THE SOUTH INDIAN BANK LTD. V. THE COMMISSIONER OF INCOME TAX,

ITA/264/2009

AI Insights

The case involves two appeals by The South Indian Bank Ltd., Trichur against the orders of the Income Tax Appellate Tribunal, Cochin Bench, concerning the assessment years 1993-94 and 1994-95. The primary issue was whether the Tribunal was correct in law and fact in holding that the write-off of certain amounts was not complete, despite the appellant having debited these sums in the Profit & Loss account and netted them from the total advances outstanding in the balance sheet. The Tribunal's decision was based on the interpretation of Section 36(1)(vii) and (viia) of the Income Tax Act, particularly concerning the treatment of provisions for bad and doubtful debts by banks.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 769226 (HC-KERALA)
• Appeal Type: Others
• Pronouncement Date: 04-12-2018
• Assessment Year: misc
• Other Referred Cases: Vithaldas H.Dhanjibhai Bardanwala v. C.I.T., Southern Technologies Ltd. v. Joint CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: JOSE JOSEPH
• Assessee Lawyers: P BALAKRISHNAN; K S MENON
• Keywords: Assessment Year; Bad debts; Deduction; Income tax appeal; Provision for bad debts
• Section: 36(1)(vii); 36(1)(viia)

Judgement Text

"IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON TUESDAY, THE 04TH DAY OF DECEMBER 2018 / 13TH AGRAHAYANA, 1940 I.T.A.No.264 of 2009 AGAINST THE ORDER IN I.T.A.122/COCH/1997 DATED 27-06-2003 OF INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN [ASSESSMENT YEAR 1994-95] APPELLANT/APPELLANT: THE SOUTH INDIAN BANK LTD., TRICHUR. BY ADVS. SRI.P.BALAKRISHNAN (E) SRI.K.S.MENON (K) RESPONDENT/RESPONDENT: THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 04.12.2018, ALONG WITH ITA.361/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA.Nos.264/2009 & - 2 - 361/2009 IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON TUESDAY, THE 04TH DAY OF DECEMBER 2018 / 13TH AGRAHAYANA, 1940 I.T.A.No.361 of 2009 AGAINST THE ORDER IN I.T.A.113/COCH/1996 DATED 27-06-2003 OF INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN [ASSESSMENT YEAR 1993-94] APPELLANT/APPELLANT: THE SOUTH INDIAN BANK LTD., TRICHUR. BY ADV. SRI.P.BALAKRISHNAN (E) RESPONDENT/RESPONDENT: THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 04.12.2018, ALONG WITH ITA.264/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA.Nos.264/2009 & - 3 - 361/2009 JUDGMENT [ I.T.A.264/2009, I.T.A.361/2009 ] Vinod Chandran,J. The question arising in the above two appeals, for the years 1993-94 and 1994-95, is the following: ITA.361/2009 Whether on the facts and in the circumstances of the case, the Tribunal is correct in law and fact in holding that the write off is not complete in the appellant's case in spite of the fact that the appellant has debited the said sum of Rs.2,18,56,250/- in the P&L account and netted the same from the total advances outstanding in the balance sheet? ITA.264/2009 Whether on the facts and in the circumstances of the case, the Tribunal is correct in law and fact in holding that the write off is not complete in the appellant's case in spite of the fact that the appellant has debited the said sum of Rs.3,04,22,000/- in the P&L account and netted the same from the total advances outstanding in the balance sheet? 2. We have heard Sri.Mohanan Pulickal for the appellant and Sri.Jose Joseph, Standing Counsel for the Department. 3. In fact, we do not think such a question arises at all on a reading of the assessment order. We will have to compare the figures for both the years to understand the real ITA.Nos.264/2009 & - 4 - 361/2009 controversy in the cases. Annexure-C produced in I.T.A.No.361 of 2009 is the assessment order for the year 1993-94. Therein, the assessee had made a claim for Rs.2,18,56,250/- as “amount written off by way of provision in the Profit and loss account in respect of advances considered as irrecoverable”. The assessee also relied on the judgment of the Gujarat High Court in Vithaldas H.Dhanjibhai Bardanwala v. C.I.T. [(1981) 130 ITR 95 (Guj.)]. The Assessing Officer [for brevity “AO”] found that the same is not applicable to Banks. The AO also found that in the financial year 1993-94, which is the previous year of the assessment year 1994-95, an amount of Rs.8,97,66,930/- was claimed as written off. This sum was found to include an amount of Rs.2,04,60,000/- out of the provision of Rs.2,18,56,250/- claimed for the assessment year 1992-93. Holding that the written off value will be considered for deduction in the assessment year 1994-95, the claim raised for the assessment year 1993-94 was not considered. We notice that even if a major portion of the claim raised for that year was found to be included in the written off amounts for the next year, there remained an amount of Rs.13,96,250/-, which was claimed as written off for the said year. We will deal with it a little later. 4. In first appeal, again the Gujarat High Court ITA.Nos.264/2009 & - 5 - 361/2009 judgment was relied on. In first appeal, the disallowance was affirmed. Before the Tribunal, the appeal was connected with the appeal for the assessment year 1994-95 and heard together. There again a contention was raised that the AO had declined the deduction on account of the ledger accounts of the account holders having not been credited with the written off amounts; thus closing the said accounts. It was also contended that with effect from 01.04.2000 a proviso and Explanation was introduced in Section 36(1)(viia)(a) allowing a deduction to Scheduled Banks for any provision made by it for assets classified by the RBI as doubtful debts. The Tribunal held that the proviso was introduced only from 01.04.2000 and, hence, not applicable in the subject assessment year. 5. The Tribunal was referring to the proviso inserted to Section 36(1)(viia) by Finance Act, 1999 with effect from 01.04.2000, which made possible deduction in respect of any provision made by a Bank for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by the RBI in this behalf. The assessee's contention is that there was absolutely no reason why the written off amounts be declined, since the same is made under clause (vii) of ITA.Nos.264/2009 & - 6 - 361/2009 Section 36(1). In this context, we have to notice Section 36(1)(vii) as it existed then and as it exists now: “S.36(1)(vii): (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”. The proviso to Section 36(1)(viia), which was inserted in 2000, made possible a deduction with respect to provisions made for all doubtful assets or loss assets as classified by the Reserve Bank of India with respect to Annexure-D Circular. Admittedly for the subject years though the Circular of the RBI was in existence, there was no provision to grant deduction for provision for bad and doubtful debts unless they are bad and doubtful debts with respect to rural bank advances, which was governed by sub-clause (viia) of Section 36(1) as it existed then. We are of the opinion that the assessee is labouring under a misapprehension that the AO ITA.Nos.264/2009 & - 7 - 361/2009 declined their claim only on the basis of the fact that the loan accounts were not credited with the amounts shown as written off. In the subject assessment years, the deduction was permissible only for the written off amounts and not provision for debts classified as bad and doubtful debts by the RBI. 6. It is in this context, we also have to refer to the assessment for the year 1994-95 keeping in mind the fact that the AO, for the year 1993-94, had specifically said that a claim has been made in the financial year 1993-94 with respect to written off bad debts coming to Rs.8,97,66,930/-, in which is included the major component which was claimed as a deduction, being provision made in the relevant previous year. Annexure-C, the assessment order for 1994-95, produced in I.T.A.No.264 of 2009, shows the consideration as below: “Accordingly the admissible deduction for bad debts is worked out as under: Amount of bad debts written off - as mentioned above. … Rs.8,97,66,930 Less: Provision outstanding in the balance sheet against rural branch advances u/s.36(1)(viia) … Rs.4,63,64,000 --------------- Balance admissible deduction … Rs.4,34,02,930”. ITA.Nos.264/2009 & - 8 - 361/2009 In this context, we have to refer to the extracted Section 36(1)(vii). Sub-section (vii) enables deduction of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year but not a provision made for bad and doubtful debts. Here, in the financial year 1993-94, as we saw from both the orders of assessment years 1993-94 and 1994-95 what was written off is Rs.8,97,66,930/-. Then, the proviso to Section 36(1)(vii) has to be applied in case of a Bank. The proviso mandates that in the case of a Bank to which clause (viia) applies, i.e., a provision is made for bad debts with respect to its rural branch advances, then the amount of deduction granted under sub-section (vii) of Section 36(1) shall be limited to the amount by which the written off amounts exceed the credit balance in the provision for bad and doubtful debts account. We also notice that this provision was exclusively with respect to the rural advances, since the written off debts of advances other than rural advances was claimed by the assessee separately for Rs.6,32,796/-; which was declined in para 3 of Annexure-C of I.T.A.No.361/2009 (Assessment Year 1993-94). The disallowance was interfered with in first appeal. We saw from the extracted portion of the assessment order for the year 1994-95 that from Rs.8,97,66,930/-, which ITA.Nos.264/2009 & - 9 - 361/2009 is the amount of bad debts of rural advances written off in the said year, the provision made under sub-clause (viia) of Section 36(1) of Rs.4,63,64,000/- has been deducted. The excess amounts written off in excess of the provision for bad debts under Section 36(1)(viia) is allowed as deduction to the extent of Rs.4,34,02,930/-. 7. In this context, we revert back to the assessment year 1993-94, where we found that the major portion of the claim made under Section 36(1)(viia) was included in the next assessment year. What remained was Rs.13,96,250/-. There could be no deduction claimed because obviously even if the said amounts are written off in the said year, it would not exceed the provision under Section 36(1)(viia). In such circumstances, we do not think that the question raised requires an answer. The amounts written off were not declined deduction, merely for the reason of the same having not been credited in the party's account; in which context alone, the decision of the Gujarat High Court applies. The learned Standing Counsel for Government of India (Taxes) alertly points out that Gujarat High Court decision as relied on by the assessee is no longer good law in view of the decision in Southern Technologies Ltd. v. Joint CIT [(2010) 320 ITR 577]. The very same Section 36(1)(vii) and (viia) came up for ITA.Nos.264/2009 & - 10 - 361/2009 consideration before the Hon'ble Supreme Court. The Hon'ble Supreme Court noticed the Explanation brought in by Finance Act, 2001 with retrospective effect from 01.04.1989. Here, the written off amounts have been granted deduction, only to the extent of the same exceeding the provision under clause (viia) of Section 36(1), which is in accordance with the statutory prescription. Accordingly, we refuse to answer the question of law raised and dismiss the appeals, leaving the parties to suffer their respective costs in these appeals. Sd/- K.VINOD CHANDRAN JUDGE Sd/- ASHOK MENON JUDGE Vku/- ITA.Nos.264/2009 & - 11 - 361/2009 APPENDIX OF ITA 264/2009 APPELLANT'S ANNEXURES: ANNEXURE-A TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN DATED 27/6/2003 IN ITA 122/COCH/1997. ANNEXURE-B TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) COCHIN DATED 3/3/97. ANNEXURE-C TRUE COPY OF THE ASSESSMENT ORDER DATED 27/9/1996 OF THE ASSESSING OFFICER. ANNEXURE-D TRUE COPY OF THE LETTER DATED 27/4/1992 OF THE RESERVE BANK OF INDIA. ITA.Nos.264/2009 & - 12 - 361/2009 APPENDIX OF ITA 361/2009 APPELLANT'S ANNEXURES: ANNEXURE -A TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN DATED 27/06/2003 IN ITA 113/COCH/1996. ANNEXURE-B TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) COCHIN DATED 30/11/95. ANNEXURE-C TRUE COPY OF THE ASSESSMENT ORDER DATED 14/03/1995 OF THE ASSESSING OFFICER. ANNEXURE-D TRUE COPY OF THE LETTER DATED 27/04/1992 OF THE RESERVE BANK OF INDIA. ANNEXURE-E CERTIFIED COPY OF ANNEXURE-A. Vku/- [TRUE COPY ] "