ACIT vs. M/s. Jila Sahakari Kendriya Bank (DCCB)

Case snapshot

Sections / provisions: 36(1)(VIIA)

Questions before the Court / Tribunal

• Section 36(1)(viia): deduction for provision for NPA/standard assets of district central co-operative bank.
• What factual, statutory and procedural conditions control the relief?
• How does the operative order apply to the parties and the challenged proceeding?

Material facts and procedural background

ITA No.455/Ind/2018 Assessment Year: 2014-15 ACIT M/s. Jila Sahakari Khandwa Kendriya Bank, बनाम/ Khandwa Road, Khargone Vs. (Appellant /Revenue) (Respondent / Assessee) PAN: AAATJ 0529 K Revenue by Shri P.K. Mishra, CIT-DR Assessee by Shri Subhash Jain & Milind Wadhwani, ARs Date of Hearing 01.02.2023 Date of Pronouncement 28.04.2023

“(1). The ld. CIT(A) has erred in deleting the disallowance made in respect of provisions for standard assets made by the assessee at Rs.5,00,00,000/-.

3. Briefly stated the facts are such that the assessee is a registered co- operative society engaged in banking business. The assessee is governed by the provisions of its parent law relating to co-operative societies as well as Banking Regulations Act. The assessee filed return of income of the relevant AY 2014-15, which was subjected to scrutiny-assessment by issuing statutory notices u/s 143(2) and 142(1). Finally, the Ld. AO completed assessment after making certain disallowances. Being aggrieved, the assessee went in first-appeal and succeeded partly. Now, the revenue has come in this appeal assailing the order of first-appeal. We proceed to decide various grounds, as reproduced earlier, in seriatim.

4. In ground No. 1, the revenue claims that the CIT(A) has erred in deleting the disallowance of Rs. 5,00,00,000/- made by AO in respect of “provision for bad-debts”. Thereafter, in ground No. 2, the revenue claims that the CIT(A) has erred in deleting the impugned disallowance even though no details were filed by assessee during assessment or appellate proceedings. Both of these grounds relate to the same issue; therefore considered together for adjudication.

5. During assessment-proceeding, Ld. AO observed that the assessee has claimed a total deduction of Rs. 10,00,00,000/- u/s 36(1)(viia) under two captions, namely (i) provision for NPA - Rs. 5,00,00,000/- and (ii) provision for standard assets – Rs. 5,00,00,000/-. Ld. AO analysed section 36(1)(viia) and framed a view that “Provision for NPA” is a provision for bad-debt and therefore allowable as deduction; but “Provision for standard assets” is not a provision for bad-debt and therefore not allowable. Finally, Ld. AO disallowed “Provision for standard assets” of Rs. 5,00,00,000/-.

Appellant / assessee submissions

6. During first-appeal, the assessee submitted that it is engaged in banking business and it has to follow the guidelines issued by Reserve Bank of India (RBI). It was further submitted that the assessee had created provision for bad debts and the whole provision i.e. 5,00,00,000/- on account of NPA plus Rs. 5,00,00,000/- on account of standard-assets, though made under two nomenclatures, is a provision for bad debts in terms of RBI guidelines. The assessee also submitted that section 36(1)(viia) allows deduction of the “provision for bad debts” made as per RBI guidelines; therefore the entire provision of Rs. 10,00,00,000/- (including the provision of Rs. 5,00,00,000/- qua standard assets) is entitled for deduction. The assessee also placed reliance on the decision of ITAT, Jodhpur in Nagaur Urban Co-operative Bank Ltd. Vs. ACIT, ITA No. 240/Jodh/2013 wherein the “provision for standard assets” was held to be a provision for bad debts allowable u/s 36(1)(viia). Ld. CIT(A) accepted assessee’s submission and allowed deduction.

7. Before us, Ld. DR representing the revenue argued that the “standard assets” are those assets which are adequately serviced by the borrowers; those assets can’t be said to be “bad debts”. Therefore, the assessee has wrongly characterized them as “bad debt”, made provision and claimed deduction. Ld. DR claimed that in Nagaur Urban Co-operative Bank Ltd. (supra), deduction was allowed for NPA and not for standard-assets.

8. Per contra, Ld. AR supported the order of first-appeal and argued that a careful reading of the order of Nagaur Urban Co-operative Bank Ltd. (supra) clearly reveals that the ITAT has allowed deduction of “provision for standard-assets” (Para No. 4 and 10 of the ITAT order). He further relied upon following decisions wherein such deduction has been allowed:

of the learned counsel for the assessee that the phrase contingency provision for standard assets is basically a provision for bad and doubtful debts only which is in general a regular feature of the banking business. It is also pertinent to mention that even though the assessee was eligible to claim much higher amount as an expenditure of provision for bad and doubtful debts, it only claimed Rs. 2 lacs. We, therefore, in the facts and circumstances of the case, are of the opinion that in the instant appeal the contingency provision for standard assets is basically in the nature of bad and doubtful debts only and the assessee has rightly claimed the expenditure u/s 36(1)(viia) of the Act. We, therefore, allow the sole ground raised by the assessee.”

Revenue / respondent submissions

On behalf of the Revenue, Shri B. K. Rawat, learned counsel relying upon the decision in Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559 (SC), argued that the said amount is not liable to deduction. In Vazir Sultan Tobacco Co.s case (1981) 132 ITR 559 (SC), the main question raised was whether amounts retained or appropriated or set apart by the concerned assessee- company by way of making provision(a) for taxation, (b) for retirement gratuity, and (c) for proposed dividends from out of profits and other surpluses, could be considered as "other reserves" within the meaning of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, for inclusion in the capital computation of the company for the purpose of levying super tax. Their Lordships of the Supreme Court remanded Vazir Sultan Tobacco Co.s case as it was found that there was no sufficient material on record regarding whether the appropriation made by the Vazir Sultan Tobacco Co. towards gratuity reserve was based on any actuarial valuation or whether it was an appropriation of an ad hoc amount. Such is not the position in the instant case wherein section 43(2)(a) of the Societies Act specifically speaks of…

Court / Tribunal analysis and reasoning

9. We have considered the rival contentions raised by both sides and perused the material held on record in the light of section 36(1)(viia) and the judicial decisions cited above. After a careful consideration, we observe that it has been loudly held in all of the decisions cited above that the provision made by a banking company in respect of standard assets, as per RBI guidelines, is very much allowed as deduction u/s 36(1)(viia). Ld. DR is not able to point out any contrary decision on this issue. We extract below the decision of ITAT Indore Bench itself in Vikramaditya Nagarik Sahakari Bank Vs. ACIT (supra):

“6. We have heard the rival contentions and perused the material placed on record. The sole grievance of the assessee revolves around the disallowance of Rs. 2 lacs confirmed by both the lower authorities relating to provision for contingency of standard assets claimed by the assessee u/s 36(1)(viia) of the Act. Before proceeding further we would like to reproduce the provision of section 36(1)(viia) of the Act as under :- “Other deductions.

Provided also that no deduction shall be allowed under the third proviso unless such income has been disclosed in the return of income under the head "Profits and gains of business or profession." Explanation. For the purposes of this sub-clause, "relevant assessment years" means the five consecutive assessment years commencing on or after the 1st day of April, 2000 and ending before the 1st day of April, 2005 7. On perusal of the above provision and in the given facts of the case, wherein the assessee, which is a cooperative bank carrying on banking business, we find that the assessee is eligible to claim provision for bad and doubtful debts to the extent of 7.5% of the total income before making any deduction under this clause and under Chapter VIA. Further in the profit and loss account except for the alleged provision for Rs. 2 lacs, no other provision for bad and doubtful debts has been claimed. We find force in the contention

17. We have considered rival submissions of both sides and perused the material held on record. At first, we would like to analyse the decisions relied upon by Ld. AR before us / Ld. CIT(A) in first-appeal:

It is settled law that in order to claim a deduction from income, it must fulfil two essential conditions, viz. (i) that the amount must be laid out wholly and exclusively for the purpose of the business, and (ii) that it should not be expenses of capital nature. Both these conditions must be complied with before the assessee claims deduction from the income. In the instant case, as stated aforesaid, if the said amount of Rs. 1,66,763 does not comprise the income of the assessee on account of its being diverted under the statutory provisions of section 43(2) of the Societies Act, then certainly, in our opinion, the assessee can claim deduction under section 37(1) of the Act which reads as under :

Operative decision and relief

14. Before us, Ld. DR referred to the order of first-appeal and strongly contented that there is a serious infirmity committed by Ld. CIT(A) i.e. the CIT(A) has made a baseless/wrong/unverified finding that the amounts claimed by assessee were “actually spent”. Ld. DR strongly contended that there is no material to indicate that the impugned amounts have been “actually spent” by assessee during the previous year relevant to assessment-year under consideration; in fact a cursory look of the P&L A/c and Balance-Sheet of assessee (copies thereof placed in the Paper-Book filed by assessee) itself demonstrates that these are mere provisions/transfer to funds made by assessee by means of accounting entries. Then, the Ld. DR submitted that the AO has rightly observed that the assessee has claimed deduction of mere provisions/transfer to funds which can be allowed only in terms of section 36(1)(viii). Ld. DR submitted that the AO has aptly computed the permissible limit as prescribed in section 36(1)(viii) and

On behalf of the Revenue, Shri B. K. Rawat, learned counsel relying upon the decision in Vazir Sultan Tobacco Co. Ltd. v. CIT (1981) 132 ITR 559 (SC), argued that the said amount is not liable to deduction. In Vazir Sultan Tobacco Co.s case (1981) 132 ITR 559 (SC), the main question raised was whether amounts retained or appropriated or set apart by the concerned assessee- company by way of making provision(a) for taxation, (b) for retirement gratuity, and (c) for proposed dividends from out of profits and other surpluses, could be considered as "other reserves" within the meaning of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963, for inclusion in the capital computation of the company for the purpose of levying super tax. Their Lordships of the Supreme Court remanded Vazir Sultan Tobacco Co.s case as it was found that there was no sufficient material on record regarding whether the appropriation made by the Vazir Sultan Tobacco Co. towards gratuity reserve was based on any actuarial valuation or whether it was an appropriation of an ad hoc amount. Such is not the position in the instant case wherein section 43(2)(a) of the Societies Act specifically speaks of…

control of assessee; or (ii) if the assessee has “actually spent” moneys for the relevant purposes during the previous year. In the present case, the provisions of section 43A of MP/CG co-operative Societies Act relied upon by Ld. AR talks of “appropriate of profits” only. There is no material available on record by which it can be verified that either of the two conditions, as narrated earlier, is satisfied. During the course of hearing, we tried to ascertain the position of each individual item comprised in Rs. 11,30,00,000/-, mentioned in the table in foregoing Para No. 12 of this order, from available documents in Paper-Book but could not reach to any conclusion. Therefore, the matter requires a complete verification at the stage of AO. Being so, we are of the view that this issue should be remanded to the file of Ld. AO who will make necessary verification with regard to existence of the conditions, after calling for the relevant details from assessee and thereafter take a final call in the matter. This ground is thus allowed in terms indicated here.

19. Resultantly, all grounds of this appeal are allowed for statistical purpose in terms mentioned above.

Ratio and legal principle

• The packaged judgment addresses Section 36(1)(viia): deduction for provision for NPA/standard assets of district central co-operative bank. The precise proposition must be read with the Court/Tribunal's reasoning and operative directions.
• Reliance depends on matching the statutory version, jurisdiction, procedural stage and material evidence recorded in the judgment.

Why this judgment matters

This decision is relevant to practitioners and affected parties dealing with section 36(1)(viia): deduction for provision for npa/standard assets of district central co-operative bank. Its value lies in showing how the adjudicating forum connected the applicable rule to the proved facts and procedural posture.

Practitioner action points

• Match the statutory version, jurisdiction, procedural stage and decisive evidence before relying on the result.
• Verify current appellate, review and SLP history and any later amendment or controlling authority.
• Attach the complete judgment to the working paper or filing and cite the paragraph/page supporting the proposition.

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Section / provision impact

• 36(1)(VIIA) - apply the exact version considered in the judgment.

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