the Income Tax Act’s Section 36(1)(viia)’s provision for standard assets
Fact and issue of the case
Feeling aggrieved by appeal-order dated 02.02.2018 passed by learned Commissioner of Income-Tax (Appeals)-II, Indore [“Ld. CIT(A)”], which in turn arises out of assessment-order dated 23.12.2016 passed by learned ACIT, Khandwa [“Ld. AO”] u/s 143(3) of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2014-15, the revenue has filed this appeal on following effective grounds:
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/-.
The Ld. CIT(A) has erred in deleting the addition holding that the provision for standard assets is provision for NPA even though no details in this regard has been filed by the assesse either during the course of assessment proceedings or during the appellate proceedings.
The Ld. CIT(A) has erred in deleting the disallowance made in respect of provision claimed u/s 36(1)(viii) of the I.T. Act of Rs.5,75,94,958/-.
The Ld. CIT(A) has erred in deleting the addition of Rs.5,75,94,958/- by holding that the provisions made u/s 36(1)(viii) of the I.T. Act 1961 under various heads are allowable as deduction as the same has been used to promote the business interest of the assesse, ignoring the facts that there were provisions and not real expenditure, therefore the same was allowable only to the 20% of profit of the business.”
Heard the learned Representatives of both sides at length and case-records perused.
Briefly stated the facts are such that the assessee is a registered cooperative 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.
Ground No. 1 and 2:
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.
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/-.
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.
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.
Observation of the court
Hon’ble Supreme Court – Rotork Controls India Pvt. Ltd. vs. CIT (2009) 314 ITR 62:
In this case, the Hon’ble Court approved deduction of provision made by assessee for “product-warranties” committed at the time of sale of product. This decision has no application to present case.
ITAT Surat – DCIT vs. Surat Dist. Co-Op Bank Ltd. ITA No. 16/AHD/2015 order dated 17.05.22:
This decision relates to the deduction of provision for bad debts u/s 36(1)(viia) and does not have application to present case.
ITAT Pune – District Central Co-operative Bank Ltd. Vs. Addl. CIT Range-1, Pune ITA No. 1796/PN/2013 A.Y. 2009-10:
This decision deals with the deduction of amortization of premium expenditure of HTM securities, provision for investment depreciation, investment fluctuation fund, claims of debt waiver scheme, depreciation on assets, etc. which are on separate footing. The decisions is not applicable to present case.
Thus, from a bare reading of above decisions, it is quite clear that the provisions/transfer to funds are allowable as deduction u/s 37(1) only if at least one of the conditions exists i.e. (i) there is an over-riding statute by which the amounts transferred to funds do not remain with / under the 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.
Resultantly, all grounds of this appeal are allowed for statistical purpose in terms mentioned above.
Order pronounced as per Rule 34 of I.T.A.T. Rules, 1963 on 28/04/2023.
Order pronounced in the open court on…. /….. /2023.
Conclusion
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
Read the full order from here
ACIT-Vs-Jila-Sahakari-Kendriya-Bank-ITAT-Indore
