$~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.
XXX XXX XXX
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.
6. XXX XXX XXX
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/
ITA 314 & 315/2012 Page 10
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