South Indian Bank Ltd. vs The Commissioner of Income Tax

C.N. Ramachandran Nair, J.—This appeal is filed by the assessee challenging the order of the Income Tax Appellate Tribunal upholding proceedings issued by the Assessing Officer u/s 143(1)(a) of the Income Tax Act for the assessment year 1994-95. The return filed by the assessee which is a banking company was processed u/s 143(1)(a) of the Income Tax Act and in the proceedings so issued, the Assessing Officer among other things made an addition of Rs. 3,04,22,000/- representing provision towards bad debt. Even though assessee filed rectification application for deletion of the addition and consequential levy of additional tax u/s 143(1A) of the Act, the same was rejected. The appeal filed before the first appellate authority was dismissed and the Tribunal confirmed the same in second appeal. It is against this order the assessee has filed this appeal raising the following questions:

i) Whether on the facts and in the circumstances of the case the Tribunal is correct in law and fact in holding that even without the retrospective amendment, the issue has been decided by the High Court in favour of revenue?

ii) Whether on the facts and in the circumstances of the case is not the Tribunal bound to follow their own decision in appellant''s case for the earlier assessment year?

Even though two questions are raised by the assessee for decision, the only issue that calls for decision is whether "the provision for bad debt" claimed by the assessee could be added to the returned income as a prima facie inadmissible deduction authorised under proviso (iii) to Section 143(1)(a) of the Act. For easy reference, the Section as it stood at the relevant time is extracted hereunder:

Section 143(1)(a) Where a return has been made u/s 139, or in respondent to a notice under Sub-section (1) of Section 142,:

(i) if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid and any amount paid otherwise by way of tax or interest, then, without prejudice to the provisions of Sub-section (2), an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued u/s 156 and all the provisions of this Act shall apply accordingly; and

(ii) if any refund is due on the basis of such return, it shall be granted to the assessee:

Provided that in computing the tax or interest payable by, or refundable to, the assessee, the following adjustments shall be made in the income or loss declared in the return, namely:

(i) any arithmetical errors in the return, accounts or documents accompanying it shall be rectified;

(ii) any loss carried forward, deduction, allowance or relief, which, on the basis of the information available in such return, accounts or documents is prima facie admissible but which is not claimed in the return, shall be allowed.

(iii) any loss carried forward, deduction, allowance or relief claimed in the return, which, on the basis of the information available in such return, accounts or documents, is prima facie inadmissible, shall be disallowed.

Counsel for the assessee relied on Annexure-F order whereunder Section 143(1)(a) adjustment made for the immediately preceding year i.e. for 1993-94 was cancelled by the Tribunal. Even though the Tribunal''s earlier year''s order was relied on by the assessee in the appeal before the Tribunal, the Tribunal declined to follow their earlier order and decided the case against the assessee based on two decisions of this Court in Commissioner of Income Tax Vs. Hotel Ambassador, and in Abad Enterprises Vs. Commissioner of Income Tax, .

Counsel for the assessee contended that appellant being a Scheduled Bank is bound to prepare it''s accounts based on RBI guidelines. According to him, provision for bad debt is created from out of earning from non-performing asset based on RBI guidelines. Since RBI guideline is binding on the assessee, unlike the case of other business concerns, assessee''s claim for bad debt should be allowed as the claim was made in accordance with the RBI guidelines is the case of the assessee. However, Standing Counsel for the department on the other hand contended that Section 36(1)(vii) does not authorise deduction of any provision for bad debt and the Section authorises to allow only deduction of bad debts actually written off in the accounts. He has specifically referred to Section 36(1)(vii)(a) of the Act which provides for deduction of claim made in respect of certain debts under RBI guidelines. Admittedly the provision for bad debt was claimed by the assessee as a deduction u/s 36(1)(vii) and not u/s 36(1)(vii)(a) of the Act. Counsel for the assessee contended that eligibility for deduction of provision for bad debt is a debatable issue and is ceased to be so only by virtue of Explanation introduced to Section 36(1)(vii) by Finance Act 2001 with effect from 1.4.1989. The contention of counsel for the appellant is that as on date of completion of proceedings u/s 143(1)(a), Explanation to Section 36(1)(vii) was not in the statute because though introduced with retrospective effect, it was in fact brought to the statute only by Finance Act 2001. Against this, counsel for the Revenue contended that even de hors the Explanation, the provision for bad debt is a prima facie inadmissible claim u/s 36(1)(vii) and so much so, the Assessing Officer is entitled to add back the amount in the course of proceedings completed u/s 143(1)(a) of the Act. Since the scope of amendment to Section 36(1)(vii) is involved, we extract hereunder Clause (vii) of Section 36(1) with the Explanation introduced by Finance Act 2001 with effect from 1.4.1989.

Section 36(1) The deduction provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28:

...

(vii) subject to the provisions of Sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year:

...

Explanation: For the purposes of this clause, any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee.

As already stated, the answer to the issue raised will depend on whether provision for bad debt claimed u/s 36(1)(vii) is a prima facie inadmissible deduction or not. Since assessee is a Schedule Bank, the further question that requires to be considered is whether in assessee''s case that provision for bad debt claimed stands on a different footing from the case of other assessees for the purpose of granting deduction u/s 36(1)(vii). Counsel for the assessee has relied on decisions of the Supreme Court in Sutlej Cotton Mills Limited Vs. Commissioner of Income Tax, Calcutta, and in The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, and contended that provision for bad debt claimed by the assessee is not a prima facie inadmissible claim. We do not find the decisions cited by the assessee are on the point. We also do not agree that the assessee being a Scheduled Bank, it''s claim has to be treated differently because we find from the regular assessment produced in court that assessee had made separate claim u/s 36(1)(vii)(a) in terms of RBI guidelines pertaining to advances made in rural areas. Besides the claim u/s 36(1)(vii)(a), it is seen that assessee had in fact made a huge claim of Rs. 8,97,66,930/- towards bad debt written off which included provision of Rs. 2,18,56,250/- towards bad debt written off which included provision of Rs. 2,18,56,250/- claimed and disallowed in the proceeding year. It is seen from the regular assessment that out of the provision claimed and disallowed in the proceeding year, substantial amount had become bad debt in the accounting year relevant for this year and the claim was allowed by the officer. Even though counsel for the assessee contended that regular assessment made u/s 143(3) later should not be looked into for the purpose of considering the validity of proceedings u/s 143(1)(a) of the Act, we called for the same only to find out the nature of claim made by assessee in the return filed which led to the proceedings u/s 143(1)(a) of the Act. In other words, we have only examined whether the claim of deduction of provision for bad debt was made u/s 36(1)(vii) or u/s 36(1)(vii)(a). In fact even in the regular assessment, the very same amount of provision for bad debt was disallowed just because it is a provision and assessee does not have a case that it is really written of. In other words, the provision for bad debt claimed by the assessee was not written off in the accounts entitling it for a deduction u/s 36(1)(vii) of the Act.

Since assessee itself does not have a case that it is no written off in the accounts and the claim was only a provision for bad debt, we are of the view that the claim is prima facie inadmissible u/s 36(1)(vii) as the Section does no authorise granting of deduction of any debt unless it is written off in the accounts for the previous year. We are therefore of the view that the claim is rightly treated as prima facie inadmissible and no enquiry or hearing is required to disallow the claim because assessees itself has no case that the amount was written off in the accounts which only qualifies it for deduction under the said Section. Therefore, the decision of the Delhi High Court in Samtel Color Ltd. v. Union of India and Ors. (2002) 1 ITR 258 relied on by the assessee has no application. The next issue to be considered is scope of the Explanation introduced to Section 36(1)(vii) by Finance Act 2001 with effect from 1.4.1989. The Explanation is to the effect that bad debt or part thereof written off as irrecoverable shall not include any provision for bad and doubtful debts made in the accounts of the assessee. We are of the view that this Explanation is only clarificatory in nature as it does not add any new meaning or dimension to the main provision which provides for deduction of bad debt only when it is written off as irrecoverable in the accounts of the assessee for the previous year. We are of the view that the Explanation was thoroughly unnecessary and probably it would have been introduced only to avoid any change of litigation. In this view of the matter, we uphold the order of the Tribunal holding that the proceedings issued u/s 143(1)(a) pertaining to the addition of provision for bad debt is perfectly in order and consequently dismiss the appeal.