ.K O'K Z@ ASSESSMENT YEARS : 2010-11 . THE CHURU CENTRAL COOPERATIVE BANK LTD., CHURU. CUKE VS. THE DCIT, CIRCLE, JHUNJHUNU. LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO. AACCT 0759 L VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ LS@ ASSESSEE BY S BY : SHRI P.C. PARWAL (C.A) JKTLO DH VKSJ LS@ REVENUE BY : SMT. NEENA JEPH (JCIT) LQUOKBZ DH RKJH[K@ DATE OF HEARING : 10.02.2016. ?KKS'K .KK DH RKJH[K @ DATE OF PRONOUNCEMENT : 24/02/2016. VKNS'K@ ORDER PER SHRI LALIET KUMAR, J.M. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF LD. CIT (A)-III, JAIPUR DATED 17.11.2014 FOR THE A.Y. 2010-11. THE GROUNDS OF APPEAL STATES AS UNDER :- 1. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS ER RED ON FACTS AND IN LAW IN RESTRICTING THE CLAIM OF DEDUCTION U/S 36 (1)(VIIA) AT RS. 11,17,000/- I.E PROVISION FOR BAD & DOUBTFUL DEBTS DEBITED TO P&L A/C IN THE YEAR UNDER CONSIDERATION AS AGAINST RS. 72,7 1,317/- CLAIMED BY ASSESSEE BY NOT ACCEPTING THE CLAIM OF ASSESSEE THA T PROVISION MADE IN EARLIER YEARS FOR WHICH DEDUCTION IS NOT ALLOWED IN THOSE YEARS SHOULD ALSO BE CONSIDERED FOR ALLOWING DEDUCTION U/S 36(1) (VIIA) AS THIS SECTION DOES NOT LAY DOWN ANY CONDITION THAT DEDUCT ION ALLOWABLE IN THIS SECTION WOULD BE RESTRICTED ONLY TO THE PROVIS ION MADE DURING THE YEAR. 2 ITA NO. 897/JP/2014 A.Y. 2010-11 THE CHURU CENTRAL CO-OPRATIVE BANK LTD. 1.1. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS FU RTHER ERRED ON FACTS AND IN LAW IN NOT ALLOWING THE CLAIM OF DEDUC TION U/S 36(1)(VIIA) IN RESPECT OF PROVISION FOR BAD & DOUBT FUL DEBTS OF RS. 11,60,154/- CREATED DURING THE YEAR OUT OF THE ACCU MULATED PROFIT OF EARLIER YEARS APART FROM RS. 11,17,000/- ALLOWED BY THE AO. GROUND NO. 1 : 2. THE ASSESSEE IS A CO-OPERATIVE SOCIETY BANK ENGA GED IN BANKING ACTIVITIES. GROUND NO. 1 PERTAINS TO THE RESTRICTION OF CLAIM O F DEDUCTION UNDER SECTION 36(1)(VIIA) OF THE I.T. ACT. IN THIS REGARD, THE AO IN THE ASS ESSMENT ORDER HAS MENTIONED AS UNDER :- 3. AS REGARDS, PROVISIONS FOR BAD DEBTS, THE ASSE SSEE VIDE ABOVE REFERRED LETTER DATED 28.02.2013 SUBMITTED THAT THE TAX CONSULTANT WHO ORIGINALLY FILED THE RETURN OF INCOME WAS NOT AWARE OF THE RELEVANT PROVISIONS OF THE ACT FOR DEDUCTION U/S 36(VIIA). ALONGWITH THE ABOVE SUBMISSION THE ASSESSEE SUBMITT ED A REVISED WORKING IN RESPECT OF THE AGGREGATE AVERAGE ADVANCES MADE B Y THE RURAL BRANCHES OF THE ASSESSEE BANK. ON THE BASIS OF SUCH WORKING, THE DEDUCTION UNDER SECTION 36(VIIA) BEING THE AGGREGATE OF 7.5% OF THE TOTAL INCOME AND 10% OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRA NCHES WAS WORKED OUT AT RS. 91,07,187/-. THE ASSESSEE BANK ALSO FURN ISHED A REVISED COMPUTATION OF INCOME BY WAY OF WHICH THE DEDUCTION U/S 36(VIIA) IN RESPECT OF PROVISIONS MADE FOR BAD AND DOUBTFUL DEB TS WAS CLAIMED AT RS. 91,07,187/-. THE SUBMISSION OF THE ASSESSEE ALONGW ITH THE COMPUTATION OF THE AGGREGATE AVERAGE ADVANCES AND THE COMPUTATI ON OF THE TOTAL DEDUCTION U/S 36(VIIA) HAS BEEN CAREFULLY CONSIDERE D. AT THE OUTSET, IT NEEDS TO BE POINTED OUT THAT THE DEDUCTION U/S 36(V IIA) IS ADMISSIBLE ONLY TO THE EXTENT OF THE ACTUAL PROVISIONS MADE FOR BAD AND DOUBTFUL DEBTS. THE OPENING LINE OF SECTION 36(VIIA) CLEARLY BRINGS OUT THIS FACT BY STARTING WITH THE WORDS IN RESPECT OF ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY- (A) A SCHEDULED BANK THE IMPORTANCE OF THE WORD MADE BEING PRESENT IN THE RELEVANT STATUTE CANNOT BE MISSED. THE INTENT OF THE LEGISLATURE WH ILE FRAMING THE STATUTE IS INCONTROVERTIBLY SPECIFIC AND BEREFT OF ANY CONF USION BY WAY OF WHICH 3 ITA NO. 897/JP/2014 A.Y. 2010-11 THE CHURU CENTRAL CO-OPRATIVE BANK LTD. THE ACTUAL QUANTIFICATION AND PROVISIONING OF THE A MOUNT OF DEBTS CONSIDERED TO BE BAD AND DOUBTFUL IS A PRIMARY REQU IREMENT. IN A CASE WHERE THE COMPUTATION OF THE AGGREGATE DEDUCTION AV AILABLE U/S 36(VIIA) EXCEEDS THE ACTUAL PROVISION MADE, THE DEDUCTION AV AILABLE TO THE ASSESSEE IN SUCH A CASE WOULD BE LIMITED TO THE ACT UAL PROVISION MADE. IN THE INSTANT CASE, THE ACTUAL PROVISION MADE FOR BAD AND DOUBTFUL DEBTS IN THE BALANCE SHEET IS ONLY RS. 11,17,000/-, THEREFOR E EVEN WHILE THE COMPUTATION OF THE DEDUCTION HAS BEEN WORKED OUT AT A FIGURE EXCEEDING THE ACTUAL PROVISION MADE, THE AVAILABLE DEDUCTION U/S 36(VIIA) SHALL BE RESTRICTED TO RS.11,17,000/- ONLY. 3. THE ASSESSEE BEING AGGRIEVED BY THE ORDER PASSED BY THE AO, CARRIED THE MATTER BEFORE LD. CIT (A), WHO VIDE THE IMPUGNED ORDER DAT ED 17.11.2014 HAS CONFIRMED THE ORDER PASSED BY THE AO. THE REASONING GIVEN BY THE LD. CIT (A) IS APTLY MENTIONED IN PARA 5.5 OF HIS ORDER. WE DEEM IT APPROPRIATE TO RE PRODUCE THE SAME AS UNDER :- 5.5. I HAVE CAREFULLY CONSIDERED THE FINDINGS OF THE AO AS ALSO THE SUBMISSION OF THE APPELLANT. FIRST OF ALL IT MAY BE MENTIONED THAT THE APPELLANT HAS NOT FILED ANY ADDITIONAL EVIDENCE ON THIS ISSUE AND THEREFORE THE SUBMISSION OF THE AO THAT ADDITIONAL EVIDENCE M AY NOT BE ACCEPTED IS NEITHER CORRECT NOR RELEVANT TO THE ISSUE UNDER CON SIDERATION. IT MAY BE NOTED THAT THE ASSESSEE HAS DEBITED RS. 11,17,000/- IN THE P&L ACCOUNT ON ACCOUNT OF PROVISIONS OF BAD AND DOUBTFUL DEBTS AS PER PROVISIONS OF SEC. 36(1)(VII)(A). THE APPELLANT CASE IS THAT ALLO WABLE DEDUCTION U/S 36(1)(VII)(A) WAS FOR RS. 91,07,187/- AND THAT THE APPELLANT HAS MADE SUCH PROVISIONS IN THE EARLIER YEARS AND THE PROVIS ION AVAILABLE FOR DEDUCTION UNDER THIS SECTION AS ON 31.03.2010 WAS F OR RS. 1,65,75,936/-. ACCORDINGLY AS PER THE APPELLANT AS AGAINST THE DED UCTION ALLOWED BY AO FOR RS. 11,17,000/- THE WHOLE OF THE GROSS TOTAL IN COME AMOUNTING TO RS. 72,71,317/- SHOULD HAVE BEEN ALLOWED AS DEDUCTION U /S 36(1)(VII)(A). ALTERNATIVELY IT IS ALSO CONTENDED THAT EVEN DURING THE ASSESSMENT YEAR UNDER CONSIDERATION PROVISIONS WAS MADE FOR RS. 22, 77,154/- IN AS MUCH AS APART FROM THE PROVISION FOR BAD AND DOUBTFUL DE BTS IN THE BALANCE SHEET FOR RS. 11,17,000/-, ANOTHER RESERVE UNDER TH E HEAD SPECIAL BAD DEBTS RESERVES AMOUNTING TO RS. 6,96,092/- AND BA D AND DOUBTFUL DEBTS RESERVES AMOUNTING TO RS. 4,64,062/- WERE AL SO CREATED AND THEREFORE THE TOTAL RESERVES CREATED DURING THE YEA R UNDER CONSIDERATION WERE ARRIVED AT RS 22,77,154/-. ON CAREFUL CONSIDER ATION OF ALL THESE FACTS IT MAY BE NOTED THAT THE DEDUCTIONS U/S 36(1) OF IT ACT INCLUDING 4 ITA NO. 897/JP/2014 A.Y. 2010-11 THE CHURU CENTRAL CO-OPRATIVE BANK LTD. DEDUCTION U/S 36(1)(VII)(A) ARE TO BE CONSIDERED/AL LOWED AGAINST THE INCOME OF THE RELEVANT ASSESSMENT YEAR. IN THIS BA CKGROUND IT MAY BE NOTED THAT DURING THE YEAR UNDER CONSIDERATION AGAI NST THE TOTAL INCOME, THE ASSESSEE HAS MADE PROVISION FOR BAD AND DOUBTFU L DEBTS FOR RS 11,17,000/-. IT IS ALSO FACT THAT IN THE COMPUTATIO N OF THE TOTAL INCOME OF THE ASSESSMENT YEAR UNDER CONSIDERATION AS ALSO IN THE REVISE COMPUTATION OF INCOME THE PROVISION FOR BAD AND DOUBTFUL DEBTS WAS CLAIMED ONLY FOR RS. 11,17,000/-. THEREFORE THE AO HAS RIGHTLY ALLO WED DEDUCTION ON ACCOUNT OF BAD AND DOUBTFUL DEBTS U/S 36(1)(VII)(A) OF SUCH AMOUNT. IN OTHER WORDS PROVISION FOR BAD AND DOUBTFUL RESERVES OF EARLIER YEARS WHICH WERE NOT ALLOWED TO THE ASSESSEE CAN NOT BE G IVEN CREDIT AGAINST THE TOTAL INCOME OF ASSESSMENT YEAR UNDER CONSIDERA TION. ACCORDINGLY THE ACTION OF THE AO IS CONFIRMED. 4. FEELING AGGRIEVED BY THE ABOVE SAID ORDER, THE A SSESSEE IS NOW BEFORE US. 4.1. THE LD. A/R FOR THE ASSESSEE HAS SUBMITTED THA T THE DEDUCTION U/S 36(1)(VIIA) IS ALLOWED IN RESPECT OF ANY PROVISION FOR BAD AND DOU BTFUL DEBTS MADE BY THE ASSESSEE NOT EXCEEDING 7.5% OF THE TOTAL INCOME AND 10% OF T HE AGGREGATE ADVANCE MADE BY THE RURAL BRANCHES. IN THE PRESENT CASE THE ASSESS EE HAS MADE THE PROVISION FOR BAD AND DOUBTFUL DEBTS FOR RS. 11,17,000/-. THE LD. CIT (A) HAS WRONGLY HELD THAT IN THE COMPUTATION OF THE TOTAL INCOME AS ALSO THE REVISED COMPUTATION, THE PROVISION FOR BAD AND DOUBTFUL DEBTS WAS CLAIMED ONLY FOR RS. 11,17,0 00/-. IN FACT, THIS IS NOT THE AMOUNT CLAIMED BUT IT IS THE AMOUNT WHICH IS ADDED IN COMP UTING THE INCOME. AGAINST THIS THE CLAIM FOR BAD AND DOUBTFUL DEBTS WAS MADE AT RS. 91 ,07,187/-. THE LD. A/R FURTHER SUBMITTED THAT WITHOUT PREJUDICE TO ABOVE, IN CASE DEDUCTION U/S 36(1)(VIIA) IS HELD ALLOWABLE IN RESPECT OF ANY PROVISION FOR BAD AND D OUBTFUL DEBTS MADE BY THE ASSESSEE DURING THE YEAR, THEN THE SAME IS ALLOWABLE AT RS. 22,77,154/- AS PER THE FOLLOWING DETAILS :- 5 ITA NO. 897/JP/2014 A.Y. 2010-11 THE CHURU CENTRAL CO-OPRATIVE BANK LTD. SPECIAL BAD DEBTS RESERVE RS. 6,96,092/- BAD & DOUBTFUL DEBT RESERVES RS. 4,64,062/- CONTINGENCY AGAINST STANDARD ASSET RS. 11,17,000/ - TOTAL : RS. 22,77,154/- ------------------ THUS THE ASSESSEE HAS CLAIMED THE DEDUCTION UNDER S ECTION 36(1)(VIIA) AT RS. 22,77,154/- AS AGAINST RS 11,17,000/-. THE LD. A/R HAS ALSO TAKEN US TO THE TABULATION MENTIONED IN THE WRITTEN SUBMISSION. THE SAME IS RE PRODUCED HEREIN BELOW :- PARTICULARS CONTINGENCY STANDARD ASSETS SPECIAL BAD DEBTS RESERVE BAD AND DOUBTFUL DEBT RESERVES PROVISION FOR NPA TOTAL OPENING BALANCE AS ON 01.04.2006. 32,83,000 23 48,42,610 61,73,149 1,42,98,782 ADD: PROVISION MADE DURING 2006-07 - - - - - CLOSING BALANCE AS ON 31.03.2007 32,83,000 23 48,42,610 61,73,149 1,42,98,782 ADD: PROVISION MADE DURING 2007-08 - - - - - CLOSING BALANCE AS ON 31.03.2008 32,83,000 23 48,42,610 61,73,149 1,42,98,782 ADD: PROVISION MADE DURING 2008-09 - - - 1,28,22,000 1,28,22,000 CLOSING BALANCE AS ON 31.03.2009 32,38,000 23 48,42,610 1,89,95,149 2,71,20,782 ADD: PROVISION MADE DURING 2009-10 11,17,000 6,96,093 4,64,062 - 22,77,155 CLOSING BALANCE AS ON 31.03.2010 44,00,000 6,96,116 53,06,672 1,89,95,149 1,93,97,936 THE LD. A/R HAS SUBMITTED THAT IN VIEW OF THE PROVI SIONS OF SECTION 36(10)(VIIA), DEDUCTION SHOULD NOT BE RESTRICTED TO THE PROVISION S MADE DURING THE YEAR AND IT SHOULD BE PERMITTED FOR THE TOTAL PURCHASES MADE IN THE BO OKS OF ACCOUNT. 4.2. PER CONTRA, THE LD. D/R FOR THE REVENUE HAS SU BMITTED THAT THE CLAIM OF THE ASSESSEE BEFORE THIS TRIBUNAL IS NOT MAINTAINABLE O N VARIOUS GROUNDS INCLUDING (1) THAT 6 ITA NO. 897/JP/2014 A.Y. 2010-11 THE CHURU CENTRAL CO-OPRATIVE BANK LTD. THE ASSESSEE HAS NOT CLAIMED DEDUCTION UNDER SECTIO N 36(1)(VIIA) IN THE ORIGINAL RETURN OF INCOME FILED BY IT AND HAS ONLY SUBMITTED THE RE VISED COMPUTATION OF INCOME BY WAY OF WHICH THE DEDUCTION UNDER SECTION 36(1)(VIIA) FO R BAD AND DOUBTFUL DEBIT WAS CLAIMED AT RS. 91,07,187/-. IT IS ALSO THE CASE OF THE LD. D/R THAT THE LITERAL MEANING OF SECTION 36(1)(VIIA) IS REQUIRED TO BE GIVEN BY THE TRIBUNAL . FURTHER, THE LD. D/R ALSO RELIED UPON THE CIRCULAR ISSUED BY THE CBDT BEARING NO 17/2008 DATED 26.11.2008 WHEREIN IN RESPECT OF SECTION 36(1)(VIIA) IT HAS BEEN MENTIONE D AS UNDER :- INSTRUCTION NO. 17/2008, DATED 26-11-2008 KINDLY REFER TO ABOVE. 2. IN A RECENT REVIEW OF ASSESSMENT OF BANKS CARRIED OUT BY C&AG, IT HAS BEEN THAT WHITE COMPUTING THE INCOME OF BANKS UNDER THE HEAD 'PROFIT AND GAINS OF BUSINESS & PROFESSION', DEDUCTIONS OF LARGE AMOUNTS UNDER DIFF ERENT SECTIONS ARE BEING ALLOWED BY THE ASSESSING OFFICERS WITHOUT PROPER VERIFICATI ON, LEADING TO SUBSTANTIAL LOSS OF REVENUE. IT IS, THEREFORE, NECESSARY THAT ASSESSMEN TS IN THE CASES OF BANKS ARE COMPLETED WITH DUE CARE AND AFTER PROPER VERIFICATI ON. IN PARTICULAR, DEDUCTIONS UNDER THE PROVISIONS REFERRED TO BELOW SHOULD BE AL LOWED ONLY AFTER A THOROUGH EXAMINATION OF THE CLAIM ON FACTS AND ON LAW AS PER THE PROVISIONS OF THE I.T. ACT., 1961. (I) UNDER SECTION 36(1)(VII) OF THE ACT, DEDUCTION ON ACCOUNT OF BAD DEBTS WHICH ARE WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE IS ADMISSIBLE. HOWEVER, THIS SHOULD BE ALLOWED ONLY OF THE ASSESSEE HAD DEB ITED THE AMOUNT OF SUCH DEBTS TO THE PROVISION FOR BAD AND DOUBTFUL DEBT ACCOUNT UND ER SECTION 36(1)(VIIA) OF THE ACT, AS REQUIRED BY SECTION 36(2)(V) OF THE ACT. (II) WHILE CONSIDERING THE CLAIM FOR BAD DEBTS UNDE R SECTION 36(1)(VII), THE ASSESSING OFFICER SHOULD ALLOW ONLY SUCH AMOUNT OF BAD DEBTS WRITTEN OFF AS EXCEEDS THE CREDIT BALANCE AVAILABLE IN THE PROVISION FOR BAD & DOUBTFUL DEBT ACCOUNT CREATED UNDER SECTION 36(2)(VIIA) OF THE ACT, THE CREDIT BA LANCE FOR THIS PURPOSE WILL BE THE OPENING CREDIT BALANCE I.E., THE BALANCE BROUGHT FO RWARD AS ON 1ST APRIL OF THE RELEVANT ACCOUNTING YEAR. (III) SECTION 36(2)(VIIA) (A) OF THE ACT PROVIDES T HAT IN RESPECT OF ANY PROVISIONS FOR BAD AND DOUBTFUL DEBTS OF THE TYPE REFERRED TO IN T HAT SUB-CLAUSE MADE BY A BANK, AN AMOUNT NOT EXCEEDING 5 PERCENT UPTO 31ST MARCH 2 003 AND THEREAFTER 7.5. PERCENT OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VIA OF THE ACT) AND AN AMOUNT NO T EXCEEDING 10 PERCENT OF THE AGGREGATE AVERAGE ADVANCES MADE BY RURAL BRANCHES' OF SUCH BANKS COMPUTED IN THE 7 ITA NO. 897/JP/2014 A.Y. 2010-11 THE CHURU CENTRAL CO-OPRATIVE BANK LTD. MANNER PRESCRIBED UNDER THE INCOME TAX RULES, 1962, SHALL BE ALLOWED AS DEDUCTION. FOR THIS PURPOSE (A) TOTAL INCOME OF THE YEAR SHOULD BE WORKED OUT A FTER ADJUSTING BROUGHT FORWARD LOSSES, IF ANY, BUT BEFORE MAKING ANY DEDUCTIONS UN DER CHAPTER VI A OF THE ACT. (B) THE DEDUCTION FOR PROVISION FOR BAD AND DOUBTFU L DEBTS SHOULD BE RESTRICTED TO THE AMOUNT OF SUCH PROVISION ACTUALLY CREATED IN TH E BOOKS OF THE ASSESSEE IN THE RELEVANT YEAR OR THE AMOUNT CALCULATED AS PER PROVI SIONS OF SECTION 36(1)(VIIA), WHICHEVER IS LESS. (C) FOR WORKING OUT THE AGGREGATE AVERAGE ADVANCES BY RURAL BRANCHES, THE ASSESSING OFFICER SHOULD VERIFY WHETHER THE BRANCH (ES) IN QUESTION ACTUALLY QUALIFY TO BE CATEGORIZED AS RURAL BRANCHES' AS PER THE DE FINITION IN EXPLANATION (IA) BELOW SECTION 36(1)(VIIA). THE AGGREGATE AVERAGE ADVANCES OF SUCH RURAL BRANCHES SHOULD THEREAFTER BE COMPUTED IN ACCORDANCE WITH RULE 6ABA OF IT. RULES, 1962. (IV) THIRD PROVISO TO SECTION 36(1)(VIIA) OF THE AC T, ALLOWS A SCHEDULED BANK OR NON- SCHEDULED BANK, AT ITS OPTION, TO CLAIM A FURTHER D EDUCTION IN EXCESS OF THE LIMITS SPECIFIED IN THE PRECEDING TWO PROVISOS, FOR AN AMO UNT UPTO THE INCOME DERIVED FROM REDEMPTION OF SECURITIES MADE IN ACCORDANCE WITH A SCHEME FRAMED BY CENTRAL GOVERNMENT. BEFORE ALLOWING DEDUCTION UNDER THIS PR OVISION, IT SHOULD BE ENSURED THAT SUCH INCOME HAS BEEN DISCLOSED IN THE RETURN O F INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. (V) SECTION 44C OF THE ACT PROVIDES THAT IN THE CAS E OF A NON-RESIDENT, HEAD OFFICE EXPENDITURE BE ALLOWED AT THE RATE OF FIVE PERCENT OF THE ADJUSTED TOTAL INCOME OR THE AMOUNT OF SO MUCH OF EXPENDITURE IN THE NATURE OF HEAD OFFICE EXPENDITURE INCURRED BY THE ASSESSEE AS IS ATTRIBUTABLE TO THE BUSINESS OF THE ASSESSEE IN INDIA, WHICHEVER IS LESS. AS PER THE EXPLANATION BELOW SUB SECTION (1) OF SECTION 92, THE DEDUCTION FOR ANY EXPENDITURE OR INTEREST ARISING F ROM AN 'INTERNATIONAL TRANSACTION' SHALL BE DETERMINED HAVING REGARD TO ITS ARM'S LENG TH PRICE, THEREFORE, IN THE CASES OF FOREIGN BANKS OR BANK BRANCHES ASSESSABLE IN IND IA, THE AO SHOULD CAREFULLY EXAMINE THE CLAIM FOR HEAD OFFICE EXPENSES IN THE L IGHT OF THESE PROVISIONS AS ALSO THE RELEVANT CLAUSE(S) OF THE APPLICABLE DTAA, BEFO RE ALLOWING SUCH CLAIMS. (VI) IN CASES WHERE AN ASSESSEE BANK PURCHASES SECU RITIES UNDER CAPITAL ACCOUNT AT A PRICE INCLUSIVE OF ANY ACCRUED INTEREST, THE ENTIRE PURCHASE CONSIDERATION IS IN THE NATURE OF CAPITAL OUTLAY. THEREFORE, ANY INTEREST E LEMENT INCLUDED IN THE PURCHASE CONSIDERATION IS NOT ALLOWABLE AS EXPENDITURE AGAIN ST INCOME ACCRUING ON THOSE SECURITIES. ( VIIAYA BANK V/S CIT 187 ITR 541 SUPREME COURT). (VII) AS PER RBI GUIDELINES DATED 16TH OCTOBER 2000 , THE INVESTMENT PORTFOLIO OF THE BANKS IS REQUIRED TO BE CLASSIFIED UNDER THREE CATEGORIES VIZ. HELD TO MATURITY (HTM), HELD FOR TRADING (HFT) AND AVAILABLE FOR SAL E (AFS). INVESTMENTS CLASSIFIED UNDER HTM CATEGORY NEED NOT BE MARKED TO MARKET AND ARE CARRIED AT ACQUISITION COST UNLESS THESE ARE MORE THAN THE FACE VALUE, IN WHICH CASE THE PREMIUM SHOULD BE AMORTISED OVER THE PERIOD REMAINING TO MATURITY. IN THE CASE OF HFT AND AFS SECURITIES FORMING STOCK IN TRADE OF THE BANK, THE DEPRECIATION / APPRECIATION IS TO BE AGGREGATED SCRIP WISE AND ONLY NET DEPRECIATION, IF ANY, IS REQUIRED TO BE PROVIDED 8 ITA NO. 897/JP/2014 A.Y. 2010-11 THE CHURU CENTRAL CO-OPRATIVE BANK LTD. FOR IN THE ACCOUNTS. THE LATEST GUIDELINES OF THE R BI MAY BE REFERRED TO FOR ALLOWING ANY SUCH CLAIMS. (VIII) SECTION 14A OF THE ACT READ WITH RULE 8D OF THE I.T. RULES, 1962, PROVIDES THAT FOR THE PURPOSE OF COMPUTING TOTAL INCOME UNDE R THE ACT, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE A SSESSEE IN RELATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THERE FORE, EXPENDITURE IN RESPECT OF EXEMPTED INCOMES SHOULD NOT BE ALLOWED AS DEDUCTION . (IX) SECTION 43B(B) OF THE ACT ENVISAGES THAT DEDUC TION TOWARDS CONTRIBUTION TO ANY PROVIDENT FUND OR SUPERANNUATION FUND OR GRATUITY F UND OR ANY OTHER FUND FOR THE WELFARE OF EMPLOYEES IS ALLOWABLE IN COMPUTING TOTA L INCOME OF THE ASSESSEE ONLY ON ACTUAL PAYMENT BASIS. THEREFORE, IT SHOULD BE VERIF IED AS TO WHETHER THE EXPENDITURE CLAIMED IN RESPECT OF ABOVE HEADS HAS A CTUALLY BEEN MET. (X) SECTION 35DDA OF THE ACT PROVIDES THAT WHERE AN ASSESSEE INCURS ANY EXPENDITURE BY WAY OF PAYMENT OF, ANY SUM TO AN EMP LOYEE AT THE TIME OF HIS RETIREMENT IN ACCORDANCE WITH ANY SCHEME OF VOLUNTA RY RETIREMENT, ONE FIFTH OF THE AMOUNT SO PAID SHALL BE DEDUCTED IN COMPUTING THE P ROFIT AND GAINS OF THE BUSINESS AND THE BALANCE SHALL BE DEDUCTED IN EQUAL INSTALME NTS FOR EACH OF THE FOUR IMMEDIATELY SUCCEEDING YEARS. THEREFORE, ONLY ONE-F IFTH OF SUCH EXPENDITURE SHOULD BE ALLOWED IN EACH OF THE FIVE YEARS. (XI) SECTION 37 OF THE ACT ENVISAGES THAT AN AMOUNT DEBITED IN THE P&L ACCOUNT IN RESPECT OF AN ACCRUED OR ASCERTAINED LIABILITY ONLY IS AN ADMISSIBLE DEDUCTION, WHILE ANY PROVISION IN RESPECT OF ANY UNASCERTAINED LIABI LITY OR A LIABILITY WHICH HAS NOT ACCRUED, DO NOT QUALIFY FOR DEDUCTION. HOWEVER, IT HAS BEEN FOUND THAT BANKS ARE CLAIMING PROVISIONS ON DIFFERENT ACCOUNTS, PROBABLY UNDER THE RBI GUIDELINES [E.G. PROVISION FOR WAGE ARREARS FOR WHICH NEGOTIATIONS A RE YET TO BE FINALIZED, PROVISION FOR STANDARD ASSET ETC...]. A CONTINGENT LIABILITY CANNOT CONSTITUTE DEDUCTIBLE EXPENDITURE FOR THE PURPOSES OF INCOME TAX ACT. THU S, PUTTING ASIDE OF MONEY WHICH MAY BECOME EXPENDITURE ON THE HAPPENING OF AN EVENT WOULD NORMALLY NOT CONSTITUTE AN ALLOWABLE EXPENDITURE UNDER THE INCOM E TAX ACT. THE AOS SHOULD VERIFY SUCH CLAIMS AS TO WHETHER THESE ARE ADMISSIB LE AS PER THE INCOME TAX ACT. (XII) UNDER SECTION 145 OF THE ACT, INCOME UNDER TH E HEADS 'PROFITS AND GAINS OF BUSINESS' OR 'INCOME FROM OTHER SOURCES' IS REQUIRE D TO BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING , REGULARLY EMPLOYED BY THE ASSESSEE. UNDER THE RBI GUIDELINES AND THE INDIAN C OMPANIES ACT, 1956, BANKS HAVE TO FOLLOW THE MERCANTILE SYSTEM OF ACCOUNTING AND P REPARE ACCOUNTS ON ACCRUAL BASTS. THE ASSESSING OFFICERS SHOULD ENSURE THAT TH IS SYSTEM IS STRICTLY FOLLOWED BY THE BANKS (IN RESPECT OF ALL SOURCES OF INCOME). THIS MAY BE BROUGHT TO THE NOTICE OF ALL CONCERNED FOR STRICT COMPLIANCE. 9 ITA NO. 897/JP/2014 A.Y. 2010-11 THE CHURU CENTRAL CO-OPRATIVE BANK LTD. 4.3. THE LD. D/R HAS ALSO RELIED UPON THE JUDGMENT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE MATTER OF STATE BAN OF PATIALA VS. CIT (2005) 272 ITR 54 (P&H), THE HONBLE HIGH COURT AFTER RELYING UPON THE CIRCULAR AND AFTER GIVING THE LEGAL INTERPRETATION TO SECTION 36(1)(VIIA) HAS HELD AS U NDER :- 6. A BARE PERUSAL OF THE ABOVE SHOWS THAT THE DED UCTION ALLOWABLE UNDER THE ABOVE PROVISIONS IS IN RESPECT OF THE PRO VISION MADE. THEREFORE, MAKING OF A PROVISION FOR BAD AND DOUBTFUL DEBT EQU AL TO THE AMOUNT MENTIONED IN THIS SECTION IS A MUST FOR CLAIMING SU CH DEDUCTION. THE TRIBUNAL HAS RIGHTLY POINTED OUT THAT THIS ISSUE ST ANDS FURTHER CLARIFIED FROM THE PROVISO TO CLAUSE (VII) OF SECTION 36(1) OF THE ACT, WHICH READS AS UNDER :- PROVIDED THAT IN THE CASE OF AN ASSESSEE TO WHICH CLAUSE (VIIA) APPLIES, THE AMOUNT OF THE DEDUCTION RELATING TO AN Y SUCH DEBT OR PART THEREOF SHALL BE LIMITED TO THE AMOUNT BY WHIC H SUCH DEBT OR PART THEREOF EXCEEDS THE CREDIT BALANCE IN THE PROV ISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER THAT CLAUSE. 7. THIS ALSO CLEARLY SHOWS THAT MAKING OF PROVISION EQUAL TO THE AMOUNT CLAIMED AS DEDUCTION IN THE ACCOUNT BOOKS IS NECESSARY FOR CLAIMING DEDUCTION UNDER SECTION 36(1)(VIIA) OF THE ACT. THE TRIBUNAL HAS DISTINGUISHED VARIOUS AUTHORITIES RELIED UPON BY TH E ASSESSEE WHEREIN DEDUCTIONS HAD BEEN ALLOWED UNDER VARIOUS PROVISION S WHICH ALSO REQUIRED CREATION OF RESERVE AFTER THE ASSESSEE HAD CREATED SUCH RESERVE IN THE ACCOUNT BOOKS BEFORE THE COMPLETION OF THE ASSESSME NT. IT HAS BEEN CORRECTLY POINTED OUT THAT IN ALL THOSE CASES, RESE RVES/PROVISIONS HAD BEEN MADE IN THE BOOKS OF ACCOUNT OF THE SAME ASSESSMENT YEAR AND NOT OF THE SUBSEQUENT ASSESSMENT YEAR. 8. IN THE PRESENT CASE, THE ASSESSEE HAS NOT MADE A NY PROVISION IN THE BOOKS OF ACCOUNT FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, IE.1985-86, BY MAKING SUPPLEMENTARY ENTRIES AND BY REVISING ITS BALANCE- SHEET. THE PROVISION HAS BEEN MADE IN THE BOOKS OF ACCOUNT OF THE SUBSEQUENT YEAR. 10 ITA NO. 897/JP/2014 A.Y. 2010-11 THE CHURU CENTRAL CO-OPRATIVE BANK LTD. IN THE LIGHT OF THE ABOVE, THE LD. D/R HAS SUBMITTE D THAT THE ISSUE NO. 1 OF THE ASSESSEE IS REQUIRED TO BE DISMISSED. 4.4. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE MATERIAL ON RECORD. IN OUR VIEW THE PROVISIONS OF SECTION 36(1)(VIIA) PROVIDES AS UNDER :- (VIIA) IN RESPECT OF ANY PROVISION FOR BAD AND DOUB TFUL 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 3OR A CO-OPERATIVE BANK OTHER THAN A PRIMARY AGRICULTURAL CREDIT SOCIETY OR A PRI MARY CO-OPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK, AN AMOUNT [NOT EXCEEDING SEVEN AND ONE-HALF PER CENT. OF THE TOTAL INCOME (COMPUTE D BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VI-A) AND A N AMOUNT NOT EXCEEDING TEN PER CENT. OF THE AGGREGATE AVERAGE ADVANCES MAD E BY THE RURAL BRANCHES OF SUCH BANK COMPUTED IN THE PRESCRIBED MANNER : PROVIDED THAT A SCHEDULED BANK OR A NON-SCHEDULED B ANK 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 B Y 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 ASSE TS SHOWN IN THE BOOKS OF ACCOUNT OF THE BANK ON THE LAST DAY OF THE PREVIOUS YEAR : PROVIDED FURTHER THAT FOR THE RELEVANT ASSESSMENT Y EARS 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 EFFE CT AS IF FOR THE WORDS 'FIVE PER CENT.', THE WORDS 'TEN PER CENT.' HAD BEEN SUBSTITU TED : PROVIDED ALSO THAT A SCHEDULED BANK OR A NON-SCHEDU LED 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, F OR 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 UN DER THE THIRD PROVISO UNLESS SUCH INCOME HAS BEEN DISCLOSED IN THE RETURN OF INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' : 11 ITA NO. 897/JP/2014 A.Y. 2010-11 THE CHURU CENTRAL CO-OPRATIVE BANK LTD. EXPLANATION FOR THE PURPOSES OF THIS SUB-CLAUSE, 'RELEVANT ASSE SSMENT YEARS' MEANS THE FIVE CONSECUTIVE ASSESSMENT YEARS COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2000, AND ENDING BEFORE THE 1 ST DAY OF APRIL, 2005 ; (B) A BANK, BEING A BANK INCORPORATED BY OR UNDER T HE LAWS OF A COUNTRY OUTSIDE INDIA, AN AMOUNT NOT EXCEEDING FIVE PER CEN T. OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CL AUSE AND CHAPTER VI-A) ; (C) A PUBLIC FINANCIAL INSTITUTION OR A STATE FINAN CIAL CORPORATION OR A STATE INDUSTRIAL INVESTMENT CORPORATION, AN AMOUNT NOT EX CEEDING FIVE PER CENT. OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCT ION UNDER THIS CLAUSE AND CHAPTER VI-A) : PROVIDED THAT A PUBLIC FINANCIAL INSTITUTION OR A S TATE 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 CONSECUTIV E ASSESSMENT YEARS COMMENCING ON OR AFTER THE 1ST DAY OF APRIL, 2003 A ND ENDING BEFORE THE 1ST DAY OF APRIL, 2005, DEDUCTION IN RESPECT OF ANY PRO VISION MADE BY IT FOR ANY ASSETS CLASSIFIED BY THE RESERVE BANK OF INDIA AS D OUBTFUL 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 CORPORA TION, AS THE CASE MAY BE, ON THE LAST DAY OF THE PREVIOUS YEAR. FROM THE BARE PERUSAL OF THE PROVISIONS, IT IS CLEA R THAT THE STATUTE HAS PROVIDED THAT THE PROVISION FOR BAD DEBT IS REQUIRED TO BE MADE BY TH E SCHEDULED BANK. FURTHER, IT IS ALSO PROVIDED IN THE SECTION UNDER CONSIDERATION THAT TH E RATE OF 7.5% AND 10% WAS DEPENDENT ON THE AGGREGATE ADVANCES MADE. THUS THE FOCAL POINT OF THE SECTION IS MADE. THE ASSESSEE IS REQUIRED TO MADE THE PROVISI ON IN THE COMPUTATION ABOUT THE BAD AND DOUBTFUL DEBTS, IS DEPENDENT UPON THE AGGRE GATE AVERAGE ADVANCES MADE IN THE RELEVANT YEAR. THE LANGUAGE OF THE STATUTE IS CLEAR AND UNAMBIGUOUS AND IS NOT CAPABLE OF ANY OTHER INTERPRETATION. IN VIEW OF TH E ABOVE, WE ARE OF THE VIEW THAT THE PROVISIONS FOR BAD AND DOUBTFUL DEBT SHOULD BE REST RICTED TO THE AMOUNT OF SUCH 12 ITA NO. 897/JP/2014 A.Y. 2010-11 THE CHURU CENTRAL CO-OPRATIVE BANK LTD. PROVISION WHICH ARE ACTUALLY CREATED IN THE BOOKS O F ACCOUNT IN THE RELEVANT YEAR. IN VIEW OF THE ABOVE, ISSUE NO. 1 IS DECIDED AGAINST T HE ASSESSEE AND IN FAVOUR OF THE REVENUE. ISSUE NO. 2 : 5. THE ASSESSEE HAS SUBMITTED THAT THE ACTUAL PROVI SION FOR BAD DEBT FOR THE RELEVANT YEAR WAS MADE AT RS. 22,77,154/- AND THE A O HAS WRONGLY TOOK THE AMOUNT FOR RS. 11,17,000/-. THE LD. A/R FOR THE ASSESSEE HAS TAKEN US TO THE PAPER BOOK TO SHOW THAT IN THE BALANCE SHEET FOR THE YEAR 2008-09 THE SPECIAL BAD DEBT RESERVE WAS RS. 23.28 AND THE BAD AND DOUBTFUL DEBTS RESERVE WA S RS. 48,42,610.29 WHEREAS IN THE ASSESSMENT YEAR UNDER CONSIDERATION THE SPECIAL BAD DEBT RESERVE WAS RS. 6,96,115.88 AND WHEREAS THE BAD AND DOUBTFUL DEBT RESERVE IN TH E YEAR UNDER CONSIDERATION WAS RS. 53,06,672.02. THUS IT WAS SUBMITTED THAT THE S PECIAL BAD DEBT RESERVE OF RS.6,96,092/- AND BAD & DOUBTFUL DEBT RESERVE OF RS . 4,64,062/- TOTALING TO RS.11,60,154/- HAS NOT BEEN ALLOWED BY THE AUTHORIT IES BELOW. 5.1. THE LD. D/R ON THE OTHER HAND SUBMITTED THAT T HE ORDER PASSED BY THE AUTHORITIES BELOW IS CORRECT AS THE ASSESSEE MADE THE PROVISION FOR BAD AND DOUBTFUL DEBT FOR RS.11,17,000/- AND THE SAME HAS BEEN RIGHTLY GRANTE D BY THE AUTHORITIES BELOW. 5.2. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE MATERIAL ON RECORD. IN OUR OPINION, THE ASSESSEE IS ENTITLED TO BAD AND DOUBTF UL DEBTS AS CLAIMED IN THE BALANCE SHEET FOR THE RELEVANT YEAR. THE AO IS, THEREFORE, DIRECTED TO VERIFY THE BAD AND DOUBTFUL DEBTS CLAIMED BY THE ASSESSEE IN THE REVIS ED COMPUTATION OF INCOME. THE 13 ITA NO. 897/JP/2014 A.Y. 2010-11 THE CHURU CENTRAL CO-OPRATIVE BANK LTD. ASSESSEE IS ALSO DIRECTED TO PRODUCE ALL THE DOCUME NTS TO SUBSTANTIATE BAD AND DOUBTFUL DEBTS MADE BY IT EITHER IN THE COMPUTATION OF TOTAL INCOME OR UNDER PROFIT & LOSS ACCOUNT. THE AO SHALL DECIDE THE MATTER ON MERIT WI THOUT BEING INFLUENCED BY THE ARITHMETICAL CALCULATION MENTIONED HEREIN ABOVE. H OWEVER, THE AO SHALL BE GUIDED BY THE LAW STATED HEREIN ABOVE I.E. THAT THE ASSESSEE IS ENTITLED TO THE BENEFIT OF BAD AND DOUBTFUL DEBTS MADE BY IT DURING THE RELEVANT YEAR. IN THE LIGHT OF ABOVE, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 6. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 24/02/2016. SD/- SD/- VH-VKJ-EHUK YFYR DQEKJ (T.R. MEENA) (LALIET KUMAR) YS[KK LNL;@ ACCOUNTANT MEMBER U;KF;D LNL;@ JUDICIAL MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 24/02/2016. DAS/ VKNS'K DH IZFRFYFI VXZSFKR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- THE CHURU CENTRAL CO-OPERATIVE BANK LTD., CHURU. 2. IZR;FKHZ@ THE RESPONDENT- THE DCIT, CIRCLE, JHUNJHUNU. 3. VK;DJ VK;QDR@ CIT 4. VK;DJ VK;QDRVIHY@ THE CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR 6. XKMZ QKBZY@ GUARD FILE (ITA NO. 897/JP/2014) VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASST. REGISTRAR 14 ITA NO. 897/JP/2014 A.Y. 2010-11 THE CHURU CENTRAL CO-OPRATIVE BANK LTD.