High Court Of Rajasthan
CIT vs. The Bank Of Rajasthan Ltd.
Sections 36(1)(vii), 36(1)(viia)
Asst. Year 1987-88
N.N. Mathur & Harbans Lal, JJ.
IT Appeal No. 23 of 2000
14th February, 2002
Counsel Appeared
L.M. Lodha, for the Appellant : Rajendra Mehta, for the Respondent
JUDGMENT
N.N. MATHUR, J. :
This appeal under s. 260A of the IT Act, 1961, is directed against the order dt. 28th Feb., 2000, passed by the Tribunal, Jodhpur Bench, whereby the Tribunal allowed the claim of the assessee for deduction of Rs. 7,88,848 with respect to the bad debt for the asst. yr. 1987-88.
2. This Court admitted the appeal on the following question of law : “Whether after the Finance Act, 1985, amending the provisions of s. 36(1)(viii) and s. 36(2) w.e.f. 1st April, 1985, inserting proviso to s. 36(i)(vii) and cl. (v) to s. 36(2), claims under s. 36(1)(viii) and 36(1)(viia) are separate and distinct ?”
3. Briefly stated that facts of the case are that the respondent-assessee the Bank of Rajasthan Ltd. is a scheduled bank governed by the provisions of Banking Regulation Act, 1949. The AO assessed the income of the respondent assessee for the asst. yr. 1985-86 on the income of Rs. 17,78,882 and for the asst. yr. 1986-87 for Rs. 1,50,04,051. The AO allowed the deduction under s. 36(1) (viia) to the tune of Rs. 34,82,940 for the asst. yr. 1985-86 and Rs. 38,77,230 for the asst. yr. 1986-87 with respect to bad and doubtful debts on advances made by its rural branches. The assessee was also allowed deduction under s. 36(1)(vii) on account of bad debts written off amounting to Rs. 6,350 and Rs. 2,12,488. On appeal, the CIT(A) was of the view that the original assessment for the asst. yrs. 1985-86 and 1986-87 were prejudicial to the interest of the Revenue with respect to the deduction of bad debts as it was done without verifying that the deduction for the bad debts claimed in respect of the urban branches without examining the question as to whether assessee was justified to deductions under s. 36(1)(vii) in addition to the deduction allowed in respect of provision for bad and doubtful debts under s. 36(1)(viia). Accordingly, the CIT (A) directed the AO to undertake de novo assessment after verification of the fact that bad debts relate to urban branches and not to the rural advances. The AO after verification of the fact found that the claim of bad debt made by the assessee for the years 1985-86 and 1986-87 under s. 36 (1)(vii) pertained to urban branches and not the rural branches. The CIT(A) again remitted the matter to the AO in view of the amendments made in s. 36(1)(vii) and 36(1)(viia) w.e.f. 1st April, 1985/1st April, 1987, for de novo completion of assessment after examining the amended provisions. The AO disallowed the claim of the assessee regarding deduction of Rs. 7,88,848 as bad debt for the asst. yr. 1986-87 on the ground that the claim was premature. The assessee again made a fresh claim for the said amount during the asst. yr. 1987-88 because certain subsequent events took place in the asst. yr. 1987-88 which showed that debt became bad and irrecoverable in the asst. yr. 1987-88. The said order was confirmed i appeal by the CIT(A). The Tribunal found that the amount outstanding against J.R. Exports had been written off in the books of account relating to the asst. yr. 1986-87. This amount was not shown as outstanding in the books of account of the assessee-bank at the commencement of the relevant accounting year nor it was outstanding at the end of the relevant accounting year pertaining to the asst. yr. 1986-87. In the opinion of the Tribunal bad debts amounting to Rs. 7,88,847 was claimed as deduction under s. 36 (1)(vii) in the asst. yr. 1986-87 which was disallowed on the ground that it was a premature claim. The subsequent events proved that the debt was found to be irrecoverable. The Tribunal also noticed the correspondences of the assessee-bank with M/s Kanga & Co., Advocate & Solicitors of Bombay. M/s Kanga & Co. by letter dt. 24th Nov., 1986, opined that since the debtor has been declared insolvent, no useful purpose will be served by pursuing the suit any further. It was also found that M/s J.R. Exports proprietorship firm of Shri J.R. Motwani started dealing with the FED Bombay branch of the appellant-bank in the year 1973. The bank had given advances and due was for a sum of Rs. 10,38,067.70. A sum of Rs. 1,74,220 and Rs. 75,000 were recovered under EPFG and PSG, respectively. After crediting the said amount the balance amount was of Rs. 7,88,847.37. The said amount was written off as the borrower had been declared insolvent and expired subsequently leaving behind no assets. Thus, the bad debt which was written off in the asst. yr. 1986-87, the debt became bad and irrecoverable in the asst. yr. 1987-88. In the opinion of the Tribunal, the assessee-bank was entitled to claim of deduction with respect to the bad debt of Rs. 7,88,847 for the asst. yr. 1987-88 as it was a premature claim for the asst. yr. 1986-87.
It is contended by Mr. L.M. Lodha that as in the books of account of the assessee the debt in question was written off only in the asst. yr. 1986-87, it became bad debt in the previous year relevant to the asst. yr. 1987-88. As such the respondent-assessee was not entitled to claim benefit and allowances by way of deduction for the asst. yr. 1987-88 as the proviso to s. 36(1)(vii) applies to the assessee’s claim in respect of bad debt. On the other hand Mr. Rajendra Mehta has supported the judgment of the Tribunal.
In order to appreciate the rival contentions, it may be convenient here to extract the relevant provisions namely, s. 36(1)(vii), (viia) and s. 36(2) sub-cl. (v) as follows : “36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in s. 28.
(i) the amount of any premium paid in respect of insurance against risk of damage or destruction of stocks of stores used for the purposes of the business or profession : … … … … (vii) subject to the provisions of sub-s. (2), the amount of any bad debt or part thereof which is established to have become a bad dept in the previous year : Provided that in the case of an assessee to which cl. (viia) applies, the amount of the deduction relating to any such debt or part thereof shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause.”
6. The provision as existed during the period 1985 to 1988 has been inserted by the Finance Act of 1985 of w.e.f.
1st April, 1985. “(viia) in respect of any provision for bad and doubtful debts made : (a) a scheduled bank not being a bank incorporated by or under the laws of a country outside India or a non-scheduled bank, an amount not exceeding five per cent of the total income (computed before making any deduction under this clause and Chapter VI-A and an amount not exceeidng ten per cent of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner : Provided that a scheduled bank or a non-scheduled bank referred to in this sub-clause shall, at its option, be allowed in any of the relevant assessment years, deduction in respect of any provision made by it for any assets classified by the Reserve Bank of India as doubtful assets or loss assets in accordance with the guidelines issued by it in this behalf, for an amount not exceeding five per cent of the amount of such assets shown in the books of account of the bank on the last day of the previous year. 36(2)—In making any deduction for a bad debt or part thereof, the following provisions shall apply : (i) no such deduction shall be allowed unless such debt or part thereof— (a) has been taken into account in computing the income of the assessee of that previous year or of an earlier previous year, or represents money lent in the ordinary course of business of banking or money-lending which is carried on by the assessee, and (b) has been written off as irrecoverable in the accounts of the assessee for that previous year, (iii) any such debt or part of debt may be deducted if it has already been written off as irrecoverable in the accounts of an earlier previous year being a previous year relevant to the assessment year commencing on the 1st day of April, 1999, or any earlier assessment year, but the AO had not allowed it to be deducted on the ground that it had not been established to have become a bad debt in that year. … … … … (v) where such debt or part of debt relates to advances made by a bank to which cl. (viia) of sub-s. (1) applies, no such deduction shall be allowed unless the bank has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause.” Sec. 36(1)(viia) was introduced by the Income-tax (Amendment) Act, 1986, with a view to provide for grant of deduction in respect of provision for bad debt made by all the banks upto 5 per cent of their total income and the additional deduction not exceeding 2 per cent of the aggregate advances made by rural branches of such bank to be computed in the prescribed manner. Therefore, the provisions of s. 36(1)(viia) w.e.f. asst. yr. 1987-88 granted deduction in respect of provision for bad and doubtful debts both in respect of their total advances including urban and rural advances subject to the limitation and conditions prescribed under the relevant rules, Thus, while s. 36(1)(vii) provides for deduction in computation of taxable profits of any debt or part thereof, which is established to have become a bad debt in the previous year subject to the fulfilment of the conditions specified in sub-s. (2) of s. 36, s. 36(1)(viia) provides for deduction in respect of any provision for bad and doubtful debt made by a scheduled bank or non-scheduled bank in relation to advances by its rural branches of any amount not exceeding the percentage of the aggregate average advances mentioned in the provision made by such branches. The proviso to s. 36(1)(vii) provides that in the case of a bank later on the expression was substituted as an assessee in place of the bank to which the cl. (viia) applies, the amount of deduction relating to the bad debts under s. 36(1)(vii) shall be limited to the amount by which said debt or part thereof exceeds the credit balance in the provisions for bad and doubtful debts account under that clause. It is significant to notice that the language used in proviso to s. 36(1)(vii) that the amount of deduction relating to any such debt or part thereof under s. 36(1)(vii) shall be limited to the amount by which such debt or part thereof exceeds the credit balance in the provision for bad and doubtful debts account made under that clause. The use of the words “any such debt or part thereof” clearly indicate that the exclusion of provision in proviso to s. 36(1)(vii) will apply only in cases, where a provision for bad and doubtful debts have been made in the relevant accounting year on the bad and doubtful debts, which were outstanding at the commencement of the relevant accounting year and/or were also outstanding at the end of the relevant year. The aggregate average advances with reference to which the deduction in respect of provision for bad and doubtful debt can be allowed necessarily implies that such a provision has to be made in respect of loan and advances made at the end of the year. Thus, it is evident that both the clauses i.e., s. 36(1)(vii) and 36(1)(viia) are separate and they are distinct and independent. It is open for an assessee to claim benefit of the provision which enables him a larger benefit. A reference be made to the decisions of the apex Court in CIT vs. Indian Engineering & Commercial (P) Ltd. (1993) 112 CTR (SC) 56 : (1993) 201 ITR 723 (SC) : TC 18R.587 and C.C.E. vs. Indo Petro Chemicals 1997(11) SCC 318. It is also a known principle in tax law that if the assessee’s income falls under two exempting sections, he is entitled to rely on both sections unless they are expressly or by necessary implication made mutually exclusive and he may claim exemption under either of them even if he does not fulfil the conditions of other.
9. In the instant case the amount outstanding against M/s J.R. Exports had been written off in the books of account relating to the asst. yr. 1986-87. This amount was not shown as outstanding in the books of account of the appellant-assessee at the commencement of the relevant accounting year nor it was outstanding at the end of the relevant accounting year pertaining to asst. yr. 198788. Bad debt amounting to Rs. 7,88,.847 was claimed as deduction under s. 36(1)(vii) in the year 1986-87, which was disallowed on the ground that it was a premature claim. The subsequent events as indicated above clearly show that the debt was found to be irrecoverable. The assessee, therefore, rightly claimed deduction in respect of bad debts under s. 36(1)(vii) in respect of that amount, which it had already written off in the books of account pertaining to asst. yr. 1986-87. Therefore, the amount of bad debt actually written off in the books of account pertaining to asst. yr. 1986-87 cannot be required to be debited against the provision of bad and doubtful debt made in the books of account pertaining to asst. yr. 1987-88 with reference to the amount of advances shown as outstanding in the asst. yr. 1987-88. In view of this, the Tribunal has rightly held that sub-cl. (viia) applies to the amount of bad debt claimed by the assessee in respect of Rs. 7,88,847 written off in the name of account of the asst. yr. 1986-87. The view also finds support from the illustration as given in the Income-tax Law by K. Chaturvedi at p. 2021. According to the author if the bad debt is written off in the earlier accounting year and the AO had not allowed it in that year and as having been prematurely written off, the AO is empowered to allow it in any subsequent year when he satisfies about its irrecoverability.
10. In view of aforesaid discussion, we find no merit in this appeal and the same in dismissed. No order as to costs.
[Citation : 255 ITR 599]