Revenue v. Jain Cooperative Bank Ltd

1. The Revenue claims to be aggrieved by the common order of the Income Tax Appellate Tribunal (ITAT) dated 30.08.2011, allowing the assessee’s appeal directed against the Commissioner (Appeals) order; as well as the Revenue’s appeal. The question of law sought to be urged in this case is as to the correctness of the view expressed by the Tribunal with regard to the deletion of the sum of `28,75,204/- made by the Assessing Officer who had disallowed the claim for bad debts. 2014:DHC:1178-DB ITA 314 & 315/2012 Page 2

2. The facts in brief are that the assessee, a Co-operative Bank in its return for AY 2007-08 claimed deduction to the tune of `77,73,715/- on account of deduction of reversal of NPA provision credited to the profit and loss account. The assessee is engaged in banking activities and had reversed NPA provisions. The assessee in the proceedings before the AO argued that the provision (for bad debts) was made due to its reflecting the NPA in terms of the Reserve Bank of India guidelines on bad debts and though such provision was made, there was no claim for deduction and, therefore, at the time of reversal, there can be no justification for adding it to the income. The assessee had submitted that it made a claim on account of bad debts and written off separately as per provisions of Section 36 (1) (vii a) read with Section 36 (2) of the Income Tax Act. The Assessing Officer rejected its claim expressing the opinion that whenever the bank actually writes off an amount, it would get a deduction. He also relied upon Section 41 (4) which stated that whenever a bad and doubtful debts is allowed for a previous or earlier years and gets recovered by the bank subsequently, the said amount should be taxed at the time of recovery.

3. The assessee carried the matter in appeal. The CIT (A) granted limited relief on the footing that the provision for NPA had been created by the assessee over the years and as on 1.4.2006, the total provision shown was `6,61,34,167/- of which a reversal of the NPA of `77,73,715/- was made thus ITA 314 & 315/2012 Page 3 leaving a balance of `5,83,60,482/- as on 31.3.2007. The sum of `77,73,715/- had been credited in the profit and loss account and subsequently reversed in the computation of income claiming it as deduction. The CIT (A) was of the opinion that the assessee had been creating provisions for NPA over the years and had claimed 100% deduction under Section 80-P (2) of the Act and had actually reduced its claim for NPA of `77,73,715/- out of the total of `6.61 Crores which meant that the assessee had been creating access provision for NPA.

4. The relevant findings of the ITAT in the impugned order are as follows: -

5. The Revenue contends that the RBI directives can at best be considered as prudential norms inapplicable to tax proceedings and that the assessee’s claim that it had written off bad debts in terms of the onetime settlement (OTS) formulated by it is untenable. Reliance is placed upon the decision in Southern Technologies Ltd. v. JCIT, 320 ITR 577 (SC). It is also argued that the conditions spelt out in Section 36 (1) (viia) and Section 36 (2) were not satisfied as to result in entitlement for deduction. It is also argued that the assessee had claimed deduction under Section 80-P. In these circumstances, the claim for deduction by way of set off in the current year through reversal of the NPA entry could not be allowed.

6. During the course of hearing, the assessee had relied upon the decision of this Court in Commissioner of Income Tax v. Mohan Meakin Ltd. (2012) 18 Taxman 47 (Del); CIT v. Lal Textile Finishing Mills (P) Ltd, 180 ITR 45 and Narayanan Chettiar Industries v. Income Tax Officer, 277 ITR 426. In all these decisions, the various High Courts including the Division Bench of this Court consistently ruled that provision for doubtful debts written back has to be seen in the context of ITA 314 & 315/2012 Page 6 whether the provision had been allowed as deduction in order to determine the taxability at the later point of time of write back. In Mohan Meakin Ltd. matter (supra), this is what the Court stated: -

Likewise in Lal Textile Finishing Mills’ matter (supra), the Punjab and Haryana High Court observed as follows: - “The answer to the question posed is provided by the judgment of this court in Commissioner of Income-tax vs Haryana Co-operative Sugar Mills Ltd. (1985) 154 ITR 751, where it was held that an amount can be brought to tax under section 41 (1) of the Act, if two conditions are satisfied, namely, that the amount has been allowed as deduction in some earlier year and that during the assessment year in question, the assessee had received the benefit representing the amount in question by way of cessation or remission of the liability in regard to the said amount. The pertinent point to note in the present case is that there is no finding nor indeed any material to show that this amount of Rs.48,610/- was ever allowed as a ITA 314 & 315/2012 Page 7 deduction in any earlier assessment year. This being so, there can be no escape from the conclusion that the said amount cannot be brought to tax in terms of section 41 (1) of the Act. The reference is, consequently, hereby answered in the affirmative, in favour of the assessee and against the Revenue.” The Madras High Court in Narayanan Chettiar matter observed as under: - “As observed by the Supreme Court in Tirunelveli Motor Bus Service Co. P. Ltd. v. CIT [1970] 78 ITR 55, unless it is established that a deduction of liability was allowed while making the assessment in the earlier year, the addition as deemed profits under section 41 (1) in respect thereof would not be permissible.”

7. In view of the clear statements of law, delineated in the preceding paragraph and having regard to the fact that in the previous years, the deduction was not allowed, this Court is satisfied that the condition precedent for application of Section 36 (1) (viia) and 36 (2) on the one hand are applicable and the Section 41 (4) would not apply in the circumstances of the case.

8. With regard to the contention of the Revenue with respect to Section 80P, this Court is of the opinion that the said provision gives general relief to a class of assessees by way of mandatory deduction of certain categories of income. The circumstance that the provision for bad debts was either added back or not added back would be irrelevant, since the deduction ITA 314 & 315/2012 Page 8 is with reference to the income from the activities listed in Section 80P (2) which is part of the gross total income. In this view, this Court is fortified by the judgment of the Bombay High Court in Commissioner of Income Tax vs. Nagpur Zilla Krishi Audyogik Sahakari Sangh Ltd., (1994) 209 ITR 481 (Bom) where it was held as follows: -