M/S. INDUS IND BANK LTD., V. THE ADDL CIT RG 2(3),

ITA 931/MUM/2004

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8900 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-01-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 12-01-2011
• Assessment Year: 2000-2001
• Appeal Filed On: 12-02-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Bad and doubtful debts
• Section: 28

Judgement Text

I.T.A NO.931/ MUM/2004 ASSESSMENT YEAR: 2000-2001 INDUSIND BANK LIMITED 1 IN THE INCOME TAX APPELLATE TRIBUNAL, G BENCH, MUMBAI. [ CORAM: PRAMOD KUMAR, AM AND V. DURGA RAO, JM ] I.T.A NO.931/ MUM/2004 ASSESSMENT YEAR: 2000-2001 INDUSIND BANK LIMITED .. APPELLANT 8 TH FLOOR, TOWER ONE, ONE INDIABULLS ONE, 841, SENAPATI BAPAT MARG, ELPHINSTONE ROAD(W), MUMBAI-400 013 PA NO. AAACI 1314 G VS ADDL. CIT, RANGE 2(3) ,. RESPONDEN T MUMBAI. D.P.BAPAT , FOR THE APPELLANT PAVAN VED, FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSEE HAS CALLED INTO QU ESTION CORRECTNESS OF CIT(A)S ORDER DATED 25 TH NOVEMBER, 2003, FOR THE ASSESSMENT YEAR 2000-2001, ON THE FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD CIT(A) ERRED IN CONFIRMING AN AMOUNT OF ` . 29,36,03,288 , REPRESENTING ACCRUED INTEREST ON SECURITIES BUT NOT FAL LING DUE FOR PAYMENT. SUCH INTEREST, WHICH IS IN THE PROCESS OF ACCR UAL, IS AT THE I.T.A NO.931/ MUM/2004 ASSESSMENT YEAR: 2000-2001 INDUSIND BANK LIMITED 2 INCIPIENT AND INCHOATE STAGE, MATURING INTO TAXABLE INCOME ONLY WHEN IT BECOMES DUE AND PAYABLE IN TERMS OF ISSUE OF SUCH SECU RITY. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LEARNED CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE AO OF DEPRECIATION TO THE EXTENT OF ` . 2,27,90,773 ON ASSETS LEASED TO VARIOUS LESSEES DURING THE COURSE OF BANKING OPERATIONS B Y THE APPELLANT. IN RESPECT OF SUCH ASSETS THE APPELLANT CONT INUES TO BE A RIGHTFUL OWNER AND IS, THEREFORE, ENTITLED FOR THE D EPRECIATION ON THE BASIS OF, AMONG OTHERS, THE USER OF THE ASSETS IN THE BUSI NESS OF LEASING. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LEARNED CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF LOSS AMOUNTING TO ` . 98,27,032 ON UNMATURED FOREIGN EXCHANGE CONTRACTS AND IGNORING THE FACT THAT THE APPELLANT MAINTAINS T HE ACCOUNTS ON MERCANTILE SYSTEM WHERE LIABILITY ALREADY ACCRUED THO UGH DISCHARGED AT A FUTURE DATE IS A PROPER DEDUCTION REGARD BEING HAD TO THE ACCEPTED PRINCIPLES OF COMMERCIAL PRACTICE AND ACCOUNTANCY. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LEARNED CIT (A) ERRED IN REDUCING THE CLAIM UNDER SE CTION 36(1)(VII) FROM ` . 110,49,17,280 TO ` .103,99,74,646 BY DOUBLY DEDUCTING THE PROVISIONS U/S.36(1)(VII) FOR FINANCIAL YEAR 1999-2000 . 2. APROPOS GROUND NO.2, MATERIAL FACTS ARE LIKE THIS. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT T HE ASSESSEE HAD EXCLUDED ` . 91,99,67,252/- ON THE GROUND THAT THIS AMOUNT THOU GH ACCRUED BUT NOT RECEIVED DURING THE YEAR BEING NOT DUE, HENCE NOT E LIGIBLE TO TAX. THE AO REJECTED THE CONTENTION OF THE ASSESSEE AND AFTER EXCLUDING ` . 62,63,63,964 BEING THE AMOUNT ALREADY TAXED IN THE ASSESSMENT YEAR 1999-2000, ADDED T HE BALANCE AMOUNT OF ` . 29,36,03,288 TO THE TOTAL INCOME OF THE ASSESSEE. AGG RIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BUT WITHOUT ANY SUCCESS. 4. AT THE TIME OF HEARING, LEARNED COUNSEL FOR THE A SSESSEE CONTENDED THAT THIS ISSUE IS COVERED BY THE DECISION OF THE ITAT MUMBAI ( SB) IN THE CASE OF DCIT (INTERNATIONAL TAXATION) VS. BANK OF BAHRAIN AND KUW AIT, 41 SOT 290 (MUM)(SB). ON THE OTHER HAND, LEARNED DEPARTMENTAL REPRESENTATI VE RELIED UPON THE HONBLE I.T.A NO.931/ MUM/2004 ASSESSMENT YEAR: 2000-2001 INDUSIND BANK LIMITED 3 SUPREME COURT JUDGEMENT IN THE CASE OF RAMABAI V.CIT , 181 ITR 400(SC) AND CONTENDED THAT INCOME HAS TO BE TAKEN ON ACCRUAL BASI S. 5. HAVING HEARD BOTH THE SIDES, WE FIND THAT THE ISSU E IS SQUARELY COVERED BY THE DECISION OF THE ITAT (SB) IN THE CASE OF DCIT V. BANK OF BAHRAIN AND KUWAIT (SUPRA), WHEREIN, IT WAS HELD AS FOLLOWS:- 11.LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE IS COVERED IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 1992-9 3, 1993-94, 1995-96 AND 1996-97. LD COUNSEL SUBMITTED THAT INTEREST ON GOV ERNMENT SECURITIES DOES NOT ACCRUE ON DAY TO DAY BASIS BUT ON FIXED DATES A ND THE ENTRY MADE IN THE BOOKS ARE NOT RELEVANT FOR INCOME TAX PURPOSES. 12. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE RE CORDS OF THE CASE. WE FIND THAT THE ISSUE IS COVERED BY THE DECISION OF T HE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 1992-93, 1993-94, 199 5-96 AND 1996-97. IN A.Y. 1996-97, THE TRIBUNAL HAS ALLOWED THE ASSESSEES AP PEAL, INTER ALIA, OBSERVING AS UNDER:- WE HAVE CAREFULLY PERUSED THE ORDER OF THE TRIBUNA L CITED ABOVE. IN THAT CASE ALSO, THE ISSUE WAS IDENTICAL, NAMELY, WH ETHER IN THE CASE OF GOVERNMENT SECURITIES, INTEREST ACCRUES ON DAY TO DA Y BASIS OR ONLY ON THE COUPON DATES. THE TRIBUNAL HELD THAT INTEREST A CCRUES ONLY ON THE COUPON DATES AND NOT ON DAY TO DAY BASIS. IN COMING TO THIS CONCLUSION, THE TRIBUNAL PLACED RELIANCE ON THE JUDGMENT OF THE LAHORE HIGH COURT IN HAVELI SHAH SARDARILAL V CIT,PUNJAB, 4 ITR 297, THE FULL BENCH OF THE PATNA HIGH COURT IN RANJIT PRASAD SINGH V CIT, BIHA R & ORISSA (4 ITC 264) AND THE KARNATAKA HIGH COURT JUDGMENT IN ADDL CIT, MYSORE V. THE VIJAY BANK LTD., MANGALORE (1976) TAX LR 524. IT WAS ALS O NOTICED BY THE TRIBUNAL THAT THE CONTENTION ADVANCED ON BEHALF OF THE REVENUE BEFORE TRIBUNAL IN THAT CASE WAS TOTALLY CONTRADICTORY TO THE CONTENTION ADVANCED BY THE REVENUE BEFORE THE KARNATAKA HIGH C OURT IN THE CASE OF VIJAY BANK(SUPRA) BEFORE THE TRIBUNAL. THE DEPARTM ENT HAD PLACED RELIANCE ON THE JUDGEMENT OF THE HONBLE BOMBAY HIG H COURT IN THE CASE OF AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATI ON V CIT, 258 ITR 602 AND TAPARIA TOOLS LTD V. JCIT, 269 ITR 102. TH ESE TWO JUDGMENTS HAVE BEEN CONSIDERED BY THE TRIBUNAL IN PARAGRAPHS 14 TO 17 OF THE ORDER CITED ABOVE AND IT WAS HELD THAT THESE JUDGEM ENTS ARE NOT APPLICABLE TO THE FACTS OF UNION BANKS CASE. IN PA RAGRAPHS 20 AND 21, THE TRIBUNAL HAS ALSO CONSIDERED THE OBJECTION OF THE D EPARTMENT THAT THE ASSESSEE CANNOT CREDIT THE INTEREST ON GOVERNMENT S ECURITIES IN THE PROFIT & LOSS ACCOUNT ON DAY TO DAY BASIS BUT CONTENDED TH AT FOR PURPOSES OF INCOME TAX ONLY THE INTEREST THAT ACCRUED ON THE CO UPON DATES CAN BE ASSESSED. THE TRIBUNAL NOTICED THE JUDGEMENT OF TH E SUPREME COURT IN THE CASE OF ANOTHER BANK, NAMELY UNITED COMMERCIAL BANK, 240 ITR 355. IN THIS CASE, THE SUPREME COURT HAS REVERSED THE JU DGEMENT OF THE I.T.A NO.931/ MUM/2004 ASSESSMENT YEAR: 2000-2001 INDUSIND BANK LIMITED 4 CALCUTTA HIGH COURT, WHICH HELD THAT THE ASSESSEE C ANNOT PREPARE THE COMPUTATION OF ITS INCOME FOR INCOME TAX PURPOSES I N A MANNER DIFFERENT FROM THE METHOD UNDER WHICH IT KEEPS ACCOUNTS. APPL YING THIS JUDGMENT OF THE SUPREME COURT, THE TRIBUNAL HELD THAT UNION BANK OF INDIA CANNOT BE PREVENTED FROM URGING IN THE RETURN THAT THE INT EREST ON GOVT. SECURITIES ACCRUED ONLY ON THE SPECIFIED COUPON DAT ES NOTWITHSTANDING THAT CREDIT HAS BEEN TAKEN IN THE PROFIT & LOSS ACC OUNT FOR THE INTEREST ON DAY TO DAY BASIS. THUS, THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE VIEW THAT THE INTEREST ACCRUES ONLY ON THE SPECIFIED COU PON DATES AND NOT ON DAY TO DAY BASIS. SINCE THE FACTS OF THE PRESENT A RE IDENTICAL, FOLLOWING THE ORDER OF THE TRIBUNAL IN THE CASE OF UNION BANK OF INDIA (SUPRA), WE UPHOLD THE ACTION TAKEN BY THE CIT (APPEALS) AND DI SMISS THE APPEAL. CONSISTENT WITH THE PRECEDENTS, WE DISMISS THIS GRO UND OF THE REVENUE. WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MAT TER THAN THE VIEW SO APPROVED BY THE SPECIAL BENCH. AS REGARDS, HONBLE S UPREME COURTS JUDGEMENT IN THE CASE OF RAMABAI (SUPRA), THE RATIO OF THIS JUDG EMENT WOULD NOT APPLY ON INTEREST ON SECURITIES, SINCE, AS NOTED BY THE TRIBUNA L IN THE ABOVE CASE, IN THE CASE OF GOVERNMENT SECURITIES, INTEREST DOES NOT ACCRUE ON DAY TO DAY BASIS BUT ONLY ON THE FIXED DATES. THAT SITUATION IS MATERIALLY DIFFERENT FROM INTEREST ON COMPENSATION AWARDS WHICH WERE DEAL WITH BY HONBLE SUPREME COURT . RESPECTFULLY FOLLOWING THE DECISION OF THE SPECIAL BENCH (SUPRA), WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. THIS GROUND IS ALLOWED. 6. SO FAR AS GROUND NO.2 IS CONCERNED, LEARNED COUNSEL FOR THE ASSESSEE DID NOT PRESS THIS GROUND. HENCE, THIS GROUND IS DISMISSED AS NOT PRESSED. 7. APROPOS GROUND NO.3, LEARNED COUNSEL CONTENDED THA T THIS ISSUE IS ALSO SQUARELY COVERED BY THE DECISION OF THE ITAT (SB) IN THE CASE OF BANK OF BAHRAIN & KUWAIT (SUPRA). HOWEVER, LEARNED D.R. RELIED UPON T HE ORDER OF THE AUTHORITIES BELOW. 8. HAVING HEARD BOTH THE SIDES, WE FIND THAT THIS ISSUE IS ALSO SQUARELY COVERED BY THE SPECIAL BENCH DECISION IN THE CASE OF BANK OF BAHRAIN & KUWAIT(SUPRA) IN ASSESSEES FAVOUR, WHEREIN, IT WAS, INTER ALIA, HELD AS FOLLOWS: I.T.A NO.931/ MUM/2004 ASSESSMENT YEAR: 2000-2001 INDUSIND BANK LIMITED 5 THERE IS NO DISPUTE THAT IF THE DATE OF MATURITY O F THE CONTRACT FALLS WITHIN THE SAME FINANCIAL YEAR THEN THE DIFFERENCE BETWEEN THE EXCHANGE RATE AS PREVAILING ON THE BALANCE SHEET DA TE AND CONTRACTED RATE IS AN ALLOWABLE DEDUCTION. THE MOOT POINT FOR CONSIDERATION IS WHETHER KEEPING IN VIEW THE NATURE OF CONTRACT, CAN IT BE SAID THAT A LIABILITY ACCRUED ON 31 ST MARCH IN RESPECT OF UNMATURED FORWARD FOREIGN EXCHANGE CONTRACT ON ACCOUNT OF FLUCTUATION IN RATE OF FOREIGN CURRENCY OR NOT. THEREFORE, IT IS NECESSARY TO FIRST EXAMIN E THE NATURE OF CONTRACT ENTERED INTO BY THE ASSESSEE. FORWARD FOREIGN EXCHA NGE CONTRACT MEANS AN AGREEMENT TO EXCHANGE DIFFERENT CURRENCIES AT A FORWARD RATE. FORWARD RATE IS A SPECIFIED RATE FOR EXCHANGE OF C URRENCY AT A SPECIFIED DATE. THE ASSESSEE ENTERS INTO FORWARD CONTRACT WI TH CLIENTS TO BUY OR SELL FOREIGN EXCHANGE AT AN AGREED PRICE AT A FUTUR E DATE IN ORDER TO HEDGE AGAINST THE POSSIBLE FUTURE FINANCIAL LOSS ON ACCOUNT OF WIDE FLUCTUATION IN THE RATE OF FOREIGN CURRENCY. THUS, FIRSTLY, FORWARD FOREIGN EXCHANGE CONTRACT CREATES A CONTINUING BIND ING OBLIGATION ON THE DATE OF CONTRACT AGAINST THE ASSESSEE TO FULFIL L THE SAME ON THE DATE OF MATURITY AND SECONDLY, IT IS IN THE NATURE OF HEDGING CONTRACT BECAUSE IT IS A CONTRACT ENTERED INTO AGAINST POSS IBLE FINANCIAL LOSSES . IN VIEW OF THE ABOVE DISCUSSION, WE ALLOW THE ASSES SEES APPEAL FOR THE FOLLOWING REASONS:- I) A BINDING OBLIGATION ACCRUED AGAINST THE ASSESSE E THE MINUTE IT ENTERED INTO FORWARD FOREIGN EXCHANGE CONTRACTS. II) A CONSISTENT METHOD OF ACCOUNTING FOLLOWED BY A SSESSEE CANNOT BE DISREGARDED ONLY ON THE GROUND THAT A BETTER MET HOD COULD BE ADOPTED. III) THE ASSESSEE HAS CONSISTENTLY FOLLOWED THE SAM E METHOD OF ACCOUNTING IN REGARD TO RECOGNITION OF PROFIT OR LO SS BOTH, IN RESPECT OF FORWARD FOREIGN EXCHANGE CONTRACT AS PER THE RATE PREVAILING ON MARCH 31. IV) A LIABILITY IS SAID TO HAVE CRYSTALISED WHEN A PENDING OBLIGATION ON THE BALANCE SHEET DATE IS DETERMINABLE WITH REAS ONABLE CERTAINITY. THE CONSIDERATIONS FOR ACCOUNTING THE I NCOME ARE ENTIRELY ON DIFFERENT FOOTING. I.T.A NO.931/ MUM/2004 ASSESSMENT YEAR: 2000-2001 INDUSIND BANK LIMITED 6 V) AS PER AS-11, WHEN THE TRANSACTION IS NOT SETTLE D IN THE SAME ACCOUNTING PERIOD AS THAT IN WHICH IT OCCURRED, THE EXCHANGE DIFFERENCE ARISES OVER MORE THAN ONE ACCOUNTING PER IOD. VI) THE FORWARD FOREIGN EXCHANGE CONTRACTS HAVE ALL THE TRAPPINGS OF STOCK-IN-TRADE. VII) IN VIEW OF THE DECISION OF HONBLE SUPREME COU RT IN THE CASE OF WOODWARD GOVERNOR INDIA (I) P.LTD., THE ASSESSEES CLAIM IS ALLOWABLE. VIII) IN THE ULTIMATE ANALYSIS, THERE IS NO REVENUE EFFECT AND IT IS ONLY THE TIMING OF TAXATION OF LOSS/PROFIT. WE, ACCORDINGLY, HOLD THAT WHERE A FORWARD CONTRACT IS ENTERED INTO BY THE ASSESSEE TO SELL THE FOREIGN CURRENCY AT AN AGR EED PRICE AT A FUTURE DATE FALLING BEYOND THE LAST DATE OF ACCOUNTING PER IOD, THE LOSS IS INCURRED TO THE ASSESSEE ON ACCOUNT OF EVALUATION O F THE CONTRACT ON THE LAST DATE OF THE ACCOUNTING PERIOD I.E. BEFORE THE DATE OF MATURITY OF THE FORWARD CONTRACT. RESPECTFULLY FOLLOWING THE DECISION OF THE SPECIAL BE NCH (SUPRA) WE ALLOW THIS GROUND OF APPEAL OF THE ASSESSEE. 9. SO FAR AS GROUND NO.4 IS CONCERNED, LEARNED REPR ESENTATIVES FAIRLY ACCEPT THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF T HE ITAT MUMBAI IN THE CASE OF OMAN INTERNATIONAL BANK, SAOG V. DCIT, 92 ITD 76 ( MUM), WHEREIN, IT WAS HELD AS FOLLOWS: 5. WE CONSIDER IT USEFUL TO REPRODUCE THE RELEVAN T LEGAL PROVISIONS BEFORE PROCEEDING TO ADDRESS OURSELVES TO THE CORE ISSUE IN THIS APPEAL. THE RELEVANT PROVISIONS ARE AS FOLLOWS : SEC. 36 (1) - THE DEDUCTIONS PROVIDED FOR IN THE FO LLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THE REIN, IN COMPUTING THE INCOME REFERRED TO IN S. 28 - (VII) SUBJECT TO THE PROVISIONS OF SUB-S. (2), THE AMOUN T 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 C L. (VIIA) APPLIES, THE AMOUNT OF THE DEDUCTION RELATING TO ANY SUCH DEBT O R 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 DOUBTFU L DEBTS ACCOUNT I.T.A NO.931/ MUM/2004 ASSESSMENT YEAR: 2000-2001 INDUSIND BANK LIMITED 7 MADE UNDER THAT CLAUSE; (VIIA)(B) IN RESPECT OF ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE BY (A) [NOT RELEVANT FOR O UR PURPOSES] (B) A BANK, BEING A BANK INCORPORATED BY OR UNDER THE LAW S 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); 6. ON A CAREFUL ANALYSIS OF THESE PROVISIONS, IT I S IMMEDIATELY CLEAR THAT THE DEDUCTION S. 36(1)(VII), SO FAR AS A FOREIGN BA NK IS CONCERNED, IS ONLY SUPPLEMENTAL IN NATURE INASMUCH AS IT COMES TO THE PLAY ONLY WHEN, AND IS ADMISSIBLE TO THE EXTENT, THE PROVISION FOR BAD AND DOUBTFUL DEBTS ALLOWED UNDER S. 36(1)(VIIA)(B) FALLS SHORT OF THE ACTUAL BAD DEBTS WRITTEN OFF AS IRRECOVERABLE. LEARNED DEPARTMENTAL REPRESENTATIVE, HOWEVER, CONTENDS THAT THE EXPRESSION USED IN SUB-S . 36(1)(VII) BEING 'THE AMOUNT BY WHICH SUCH DEBT OR PART THEREOF EXCE EDS THE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER THAT CLAUSE', IT IS NOT MATERIAL AS TO WHAT W AS THE ACTUAL DEDUCTION UNDER S. 36(1)(VIIA) ALLOWED BY THE REVENUE, BUT AS LONG AS THE BAD DEBT IS LESS THAN THE TOTAL CREDIT BALANCE IN THE PROVIS ION ACCOUNT, DEDUCTION UNDER S. 36(1)(VII) CANNOT BE ALLOWED IN RESPECT OF THE SAME. THIS OBJECTION, IN OUR CONSIDERED VIEW, IS FALLACIOUS IN ASMUCH AS THE REFERENCE IS FOR 'CREDIT BALANCE IN THE PROVISION F OR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER THAT CL. [36(1)(VIIA)]', A ND, THEREFORE, ONLY SUCH PROVISION CAN BE TAKEN INTO ACCOUNT AS IS ADMI SSIBLE UNDER S. 36(1)(VIIA). CLAUSES (VII) AND (VIIA) ARE TWO INDEP ENDENT CLAUSES OF S. 36(1) AND AS PER THE SCHEME OF THE ACT, IN OUR CONS IDERED VIEW, THE DEDUCTION UNDER S. 36(1)(VII) IS SUPPLEMENTAL IN NA TURE AND IT, THEREFORE, COMES TO THE PLAY TO THE EXTENT DEDUCTIO N ALREADY ALLOWED UNDER S. 36(1)(VIIA) FALLS SHORT OF THE ACTUAL BAD DEBTS. IT IS, THEREFORE, AT THE FIRST SIGHT QUITE LOGICAL TO ASSERT THAT DEDUCT ION UNDER S. 36(1)(VII) SHOULD ONLY BE ALLOWED TO THE EXTENT ACTUAL BAD DEB TS UNRECOVERABLE AND WRITTEN OFF FALL SHORT OF DEDUCTIONS ALLOWABLE UNDER S. 36(1)(VIIA)(B) BUT THEN THERE HAS TO BE A MECHANISM TO ENABLE SUCH A COMPUTATION. THE DEDUCTION UNDER S. 36(1) (VIIA)(B) IS IN THE NATURE OF AN AD HOC DEDUCTION AND OBVIOUSLY WITHOUT ANY REGAR D TO THE ACTUAL LOSS SUFFERED BY THE ASSESSEE-BANK ON ACCOUNT OF BAD DEB TS. AS THIS DEDUCTION IS IN THE NATURE OF A TAXABLE BUSINESS INCOME BASED DEDUCTION , THIS DEDUCTION CAN ONLY BE QUANTIFIED AFTER COMPUTING THE TAXABLE BUSINESS INCOME OF THE ASSESSEE, THOUGH BEF ORE MAKING ANY DEDUCTION UNDER S. 36(1) (VIIA)(B) ITSELF. THIS PRO CESS OF DETERMINING THE TAXABLE BUSINESS PROFITS NECESSARILY TAKES INTO ACCOUNT ALL OTHER DEDUCTIONS UNDER S. 36, INCLUDING, INTER ALIA, DEDU CTION ADMISSIBLE UNDER S. 36(1) (VII). IN OTHER WORDS, DEDUCTION UND ER S. 36(1)(VII) IS REQUIRED TO BE COMPUTED AND ALLOWED BEFORE COMPUTAT ION OF DEDUCTION OF S. 36(1)(VIIA). THEREFORE, AT THE STAGE OF COMPU TING ADMISSIBLE DEDUCTION UNDER S. 36(1)(VII), ADMISSIBLE DEDUCTION UNDER S. I.T.A NO.931/ MUM/2004 ASSESSMENT YEAR: 2000-2001 INDUSIND BANK LIMITED 8 36(1)(VIIA)(B) CANNOT BE WORKED OUT. IN THIS VIEW O F THE MATTER, IN OUR CONSIDERED VIEW, THE SCHEME OF THE ACT DOES NOT VIS UALIZE TAKING INTO ACCOUNT ADMISSIBLE PROVISION UNDER S. 36(1)(VIIA)(B ) FOR THE CURRENT PREVIOUS YEAR, FOR THE PURPOSE OF COMPUTING DEDUCTI ON UNDER S. 36(1)(VII) OF THE ACT. THE COMPUTATIONS MADE BY THE AO IN THE IMPUGNED ORDER SHOW THAT DEDUCTION ALLOWED UNDER S. 36(1)(VI IA) IS RS. 40,48,390 AND NET BUSINESS INCOME IS RS. 6,41,77,764, BUT THE N THE DEDUCTION UNDER S. 36(1)(VIIA) DOES NOT WORK OUT TO 5 PER CEN T OF THE PROFITS BEFORE ALLOWING THIS DEDUCTION (6,41,77,764 + 40,48,390 = 6,82,26,154) WHICH SHOULD HAVE BEEN THEN RS. 34,11,307. THE INCONSISTE NCY HAS ARISEN BECAUSE THE AO COMPUTED THE ADMISSIBLE DEDUCTION UN DER S. 36(1)(VIIA)(B) EVEN BEFORE COMPUTING DEDUCTION UNDE R S. 36(1)(VII) BECAUSE HE WANTED TO RESTRICT THE DEDUCTION UNDER S . 36(1)(VII) ON THE BASIS OF DEDUCTION PERMISSIBLE FOR THE CURRENT YEAR UNDER S. 36(1)(VIIA)(B). THIS METHODOLOGY ADOPTED BY THE AO IS INHERENTLY CONTRARY TO THE SCHEME OF THE ACT, AND IS, IN OUR H UMBLE UNDERSTANDING, BOUND TO GIVE RESULTS WHICH FAIL THE EQUATION. WE A RE, THEREFORE, OF THE OPINION THAT THE CIT(A) INDEED ERRED IN UPHOLDING T HE ACTION OF THE AO IN TAKING INTO ACCOUNT THE ADMISSIBLE DEDUCTION UND ER S. 36(1)(VIIA)(B) FOR THE RELEVANT PREVIOUS YEAR, FOR COMPUTING SHORT FALL FOR THE PURPOSE OF S. 36(1)(VII) OF THE ACT. AS FOR THE LEARNED CIT (A) S RELIANCE ON HON BLE PUNJAB & HARYANA HIGH COURT S JUDGMENT IN THE CASE OF NANDLAL SOHANLAL VS. CIT 1978 CTR (P&H)(FB) 5 : (1977) 110 I TR 170 (P&H)(FB) SUFFICE TO MENTION THAT, IN OUR CONSIDERED VIEW, TH E VIEW CANVASSED BY THE REVENUE IS NOT A CORRECT OR ACCEPTABLE VIEW OF THE MATTER. WE, THEREFORE, REJECT THE SAME AS AN UNTENABLE VIEW AND DECLINE TO GO INTO THE CONTROVERSY AS TO WHAT WILL BE THE LEGAL POSITI ON IN A SITUATION IN WHICH MORE THAN ONE VIEWS ON AN ISSUE ARE POSSIBLE VIEWS. 7. WE MUST, HOWEVER, ALSO DEAL WITH THE JUDGMENT OF HON BLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. BANK OF RAJASTHAN LTD. (2002) 174 CTR (RAJ) 400 : (2002) 255 ITR 599 (RAJ) WHICH HAS BEEN HEAVILY RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. IN PARTICULAR, LEARNED DEPARTMENTAL REPRESENTATIVE HAS INVITED OUR ATTENTION TO THE FOLLOWING OBSERVATIONS MADE BY THEIR LORDSHIPS IN T HE AFORESAID JUDGMENT : 'THE USE OF THE WORDS ANY SUCH DEBT OR PART THERE OF CLEARLY INDICATE THAT THE EXCLUSION OF PROVISION IN PROVISO TO S. 36 (1)(VII) WILL APPLY ONLY IN CASES, WHERE A PROVISION FOR BAD AND DOUBTFUL DE BTS HAVE BEEN MADE IN THE RELEVANT ACCOUNTING YEAR ON THE BAD AND DOUB TFUL DEBTS, WHICH WERE OUTSTANDING AT THE COMMENCEMENT OF THE RELEVAN T ACCOUNTING YEAR AND/OR WERE ALSO OUTSTANDING AT THE END OF THE RELE VANT YEAR. THE AGGREGATE AVERAGE ADVANCES WITH REFERENCE TO WHICH THE DEDUCTION IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBT CAN BE ALLOWED NECESSARILY IMPLIES THAT SUCH A PROVISION HAS TO BE MADE IN RESPECT OF I.T.A NO.931/ MUM/2004 ASSESSMENT YEAR: 2000-2001 INDUSIND BANK LIMITED 9 LOAN AND ADVANCES MADE AT THE END OF THE YEAR.' THE ABOVE OBSERVATION HAS BEEN MADE IN THE CONTEXT OF S. 36(1)(VII) AND T O STATE THAT THE PROVISION UNDER THAT SECTION CAN ONLY BE MADE IN RE SPECT OF A BAD AND DOUBTFUL DEBT WHICH IS OUTSTANDING AT THE BEGINNING OR END OF THE RELEVANT PREVIOUS YEAR. THERE IS NO DISPUTE ABOUT T HE FACT THAT EVEN A DEBT AT THE END OF THE YEAR CAN BE SUBJECT-MATTER O F PROVISION UNDER S. 36(1)(VII), AND IT NEED NOT BE CONFINED TO THE DEBT OUTSTANDING AT THE BEGINNING OF THE YEAR. IT IS NOTEWORTHY THAT THE RE FERENCE IS FOR THE DEBTS NOT THE PROVISION AT THE END OF THE YEAR. THERE IS NO SUGGESTION, HOWEVER, THAT FOR THE PURPOSE OF COMPUTING SHORTFAL L OF PROVISION FOR THE PURPOSE OF S. 36(1)(VII), IT IS OPEN TO THE AO TO TAKE INTO ACCOUNT BALANCE OF PROVISION CREATED UNDER S. 36(1)(VIIA)(B ) AT THE END OF THE RELEVANT YEAR. THE ABOVE OBSERVATIONS MADE BY THE H ON BLE RAJASTHAN HIGH COURT, THEREFORE, DO NOT COME IN OUR WAY IN TA KING THE STAND THAT WE HAVE TAKEN IN THE PRECEDING PARAGRAPH. 8. WE NOW COME TO ANOTHER PLEA STRENUOUSLY ARGUED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, AND THAT IS WITH REGAR D TO THE PROPOSITION THAT IN CASE THE ASSESSEE S PLEA IS T O BE UPHELD, THE ASSESSEE WILL GET UNDUE BENEFIT IN THE FIRST YEAR O F OPERATIONS, BECAUSE, ON ONE HAND, THE ASSESSEE WILL BE ENTITLED TO AN AD HOC CLAIM ON THE BASIS OF TAXABLE BUSINESS INCOME AND, ON THE OTHER HAND, SUCH AN AD HOC CLAIM WILL NOT BE SET OFF IN DEDUCTION FOR ACTUAL B AD DEBTS. ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, THIS INCON GRUITY WILL END UP IN A SITUATION THAT THE ASSESSEE WILL GET DEDUCTION FOR MORE THAN ACTUAL BAD DEBTS SOMETHING WHICH IS CLEARLY CONTRARY TO THE SCHEME OF THE ACT AND PATENTLY ABSURD. 9. THERE ARE TWO ASPECTS TO THIS ISSUE. IN THE FIR ST PLACE, THE AD HOC DEDUCTION UNDER S. 36(1)(VIIA) (B) BEING THE LAST I TEM ON THE COMPUTATION OF TAXABLE BUSINESS PROFITS, IT CANNOT BE TAKEN INTO ACCOUNT AT THE TIME OF ALLOWING DEDUCTION UNDER S. 36(1)(VI I), AND, TO THAT EXTENT, THE ACTUAL DEDUCTION ATTRIBUTABLE TO BAD DEBTS [I.E . 36(1)(VII) PLUS 36(1)(VIIA)(B)] WILL INDEED BE MORE THAN THE ACTUAL BAD DEBTS IN THAT YEAR. HOWEVER, SINCE THE PROVISION SO ALLOWED UNDER S. 36(1)(VIIA)(B) IS TO BE TAKEN INTO ACCOUNT WHILE ALLOWING DEDUCTION F OR ACTUAL BAD DEBTS IN THE SUBSEQUENT YEAR, THE EFFECT OF EXCESS DEDUCT ION, IF ANY, WILL BE SQUARED UP IN THAT SUBSEQUENT YEAR. SECONDLY, A VIE W SEEMS PERFECTLY ACCEPTABLE THAT THE PROVISION FOR BAD DEBTS ALLOWAB LE UNDER S. 36(1)(VIIA)(B) BEING INHERENTLY ATTRIBUTABLE TO THE DEBTS OUTSTANDING AT THE END OF THE YEAR, PROVISION ALLOWABLE AS SUCH IS AGAINST FUTURE BAD DEBTS OUT OF DEBTS OUTSTANDING AT THE YEAR END, AND , THEREFORE, IT NEED NOT BE MIXED UP WITH ACTUAL BAD DEBTS INCURRED DURI NG THE YEAR. VIEWED FROM THESE POINTS OF VIEW, THERE IS NO SUCH INCONGR UITY AS PERCEIVED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. ACCORDINGL Y, WE ARE NOT INCLINED TO UPHOLD THE OBJECTION TAKEN BY THE REVEN UE. I.T.A NO.931/ MUM/2004 ASSESSMENT YEAR: 2000-2001 INDUSIND BANK LIMITED 10 10. FOR THE DETAILED REASONS SET OUT ABOVE, WE DEEM IT FIT AND PROPER TO DIRECT THE AO TO ALLOW DEDUCTION UNDER S. 36(1)(VII ), WITHOUT TAKING INTO ACCOUNT THE ADMISSIBLE DEDUCTION UNDER S. 36(1) (VI IA)(B) FOR THE RELEVANT PREVIOUS YEAR, WHICH, IN OUR CONSIDERED VI EW, CAN ONLY BE TAKEN INTO ACCOUNT FOR COMPUTING DEDUCTION UNDER S. 36(1)(VII) FOR SUBSEQUENT YEAR(S). THE AO SHALL ALSO MAKE CONSEQUE NTIAL AMENDMENTS IN DEDUCTION ADMISSIBLE UNDER S. 36(1)(VIIA)(B) IN TERMS OF THE OBSERVATIONS ABOVE. WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MAT TER THAN THE VIEW SO TAKEN BY A CO-ORDINATE BENCH. RESPECTFULLY FOLLOWING THE DECISION IN THE CASE OF OMAN INTERNATIONAL BANK (SUPRA), WE ALLOW THIS GROUND OF APPEAL. 10. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 14 TH JANUARY, 2011 SD/- (V. DURGA RAO ) (JUDICIAL MEMBER) SD/- (PRAMOD KUMAR) (ACCOUNTANT MEMBER) MUMBAI, DATED 14 TH JANUARY, 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),XXXIII, MUMBA I 4. COMMISSIONER OF INCOME TAX,CITY-II , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH G, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI I.T.A NO.931/ MUM/2004 ASSESSMENT YEAR: 2000-2001 INDUSIND BANK LIMITED 11 DATE INITIALS 1. DRAFT DICTATED ON 12.1.2011 PS 2. DRAFT PLACED BEFORE AUTHOR 12.1.11 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM/JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/JM 5. APPROVED DRAFT COMES TO THE SR. PS PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE ON WHICH FILE GOES TO A.R. 10. DATE OF DISPATCH OF ORDER I.T.A NO.931/ MUM/2004 ASSESSMENT YEAR: 2000-2001 INDUSIND BANK LIMITED 12