Cit vs Jain Cooperative Bank Ltd
2014 Latest Caselaw 1128 Del

$~26&27

*      IN THE HIGH COURT OF DELHI AT NEW DELHI

%                                          DECIDED ON: 04.03.2014


+                         ITA 314 & 315/2012

       CIT                                                ..... Appellant

                          Through: Mr. N.P. Sahni, Sr. Standing
                          Counsel with Mr. Nitin Gulati, Jr. Standing
                          Counsel.

                          versus

       JAIN COOPERATIVE BANK LTD                        ..... Respondent

Through: Mr. Ved Jain, Advocate.

CORAM:

HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.V. EASWAR MR. JUSTICE S.RAVINDRA BHAT (OPEN COURT)

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.

ITA 314 & 315/2012 Page 1

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 2 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. Now, coming to the appeal filed by the Revenue, the only issue for consideration relates to deleting the disallowance of Rs.28,75,204/- on account of bad debts. The facts relating to this ground of appeal are that the Assessing Officer during the course of assessment proceedings noted that the assessee had claimed deduction u/s 36 (1) (vii) of the Act in respect of bad debts of Rs.28,75,204/-. On a query raised by the Assessing Officer, it was submitted that the amount of Rs.28,75,204/- was written off under one time settlement scheme of RBI. This amount was not debited to the P&L A/c, but was debited to unrealized interest provisions. This deduction was claimed u/s 36 (1) (vii) of the Act.

The Assessing officer, however, did not accept the explanation of the assessee. He observed that the assessee had accepted in his computation of income for assessment year 2007-08 that he had debited Rs.28,75,204/- to the provisions created in earlier years

ITA 314 & 315/2012 Page 3 and has not debited the same to the P&L A/c. Therefore, it was clear that the provision which was created in earlier years were available for such debt. Hence, amount was not in excess of provisions for bad and doubtful debt created u/s 36 (1) (viia) of the Act. Further, the assessee had claimed deduction u/s 80P of the Act in earlier years by virtue of which the same income has not been taxed. As a pre income which has not been taxed in earlier years cannot be allowed to reduce the taxable income of the future years. The Assessing Officer, therefore, disallowed the claim for bad debts.

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8. We have heard both the parties and gone through the material available on record. There is no dispute about the fact that the assessee being a cooperative bank was engaged in money lending business. The income earned by the assessee was allowable as deduction u/s 80P of the Act. There is no dispute about the fact that on account of one time settlement scheme introduced by the RBI, assessee had written off the amount of Rs.28,75,204/- and the account of the parties have been written off. U/s 36 (2) (i) of the Act, the deduction shall be allowed on account of bad debt unless as debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year or represents money lent in the manner the course of business of banking for money lending which is carried on by the assessee. The assessee is engaged in the business of banking or money lending. This fact is not in dispute. The assessee has written off of the account of the parties on account of one time

ITA 314 & 315/2012 Page 4 settlement. The interest income earned has been included in the income of the earlier years which got exempt by virtue of deduction u/s 80P of the Act to which the assessee was eligible. Therefore, the interest income has been taken into account in computing the income of the assessee."

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 5 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: -

"18. As regards the excess provision for doubtful debts amounting to Rs.17,133/- which has been written back, the finding of the CIT (A) that the provision was never allowed as a deduction in the earlier years. Since the finding that the provision was not allowed in the earlier year as a deduction is not under challenge, the amount cannot be added under Section 41 (1) when it is written back in the accounts. The decision of the Tribunal is upheld."

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 6 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 7 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: -

"5. A close examination of the above provisions would reveal that treating the original intention at the time of purchase of commodities as the deciding factor is basically erroneous. Section 80P allows, in the computation of the total gross income of the society, a straight deduction in respect of certain types of income to the extent specified. Exempt incomes include (A) the whole of the amount of profits and gains attributable to the activities referred to in clauses (a) (i) to (vii) of sub- section (2), (B) limited amount of profits and gains derived from the business other than those specified at clauses (a) (i) to (b), which would include sales even to non-members. All this implies that the society is not disentitled from claiming exemption only because it carries on activities the income from which is not exempt. In that case, by the very nature of things, the purchase of the bulk of the commodities would be made for tapping the entire market inclusive of both members as well as non-members without separately earmarking the purchases for sale to members. The exercise of judging the original intention is thus futile. It is not at all necessary.

The scheme is clear. All sales of specified commodities to members -irrespective of their proportion and quantum - would belong to the exempted category and all such sales to non-members - irrespective of their proportion and quantum - would belong to the non-exempted category.

The Tribunal was thus in error in holding that the

ITA 314 & 315/2012 Page 8 original intention at the time of purchase of items was the deciding factor and not their ultimate disposal. The correct approach would be to grant exemption to the whole amount of profits and gains attributable only to actual sales of specified commodities to members, irrespective of the original intention at the time of purchase.

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Section 80A which is the first section in that Chapter mentions that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80C to 80U. section 80B(5) gives the definition of the term "gross total income" as meaning the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter or under section 280-O. Sub-section (1) of section 80P provides that where the gross total income of an assessee includes any income mentioned in sub-section (2), the amount of profits and gains of business attributable to certain activities will have to be deducted in computing its total income. Quite obviously, the words "gross total income" referred to in section 80P(1) must be given the defined meaning which means total income computed in accordance with the provisions of the Act, but before making any deduction under Chapter VI-A or section 280-O. Computation in accordance with the provisions of the Act must mean computation in accordance with section 29. It would be consistent and reasonable to hold that the expression "the amount of profits and gains" used in sub-section (2) of section 80P cannot be

ITA 314 & 315/2012 Page 9 understood in a different sense. The expression must mean income as computed under section 29."

9. In view of the above findings, this Court is of the opinion that no substantial question of law arises for consideration. The appeals are accordingly dismissed.

S. RAVINDRA BHAT (JUDGE)

R.V. EASWAR (JUDGE) MARCH 04, 2014 /vks/

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