The proviso to section 36(1)(vii) does not apply to the disallowance of a deduction for bad debts related to non-rural advances

Fact and issue of the case

These three appeals are by the assessee against the separate orders dated 21.3.2023, 23.3.2023 & 24.03.2023 of the CIT(Appeals), National Faceless Appeal Centre, Delhi [NFAC] for the assessment years 2011-12 to 2013-14. Certain common issues are involved in these appeals and therefore they are heard together and disposed of by this consolidated order for the sake of convenience and brevity

The assessee is a public sector bank carrying on the business of The original assessment order was passed in the name of M/s. Syndicate Bank, which merged with M/s. Canara Bank w.e.f. 1.4.2020 vide Govt. of India Notification No.GSR 155(E) dated 4.3 .2020

The legal issue common in all these appeals with regard to reopening of assessment u/s. 147 of the Income-tax Act, 1961 [the Act] was not pressed at the time of hearing of the appeals, hence the same is dismissed as not pressed for all the assessment years under

The brief facts of the case are that the assessee, a public sector bank, filed its return of Rs.558,39,58,312 for AY 2011-12 originally on 29.9.2011 under the regular provisions of the Act and Rs.986,79,76,772 under the MAT provisions.. The return was processed u/s. 143(1) on 5.7.2012 granting refund of Rs.368,88,85, 120. Subsequently assessee filed a revised return on 27.11.2012 admitting income of Rs.230,26,47,624 under regular computation after set off of brought forward losses of Rs.289,41,70,061 and current year loss under other sources of Rs. 1,14,94,402. MAT income declared is Rs.406,47,28 ,293. The case was under scrutiny and assessment u/s. 143(3) was made on 22.2.2013 determining total income at Rs.1349,88,63,070 under regular provisions and at Rs.1848,74,25,223 under u/s. 115JB

During the course of scrutiny proceedings for AY 20 16-17, it was noted that the assessee bank had been regularly claiming depreciation on consolidated value of land & building including vacant land also at the rate applicable for building. Notice u/s. 148 was issued on 29.3.2018 on the ground that assessee was claiming excess The assessee furnished return of income electronically on 21.8.2018 wherein the claim of depreciation was reduced to the extent of Rs.50,25, 197. Assessment was completed u/s. 143(3) r.w.s. 147 of the Act on 3 1.12.2018 determining total income at Rs. 1502,69,05,350 under regular provisions and at Rs. 1848,74,25,220 under MAT provisions after making certain disallowances

The first common issue that arises for consideration in AYs 2011-12 & 2012-13 is the disallowance u/s. 36(1)(vii) of the Act. The grounds raised in AY 2011-12 are as follows

The learned CIT(A) erred in upholding the disallowance of Rs. 462,79,56,763/-u/s 36(1)(vii)

The disallowance made by the learned Assessing Officer and upheld by the learned CIT(A) is based on change of opinion and as such, not tenable in law

The learned CIT(A) erred in holding that the Appellant bank had not written off bad debts

The learned CIT(A) failed to appreciate the fact that this issue which was decided in favour of the Appellant has been accepted by the Department

The learned CIT(A) failed to appreciate the fact that the Appellant bank had written off bad debts by debiting to Provision account and reducing the same from the Gross Loans & Advances

The learned CIT(A) failed to appreciate the fact that non rural debts written off are not covered by the proviso to section 36(1)(vii)

The learned CIT(A) erred in holding that the Explanation 2 to section 36(1)(vii) is applicable retrospectively

The learned CIT(A) erred in not following the binding decisions of High Courts & Tribunals

For AY 2011-12, the AO noted that assessee has claimed deduction of bad debts u/s. 36(1)(vii) without actually writing off the debts are irrecoverable in the individual loan accounts of the debtors concerned. The AO found that majority of the write-off is Prudential Write Off (PWO) at the Head Office level with a view to create provisions for Non-Performing Assets (NPAs) in the books of accounts as per RBI Guidelines. In the PWO the fact of write-off of bad debt has not been allowed to be communicated to the branch level, where the individual loan accounts are outstanding. According to the AO, this implies that debts have not been actually written off in the individual loan accounts. Further, the amounts have been debited to the P&L account under the head ‘Provisions & Contingencies’ and the claim of bad debt written off has been made in the computation of income only. The amounts have been charged to profit for creating provisions and not for actual write off of bad debts. The write off of bad debts is by way of executive decision, much after the finalization of books of accounts and holding of AGM which indicates that the claim of bad debt is only an afterthought for reducing the tax liability of the assessee

The AO further noted that the assessee did not charge the amount of bad debts written off to the provision for bad and doubtful debts account, even though there was a sufficient credit balance available in the provisions created for the very purpose. The AO relied on the first proviso to section 36(1)(vii) which expressly states that the claim of bad debt written off shall be admissible, only to the extent the same exceeds the credit balance in provisions for bad and doubtful Further Explanation 2 below section 36(1)(vii) makes it amply clear that there shall be only one account of provision for bad and doubtful dets, against which all claims of bad debts actually written off during the year shall be first set off, without any distinction between rural advances and other advances. Thus, only the excess amount of bad debts written off, remaining after such set off, is admissible as deduction u/s. 36(1)(vii)

Observation of the court

We have heard the rival submissions and perused the materials on record. We notice that the coordinate Bench of the Tribunal in the case of Canara Bank (Syndicate Bank) in ITA No.1885/Bang/2018 by order dated 23.1.2020 for AY 2014-15 considered this issue and held as under

We have heard rival submissions and perused the material on record. The Tribunal in assessee’s own case for assessment year 2013-2014 (supra) had restored the issue to the files of the CIT(A). The CIT(A) was directed to examine whether the assessee being a banking company would be liable for book profits u/s 115JB of the Act. The relevant finding of the Tribunal in assessee’s own case, reads as follows

We heard the parties on this issue and perused the record. We notice that the Ld CIT(A) has expressed the view that the assessee would fall under clause (a) of sec.1 15JB(2). However the case of the assessee is that clause (b) of sec.1 15JB(2) is made applicable to banking companies, since banking company is included in sec. 211 of the Companies Act. However, it is the contention of the assessee that it is not a ‘banking company”, i.e., it is a “corresponding new bank

We notice that the provisions of sec.5 1 of the Act specifically states that only certain provisions of BR Act are applicable to “Corresponding new bank”. We noticed earlier that the Ld CIT(A) has proceeded to decide this issue by observing that all provisions of BR Act are applicable to the Company. We notice that the Ld CIT(A) did not consider the effect of provisions of sec.51 of the BR Act upon the assessee. Hence the decision taken by him under the impression that all the provisions of BR Act are applicable to the assessee is faulted one. In our view the Ld CIT(A) should considered the effect of provisions of sec. 51 of BR Act and accordingly he should have appreciated the contentions of the assessee on the definition of “banking company”, provisions of sec.21 1(2) of the Companies Act etc. Since these aspects go to the root of the issue, in our view, this issue needs to be examined at the end of Ld CIT(A) afresh. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to his file for examining it afresh

In view of the co-ordinate Bench order of the Tribunal in assessee’s own case for assessment year 2013- 2014, we restore this issue to the files of the CIT(A). The CIT(A) shall follow the directions contained in the Tribunal order for assessment year 2013-2014 and shall afford a reasonable opportunity of hearing to the assessee before a decision is taken on the issue. It is ordered accordingly

Respectfully following the above decision of the Tribunal, we restore this issue to the file of the CIT(A) with similar directions. This ground of the assessee for the AYs 2011-12 to 2013- 14 is allowed for statistical purposes. Accordingly the alternate ground regarding adding various items to arrive at the book profit raised by the assessee for AY 2011-12 to 2013-14 is also restored to CIT(Appeals) for fresh decision in accordance with law

In the result, the appeals are partly allowed for statistical The common order passed in these appeals shall be placed in the respective appeals

In view of the appeals having been disposed of, the Stay Petitions have become infructuous and dismissed as such

Pronounced in the open court on this 28th day of April, 2023